UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2010 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 1-15081
UnionBanCal Corporation
(Exact name of registrant as specified in its charter)
Delaware | 94-1234979 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
400 California Street, San Francisco, California | 94104-1302 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number: (415) 765-2969 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filero | Accelerated filero | ||
Non-accelerated filerþ(Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Number of shares of Common Stock outstanding at April 30, 2010: 136,330,829
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
UnionBanCal Corporation and Subsidiaries
TABLE OF CONTENTS
| Page Number | |||
---|---|---|---|---|
PART I. | ||||
Financial Information | ||||
Condensed Consolidated Financial Highlights | 6 | |||
ITEM 1. FINANCIAL STATEMENTS | 7 | |||
Condensed Consolidated Statements of Income | 7 | |||
Condensed Consolidated Balance Sheets | 8 | |||
Condensed Consolidated Statements of Changes in Stockholder's Equity | 9 | |||
Condensed Consolidated Statements of Cash Flows | 10 | |||
Note 1—Basis of Presentation and Nature of Operations | 11 | |||
Note 2—Recently Issued Accounting Pronouncements | 11 | |||
Note 3—Privatization | 12 | |||
Note 4—Securities | 14 | |||
Note 5—Loans and Allowance for Loan Losses | 20 | |||
Note 6—Goodwill and Intangible Assets | 21 | |||
Note 7—Variable Interest Entities | 23 | |||
Note 8—Private Capital and Other Investments | 25 | |||
Note 9—Employee Pension and Other Postretirement Benefits | 27 | |||
Note 10—Other Noninterest Income and Noninterest Expense | 27 | |||
Note 11—Borrowed Funds | 28 | |||
Note 12—Medium- and Long-Term Debt | 29 | |||
Note 13—Fair Value Measurement and Fair Value of Financial Instruments | 30 | |||
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging | 38 | |||
Note 15—Accumulated Other Comprehensive Loss | 45 | |||
Note 16—Commitments, Contingencies and Guarantees | 46 | |||
Note 17—Business Segments | 48 | |||
Note 18—Subsequent Events | 51 | |||
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 53 | |||
Introduction | 53 | |||
Executive Overview | 53 | |||
Critical Accounting Estimates | 55 | |||
Financial Performance | 56 | |||
Net Interest Income | 58 | |||
Noninterest Income and Noninterest Expense | 59 | |||
Income Tax Expense | 60 | |||
Loans | 61 | |||
Cross-Border Outstandings | 63 | |||
Provision for Credit Losses | 64 | |||
Allowances for Credit Losses | 64 | |||
Nonperforming Assets | 66 | |||
Loans 90 Days or More Past Due and Still Accruing | 68 | |||
Securities | 68 | |||
Deposits | 70 |
2
| Page Number | |||
---|---|---|---|---|
Fair Value of Financial Instruments | 71 | |||
Quantitative and Qualitative Disclosures About Market Risk | 72 | |||
Liquidity Risk | 75 | |||
Regulatory Capital | 78 | |||
Business Segments | 78 | |||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 86 | |||
ITEM 4. CONTROLS AND PROCEDURES | 86 | |||
PART II. | ||||
Other Information | 87 | |||
ITEM 1. LEGAL PROCEEDINGS | 87 | |||
ITEM 1A. RISK FACTORS | 87 | |||
ITEM 6. EXHIBITS | 87 | |||
SIGNATURES | 88 |
3
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts and expectations. See Part I, Item 1A. "Risk Factors," and the other risks described in our 2009 Annual Report on Form 10-K for factors to be considered when reading any forward-looking statements in this filing.
This report includes forward-looking statements, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may." These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made.
In this document, for example, we make forward-looking statements, which discuss our expectations about:
- •
- Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, underwriting standards, and risk grade and credit migration trends and our delinquency rates compared to the industry average
- •
- Our business objectives, strategies and initiatives, our organizational structure, the growth of our business and our competitive position and prospects
- •
- Our assessment of significant factors and developments that have affected or may affect our results
- •
- Pending and recent legal and regulatory actions, and future legislative and regulatory developments, including the effects of legislation and governmental measures introduced in response to the financial crises affecting the banking system, financial markets and the U.S. economy and changes to the Federal Deposit Insurance Corporation's deposit insurance assessment policies and anticipated costs as a result of these developments
- •
- Regulatory controls and processes and their impact on our business
- •
- The costs and effects of legal actions, investigations, regulatory actions, criminal proceedings or similar matters, or adverse facts and developments related thereto
- •
- Credit quality and provision for credit losses, including our expectation that elevated levels of charge offs, which we began to experience in the latter half of 2008, will continue during the remainder of 2010
- •
- Our assessment of economic conditions and trends and credit cycles and their impact on our business
- •
- The impact of changes in interest rates and our strategy to manage our interest rate risk profile
- •
- Loan portfolio composition and risk grade trends, expected charge offs, delinquency rates compared to the industry average and our underwriting standards
- •
- The adequacy of our insurance coverage
4
- •
- Our relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers
- •
- Our intent to sell, and the likelihood that we would be required to sell, various investment securities
- •
- Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook for the U.S. in general and for any particular region of the U.S. including, in particular, California, Oregon, Texas and Washington
- •
- Tax rates and taxes, including our intention to defend tax deductions, the possible effect of changes in Mitsubishi UFJ Financial Group, Inc.'s taxable profits on our California State tax obligations and of expected tax credits or benefits and our intention to file our 2009 California tax return under a water's-edge election
- •
- Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or change in accounting principle and future recognition of impairments for the fair value of assets, including goodwill and intangible assets
- •
- Expected rates of return, yields and projected results
- •
- Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network, pursue acquisitions or otherwise restructure, reorganize or change our business mix, and their timing and their impact on our business
- •
- The relationship between our business and that of BTMU and Mitsubishi UFJ Financial Group, Inc., the impact of their credit rating on our credit ratings and actions that may or may not be taken by BTMU and Mitsubishi UFJ Financial Group, Inc.
- •
- Our strategies and expectations regarding capital levels and liquidity, our funding base and intent to fund our operations on an independent basis
- •
- The continued weak economic outlook for the U.S. and global economy
There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to, those listed in Item 1A "Risk Factors" of Part II and Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part I of this Form 10-Q.
Readers of this document should not rely unduly on forward-looking information and should consider all uncertainties and risks disclosed throughout this document and in our other reports to the SEC, including, but not limited to, those discussed below. Any factor described in this report could by itself, or together with one or more other factors, adversely affect our business, future prospects, results of operations or financial condition.
5
PART I. FINANCIAL INFORMATION
UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Financial Highlights
(Unaudited)
| As of and for the Three Months Ended | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | March 31, 2009 | March 31, 2010 | Percent Change | |||||||||
Results of operations: | ||||||||||||
Net interest income(1) | $ | 562,620 | $ | 576,794 | 2.52 | % | ||||||
Provision for loan losses | 249,000 | 170,000 | (31.73 | ) | ||||||||
Noninterest income | 174,716 | 209,905 | 20.14 | |||||||||
Noninterest expense | 521,383 | 524,572 | 0.61 | |||||||||
Income (loss) before income taxes and including noncontrolling interests(1) | (33,047 | ) | 92,127 | nm | ||||||||
Taxable-equivalent adjustment | 2,617 | 2,441 | (6.73 | ) | ||||||||
Income tax expense (benefit) | (25,856 | ) | 15,401 | nm | ||||||||
Net income (loss) including noncontrolling interests | (9,808 | ) | 74,285 | nm | ||||||||
Less: Net loss from noncontrolling interests | — | (3,059 | ) | nm | ||||||||
Net income (loss) attributable to UnionBanCal Corporation (UNBC) | $ | (9,808 | ) | $ | 77,344 | nm | ||||||
Balance sheet (end of period): | ||||||||||||
Total assets | $ | 68,725,270 | $ | 85,471,296 | 24.37 | % | ||||||
Total loans | 49,441,063 | 46,721,210 | (5.50 | ) | ||||||||
Nonperforming assets | 834,738 | 1,466,937 | 75.74 | |||||||||
Total deposits | 48,878,733 | 66,581,593 | 36.22 | |||||||||
Medium- and long-term debt | 5,140,931 | 4,710,979 | (8.36 | ) | ||||||||
UNBC Stockholder's equity | 7,475,472 | 9,706,081 | 29.84 | |||||||||
Balance sheet (period average): | ||||||||||||
Total assets | $ | 67,072,499 | $ | 84,810,109 | 26.45 | % | ||||||
Total loans | 49,789,046 | 46,847,523 | (5.91 | ) | ||||||||
Earning assets | 59,626,207 | 78,311,856 | 31.34 | |||||||||
Total deposits | 46,633,173 | 67,838,145 | 45.47 | |||||||||
UNBC Stockholder's equity | 7,336,212 | 9,532,428 | 29.94 | |||||||||
Financial ratios: | ||||||||||||
Return on average assets(2) | (0.06 | )% | 0.37 | % | ||||||||
Return on average UNBC stockholder's equity(2) | (0.54 | ) | 3.29 | |||||||||
Efficiency ratio(3) | 65.69 | 64.98 | ||||||||||
Net interest margin(1)(2) | 3.79 | 2.95 | ||||||||||
Tangible common equity ratio(4) | 7.12 | 8.47 | ||||||||||
Tier 1 common capital ratio(5) | 8.72 | 11.96 | ||||||||||
Tier 1 risk-based capital ratio | 8.74 | 11.98 | ||||||||||
Total risk-based capital ratio | 11.59 | 14.70 | ||||||||||
Leverage ratio | 8.46 | 9.22 | ||||||||||
Allowance for loan losses to(6): | ||||||||||||
Total loans | 1.76 | 3.01 | ||||||||||
Nonaccrual loans | 107.41 | 99.06 | ||||||||||
Allowance for credit losses to(7): | ||||||||||||
Total loans | 2.07 | 3.38 | ||||||||||
Nonaccrual loans | 126.10 | 111.11 | ||||||||||
Net loans charged off to average total loans(2) | 0.95 | 1.03 | ||||||||||
Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale | 1.69 | 3.14 | ||||||||||
Nonperforming assets to total assets | 1.21 | 1.72 |
- (1)
- Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
- (2)
- Annualized.
- (3)
- The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance sheet commitments, low income housing credit (LIHC) investment amortization expense and expenses of the consolidated variable interest entities (VIEs), as a percentage of net interest and noninterest income.
- (4)
- The tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible equity (UNBC stockholder's equity less goodwill and intangible assets net of related deferred taxes) divided by tangible assets (total assets less goodwill and intangible assets net of related deferred taxes). The methodology of determining tangible common equity may differ among companies. The tangible common equity ratio has been included to facilitate the understanding of the Company's capital structure and for use in assessing and comparing the quality and composition of UNBC's capital structure to other financial institutions.
- (5)
- The Tier 1 common capital ratio is the ratio of Tier 1 capital, less qualifying trust preferred securities, to risk weighted assets. The Tier 1 common capital ratio, a non-GAAP financial measure, has been included to facilitate the understanding of the Company's capital structure and for use in assessing and comparing the quality and composition of UNBC's capital structure to other financial institutions.
- (6)
- The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonaccrual loans, as appropriate.
- (7)
- The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonaccrual loans, as appropriate.
- nm=
- not meaningful
6
UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
(Amounts in thousands) | 2009 | 2010 | |||||||
Interest Income | |||||||||
Loans | $ | 601,842 | $ | 539,574 | |||||
Securities | 102,897 | 143,336 | |||||||
Interest bearing deposits in banks | 900 | 4,055 | |||||||
Federal funds sold and securities purchased under resale agreements | 141 | 119 | |||||||
Trading account assets | 150 | 819 | |||||||
Total interest income | 705,930 | 687,903 | |||||||
Interest Expense | |||||||||
Deposits | 105,038 | 85,562 | |||||||
Federal funds purchased and securities sold under repurchase agreements | 53 | 37 | |||||||
Commercial paper | 1,592 | 240 | |||||||
Other borrowed funds | 11,477 | 1,202 | |||||||
Medium- and long-term debt | 27,529 | 26,241 | |||||||
Trust notes | 238 | 268 | |||||||
Total interest expense | 145,927 | 113,550 | |||||||
Net Interest Income | 560,003 | 574,353 | |||||||
Provision for loan losses | 249,000 | 170,000 | |||||||
Net interest income after provision for loan losses | 311,003 | 404,353 | |||||||
Noninterest Income | |||||||||
Service charges on deposit accounts | 71,322 | 66,140 | |||||||
Securities gains, net | — | 33,893 | |||||||
Trust and investment management fees | 33,907 | 31,420 | |||||||
Trading account activities | 22,692 | 21,093 | |||||||
Merchant banking fees | 13,832 | 13,676 | |||||||
Card processing fees, net | 7,536 | 8,620 | |||||||
Brokerage commissions and fees | 8,307 | 8,528 | |||||||
Other | 17,120 | 26,535 | |||||||
Total noninterest income | 174,716 | 209,905 | |||||||
Noninterest Expense | |||||||||
Salaries and employee benefits | 243,563 | 279,586 | |||||||
Net occupancy | 41,921 | 43,380 | |||||||
Intangible asset amortization | 40,887 | 31,793 | |||||||
Regulatory agencies | 17,938 | 29,848 | |||||||
Outside services | 18,834 | 22,785 | |||||||
Professional services | 15,938 | 16,361 | |||||||
Equipment | 15,413 | 15,811 | |||||||
Software | 15,038 | 14,728 | |||||||
Foreclosed asset expense (income) | 886 | (198 | ) | ||||||
(Reversal of) provision for losses on off-balance sheet commitments | 26,000 | (5,000 | ) | ||||||
Privatization-related expense | 26,819 | 5,153 | |||||||
Other | 58,146 | 70,325 | |||||||
Total noninterest expense | 521,383 | 524,572 | |||||||
Income (loss) before income taxes and including noncontrolling interests | (35,664 | ) | 89,686 | ||||||
Income tax expense (benefit) | (25,856 | ) | 15,401 | ||||||
Net Income (Loss) including Noncontrolling Interests | (9,808 | ) | 74,285 | ||||||
Less: Net loss from noncontrolling interests | — | (3,059 | ) | ||||||
Net Income (Loss) attributable to UNBC | $ | (9,808 | ) | $ | 77,344 | ||||
See accompanying notes to condensed consolidated financial statements.
7
UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | |||||||||||||
Cash and due from banks | $ | 1,328,279 | $ | 1,198,258 | $ | 1,110,333 | |||||||
Interest bearing deposits in banks (includes $9,991 at March 31, 2010 related to consolidated variable interest entities (VIEs)) | 2,505,861 | 6,585,029 | 6,874,338 | ||||||||||
Federal funds sold and securities purchased under resale agreements | 110,083 | 442,552 | 488,520 | ||||||||||
Total cash and cash equivalents | 3,944,223 | 8,225,839 | 8,473,191 | ||||||||||
Trading account assets: | |||||||||||||
Pledged as collateral | 8,295 | 15,168 | 54,380 | ||||||||||
Held in portfolio | 1,149,832 | 710,480 | 775,915 | ||||||||||
Securities available for sale: | |||||||||||||
Pledged as collateral | 43,374 | 2,500 | — | ||||||||||
Held in portfolio | 7,506,069 | 22,556,329 | 22,164,722 | ||||||||||
Securities held to maturity (Fair value: March 31, 2009, $959,137; | |||||||||||||
December 31, 2009, $1,457,654; March 31, 2010, $1,500,746) | 1,150,342 | 1,227,718 | 1,247,561 | ||||||||||
Loans (net of allowance for loan losses: March 31, 2009, $870,185; | |||||||||||||
December 31, 2009, $1,357,000; March 31, 2010, $1,408,013) | 48,570,878 | 45,871,508 | 45,313,197 | ||||||||||
Due from customers on acceptances | 15,077 | 8,514 | 7,788 | ||||||||||
Premises and equipment, net | 670,376 | 674,298 | 671,230 | ||||||||||
Intangible assets | 672,568 | 561,040 | 529,247 | ||||||||||
Goodwill | 2,369,326 | 2,369,326 | 2,369,326 | ||||||||||
Other assets (includes $297,736 at March 31, 2010 related to consolidated VIEs) | 2,624,910 | 3,375,408 | 3,864,739 | ||||||||||
Total assets | $ | 68,725,270 | $ | 85,598,128 | $ | 85,471,296 | |||||||
Liabilities | |||||||||||||
Noninterest bearing | $ | 13,543,015 | $ | 14,558,989 | $ | 14,389,261 | |||||||
Interest bearing | 35,335,718 | 53,958,664 | 52,192,332 | ||||||||||
Total deposits | 48,878,733 | 68,517,653 | 66,581,593 | ||||||||||
Federal funds purchased and securities sold under repurchase agreements | 320,376 | 150,453 | 575,668 | ||||||||||
Commercial paper | 749,381 | 888,541 | 799,106 | ||||||||||
Other borrowed funds | 3,861,905 | 591,934 | 833,617 | ||||||||||
Trading account liabilities | 965,105 | 538,894 | 736,813 | ||||||||||
Acceptances outstanding | 15,077 | 8,514 | 7,788 | ||||||||||
Other liabilities (includes $1,675 at March 31, 2010 related to consolidated VIEs) | 1,304,423 | 1,096,095 | 1,224,440 | ||||||||||
Medium- and long-term debt (includes $7,853 at March 31, 2010 related to consolidated VIEs) | 5,140,931 | 4,212,184 | 4,710,979 | ||||||||||
Junior subordinated debt payable to subsidiary grantor trust | 13,867 | 13,527 | 13,444 | ||||||||||
Total liabilities | 61,249,798 | 76,017,795 | 75,483,448 | ||||||||||
Commitments, contingencies and guarantees—See Note 16 | |||||||||||||
Equity | |||||||||||||
UNBC Stockholder's Equity | |||||||||||||
Preferred stock: | |||||||||||||
Authorized 5,000,000 shares; no shares issued or outstanding | — | — | — | ||||||||||
Common stock, par value $1 per share: | |||||||||||||
Authorized 300,000,000 shares; 136,330,829 shares issued | 136,331 | 136,331 | 136,331 | ||||||||||
Additional paid-in capital | 3,195,023 | 5,195,023 | 5,195,023 | ||||||||||
Retained earnings | 4,954,994 | 4,899,841 | 4,977,185 | ||||||||||
Accumulated other comprehensive loss | (810,876 | ) | (650,862 | ) | (602,458 | ) | |||||||
Total UNBC stockholder's equity | 7,475,472 | 9,580,333 | 9,706,081 | ||||||||||
Noncontrolling interests | — | — | 281,767 | ||||||||||
Total equity | 7,475,472 | 9,580,333 | 9,987,848 | ||||||||||
Total liabilities and equity | $ | 68,725,270 | $ | 85,598,128 | $ | 85,471,296 | |||||||
See accompanying notes to condensed consolidated financial statements.
8
UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholder's Equity
(Unaudited)
(In thousands, except shares) | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Noncontrolling interests(1) | Total stockholder's equity | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCE DECEMBER 31, 2008 | $ | 136,331 | $ | 3,195,023 | $ | 4,964,802 | $ | (811,851 | ) | $ | — | $ | 7,484,305 | ||||||||
Comprehensive loss: | |||||||||||||||||||||
Net loss—For the three months | |||||||||||||||||||||
ended March 31, 2009 | (9,808 | ) | (9,808 | ) | |||||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||||
Net change in unrealized gains on cash flow hedges | (12,972 | ) | (12,972 | ) | |||||||||||||||||
Net change in unrealized losses on securities | 10,490 | 10,490 | |||||||||||||||||||
Foreign currency translation adjustment | (420 | ) | (420 | ) | |||||||||||||||||
Net change in pension and other benefits | 3,877 | 3,877 | |||||||||||||||||||
Total comprehensive loss, net of tax | (8,833 | ) | |||||||||||||||||||
Net change | — | — | (9,808 | ) | 975 | — | (8,833 | ) | |||||||||||||
BALANCE MARCH 31, 2009 | $ | 136,331 | $ | 3,195,023 | $ | 4,954,994 | $ | (810,876 | ) | $ | — | $ | 7,475,472 | ||||||||
BALANCE DECEMBER 31, 2009 | $ | 136,331 | $ | 5,195,023 | $ | 4,899,841 | $ | (650,862 | ) | $ | — | $ | 9,580,333 | ||||||||
Cumulative effect of change in accounting for VIEs(1) | 271,923 | 271,923 | |||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||
Net income (loss)—For the three months ended March 31, 2010 | 77,344 | (3,059 | ) | 74,285 | |||||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||||
Net change in unrealized gains on cash flow hedges | (13,364 | ) | (13,364 | ) | |||||||||||||||||
Net change in unrealized losses on securities | 57,292 | 57,292 | |||||||||||||||||||
Foreign currency translation adjustment | 536 | 536 | |||||||||||||||||||
Net change in pension and other benefits | 3,940 | 3,940 | |||||||||||||||||||
Total comprehensive income, net of tax | 122,689 | ||||||||||||||||||||
Noncontrolling interests | 12,903 | 12,903 | |||||||||||||||||||
Net change | — | — | 77,344 | 48,404 | 281,767 | 407,515 | |||||||||||||||
BALANCE MARCH 31, 2010 | $ | 136,331 | $ | 5,195,023 | $ | 4,977,185 | $ | (602,458 | ) | $ | 281,767 | $ | 9,987,848 | ||||||||
- (1)
- For additional information on the consolidated VIEs, refer to Note 7 to these condensed consolidated financial statements in this Form 10-Q.
See accompanying notes to condensed consolidated financial statements.
9
UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended March 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2009 | 2010 | ||||||||
Cash Flows from Operating Activities: | ||||||||||
Net income (loss) including noncontrolling interests | $ | (9,808 | ) | $ | 74,285 | |||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||
Provision for loan losses | 249,000 | 170,000 | ||||||||
(Reversal of) provision for losses on off-balance sheet commitments | 26,000 | (5,000 | ) | |||||||
Depreciation, amortization and accretion | 33,937 | 62,566 | ||||||||
Deferred income taxes | (39,045 | ) | (16,794 | ) | ||||||
Net gains on sales of securities | — | (33,893 | ) | |||||||
Net decrease (increase) in trading account assets | 58,652 | (104,647 | ) | |||||||
Net increase in prepaid expenses | (28,058 | ) | (74,481 | ) | ||||||
Net decrease (increase) in fees and other receivable | 10,189 | (86,251 | ) | |||||||
Net increase in other assets | (39,800 | ) | (60,109 | ) | ||||||
Net decrease in accrued expenses | (146,786 | ) | (2,802 | ) | ||||||
Net increase (decrease) in trading account liabilities | (69,558 | ) | 197,919 | |||||||
Net increase (decrease) in other liabilities | (251,929 | ) | 108,525 | |||||||
Loans originated for resale | (64,953 | ) | — | |||||||
Net proceeds from sale of loans originated for resale | 8,772 | — | ||||||||
Other, net | 8,667 | (9,027 | ) | |||||||
Discontinued operations, net | (6,027 | ) | — | |||||||
Total adjustments | (250,939 | ) | 146,006 | |||||||
Net cash provided by (used in) operating activities | (260,747 | ) | 220,291 | |||||||
Cash Flows from Investing Activities: | ||||||||||
Proceeds from sales of securities available for sale | 5,624 | 1,046,957 | ||||||||
Proceeds from matured and called securities available for sale | 533,465 | 1,099,785 | ||||||||
Purchases of securities available for sale | (1,018,444 | ) | (1,668,031 | ) | ||||||
Proceeds from matured securities held to maturity | 819 | 2,057 | ||||||||
Purchases of premises and equipment, net | (19,437 | ) | (15,023 | ) | ||||||
Net decrease in loans | 100,203 | 384,720 | ||||||||
Other, net | (791 | ) | (1,281 | ) | ||||||
Net cash provided by (used in) investing activities | (398,561 | ) | 849,184 | |||||||
Cash Flows from Financing Activities: | ||||||||||
Net increase (decrease) in deposits | 2,828,964 | (1,913,944 | ) | |||||||
Net increase in federal funds purchased and securities sold under repurchase agreements | 147,618 | 425,215 | ||||||||
Net increase (decrease) in commercial paper and other borrowed funds | (3,749,638 | ) | 152,248 | |||||||
Proceeds from issuance of medium- and long-term debt | 1,625,000 | 1,000,000 | ||||||||
Repayment of medium-term debt | (750,000 | ) | (500,000 | ) | ||||||
Other, net | (420 | ) | 536 | |||||||
Change in noncontrolling interests | — | 12,903 | ||||||||
Discontinued operations, net | (1,929 | ) | — | |||||||
Net cash provided by (used in) financing activities | 99,595 | (823,042 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (559,713 | ) | 246,433 | |||||||
Cash and cash equivalents at beginning of period | 4,504,345 | 8,225,839 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (409 | ) | 919 | |||||||
Cash and cash equivalents at end of period | $ | 3,944,223 | $ | 8,473,191 | ||||||
Cash Paid During the Period For: | ||||||||||
Interest | $ | 151,187 | $ | 101,710 | ||||||
Income taxes, net | 6,743 | (1,849 | ) | |||||||
Supplemental Schedule of Noncash Investing and Financing Activities: | ||||||||||
Securities available for sale transferred to securities held to maturity | $ | 1,144,036 | $ | — | ||||||
Loans transferred to foreclosed assets (OREO) | 8,602 | 28,898 |
See accompanying notes to condensed consolidated financial statements.
10
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1—Basis of Presentation and Nature of Operations
The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission (SEC). However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the period ended March 31, 2010 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in UnionBanCal Corporation's Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K). The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ compared to those estimates.
UnionBanCal Corporation is a financial holding company and commercial bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. UnionBanCal Corporation and its subsidiaries (the Company) provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington, and Texas as well as nationally and internationally.
On November 4, 2008, the Company became a privately held company (privatization transaction). All of the Company's issued and outstanding shares of common stock are owned by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU). Prior to the transaction, BTMU owned approximately 64 percent of the Company's outstanding shares of common stock.
See Note 3 to these condensed consolidated financial statements in this Form 10-Q for additional information on the Company's privatization transaction.
Note 2—Recently Issued Accounting Pronouncements
Accounting for Transfers of Financial Assets
In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-16, "Accounting for Transfers of Financial Assets" which formally codifies Statement of Financial Accounting Standards (SFAS) No. 166, "Accounting for Transfers of Financial Assets—an amendment of FASB Statement 140," which was issued in June 2009. The guidance eliminates the concept of qualifying special purpose entities (QSPEs) and modifies financial asset derecognition criteria. The elimination of the exception for QSPEs will likely result in many sponsors that transferred financial assets to such vehicles to consolidate them. The derecognition modifications require that companies consider all arrangements such that the transferred financial asset is legally isolated from the transferor and any of its consolidated affiliates when determining whether derecognition is appropriate for a transferred financial asset. For a transfer of a portion of a financial asset to be derecognized, it must meet the definition of a participating interest. The guidance also requires that all beneficial interests retained in transferred financial assets be initially measured at fair value. Disclosures are amended to require description of a company's continuing involvement with transferred financial assets and details regarding financial or other support provided. The
11
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 2—Recently Issued Accounting Pronouncements (Continued)
guidance was effective January 1, 2010. At adoption, there was no impact on the Company's financial position or results of operations.
Consolidation Criteria for Variable Interest Entities
In December 2009, the FASB issued ASU 2009-17, "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities" which formally codifies SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" which was issued in June 2009. The guidance changes the method of analyzing which party shall consolidate a variable interest entity (VIE) by providing revised criteria for determining the primary beneficiary. A company would be required to determine the primary beneficiary of a VIE on a continual basis based on a qualitative assessment of which party, if any, has the power to direct activities and the right to receive benefits or the obligation to absorb losses. The guidance also states that if power is shared by multiple parties such that no one party has the power to direct the activities, then no party shall consolidate the VIE. Disclosures are also amended to require disclosure of continuing involvement with VIEs and judgments used in the consolidation analysis such as the method, significant judgments and assumptions used for determining the primary beneficiary. The guidance was effective January 1, 2010. As a result of reviewing the Company's variable interest entities and the determination of the primary beneficiary, the Company consolidated certain Low Income Housing Tax Credit investment funds. At adoption, management recorded increases in total assets of $281 million, liabilities of $9 million and stockholder's equity attributable to noncontrolling interests of $272 million. This guidance did not have a material impact on the Company's results of operations. Disclosures required under this guidance are included in Note 7 to these condensed consolidated financial statements.
Improving Disclosures about Fair Value Measurements
In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair Value Measurements." This guidance amends FASB ASC 820-10, "Fair Value Measurements and Disclosures" with respect to disclosures. Specifically, this guidance requires the disclosure of transfers in and out of Level 1 and Level 2 and a gross presentation within the Level 3 rollforward. This guidance also clarifies that the information should be presented by class of financial asset or liability and that a discussion of valuation techniques and inputs is required for Level 2 and Level 3 recurring and nonrecurring fair value measurements. The guidance, which applies only to disclosures, was effective March 31, 2010 except for the gross presentation within the Level 3 rollforward, which is effective March 31, 2011. Disclosures required under this guidance are included within Note 13 to these condensed consolidated financial statements.
The privatization transaction was accounted for as a business combination and the purchase price was pushed down to the Company's consolidated financial statements. Accordingly, the purchase price paid by BTMU plus related purchase accounting adjustments have been reflected on the Company's consolidated balance sheet as of October 1, 2008. This resulted in a new basis of accounting, which reflects an adjustment for the estimated fair value of the Company's assets and liabilities. After all of the fair value adjustments to the Company's assets and liabilities were assigned, the remainder of the purchase price was recorded as goodwill.
12
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 3—Privatization (Continued)
The Company recorded amortization (accretion) of the fair value adjustments by category for the three months ended March 31, 2009 and 2010 as follows:
| For the Three Months ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2009 | 2010 | ||||||
Securities | $ | (6,787 | ) | $ | (6,575 | ) | ||
Loans | (32,865 | ) | (14,333 | ) | ||||
Cash flow hedges | 3,765 | 1,073 | ||||||
Premises and equipment | 2,048 | 2,152 | ||||||
Intangible assets | 40,524 | 31,588 | ||||||
Long-term debt | 910 | 910 | ||||||
Total amortization | $ | 7,595 | $ | 14,815 | ||||
The Company recorded expenses for the privatization transaction for the three months ended March 31, 2009 and 2010 as follows:
| For the Three Months ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2009 | 2010 | |||||
Salaries and employee benefits(1) | $ | 26,181 | $ | 5,153 | |||
Professional services | 605 | — | |||||
Other | 33 | — | |||||
Total | $ | 26,819 | $ | 5,153 | |||
- (1)
- Represents the amortization of the bridge award compensation.
13
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below.
Securities Available for Sale
| December 31, 2009 | March 31, 2010 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Amortized Cost(1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost(1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||
U.S. Treasury | $ | 299,488 | $ | 189 | $ | — | $ | 299,677 | $ | 299,724 | $ | 140 | $ | — | $ | 299,864 | ||||||||||
Other U.S. government | 12,311,626 | 13,165 | 47,373 | 12,277,418 | 13,021,963 | 30,641 | 13,322 | 13,039,282 | ||||||||||||||||||
Residential mortgage-backed securities—agency | 9,215,771 | 171,513 | 25,161 | 9,362,123 | 8,056,257 | 165,092 | 8,401 | 8,212,948 | ||||||||||||||||||
Residential mortgage-backed securities—non-agency | 454,646 | 36 | 63,243 | 391,439 | 418,094 | 143 | 50,395 | 367,842 | ||||||||||||||||||
State and municipal | 43,287 | 1,830 | 21 | 45,096 | 43,888 | 1,725 | 19 | 45,594 | ||||||||||||||||||
Asset-backed and debt securities | 112,609 | 1,598 | 6,072 | 108,135 | 111,584 | 2,103 | 3,437 | 110,250 | ||||||||||||||||||
Equity securities | 74,791 | 441 | 291 | 74,941 | 88,521 | 628 | 207 | 88,942 | ||||||||||||||||||
Total securities available for sale | $ | 22,512,218 | $ | 188,772 | $ | 142,161 | $ | 22,558,829 | $ | 22,040,031 | $ | 200,472 | $ | 75,781 | $ | 22,164,722 | ||||||||||
Securities Held to Maturity
| December 31, 2009 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Recognized in Other Comprehensive Income (OCI)(2) | | Not Recognized in OCI(2) | | ||||||||||||||||||
(Dollars in thousands) | Amortized Cost(1) | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Value | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||
Collateralized loan obligations (CLOs) | $ | 1,758,716 | $ | — | $ | 531,094 | $ | 1,227,622 | $ | 231,135 | $ | 1,199 | $ | 1,457,558 | |||||||||
Foreign securities | 96 | — | — | 96 | — | — | 96 | ||||||||||||||||
Total securities held to maturity | $ | 1,758,812 | $ | — | $ | 531,094 | $ | 1,227,718 | $ | 231,135 | $ | 1,199 | $ | 1,457,654 | |||||||||
| March 31, 2010 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Recognized in Other Comprehensive Income (OCI)(2) | | Not Recognized in OCI(2) | | ||||||||||||||||||
(Dollars in thousands) | Amortized Cost(1) | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Value | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||
CLOs | $ | 1,762,268 | $ | — | $ | 514,806 | $ | 1,247,462 | $ | 254,005 | $ | 820 | $ | 1,500,647 | |||||||||
Foreign securities | 99 | — | — | 99 | — | — | 99 | ||||||||||||||||
Total securities held to maturity | $ | 1,762,367 | $ | — | $ | 514,806 | $ | 1,247,561 | $ | 254,005 | $ | 820 | $ | 1,500,746 | |||||||||
- (1)
- Amortized cost reflects fair value adjustments as a result of the Company's privatization. Refer to Note 3 to these condensed consolidated financial statements.
- (2)
- The amount recognized in OCI reflects the unrealized loss at date of transfer to the held to maturity classification, net of amortization, while the amount not recognized in OCI reflects the incremental change in value after such transfer.
14
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4—Securities (Continued)
For the three months ended March 31, 2010, interest income included $0.6 million from non-taxable securities.
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 Available for Sale(1)
| March 31, 2010 | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Amortized Cost(3) | Fair Value | ||||||
Due in one year or less | $ | 3,812,907 | $ | 3,817,978 | ||||
Due after one year through five years | 9,827,259 | 9,847,656 | ||||||
Due after five years through ten years | 1,290,670 | 1,332,479 | ||||||
Due after ten years | 7,020,674 | 7,077,667 | ||||||
Equity securities(2) | 88,521 | 88,942 | ||||||
Total securities available for sale | $ | 22,040,031 | $ | 22,164,722 | ||||
Securities Held to Maturity
| March 31, 2010 | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Amortized Cost(3) | Fair Value | ||||||
Due in one year or less | $ | 99 | $ | 99 | ||||
Due after one year through five years | 15,467 | 14,037 | ||||||
Due after five years through ten years | 1,399,187 | 1,216,465 | ||||||
Due after ten years | 347,614 | 270,145 | ||||||
Total securities held to maturity | $ | 1,762,367 | $ | 1,500,746 | ||||
- (1)
- The remaining contractual maturities of residential mortgage-backed securities are classified without regard to prepayments. The contractual maturity of these securities is not a reliable indicator of their expected life since borrowers have the right to repay their obligations at any time.
- (2)
- Equity securities do not have a stated maturity.
- (3)
- Amortized cost reflects fair value adjustments as a result of the Company's privatization. Refer to Note 3 to these condensed consolidated financial statements.
The proceeds from sales of securities available for sale, gross realized gains and gross realized losses are shown below. The specific identification method is used to calculate realized gains and losses on sales.
| For the Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2009 | 2010 | |||||
Proceeds from sales | $ | 5,624 | $ | 1,046,957 | |||
Gross realized gains | 4 | 35,173 | |||||
Gross realized losses | — | — |
15
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4—Securities (Continued)
Analysis of Unrealized Losses on Securities
At December 31, 2009 and March 31, 2010, the Company's securities, shown below, were in a continuous unrealized loss position for the periods less than 12 months and 12 months or more.
Securities Available for Sale
| December 31, 2009 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | ||||||||||||||||||||
Other U.S. government | $ | 8,682,501 | $ | 47,373 | 106 | $ | — | $ | — | — | $ | 8,682,501 | $ | 47,373 | 106 | ||||||||||||||
Residential mortgage-backed securities—agency | 2,928,456 | 24,628 | 61 | 232,670 | 533 | 28 | 3,161,126 | 25,161 | 89 | ||||||||||||||||||||
Residential mortgage-backed securities—non-agency | — | — | — | 362,471 | 63,243 | 17 | 362,471 | 63,243 | 17 | ||||||||||||||||||||
State and municipal | 760 | 1 | 2 | 1,498 | 20 | 6 | 2,258 | 21 | 8 | ||||||||||||||||||||
Asset-backed and debt securities | 27,325 | 2,219 | 3 | 62,427 | 3,853 | 9 | 89,752 | 6,072 | 12 | ||||||||||||||||||||
Equity securities | — | — | — | 164 | 291 | 2 | 164 | 291 | 2 | ||||||||||||||||||||
Total securities available for sale | $ | 11,639,042 | $ | 74,221 | 172 | $ | 659,230 | $ | 67,940 | 62 | $ | 12,298,272 | $ | 142,161 | 234 | ||||||||||||||
| March 31, 2010 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | ||||||||||||||||||||
Other U.S. government | $ | 3,756,551 | $ | 13,322 | 56 | $ | — | $ | — | — | $ | 3,756,551 | $ | 13,322 | 56 | ||||||||||||||
Residential mortgage-backed securities—agency | 1,238,210 | 8,298 | 32 | 54,308 | 104 | 10 | 1,292,518 | 8,402 | 42 | ||||||||||||||||||||
Residential mortgage-backed securities—non-agency | — | — | — | 342,962 | 50,395 | 17 | 342,962 | 50,395 | 17 | ||||||||||||||||||||
State and municipal | 427 | — | 1 | 1,495 | 19 | 6 | 1,922 | 19 | 7 | ||||||||||||||||||||
Asset-backed and debt securities | 21,247 | 660 | 2 | 55,856 | 2,776 | 8 | 77,103 | 3,436 | 10 | ||||||||||||||||||||
Equity securities | — | — | — | 249 | 207 | 2 | 249 | 207 | 2 | ||||||||||||||||||||
Total securities available for sale | $ | 5,016,435 | $ | 22,280 | 91 | $ | 454,870 | $ | 53,501 | 43 | $ | 5,471,305 | $ | 75,781 | 134 | ||||||||||||||
Securities Held to Maturity
| December 31, 2009 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | ||||||||||||||||||||
CLOs | $ | 103,921 | $ | 26,412 | 21 | $ | 1,353,637 | $ | 505,881 | 201 | $ | 1,457,558 | $ | 532,293 | 222 | ||||||||||||||
Total securities held to maturity | $ | 103,921 | $ | 26,412 | 21 | $ | 1,353,637 | $ | 505,881 | 201 | $ | 1,457,558 | $ | 532,293 | 222 | ||||||||||||||
16
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4—Securities (Continued)
| March 31, 2010 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | ||||||||||||||||||||
CLOs | $ | — | $ | — | — | $ | 1,500,647 | $ | 515,626 | 222 | $ | 1,500,647 | $ | 515,626 | 222 | ||||||||||||||
Total securities held to maturity | $ | — | $ | — | — | $ | 1,500,647 | $ | 515,626 | 222 | $ | 1,500,647 | $ | 515,626 | 222 | ||||||||||||||
The Company's securities are primarily investments in debt securities. Debt securities available for sale and debt securities held to maturity are subject to quarterly impairment testing when a security's fair value is lower than its amortized cost. Debt securities with unrealized losses are considered other-than-temporarily impaired if the Company intends to sell the security, if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the entire amortized cost basis of the security. Any impairment on securities the Company intends, or is more likely than not required, to sell is recognized in earnings as the entire difference between the amortized cost and its fair value. Any impairment on securities the Company does not intend or it is not more likely than not required to sell before recovery is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The credit loss is measured as the difference between the present value of expected cash flows, discounted using the security's effective interest rate, and the amortized cost of the security.
The following describes the nature of the Company's investments, the causes of impairment, the severity and duration of the impairment, if applicable, and the conclusions reached on the temporary or other-than-temporary status of the unrealized losses.
At March 31, 2010, the Company did not have the intent to sell temporarily impaired securities until a recovery of the fair value, which may be maturity, and it is not more likely than not that the Company will have to sell the securities prior to recovery of fair value.
Other U.S. Government Securities
Other U.S. Government securities are securities issued by one of the several Government-Sponsored Enterprises (GSEs) such as Fannie Mae, Freddie Mac, Federal Home Loan Banks or Federal Farm Credit Banks. They are not backed by the full faith and credit of the United States government. These securities are issued with a stated interest rate and mature in less than five years. The unrealized losses on other U.S. Government securities resulted from higher interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than-temporarily impaired at March 31, 2010.
Residential Mortgage-Backed Securities—Agency
Agency residential mortgage-backed securities consist of securities guaranteed by a GSE such as Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on agency residential mortgage-backed securities resulted from higher interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than-temporarily impaired at March 31, 2010.
17
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4—Securities (Continued)
Residential Mortgage-Backed Securities—Non-Agency
Non-agency residential mortgage backed securities are issued by financial institutions with no guarantee from GSEs. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The securities are primarily rated investment grade. The unrealized losses on non-agency residential mortgage-backed securities resulted from declining credit quality of underlying collateral and credit spreads widening since purchase. The Company estimated loss projections for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral provided by a third-party vendor using industry consensus estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Based on this assessment of expected credit losses of each security, an insignificant amount of impairment was recognized on two securities during the first quarter of 2010. No observable credit quality issues were present in the remaining portfolio at March 31, 2010.
State and Municipal Securities
State and municipal securities are primarily securities issued by state and local governments to finance operating expenses and various projects. These securities are issued at a stated interest rate and have varying expected maturities ranging up to 30 years. The unrealized losses on the state and municipal securities resulted from higher interest rates subsequent to purchase and not from credit quality. As a result, the securities were not other-than-temporarily impaired at March 31, 2010.
Asset-Backed and Debt Securities
Asset-backed and debt securities in a loss position at March 31, 2010 consist of $71.6 million in privately placed debt securities issued by power and utilities companies and $5.4 million in commercial mortgage-backed securities. Expected cash flows of these debt securities are assessed to determine if the amortized cost basis of these securities is recoverable. Based on this assessment, the Company concluded that these securities were not other-than-temporarily impaired as of March 31, 2010.
Collateralized Loan Obligations
The Company's CLOs consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, the Company reclassified its CLOs from available for sale to held to maturity. The Company considers the held to maturity classification to be more appropriate because the Company has the ability and the intent to hold these securities to maturity.
Certain of these CLOs are highly illiquid securities for which fair values are difficult to obtain. Unrealized losses arise from widening credit spreads, credit quality of the underlying collateral, uncertainty regarding the valuation of such securities and the market's opinion of the performance of the fund managers. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Any security with a change in credit rating is also subject to cash flow analysis to determine whether or not an other-than-temporary impairment exists. The fair value of the CLO portfolio was adversely impacted in 2009
18
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4—Securities (Continued)
and the first quarter of 2010 by the overall financial market crisis. Although none of the CLOs in the Company's portfolio contain subprime loan assets, widening credit spreads caused their value to decline. An analysis was performed as of March 31, 2010 to determine whether any of the unrealized losses related to CLOs was believed to be other-than-temporary. Based on this analysis, the Company concluded that since no observable credit quality issues were present in the CLO portfolio at March 31, 2010, these securities were not other-than-temporarily impaired.
Securities Pledged as Collateral
Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the same or substantially the same securities before maturity at a fixed or determinable price. The Company's policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
The Company separately identifies in the condensed consolidated balance sheets, securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At March 31, 2010, the Company had $5.4 billion of securities available for sale pledged as collateral where the secured party cannot resell or repledge such securities. These available for sale securities have been pledged to secure borrowings ($312.5 million), to support unrealized losses on derivative transactions reported in trading liabilities ($376.1 million) and to secure public and trust department deposits ($4.7 billion).
At March 31, 2009, December 31, 2009, and March 31, 2010, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $109.9 million ($109.9 million of which has been repledged to secure public agency or bankruptcy deposits and to cover short sells), $442.6 million ($434.6 million of which has been repledged to secure public agency or bankruptcy deposits and to cover short sells), and $338.4 million ($296.4 million of which has been repledged to secure bankruptcy deposits and to cover short sells), respectively. These securities were received as collateral for secured lending and to obtain qualified securities to meet the Company's collateral needs.
19
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 5—Loans and Allowance for Loan Losses
A summary of loans, net of unearned interest and deferred fees of $23 million, $53 million and $47 million, at March 31, 2009, December 31, 2009 and March 31, 2010, respectively, is as follows:
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial, financial and industrial | $ | 17,902,431 | $ | 15,258,081 | $ | 14,870,549 | ||||||||
Construction | 2,781,192 | 2,429,009 | 2,151,432 | |||||||||||
Mortgage: | ||||||||||||||
Residential | 15,998,637 | 16,716,048 | 16,892,822 | |||||||||||
Commercial | 8,233,371 | 8,245,778 | 8,248,574 | |||||||||||
Total mortgage | 24,232,008 | 24,961,826 | 25,141,396 | |||||||||||
Consumer: | ||||||||||||||
Installment | 2,336,931 | 2,244,239 | 2,185,539 | |||||||||||
Revolving lines of credit | 1,451,193 | 1,672,842 | 1,728,828 | |||||||||||
Total consumer | 3,788,124 | 3,917,081 | 3,914,367 | |||||||||||
Lease financing | 662,295 | 653,743 | 640,741 | |||||||||||
Total loans held for investment | 49,366,050 | 47,219,740 | 46,718,485 | |||||||||||
Total loans held for sale | 75,013 | 8,768 | 2,725 | |||||||||||
Total loans | 49,441,063 | 47,228,508 | 46,721,210 | |||||||||||
Allowance for loan losses | 870,185 | 1,357,000 | 1,408,013 | |||||||||||
Loans, net | $ | 48,570,878 | $ | 45,871,508 | $ | 45,313,197 | ||||||||
Changes in the allowance for loan losses were as follows:
| For the Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2009 | 2010 | ||||||
Allowance for loan losses, beginning of period | $ | 737,767 | $ | 1,357,000 | ||||
Loans charged off | 117,883 | 135,620 | ||||||
Recoveries of loans previously charged off | 1,505 | 16,209 | ||||||
Total net loans charged off | 116,378 | 119,411 | ||||||
Provision for loan losses | 249,000 | 170,000 | ||||||
Foreign translation adjustment | (204 | ) | 424 | |||||
Allowance for loan losses, end of period | 870,185 | 1,408,013 | ||||||
Allowance for losses on off-balance sheet commitments | 151,374 | 171,374 | ||||||
Allowances for credit losses, end of period | $ | 1,021,559 | $ | 1,579,387 | ||||
The provision for loan losses decreased by $79 million to $170 million for the first quarter of 2010 from $249 million for the first quarter of 2009, primarily due to a decrease in criticized assets and lower loss content in nonaccrual loans, partially offset by higher loss content in the residential mortgage and consumer loan portfolios during the first quarter of 2010 versus an increase in criticized assets during the first quarter of
20
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 5—Loans and Allowance for Loan Losses (Continued)
2009, partially offset by an increase in unallocated allowance mainly attributable to higher estimated inherent loss in retail credits during the first quarter of 2010.
Nonaccrual loans totaled $810.1 million, $1.3 billion and $1.4 billion at March 31, 2009, December 31, 2009 and March 31,2010, respectively. There were $2.8 million, $20.8 million, and $22.3 million (none, $3.8 million and $6.7 million of which were on accrual status at March 31, 2009, December 31, 2009, and March 31, 2010, respectively) of troubled debt restructured loans at March 31, 2009, December 31, 2009 and March 31, 2010, respectively. Loans 90 days or more past due and still accruing totaled $23.6 million, $5.0 million and $15.0 million at March 31, 2009, December 31, 2009 and March 31, 2010, respectively.
Note 6—Goodwill and Intangible Assets
As part of the Company's privatization transaction, the Company recorded goodwill of $2.0 billion and intangible assets of $752 million. See Note 3 to these condensed consolidated financial statements in this Form 10-Q for information on the Company's privatization transaction.
Goodwill
There were no changes in the carrying amount of goodwill during the three months ended March 31, 2009 and 2010. The carrying amount of goodwill at March 31, 2009, December 31, 2009 and March 31, 2010 was $2.4 billion. The Company's goodwill by reportable business segment at each of March 31, 2009, December 31, 2009 and March 31, 2010 was $1.2 billion for Retail Banking and $1.2 billion for Corporate Banking.
The Company reviews its goodwill for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
21
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 6—Goodwill and Intangible Assets (Continued)
Intangible Assets
The table below reflects the Company's identifiable intangible assets and accumulated amortization at March 31, 2009, December 31, 2009 and March 31, 2010.
| March 31, 2009 | December 31, 2009 | March 31, 2010 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
Core deposit intangibles | $ | 619,398 | $ | (117,949 | ) | $ | 501,449 | $ | 619,398 | $ | (233,042 | ) | $ | 386,356 | $ | 619,398 | $ | (262,664 | ) | $ | 356,734 | |||||||
Trade name | 108,733 | (1,369 | ) | 107,364 | 108,733 | (3,430 | ) | 105,303 | 108,733 | (4,117 | ) | 104,616 | ||||||||||||||||
Customer relationships | 53,761 | (2,375 | ) | 51,386 | 53,761 | (5,531 | ) | 48,230 | 53,761 | (6,592 | ) | 47,169 | ||||||||||||||||
Other | 9,555 | (814 | ) | 8,741 | 9,555 | (1,498 | ) | 8,057 | 9,555 | (1,921 | ) | 7,634 | ||||||||||||||||
Subtotal—intangibles with a definite useful life | $ | 791,447 | $ | (122,507 | ) | $ | 668,940 | $ | 791,447 | $ | (243,501 | ) | $ | 547,946 | $ | 791,447 | $ | (275,294 | ) | $ | 516,153 | |||||||
Other intangibles with an indefinite useful life | 3,628 | — | 3,628 | 13,094 | — | 13,094 | 13,094 | — | 13,094 | |||||||||||||||||||
Total intangibles | $ | 795,075 | $ | (122,507 | ) | $ | 672,568 | $ | 804,541 | $ | (243,501 | ) | $ | 561,040 | $ | 804,541 | $ | (275,294 | ) | $ | 529,247 | |||||||
Total amortization expense for the three months ended March 31, 2009 and 2010 was $40.9 million and $31.8 million, respectively.
Estimated future amortization expense at March 31, 2010 is as follows:
(Dollars in thousands) | Core Deposit Intangibles (CDI) | Trade Name | Customer Relationships | Other | Total Identifiable Intangible Assets with a Definite Useful Life | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Estimated amortization expense for the years ending: | |||||||||||||||||
Remaining 2010 | $ | 84,407 | $ | 2,060 | $ | 3,184 | $ | 1,102 | $ | 90,753 | |||||||
2011 | 88,015 | 2,747 | 3,968 | 1,305 | 96,035 | ||||||||||||
2012 | 69,260 | 2,747 | 3,679 | 856 | 76,542 | ||||||||||||
2013 | 44,743 | 2,747 | 3,436 | 849 | 51,775 | ||||||||||||
2014 | 31,803 | 2,747 | 3,232 | 712 | 38,494 | ||||||||||||
Thereafter | 38,506 | 91,568 | 29,670 | 2,810 | 162,554 | ||||||||||||
Total estimated amortization expense | $ | 356,734 | $ | 104,616 | $ | 47,169 | $ | 7,634 | $ | 516,153 | |||||||
22
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 7—Variable Interest Entities
Effective January 1, 2010, the Company adopted ASU 2009-17, "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities". At adoption of this guidance, the Company recorded increases in total assets of $281 million, liabilities of $9 million and stockholder's equity attributable to noncontrolling interests of $272 million. The cumulative effect on retained earnings was not significant.
The Company is involved in various structures that are considered to be VIEs. Generally, a VIE is a corporation, partnership, trust or any other legal structure that has equity investors that: 1) do not have sufficient equity at risk for the entity to independently finance its activities; 2) lack the power to direct the activities that significantly impact the entity's economic success; and/or 3) do not have an obligation to absorb the entity's losses or the right to receive the entity's returns. The Company's investments in VIEs primarily consist of equity investments in low income housing credit (LIHC) structures and renewable energy projects, which are designed to generate a return primarily through the realization of federal tax credits, and private capital investments.
Consolidated VIEs
The Company is required to consolidate VIEs in which it is the primary beneficiary. The Company is determined to be the primary beneficiary of a VIE when it has the power to direct matters that most significantly impact the activities of the VIE and has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
At March 31, 2010, $308 million in assets and $10 million in liabilities were consolidated by the Company on its condensed consolidated balance sheet related to two LIHC investment fund structures because the Company sponsors, manages and syndicates the funds. The assets are included in other assets as well as cash and due from banks, the liabilities are primarily included in medium- and long-term debt, and third-party investor interests are included in stockholder's equity as noncontrolling interests. Neither creditors nor equity investors in the LIHC investments have any recourse to the general credit of the Company and the Company's creditors do not have any recourse to the assets of the consolidated LIHC investments.
During the first quarter of 2010, the Company recorded $5 million of expenses related to its consolidated VIEs. The expenses are included in other noninterest expense on the Company's condensed consolidated statements of income.
LIHC Unguaranteed Syndicated Investment Funds
The Company is a sponsor and syndicator of low-income housing tax credit investments. In these syndication transactions, the Company creates the investment funds, serves as the managing investor member, and sells limited investor member interests to third parties. The Company receives benefits through income from the structuring of these funds, servicing fees for managing the funds and, as an investor member, tax benefits and tax credits to reduce the Company's tax liability. As sponsor and managing member of the funds, the Company's activities include selecting, evaluating, structuring, negotiating and closing the fund investment in operating limited partnerships, as well as oversight of the ongoing operations of the fund portfolio. There is no single third-party investor with the power to remove the Company as managing member. In this role, the Company directs the activities that most significantly impact the fund's economic performance and receives benefits from the fund.
23
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 7—Variable Interest Entities (Continued)
LIHC Guaranteed Syndicated Investment Funds
The Company also forms limited liability companies (LLCs), which in turn invest in low income housing tax credit operating partnerships. Interests in these funds are sold to third parties who pay a premium for a guaranteed return. The Company earns structuring fees from the sale of these funds and asset management fees. The Company also serves as the funds' non-member asset manager and guarantor. As sponsor and non-member asset manager of the funds, the Company's activities include selecting, evaluating, structuring, negotiating and closing investments in operating limited partnerships, as well as oversight of the ongoing operations of the fund portfolio. As guarantor, the Company guarantees a minimum rate of return throughout the investment term. There is no single third-party investor with the power to remove the Company as asset manager. In the Company's role as sponsor and asset manager, it directs the activities that most significantly impact the funds economic performance. Separately, it has an obligation to absorb losses pertaining to its minimum rate of return guarantee to investors. For details of the guarantee, see Note 16 in these condensed consolidated financial statements.
Unconsolidated VIEs in Which the Company has a Variable Interest
The Company holds variable interests in other VIEs that it is not required to consolidate as it is not the primary beneficiary. In such cases, it does not hold the power, through its equity investments or otherwise, to direct the VIE's significant activities. The following table presents the Company's carrying amounts related to the unconsolidated VIEs and location on the condensed consolidated balance sheet at March 31, 2010. The table also presents the Company's maximum exposure to loss resulting from its involvement with these VIEs. The maximum exposure to loss represents the carrying value of the Company's involvement plus, any legally binding unfunded commitments in the unlikely event that all of the assets in the VIEs become worthless.
| March 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Other Assets | Other Liabilities | Maximum Exposure to Loss | ||||||||
LIHC investments | $ | 467,071 | $ | 5,720 | $ | 643,415 | |||||
Renewable energy investments | 304,770 | — | 304,770 | ||||||||
Private capital investments | 156,459 | — | 248,211 | ||||||||
Total unconsolidated VIEs | $ | 928,300 | $ | 5,720 | $ | 1,196,396 | |||||
LIHC Investments
The Company makes equity investments in various private investment partnership funds and limited partnerships that sponsor qualified affordable housing projects. As a limited partner and non-managing investor member in these operating partnerships, the Company is allocated tax credits and tax deductions from operating losses associated with the underlying properties. The power to direct the activities of the investments resides with the general partner and/or managing member of these partnerships. As a result, the Company does not consolidate these investments. These LIHC investments are accounted for under the equity or effective yield method and are reflected in other assets on the Company's condensed consolidated balance sheet. The Company increases the LIHC investment carrying amount and recognizes a liability for all unconditional unfunded equity commitments. These liabilities are reflected in other liabilities on the
24
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 7—Variable Interest Entities (Continued)
Company's condensed consolidated balance sheet. In addition, the Company has $176 million in off-balance sheet conditional unfunded commitments that may be drawn when specific conditions are achieved, including the completion of construction of low income housing units. These unfunded commitments are included in the maximum exposure to loss attributable to LIHC investments in the table above.
Renewable Energy Investments
The Company makes equity investments in LLCs created to operate and manage renewable energy projects. The managing member or general partner of the LLC identifies and selects the assets of the entity and provides management and/or oversight of the ongoing operations of the renewable energy project. As a passive and limited investor member, the Company is allocated production tax credits and taxable income or losses associated with the projects. These renewable energy investments are accounted for under the equity method with the investments reflected in other assets on the Company's condensed consolidated balance sheet.
Private Capital Investments
The Company makes equity investments in various private capital investment funds either directly in privately held companies or indirectly through private equity funds. As a passive investor, the Company has no rights that provide the power to direct the activities of the investments. The power to identify and select the assets of the investments resides with the managing member and/or general partner of each direct and fund investment. These private capital investments are accounted for under either the cost or equity method and are reflected in other assets on the Company's condensed consolidated balance sheet. In addition, the Company has off-balance sheet unfunded commitments of $92 million to provide additional liquidity as required by the funds. These unfunded commitments are reflected in the maximum exposure to loss attributable to private capital investments in the table above.
Note 8—Private Capital and Other Investments
The following table shows the balances of private capital and other investments, which are recorded in other assets, at March 31, 2009, December 31, 2009 and March 31, 2010.
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Private capital and other investments: | ||||||||||||
Private capital investments—cost basis | $ | 153,600 | $ | 119,121 | $ | 118,215 | ||||||
Private capital investments—equity method | — | 46,296 | 60,528 | |||||||||
LIHC investments—guaranteed | 209,858 | 185,779 | 175,703 | |||||||||
LIHC investments—unguaranteed | 331,702 | 319,031 | 293,959 | |||||||||
Consolidated VIEs | — | — | 297,736 | |||||||||
Renewable energy investments | 261,971 | 305,917 | 304,770 | |||||||||
Total private capital and other investments | $ | 957,131 | $ | 976,144 | $ | 1,250,911 | ||||||
The Company invests in private capital funds either directly in privately held companies or indirectly through private equity funds. These investments are accounted for based on the cost or equity method depending on whether the Company has significant influence over the investee. The investments' fair value is
25
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 8—Private Capital and Other Investments (Continued)
estimated when events or conditions indicate that it is probable that the carrying value of the investment will not be fully recovered in the foreseeable future. Fair value is estimated based on the company's business model, current and projected financial performance, liquidity and overall economic and market conditions. As a practical expedient, fair value can also be estimated as the NAV of the fund. If fair value is estimated to be below cost, an evaluation for other-than-temporary impairment is performed. If any of the factors used to determine fair value indicate that a recovery is unlikely or will not occur for a reasonable period of time, an other-than-temporary impairment is recorded. Based on this analysis, the Company recorded $1.8 million of other-than-temporary impairment on its private capital investments in the first quarter of 2010.
The Company also invests in limited liability partnerships and other entities operating qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. These LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. The unguaranteed LIHC investments are accounted for under the equity method. As of March 31, 2010, this category also includes $29.5 million of investments in real estate private equity funds that are compliant with the Community Reinvestment Acts Standards (CRA investments). These investments are tested quarterly for impairment. The Company had no other-than-temporary impairment on its unguaranteed LIHC and CRA investments.
The Company also invests in guaranteed LIHC investments where the availability of tax credits are guaranteed by a creditworthy entity. The investments are initially recorded at cost and amortized over the period the tax credits are allocated to provide a constant effective yield. These investments are tested quarterly for impairment. The Company had no other-than-temporary impairment on its guaranteed LIHC investments during the first quarter of 2010.
The Company invests in limited liability partnerships that operate renewable energy projects. Tax credits, taxable income and distributions associated with these renewable energy projects are allocated to investors according to the terms of the partnership agreements. These investments are accounted for under the equity method, with the initial investment recorded at cost and the carrying value adjusted for the Company's share of partnership net income and distributions received. These investments are tested annually for impairment, based on projected operating results and expected realizability of tax credits. The Company had no other-than-temporary impairment during the first quarter of 2010 on its renewable energy investments.
26
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 9—Employee Pension and Other Postretirement Benefits
The following tables summarize the components of net periodic benefit cost for the three months ended March 31, 2009 and 2010.
| Pension Benefits | Other Benefits | Superannuation, SERP(1) and ESBP(2) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Three Months Ended March 31, | For the Three Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||||
(Dollars in thousands) | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | ||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||
Service cost | $ | 13,616 | $ | 11,898 | $ | 2,332 | $ | 2,347 | $ | 256 | $ | 263 | ||||||||
Interest cost | 20,811 | 22,369 | 3,055 | 3,287 | 941 | 934 | ||||||||||||||
Expected return on plan assets | (35,219 | ) | (36,514 | ) | (2,501 | ) | (3,092 | ) | — | — | ||||||||||
Amortization of prior service cost | — | — | (16 | ) | (16 | ) | — | — | ||||||||||||
Amortization of transition amount | — | — | 328 | 328 | — | — | ||||||||||||||
Recognized net actuarial loss | 3,055 | 3,177 | 2,153 | 1,363 | 865 | 218 | ||||||||||||||
Total net periodic benefit cost | $ | 2,263 | $ | 930 | $ | 5,351 | $ | 4,217 | $ | 2,062 | $ | 1,415 | ||||||||
- (1)
- Supplemental Executives Retirement Plan (SERP)
- (2)
- Executive Supplemental Benefit Plans (ESBP)
Note 10—Other Noninterest Income and Noninterest Expense
The details of other noninterest income and noninterest expense are as follows:
Other Noninterest Income
| For the Three Months Ended | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | March 31, 2009 | March 31, 2010 | ||||||
Standby letters of credit fees | $ | 7,045 | $ | 8,458 | ||||
Trade related commission and fees | 7,325 | 6,762 | ||||||
Private capital and other investment income (expense) | (2,554 | ) | 3,434 | |||||
Other | 5,304 | 7,881 | ||||||
Total other noninterest income | $ | 17,120 | $ | 26,535 | ||||
27
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 10—Other Noninterest Income and Noninterest Expense (Continued)
Other Noninterest Expense
| For the Three Months Ended | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | March 31, 2009 | March 31, 2010 | ||||||
Low income housing credit investment amortization | $ | 10,166 | $ | 13,526 | ||||
Advertising and public relations | 10,621 | 10,165 | ||||||
Communications | 8,718 | 9,529 | ||||||
Data processing | 8,575 | 8,110 | ||||||
Printing and office supplies | 4,940 | 4,958 | ||||||
Travel | 6,353 | 5,459 | ||||||
Foreclosed asset expense (income) | 886 | (198 | ) | |||||
Expenses related to consolidated VIEs | — | 5,039 | ||||||
Other | 7,887 | 13,737 | ||||||
Total other noninterest expense | $ | 58,146 | $ | 70,325 | ||||
The following is a summary of the major categories of borrowed funds:
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Federal funds purchased and securities sold under repurchase agreements, with weighted average interest rates of 0.10%, 0.07% and 0.10% at March 31, 2009, December 31, 2009 and March 31, 2010, respectively | $ | 320,376 | $ | 150,453 | $ | 575,668 | |||||||
Commercial paper, with weighted average interest rates of 0.77%, 0.16%, and 0.18% at March 31, 2009, December 31, 2009 and March 31, 2010, respectively | 749,381 | 888,541 | 799,106 | ||||||||||
Other borrowed funds: | |||||||||||||
Federal Home Loan Bank borrowings, with weighted average interest rates of 1.13% at March 31, 2009 | 650,000 | — | — | ||||||||||
Term federal funds purchased, with weighted average interest rates of 0.97%, 0.19% and 0.18% at March 31, 2009, December 31, 2009 and March 31, 2010, respectively | 105,500 | 505,000 | 730,000 | ||||||||||
Federal Reserve Bank Term Borrowings, with weighted average interest rate of 0.25% at March 31, 2009 | 3,000,000 | — | — | ||||||||||
All other borrowed, with weighted average interest rates of 1.67%, 1.75% and 0.74% at March 31, 2009, December 31, 2009 and March 31, 2010, respectively | 106,405 | 86,934 | 103,617 | ||||||||||
Total borrowed funds | $ | 4,931,662 | $ | 1,630,928 | $ | 2,208,391 | |||||||
28
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 12—Medium- and Long-Term Debt
The following is a summary of the Company's medium-term senior debt, medium-term note payable, and long-term subordinated debt:
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Medium-Term senior debt: | ||||||||||||
Fixed rate Federal Home Loan Bank Advances. These notes bear a combined weighted average rate of 2.42% at March 31, 2009, 2.93% at December 31, 2009 and 2.62% at March 31, 2010 | $ | 2,901,000 | $ | 2,001,000 | $ | 2,501,000 | ||||||
Floating rate notes due March 2011. These notes, which bear interest at 0.08% above 3-month LIBOR, had a rate of 1.40% at March 31, 2009, 0.33% at December 31, 2009, and 0.34% at March 31, 2010 | 500,000 | 500,000 | 500,000 | |||||||||
Floating rate notes due March 2012. These notes, which bear interest at 0.20% above 3-month LIBOR, had a rate of 1.52% at March 31, 2009, 0.45% at December 31, 2009 and 0.46% at March 31, 2010 | 500,000 | 500,000 | 500,000 | |||||||||
Medium-Term note payable: | ||||||||||||
Fixed rate 6.03% notes due July 2014 (related to consolidated VIE) | — | — | 7,853 | |||||||||
Long-Term subordinated debt: | ||||||||||||
Fixed rate 5.25% notes due December 2013 | 445,167 | 434,362 | 431,008 | |||||||||
Fixed rate 5.95% notes due May 2016 | 794,764 | 776,822 | 771,118 | |||||||||
Total medium- and long-term debt | $ | 5,140,931 | $ | 4,212,184 | $ | 4,710,979 | ||||||
As of March 31, 2009, December 31, 2009 and March 31, 2010, the Company had pledged loans and securities of $40.5 billion, $38.0 billion, and $35.9 billion, respectively, as collateral for short- and medium-term advances from the Federal Reserve Bank and Federal Home Loan Bank.
In October 2008, the Federal Deposit Insurance Corporation (FDIC) established the Temporary Liquidity Guarantee (TLG) Program. On March 16, 2009, the Bank issued $1.0 billion principal amount of Senior Floating Rate Notes under the TLG Program. The proceeds thereof were used for general corporate purposes. Of the $1.0 billion of senior notes, $500 million in principal amount bear interest at a rate equal to three-month LIBOR plus 0.08% per annum and mature on March 16, 2011 (2011 Notes). The remaining $500 million in principal amount bear interest at a rate equal to three-month LIBOR plus 0.20% per annum and mature on March 16, 2012 (2012 Notes). In connection with the FDIC guarantee under the TLG Program, a fee of 1% per annum is charged to the Bank on the $1.0 billion of senior notes. The interest on the 2011 Notes and the 2012 Notes is payable and reset quarterly on the 16th of March, June, September and December of each year.
Under the TLG Program, as amended on June 3, 2009, the Bank's senior unsecured debt with a maturity of more than 30 days and issued between October 14, 2008 and October 31, 2009 is guaranteed by the full faith and credit of the United States. For debt issued prior to April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or June 30, 2012. For debt issued on or after April 1, 2009, the FDIC guarantee expires upon the earlier of either the maturity date of the debt or December 31, 2012. The Bank has elected to opt-out of the TLG Program effective January 1, 2010.
29
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments
Fair Value Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company's estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy. This hierarchy is based on the quality and reliability of the information used to determine fair value.
Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since the valuations are based on quoted prices that are readily available in an active market, they do not entail a significant degree of judgment.
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Valuations are based on at least one significant unobservable input that is supported by little or no market activity and is significant to the fair value measurement. Values are determined using pricing models and discounted cash flow models that include management judgment and estimation, which may be significant.
In assigning the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured at fair value. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be many significant inputs that are readily observable.
Valuation Methodologies
The Company has an established and documented process for determining fair value for financial assets and financial liabilities that are measured at fair value on either a recurring or nonrecurring basis. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as interest rates, yield curves, foreign exchange rates, volatilities and credit curves. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that consider the Company's creditworthiness in determining the fair value of its trading liabilities. A description of the valuation methodologies used for certain financial assets and financial liabilities measured at fair value is as follows:
Recurring Fair Value Measurements:
Trading Account Assets: Trading account assets are recorded at fair value and primarily consist of securities and derivatives held for trading purposes. See discussion below on securities available for sale, which utilize the same valuation methodology as trading account securities. See also discussion below on derivatives valuation.
30
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
Securities Available for Sale: Securities available for sale are recorded at fair value based on readily available quoted market prices, if available. If such quoted market prices are not available, management utilizes third-party pricing services and broker quotations from dealers in the specific instruments. If no market prices or broker quotes are available, external pricing models are used. To the extent possible, these pricing model valuations utilize observable market inputs obtained for similar securities. Typical inputs include LIBOR and U.S. Treasury yield curves, benchmark yields, consensus prepayment estimates and credit spreads. Level 1 measured securities include U.S. government and agency securities. Level 2 measured securities include residential mortgage-backed securities and certain asset-backed securities.
Derivatives: The Company's derivatives are primarily traded in over-the-counter markets where quoted market prices are not readily available. The Company values its derivatives using pricing models that are widely accepted in the financial services industry with inputs that are observable in the market or can be derived from or corroborated by observable market data. These models reflect the contractual terms of the derivatives including the period to maturity and market observable inputs such as yield curves and option volatility. Valuation adjustments are made to reflect counterparty credit quality and to consider the creditworthiness of the Company. Derivatives, which are included in trading account assets, trading account liabilities and other assets, are generally measured as Level 2.
Nonrecurring Fair Value Measurements:
Loans Held for Sale: Residential mortgage and commercial loans held for sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from GSEs. These loans are classified as Level 2. The fair value of commercial loans held for sale may be based on secondary market offerings for loans with similar characteristics or a valuation methodology utilizing the appraised value to outstanding loan balance ratio. These loan values are classified as Level 3.
Individually Impaired Loans: Individually impaired loans are evaluated and valued at the time the loan is identified as impaired based on the present value of the remaining expected cash flows. Because the discount factor applied is based on the loan's original effective yield rather than a current market rate, that present value does not represent fair value. However, as a practical expedient, an impaired loan may be measured based on a loan's observable market price or the underlying collateral securing the loan (provided that the loan is collateral dependent), which does represent fair value. Collateral may be real estate or business assets including equipment. The value of collateral is determined based on independent appraisals. Appraised values may be adjusted based on management's historical knowledge, changes in market conditions from the time of valuation, and management's knowledge of the client and the client's business. The loan's market price is determined using market pricing for similar assets, adjusted for management judgment. Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly. Impaired loans that are adjusted to fair value based on underlying collateral or the loan's market price are classified as Level 3.
Private Equity and Community Reinvestment Act (CRA) Investments: Private equity and CRA investments are recorded either at cost or using the equity method and are evaluated for impairment. The valuation of these investments requires significant management judgment due to the absence of quoted market prices, lack of liquidity and the long-term nature of these assets. When required, the fair value of
31
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
the investments was estimated using the NAV of the fund or based on the investee's business model, current and projected financial performance, liquidity and overall economic and market conditions. Private equity and CRA investment measurements are generally classified as Level 3.
Other Real Estate Owned (OREO): OREO represents collateral acquired through foreclosure and is recorded at the lower of the loan's unpaid principal balance or the collateral's fair value, adjusted for disposition costs. OREO values are reviewed on an ongoing basis and any decline in value is recorded as a fair value adjustment. The value of OREO is determined based on independent appraisals and is generally classified as Level 3.
LIHC Investments: LIHC investments represent guaranteed and unguaranteed funds that are recorded using the effective yield or equity method of accounting, with the investment amortized over the period the tax credits are allocated. These investments are evaluated for impairment based on the realizability of the tax credits and benefits from operating losses. Realizabilty of the tax credits is based on the qualification of low-income status for the underlying properties. These investments are generally classified as Level 3.
32
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
Fair Value Measurements on a Recurring Basis
The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2009, December 31, 2009 and March 31, 2010, by major category and by valuation hierarchy level.
| March 31, 2009 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Netting Adjustment(1) | Fair Value | ||||||||||||
Assets | |||||||||||||||||
Trading account assets | $ | 48,275 | $ | 1,167,710 | $ | — | $ | (57,858 | ) | $ | 1,158,127 | ||||||
Securities available for sale | 826,652 | 6,718,060 | 4,731 | — | 7,549,443 | ||||||||||||
Other assets(2) | — | 130,045 | — | (47,475 | ) | 82,570 | |||||||||||
Total assets | $ | 874,927 | $ | 8,015,815 | $ | 4,731 | $ | (105,333 | ) | $ | 8,790,140 | ||||||
Liabilities | |||||||||||||||||
Trading account liabilities | $ | 21,126 | $ | 1,049,312 | $ | — | $ | (105,333 | ) | $ | 965,105 | ||||||
Total liabilities | $ | 21,126 | $ | 1,049,312 | $ | — | $ | (105,333 | ) | $ | 965,105 | ||||||
| December 31, 2009 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Netting Adjustment(1) | Fair Value | ||||||||||||
Assets | |||||||||||||||||
Trading account assets: | |||||||||||||||||
U.S. Treasury | $ | 15,430 | $ | — | $ | — | $ | — | $ | 15,430 | |||||||
Other U.S. government | 28,649 | — | — | — | 28,649 | ||||||||||||
State and municipal | — | 24,878 | — | — | 24,878 | ||||||||||||
Commercial paper | — | 74,594 | — | — | 74,594 | ||||||||||||
Derivative contracts | 1,453 | 648,227 | — | (67,583 | ) | 582,097 | |||||||||||
Total trading account assets | 45,532 | 747,699 | — | (67,583 | ) | 725,648 | |||||||||||
Securities available for sale: | |||||||||||||||||
U.S. Treasury | 299,677 | — | — | — | 299,677 | ||||||||||||
Other U.S. government | 12,277,418 | — | — | — | 12,277,418 | ||||||||||||
Residential mortgage-backed securities—agency | — | 9,362,123 | — | — | 9,362,123 | ||||||||||||
Residential mortgage-backed securities—non-agency | — | 391,439 | — | — | 391,439 | ||||||||||||
State and municipal | — | 39,637 | 5,459 | — | 45,096 | ||||||||||||
Asset-backed and debt securities | — | 108,135 | — | — | 108,135 | ||||||||||||
Equity securities | 73,522 | — | 1,419 | — | 74,941 | ||||||||||||
Total securities available for sale | 12,650,617 | 9,901,334 | 6,878 | — | 22,558,829 | ||||||||||||
Other assets(2) | — | 97,186 | — | (68,302 | ) | 28,884 | |||||||||||
Total assets | $ | 12,696,149 | $ | 10,746,219 | $ | 6,878 | $ | (135,885 | ) | $ | 23,313,361 | ||||||
Liabilities | |||||||||||||||||
Trading account liabilities: | |||||||||||||||||
Derivatives | $ | 1,978 | $ | 630,951 | $ | — | $ | (101,958 | ) | $ | 530,971 | ||||||
Securities sold, not yet purchased | 7,923 | — | — | — | 7,923 | ||||||||||||
Total trading account liabilities | 9,901 | 630,951 | — | (101,958 | ) | 538,894 | |||||||||||
Other liabilities(2) | — | 12,164 | — | (9,927 | ) | 2,237 | |||||||||||
Total liabilities | $ | 9,901 | $ | 643,115 | $ | — | $ | (111,885 | ) | $ | 541,131 | ||||||
- (1)
- Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.
- (2)
- Other assets and liabilities include nontrading derivatives.
33
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
| March 31, 2010 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Netting Adjustment(1) | Fair Value | ||||||||||||
Assets | |||||||||||||||||
Trading account assets: | |||||||||||||||||
U.S. Treasury | $ | 54,380 | $ | — | $ | — | $ | — | $ | 54,380 | |||||||
Other U.S. government | 55,627 | — | — | — | 55,627 | ||||||||||||
State and municipal | — | 17,697 | — | — | 17,697 | ||||||||||||
Commercial paper | — | 47,295 | — | — | 47,295 | ||||||||||||
Foreign exchange derivative contracts | 613 | 27,290 | — | (5,469 | ) | 22,434 | |||||||||||
Energy derivative contracts | — | 208,992 | — | (57,459 | ) | 151,533 | |||||||||||
Interest rate derivative contracts | 100 | 474,916 | — | (12,250 | ) | 462,766 | |||||||||||
Equity derivative contracts | — | 19,123 | — | (560 | ) | 18,563 | |||||||||||
Total trading account assets | 110,720 | 795,313 | — | (75,738 | ) | 830,295 | |||||||||||
Securities available for sale: | |||||||||||||||||
U.S. Treasury | 299,864 | — | — | — | 299,864 | ||||||||||||
Other U.S. government | 13,039,282 | — | — | — | 13,039,282 | ||||||||||||
Residential mortgage-backed securities—agency | — | 8,212,948 | — | — | 8,212,948 | ||||||||||||
Residential mortgage-backed securities—non-agency | — | 367,842 | — | — | 367,842 | ||||||||||||
State and municipal | — | 38,838 | 6,756 | — | 45,594 | ||||||||||||
Asset-backed and debt securities | �� | 110,250 | — | — | 110,250 | ||||||||||||
Equity securities | 87,516 | — | 1,426 | — | 88,942 | ||||||||||||
Total securities available for sale | 13,426,662 | 8,729,878 | 8,182 | — | 22,164,722 | ||||||||||||
Other assets: | |||||||||||||||||
Interest rate hedging contracts | — | 29,989 | — | (12,683 | ) | 17,306 | |||||||||||
Total other assets | — | 29,989 | — | (12,683 | ) | 17,306 | |||||||||||
Total assets | $ | 13,537,382 | $ | 9,555,180 | $ | 8,182 | $ | (88,421 | ) | $ | 23,012,323 | ||||||
Liabilities | |||||||||||||||||
Trading account liabilities: | |||||||||||||||||
Foreign exchange derivative contracts | $ | 674 | $ | 45,247 | $ | — | $ | (9,145 | ) | $ | 36,776 | ||||||
Energy derivative contracts | — | 209,011 | — | (39,287 | ) | 169,724 | |||||||||||
Interest rate derivative contracts | 893 | 447,208 | — | (33,496 | ) | 414,605 | |||||||||||
Equity derivative contracts | — | 19,123 | — | — | 19,123 | ||||||||||||
Securities sold, not yet purchased | 96,585 | — | — | — | 96,585 | ||||||||||||
Total trading account liabilities | 98,152 | 720,589 | — | (81,928 | ) | 736,813 | |||||||||||
Other liabilities: | |||||||||||||||||
Interest rate hedging contracts | — | — | — | — | — | ||||||||||||
Total other liabilities | — | — | — | — | — | ||||||||||||
Total liabilities | $ | 98,152 | $ | 720,589 | $ | — | $ | (81,928 | ) | $ | 736,813 | ||||||
- (1)
- Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.
34
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
The following tables present a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2009 and 2010. Level 3 available for sale securities primarily consist of community redevelopment bonds. These bonds were carried at cost, which approximates fair value.
| For the Three Months Ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2009 | 2010 | |||||||
Balance, beginning of period | $ | 1,203,092 | $ | 6,878 | |||||
Total gains/(losses) (realized/unrealized): | |||||||||
Included in income before taxes | 20 | — | |||||||
Included in other comprehensive income (loss) | (54,749 | ) | 7 | ||||||
Purchases, sales, issuances and settlements | 126 | 1,297 | |||||||
Transfers in (out) Level 3(1) | (1,143,758 | ) | — | ||||||
Balance, end of period | $ | 4,731 | $ | 8,182 | |||||
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period | $ | — | $ | — |
- (1)
- The CLO portfolio was transferred out of Level 3 during the first quarter of 2009 as a result of the reclassification from available for sale to held to maturity. Held to maturity securities are not measured at fair value on a recurring basis and therefore are not subject to this fair value disclosure requirement.
There were no transfers in or out of the Level 1 and 2 valuation hierarchies during the first quarter of 2010.
Fair Value Measurement on a Nonrecurring Basis
Certain financial assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the three months ended March 31, 2009, December 31, 2009, and March 31, 2010 that were still held on the condensed consolidated balance sheet as of the respective periods ended, the following tables present the carrying value of such financial instruments by the level of valuation assumptions used to determine each fair value adjustment.
35
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
| March 31, 2009 | | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | Loss for the Three Months Ended March 31, 2009 | ||||||||||||
Loans | $ | 178,859 | $ | — | $ | — | $ | 178,859 | $ | (40,290 | ) | ||||||
Other Assets | 14,959 | — | — | 14,959 | (3,404 | ) | |||||||||||
Total | $ | 193,818 | $ | — | $ | — | $ | 193,818 | $ | (43,694 | ) | ||||||
| March 31, 2010 | | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | Loss for the Three Months Ended March 31, 2010 | |||||||||||||
Loans: | ||||||||||||||||||
Impaired Loans | $ | 614,901 | $ | — | $ | — | $ | 614,901 | $ | (14,767 | ) | |||||||
Other Assets: | ||||||||||||||||||
OREO | 8,374 | — | — | 8,374 | (1,046 | ) | ||||||||||||
Private Equity Investments | 4,852 | — | — | 4,852 | (1,762 | ) | ||||||||||||
Total | $ | 628,127 | $ | — | $ | — | $ | 628,127 | $ | (17,575 | ) | |||||||
Loans include residential mortgage and commercial loans held for sale measured at the lower of cost or fair value and individually impaired loans that are measured based on the fair value of the underlying collateral or the fair value of the loan. The fair value of fixed-rate residential mortgage loans was determined using whole loan forward prices obtained from GSEs. The fair value of commercial loans was determined using market pricing for similar assets, adjusted for management judgment. The fair value of impaired loans was determined based on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment.
Other assets consist of private equity investments that were written down to fair value due to impairment, and OREO that was measured at the lower of cost or fair value. The fair value of OREO was primarily based on independent appraisals.
Private equity investments with a total fair value of $4.9 million at March 31, 2010 relate to one fund that invests in bank loans, distressed debt, stressed high yield debt, mezzanine investments and public equities. The fair value of these investments was estimated using NAV. Generally, these investments cannot be redeemed with the funds and the return of invested capital and its gains are derived from distributions received upon the liquidation of the underlying assets of the fund. It is estimated that the underlying assets of the fund would be liquidated within a 10-year period and the Company does not plan to sell any of these investments at this time. There was no unfunded commitment related to this investment included in the above nonrecurring fair value table at March 31, 2010.
Fair Value of Financial Instruments Disclosures
In addition to financial instruments recorded at fair value in the Company's financial statements, the disclosure of the estimated fair value of financial instruments that are not carried at fair value is also required. Excluded from this disclosure requirement are lease financing arrangements, investments accounted for under the equity method, employee pension and other postretirement obligations and all nonfinancial assets and
36
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
liabilities, including goodwill and other intangible assets such as long-term customer relationships. The fair values presented are estimates for certain individual financial instruments and do not represent an estimate of the fair value of the Company as a whole.
Certain financial instruments that are not recognized at fair value on the consolidated balance sheet are carried at amounts that approximate fair value due to their short-term nature. These financial instruments include cash and due from banks, interest bearing deposits in banks, federal funds sold and purchased, securities purchased under resale agreements, securities sold under repurchase agreements and commercial paper. In addition, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking, and market rate and other savings are deemed to equal their carrying values.
Private equity investments including direct investments in privately held companies and indirect investments in private equity funds are carried at amounts that approximate fair value. Due to the unavailability of quoted market prices, the investments are initially valued based on cost and subsequently valued utilizing available market data to determine if the carrying value of these investments should be adjusted. Valuations are based on the investee's recent financial performance and future potential, the value of underlying investee's assets, the risks associated with the particular business, current market conditions, and other relevant factors.
Although off-balance sheet commitments, which include commitments to extend credit and standby and commercial letters of credit, are not required to be recorded at fair value on the consolidated balance sheet, they are carried at amounts that approximate fair value. The carrying value of these off-balance sheet instruments represents the unamortized fee income assessed based on the credit quality and other covenants imposed on the borrower. Since the amount assessed represents the market rate that would be charged for similar agreements, management believes that the carrying value approximates the fair value of these instruments.
Financial instruments for which their carrying values do not approximate fair value include loans, interest bearing deposits with stated maturities, other borrowed funds, medium- and long-term debt, and trust notes.
Securities held to maturity: The fair value of CLOs classified as held to maturity was estimated using a pricing model and broker quotes. The model is based on internally developed assumptions using available market data obtained from market participants and credit rating agencies.
Loans: The fair values of mortgage loans were estimated based on quoted market prices for loans with similar credit and interest rate risk characteristics. The fair values of other types of loans were estimated based upon the type of loan and maturity. The fair value of these loans was determined by discounting the future expected cash flows using the current origination rates for similar loans made to borrowers with similar credit ratings.
Interest bearing deposits: The fair values of savings accounts and certain money market accounts were based on the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit was estimated using a discounted cash flow calculation that applies current interest rates being offered on certificates with similar maturities.
37
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13—Fair Value Measurement and Fair Value of Financial Instruments (Continued)
Other borrowed funds: The fair values of Federal Reserve Bank term borrowings, Federal Home Loan Bank borrowings and term federal funds purchased were estimated using a discounted cash flow calculation that applies current market rates for applicable maturities. The carrying values of other short-term borrowed funds were assumed to approximate their fair value due to their limited duration.
Medium- and long-term debt: The fair value of medium- and long-term debt was estimated using either a discounted cash flow analysis based on current market interest rates for debt with similar maturities and credit quality or estimated using market quotes.
Trust notes: The fair value of trust notes was estimated using market quotes of similar securities.
The table below presents the carrying value and estimated fair value of certain financial instruments held by the Company as of December 31, 2009 and March 31, 2010.
| December 31, 2009 | March 31, 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||
Assets | ||||||||||||||
Securities held to maturity | $ | 1,227,718 | $ | 1,457,558 | $ | 1,247,561 | $ | 1,500,746 | ||||||
Loans, net of allowance for loan losses(1) | 45,222,765 | 44,924,749 | 44,677,956 | 44,429,098 | ||||||||||
Liabilities | ||||||||||||||
Interest bearing deposits | 53,958,664 | 53,969,991 | 52,192,332 | 52,218,554 | ||||||||||
Other borrowed funds | 591,934 | 591,953 | 833,617 | 833,617 | ||||||||||
Medium- and long-term debt | 4,212,184 | 4,180,328 | 4,710,979 | 4,690,838 | ||||||||||
Junior subordinated debt payable to subsidiary grantor trust | 13,527 | 13,076 | 13,444 | 14,233 | ||||||||||
Off-Balance Sheet Instruments | ||||||||||||||
Commitments to extend credit | 122,986 | 122,986 | 116,779 | 116,779 | ||||||||||
Standby and commercial letters of credit | 5,772 | 5,772 | 5,011 | 5,011 |
- (1)
- Excludes lease financing, net of related allowance.
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging
The Company is a party to certain derivative and other financial instruments that are entered into for the purpose of trading, meeting the needs of customers, and changing the impact on the Company's operating results due to market fluctuations in currency and/or interest rates.
Credit and market risks are inherent in derivative instruments. 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. The Company utilizes master netting and collateral support annex (CSA) agreements in order to reduce its exposure to credit risk. Master netting agreements mitigate credit risk by permitting the offset of amounts due from and to individual counterparties in the event of default. The CSA requires the counterparty with derivatives in a net loss position to provide collateral as
38
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
prescribed by such agreement. Additionally, the Company considers the potential loss in the event of counterparty default in estimating the fair value amount of the derivative instrument. Market risk is the possibility that future changes in market conditions may make the financial instrument less valuable.
Derivatives are used to manage exposure to interest rate and foreign currency risk, generate profits from proprietary trading and assist customers with their risk management objectives. The Company designates derivative instruments as those used for US GAAP hedge accounting purposes, and those for trading or economic hedge purposes. All derivative instruments are recognized as assets or liabilities on the condensed consolidated balance sheet at fair value.
The tables below present the notional amounts, and the location and fair value amounts of the Company's derivative instruments reported on the condensed consolidated balance sheet, segregated between derivative instruments designated and qualifying as hedging instruments under US GAAP and all other derivative instruments as of March 31, 2009, December 31, 2009 and March 31, 2010.
| March 31, 2009 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Asset Derivatives(1) | Liability Derivatives(1) | |||||||||||||
(Dollars in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||
Total derivatives designated as hedging instruments under US GAAP: | ||||||||||||||||
Interest rate contracts(2) | $ | 5,000,000 | Other assets | $ | 130,045 | Other liabilities | $ | — | ||||||||
Derivatives not designated as hedging instruments under US GAAP: | ||||||||||||||||
Foreign exchange contracts | $ | 4,108,972 | Trading account assets | $ | 84,712 | Trading account liabilities | $ | 59,238 | ||||||||
Energy contracts | 3,214,646 | Trading account assets | 368,292 | Trading account liabilities | 367,491 | |||||||||||
Interest rate contracts | 23,304,525 | Trading account assets | 649,688 | Trading account liabilities | 618,880 | |||||||||||
Equity contracts | 53,910 | Trading account assets | 1,900 | Trading account liabilities | 1,900 | |||||||||||
Other contracts | 6,466 | Other assets | 157 | Other liabilities | (1,080 | ) | ||||||||||
Total derivatives not designated as hedging instruments under US GAAP: | $ | 30,688,519 | $ | 1,104,749 | $ | 1,046,429 | ||||||||||
39
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
| December 31, 2009 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Asset Derivatives(1) | Liability Derivatives(1) | |||||||||||||
(Dollars in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||
Total derivatives designated as hedging instruments under US GAAP: | ||||||||||||||||
Interest rate contracts(2) | $ | 8,800,000 | Other assets | $ | 97,186 | Other liabilities | $ | 12,164 | ||||||||
Derivatives not designated as hedging instruments under US GAAP: | ||||||||||||||||
Foreign exchange contracts | $ | 2,701,925 | Trading account assets | $ | 22,398 | Trading account liabilities | $ | 27,097 | ||||||||
Energy contracts | 3,405,389 | Trading account assets | 166,395 | Trading account liabilities | 167,640 | |||||||||||
Interest rate contracts | 25,226,564 | Trading account assets | 446,756 | Trading account liabilities | 424,060 | |||||||||||
Equity contracts | 254,372 | Trading account assets | 14,133 | Trading account liabilities | 14,133 | |||||||||||
Other contracts | 5,350 | Other assets | 389 | Other liabilities | (848 | ) | ||||||||||
Total derivatives not designated as hedging instruments under US GAAP | $ | 31,593,600 | $ | 650,071 | $ | 632,082 | ||||||||||
| March 31, 2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Asset Derivatives(1) | Liability Derivatives(1) | |||||||||||||
(Dollars in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||
Total derivatives designated as hedging instruments under US GAAP: | ||||||||||||||||
Interest rate contracts(2) | $ | 4,000,000 | Other assets | $ | 29,989 | Other liabilities | $ | — | ||||||||
Derivatives not designated as hedging instruments under US GAAP: | ||||||||||||||||
Foreign exchange contracts | $ | 2,527,780 | Trading account assets | $ | 27,903 | Trading account liabilities | $ | 45,921 | ||||||||
Energy contracts | 3,445,900 | Trading account assets | 208,992 | Trading account liabilities | 209,011 | |||||||||||
Interest rate contracts | 25,727,337 | Trading account assets | 475,016 | Trading account liabilities | 448,101 | |||||||||||
Equity contracts | 433,378 | Trading account assets | 19,123 | Trading account liabilities | 19,123 | |||||||||||
Other contracts | 5,163 | Other assets | 462 | Other liabilities | (775 | ) | ||||||||||
Total derivatives not designated as hedging instruments under US GAAP | $ | 32,139,558 | $ | 731,496 | $ | 721,381 | ||||||||||
- (1)
- Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and CSA agreements.
- (2)
- The fair value includes unamortized premium of $7.7 million, $3.0 million and $6.7 million related to terminated contracts at March 31, 2009, December 31, 2009 and March 31, 2010, respectively.
Certain of the Company's derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the Company's credit rating was to fall below the specified rating, the counterparties
40
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions. At March 31, 2010, the aggregate fair value (including net interest payable/receivable) of all derivative instruments with credit-risk mitigated contingent features that are in a liability position was $57.6 million. The Company had pledged securities (including accrued interest) of $41.8 million for collateral in the normal course of business. If all of the credit-risk-related contingent features underlying these agreements had been triggered on March 31, 2010, the Company would have been required to provide additional collateral of $15.8 million to settle these contracts.
Derivatives used in Asset and Liability Management
Derivative instruments are integral components of the Company's asset and liability management activities. The Company uses interest rate derivatives to manage the Company's net interest income sensitivity to changes in market interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily LIBOR-based commercial loans, certificates of deposit, borrowings, and fixed rate subordinated debt. The following describes the significant hedging strategies of the Company.
Cash Flow Hedges
Hedging Strategies for Variable Rate Loans, Borrowings and Certificates of Deposit and Other Time Deposits
The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged risk being the variability in those payments due to changes in the designated benchmark rate (i.e., U.S. dollar LIBOR). In these strategies, the hedging instruments are matched with groups of similar variable rate instruments such that the reset tenor of the variable rate instruments and that of the hedging instrument are identical. Cash flow hedging strategies include the utilization of purchased floor, cap, collars and corridor options and interest rate swaps. At March 31, 2010, the weighted average remaining life of the currently active (excluding any forward positions) cash flow hedges was approximately 3.0 years.
The Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Payments received under the floor contract offset the decline in loan interest income if the relevant LIBOR index falls below the floor's strike rate.
The Company uses interest rate floor corridors to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Net payments to be received under the floor corridor contracts offset the decline in loan interest income if the relevant LIBOR index falls below the corridor's upper strike rate, but only to the extent the index remains above the lower strike rate. The corridor will not provide protection from declines in the relevant LIBOR index to the extent it falls below the corridor's lower strike rate.
The Company uses interest rate collars to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Net payments received under the collar contract offset declines in loan interest income if the relevant LIBOR index falls below the collar's floor strike rate, while net payments paid reduce the increase in loan interest income if the LIBOR index rises above the collar's cap strike rate.
41
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
The Company uses interest rate swaps to hedge the variable cash flows associated with 1-month or 3-month LIBOR indexed loans. Payments received (or paid) under the swap contract offset fluctuations in loan interest income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans' interest income caused by changes in the relevant LIBOR index.
The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with 1-month or 3-month LIBOR indexed borrowings. Payments received under the cap contract offset the increase in borrowing interest expense if the relevant LIBOR index rises above the cap's strike rate.
The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with the forecasted issuance and rollover of short-term, fixed rate CDs. In these hedging relationships, the Company hedges the change in interest rates based on 1-month, 3-month, and 6-month LIBOR, which is consistent with the CDs' original term to maturity and reflects their repricing frequency. Net payments to be received under the cap contract offset increases in interest expense caused by the relevant LIBOR index rising above the cap's strike rate.
The Company uses interest rate cap corridors to hedge the variable cash flows associated with the forecasted issuance and rollover of short-term, fixed rate CDs. In these hedging relationships, the Company hedges changes in interest rates, either 1-month, 3-month, or 6-month LIBOR, based on the original term to maturity of the CDs. Net payments received under the cap corridor contract offset increases in deposit interest expense caused by the relevant LIBOR index rising above the corridor's lower strike rate, but only to the extent the index does not exceed the upper strike rate. The corridor will not provide protection from increases in the relevant LIBOR index to the extent it rises above the corridor's upper strike rate.
Hedging transactions are structured at inception so that the notional amounts of the hedging instruments are matched to an equal principal amount of loans, CDs, or borrowings, the index and repricing frequencies of the hedging instruments match those of the loans, CDs, or borrowings and the period in which the designated hedged cash flows occurs is equal to the term of the hedge instruments. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedging instruments versus those of the loans, CDs or borrowings.
For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness or hedge components excluded from the assessment of hedge effectiveness are recognized in noninterest expense in the period in which they arise. Based upon amounts included in accumulated other comprehensive income at March 31, 2010, the Company expects to realize approximately $14.0 million in net interest income during the twelve months ending March 31, 2011. This amount could differ from amounts actually realized due to changes in interest rates and the addition of other hedges subsequent to March 31, 2010.
42
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
The following tables present the amount and location of the net gains and losses recorded in the Company's condensed consolidated statements of income and changes in stockholder's equity for derivatives designated as cash flow hedges for the three months ended March 31, 2009 and March 31, 2010.
| For the Three Months Ended March 31, 2009 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Gain or (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||
| | Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||||||||
| Amount of Gain or (Loss) Recognized in OCI on Derivative Instruments (Effective Portion) | ||||||||||||||
(Dollars in thousands) | Location | Amount | Location | Amount | |||||||||||
Derivatives in Cash Flow Hedging Relationships | |||||||||||||||
Interest Income | $ | 32,138 | |||||||||||||
Interest rate contracts | $ | 6,982 | Interest Expense | (26 | ) | Noninterest Expense | $ | 14 | |||||||
Total | $ | 6,982 | $ | 32,112 | $ | 14 | |||||||||
| For the Three Months Ended March 31, 2010 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Gain or (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||
| | Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |||||||||||||
| Amount of Gain or (Loss) Recognized in OCI on Derivative Instruments (Effective Portion) | ||||||||||||||
(Dollars in thousands) | Location | Amount | Location | Amount | |||||||||||
Derivatives in Cash Flow Hedging Relationships | |||||||||||||||
Interest Income | $ | 20,116 | |||||||||||||
Interest rate contracts | $ | (1,897 | ) | Interest Expense | — | Noninterest Expense | $ | (6 | ) | ||||||
Total | $ | (1,897 | ) | $ | 20,116 | $ | (6 | ) | |||||||
Trading Derivatives and Economic Hedges
Derivative instruments classified as trading include both derivatives entered into for the Company's own account and as an accommodation for customers. Derivatives held for trading purposes are included in trading assets or trading liabilities with changes in fair value reflected in trading income or losses. The majority of the Company's derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures.
The Company offers market-linked certificates of deposit, which allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to the S&P 500, the Dow Jones UBS Commodity Index or a currency-linked index. The Company hedges its exposure to the embedded derivative contained in market-linked CDs with a perfectly matched over-the-counter call option. Both the embedded derivative and call option are recorded at fair value with the realized and unrealized changes in fair value recorded in noninterest income within trading account activities.
The Company has a limited portfolio of market path CDs, which provide the current CD holders with a return tied to the respective index. The Company engages in an economic hedging strategy in which the interest paid based on the respective index is exchanged for a fixed rate of interest. The Company accounts for
43
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)
the derivative embedded in the market path CD separately at fair value. A total return swap that encompasses the value of a series of options that had individually hedged each CD is recorded at fair value. The fair value of the embedded derivative and the hedge instrument are recorded in other assets and other liabilities and the changes in the fair value of the embedded derivative and the hedge instrument are recognized as interest expense.
The following table presents the amount and location of the net gains and losses reported in the condensed consolidated statement of income for derivative instruments classified as trading and derivatives used as economic hedges for the three months ended March 31, 2009 and March 31, 2010.
| Gain or (Loss) Recognized in Income on Derivative Instruments | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| | For the Three Months Ended March 31, 2009 | For the Three Months Ended March 31, 2010 | |||||||
(Dollars in thousands) | Location | Amount | Amount | |||||||
Trading Derivatives and Economic Hedges: | ||||||||||
Interest rate contracts | Trading account activities | $ | 4,557 | $ | 2,441 | |||||
Foreign exchange contracts | Trading account activities | 8,071 | 8,919 | |||||||
Energy contracts | Trading account activities | 4,335 | 2,284 | |||||||
Equity contracts | Trading account activities | 427 | 2,941 | |||||||
Other contracts | Interest expense | (38 | ) | (24 | ) | |||||
Total | $ | 17,352 | $ | 16,561 | ||||||
44
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 15—Accumulated Other Comprehensive Loss
The following table presents the change in each of the components of other comprehensive loss and the related tax effect of the change allocated to each component.
(Dollars in thousands) | Before Tax Amount | Tax Effect | Net of Tax | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
For the Three Months Ended March 31, 2009: | |||||||||||
Cash flow hedge activities: | |||||||||||
Unrealized net gains on hedges arising during the period | $ | 6,982 | $ | (2,743 | ) | $ | 4,239 | ||||
Less: accretion of fair value adjustment | 3,765 | (1,441 | ) | 2,324 | |||||||
Less: reclassification adjustment for net gains on hedges included in net income | (32,112 | ) | 12,577 | (19,535 | ) | ||||||
Net change in unrealized gains on hedges | (21,365 | ) | 8,393 | (12,972 | ) | ||||||
Securities: | |||||||||||
Unrealized holding gains arising during the period on securities available for sale | 16,737 | (6,576 | ) | 10,161 | |||||||
Less: accretion of fair value adjustment on securities available for sale | (6,787 | ) | 2,666 | (4,121 | ) | ||||||
Less: accretion of net unrealized losses on held to maturity securities | 7,330 | (2,880 | ) | 4,450 | |||||||
Net change in unrealized losses on securities | 17,280 | (6,790 | ) | 10,490 | |||||||
Foreign currency translation adjustment | (692 | ) | 272 | (420 | ) | ||||||
Reclassification adjustment for pension and other benefits included in net income: | |||||||||||
Amortization of prior service costs | (16 | ) | 6 | (10 | ) | ||||||
Amortization of transition amount | 328 | (129 | ) | 199 | |||||||
Recognized net actuarial loss | 6,074 | (2,386 | ) | 3,688 | |||||||
Net change in pension and other benefits | 6,386 | (2,509 | ) | 3,877 | |||||||
Net change in accumulated other comprehensive loss | $ | 1,609 | $ | (634 | ) | $ | 975 | ||||
For the Three Months Ended March 31, 2010: | |||||||||||
Cash flow hedge activities: | |||||||||||
Unrealized net losses on hedges arising during the period | $ | (1,897 | ) | $ | 746 | $ | (1,151 | ) | |||
Less: accretion of fair value adjustment | 1,073 | (422 | ) | 651 | |||||||
Less: Reclassification adjustment for net gains on hedges included in net income | (21,189 | ) | 8,325 | (12,864 | ) | ||||||
Net change in unrealized gains on hedges | (22,013 | ) | 8,649 | (13,364 | ) | ||||||
Securities: | |||||||||||
Unrealized holding gains arising during the period on securities available for sale | 112,088 | (44,040 | ) | 68,048 | |||||||
Reclassification adjustment for net gains on securities available for sale included in net income | (33,900 | ) | 13,319 | (20,581 | ) | ||||||
Less: accretion of fair value adjustment on securities available for sale | (104 | ) | 41 | (63 | ) | ||||||
Less: accretion of fair value adjustment on held to maturity securities | (6,471 | ) | 2,543 | (3,928 | ) | ||||||
Less: accretion of net unrealized losses on held to maturity securities | 22,757 | (8,941 | ) | 13,816 | |||||||
Net change in unrealized losses on securities | 94,370 | (37,078 | ) | 57,292 | |||||||
Foreign currency translation adjustment | 883 | (347 | ) | 536 | |||||||
Reclassification adjustment for pension and other benefits included in net income: | |||||||||||
Amortization of prior service costs | (16 | ) | 6 | (10 | ) | ||||||
Amortization of transition amount | 328 | (129 | ) | 199 | |||||||
Recognized net actuarial loss | 4,758 | (1,007 | ) | 3,751 | |||||||
Net change in pension and other benefits | 5,070 | (1,130 | ) | 3,940 | |||||||
Net change in accumulated other comprehensive loss | $ | 78,310 | $ | (29,906 | ) | $ | 48,404 | ||||
45
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 15—Accumulated Other Comprehensive Loss (Continued)
The following table presents the change in accumulated other comprehensive loss balances.
(Dollars in thousands) | Net Unrealized Gains (Losses) on Cash Flow Hedges | Net Unrealized Gains (Losses) on Securities | Foreign Currency Translation Adjustment | Pension and Other Benefits Adjustment | Accumulated Other Comprehensive Loss | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, December 31, 2008 | $ | 73,308 | $ | (352,710 | ) | $ | (1,113 | ) | $ | (531,336 | ) | $ | (811,851 | ) | ||
Change during the period | (12,972 | ) | 10,490 | (420 | ) | 3,877 | 975 | |||||||||
Balance, March 31, 2009 | $ | 60,336 | $ | (342,220 | ) | $ | (1,533 | ) | $ | (527,459 | ) | $ | (810,876 | ) | ||
Balance, December 31, 2009 | $ | 19,298 | $ | (296,309 | ) | $ | 263 | $ | (374,114 | ) | $ | (650,862 | ) | |||
Change during the period | (13,364 | ) | 57,292 | 536 | 3,940 | 48,404 | ||||||||||
Balance, March 31, 2010 | $ | 5,934 | $ | (239,017 | ) | $ | 799 | $ | (370,174 | ) | $ | (602,458 | ) | |||
Note 16—Commitments, Contingencies and Guarantees
The following table summarizes the Company's significant commitments.
(Dollars in thousands) | March 31, 2010 | |||
---|---|---|---|---|
Commitments to extend credit | $ | 21,712,125 | ||
Standby letters of credit | 4,651,352 | |||
Commercial letters of credit | 48,493 | |||
Risk participations in bankers' acceptances | 305 | |||
Commitments to fund principal investments | 92,417 | |||
Commitments to fund LIHC investments | 176,344 | |||
Commitments to fund CLO securities | 9,663 |
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 maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. Additionally, the Company enters into risk participations in bankers' acceptances wherein a fee is received to guarantee a portion of the credit risk on an acceptance of another bank. The majority of these types of commitments have terms of one year or less. At March 31, 2010, the carrying value of the Company's risk participations in bankers' acceptances and standby and commercial letters of credit totaled $5.0 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments. The carrying value of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the consolidated balance sheet.
46
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 16—Commitments, Contingencies and Guarantees (Continued)
The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on management's credit assessment of the customer.
Principal investments include direct investments in private and public companies and indirect investments in private equity funds. The Company issues commitments to provide equity and mezzanine capital financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately-held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate.
The Company invests in either guaranteed or unguaranteed LIHC investments. The guaranteed LIHC investments carry a minimum rate of return guarantee by a creditworthy entity. The unguaranteed LIHC investments carry partial guarantees covering the timely completion of projects, availability of tax credits and operating deficit thresholds from the issuer. For these LIHC investments, the Company has committed to provide additional funding as stipulated by its investment participation.
The Company is a fund manager for limited liability companies issuing LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over a twelve-year weighted average period. Additionally, the Company receives guarantees which include the timely completion of projects, availability of tax credits and operating deficit thresholds from the limited liability partnerships/corporations issuing the LIHC investments that reduce the Company's ultimate exposure to loss. As of March 31, 2010, the Company's maximum exposure to loss under these guarantees is limited to a return of investor capital and minimum investment yield, or $192.2 million. The risk that the Company would be required to pay investors for a yield deficiency is low, based on the continued satisfactory performance of the underlying properties. The Company has a reserve of $6.8 million recorded related to these guarantees, which represents the remaining unamortized fair value of the guarantee fees that were recognized at inception. For information on the Company's LIHC investments that were consolidated, refer to Note 7 in these condensed consolidated financial statements.
The Company guarantees its subsidiaries' leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease transactions, the Company does not have any material obligation to be satisfied. As of March 31, 2010, we had no exposure to loss for these agreements.
The Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $1,699 million at March 31, 2010. The market value of the associated collateral was $1,746 million at March 31, 2010. As of March 31, 2010, the Company had no exposure that would require it to pay under this securities lending indemnification, since the collateral market value exceeds the securities lent.
47
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 16—Commitments, Contingencies and Guarantees (Continued)
The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of March 31, 2010, the maximum exposure to loss under these contracts totaled $44.1 million. The risk that the Company would be required to perform under these guarantees varies based on the creditworthiness of the other financial institution's customer. Credit risk grades are assigned by the Company based on the estimated probability of default. The risk of default is considered low for those with superior to good credit ratings, moderate for those with satisfactory to adequate credit ratings, and high for those considered special mention, substandard, doubtful and loss. Based on these criteria, at March 31, 2010, the Company had a maximum exposure to loss under these contracts with a low, moderate, and high risk of payment exposure of $8.3 million, $24.4 million, and $11.4 million, respectively. At March 31, 2010, the Company maintained a reserve of $2.4 million for losses related to these guarantees.
The Company is a member of the Visa USA network (Visa). Visa's bylaws obligate its members to indemnify Visa for losses in connection with the settlement of certain antitrust lawsuits. The Company's indemnification obligation is limited to its proportionate share. The Company had a liability of $4.2 million both in December 31, 2009 and March 31, 2010, representing the estimated fair value of the Company's obligations under the indemnity provisions. The $4.2 million liability represents the Company's estimate of the fair value of its proportionate share of the sum of Visa's remaining amount owed to American Express under the previously executed settlement agreement plus the Company's estimate of Visa's future settlements under pending lawsuits, after subtracting the balance in Visa's escrow account. The Company's maximum exposure to loss for the remaining pending Visa antitrust lawsuits is not determinable, as it is dependent on the outcome of the litigation, but any loss will be proportionate to the Company's ownership interest in Visa. At March 31, 2010, the risk that the Company would be required to pay as a result of this guarantee is considered to be low, based on Visa's continued cash funding of the escrow account to pay its antitrust lawsuit settlements.
The Company is subject to various pending and threatened legal actions that arise in the normal course of business. Reserves for losses from legal actions that are both probable and estimable are recorded at the time of that determination. Management believes that the disposition of all claims currently pending will not have a material adverse effect on the Company's consolidated financial condition, operating results or liquidity.
As a result of a corporate reorganization in the fourth quarter of 2009, the Company reevaluated its business segments. Under the new organizational structure, the Company has three operating segments: Retail Banking Group, Corporate Banking Group and Pacific Rim Corporate Group. The Corporate Banking Group and Pacific Rim Corporate Group segments have been aggregated together. The Company has two reportable business segments: Retail Banking and Corporate Banking.
Prior to this reorganization, the various operating segments were aggregated into two reportable business segments formerly known as "Retail Banking" and "Wholesale Banking". The Company's new reportable business segment structure is similar to the previous structure. However, the Global and Wealth Markets division, which was previously included in Retail Banking, is now included in Corporate Banking. Additionally, the goodwill, intangible assets, and related amortization/accretion associated with the privatization transaction previously were included in the Company's segment results. To align with the chief operating
48
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 17—Business Segments (Continued)
decision maker's view of these segments, the Company has adjusted the 2009 reportable business segment results to exclude privatization-related goodwill, intangible assets, and related amortization/accretion from the reportable business segment results and included such amounts in "Other."
- •
- Retail Banking offers a range of banking products and services, primarily to individuals and small businesses, delivered generally through a network of branches and ATMs located in the western U.S and telephone and internet access 24-hours-a-day. These products offered include mortgages, home equity lines of credit, consumer and commercial loans, and deposit accounts.
- •
- Corporate Banking provides credit, depository and cash management services, investment and risk management products to businesses, individuals and target specialty niches. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services and capital markets products, as well as trust, private banking, investment and asset management services for individuals and institutions. The Pacific Rim Corporate Group offers a range of credit, deposit, and investment management products and services to companies headquartered in either Japan or the U.S.
Other is comprised of certain non-bank subsidiaries of UnionBanCal Corporation; the transfer pricing center; the earnings associated with the allowance for credit losses; the amount of the provision for credit losses over/(under) the risk-adjusted return on capital (RAROC) expected loss for the period; the residual costs of support groups; goodwill, intangible assets, and the related amortization/accretion associated with the Company's privatization transaction; the elimination of the fully taxable-equivalent basis amount; and the difference between the marginal tax rate and the consolidated effective tax rate. In addition, "Other" includes Corporate Treasury, which is responsible for Asset-Liability Management (ALM), wholesale funding, and the ALM investment securities and derivatives hedging portfolios.
The information, set forth in the table that follows, reflects selected income statement and balance sheet items by business segment. The information presented does not necessarily represent the business units' financial condition and results of operations were they independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies.
The information in the table is derived from the internal management reporting system used by management to measure the performance of the individual segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each operating segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. During the first quarter of 2010, the Company refined its transfer pricing methodology with respect to reference rates for deposits and to include additional assumptions about liquidity premiums, benefits granted for eligible loan collateral and charges for collateral requirements on deposits. Noninterest income and expense directly attributable to an operating segment are assigned to that operating segment. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to an operating segment based on a predetermined percentage of usage. Under the Company's RAROC methodology, credit expense is charged to an operating segment based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks.
49
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 17—Business Segments (Continued)
The Company reflects a "market view" perspective in measuring the business segments. The market view is a measurement of customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are reflected in "Reconciling Items."
The business segment results for prior periods have been restated to reflect changes in the transfer pricing methodology, the organizational changes that have occurred and the market view contribution.
| Retail Banking | Corporate Banking | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of and for the Three Months Ended March 31, | As of and for the Three Months Ended March 31, | ||||||||||||
| 2009 | 2010 | 2009 | 2010 | ||||||||||
Results of operations—Market View (dollars in thousands): | ||||||||||||||
Net interest income (expense) | $ | 190,443 | $ | 243,032 | $ | 292,838 | $ | 384,641 | ||||||
Noninterest income (expense) | 67,320 | 65,952 | 115,016 | 117,915 | ||||||||||
Total revenue | 257,763 | 308,984 | 407,854 | 502,556 | ||||||||||
Noninterest expense (income) | 203,018 | 214,077 | 217,855 | 244,558 | ||||||||||
Credit expense (income) | 7,438 | 6,613 | 69,084 | 79,899 | ||||||||||
Income (loss) before income taxes and including noncontrolling interests | 47,307 | 88,294 | 120,915 | 178,099 | ||||||||||
Income tax expense (benefit) | 18,497 | 34,523 | 25,693 | 47,116 | ||||||||||
Net income (loss) including noncontrolling interests | 28,810 | 53,771 | 95,222 | 130,983 | ||||||||||
Less: Net loss from noncontrolling interests | — | — | — | — | ||||||||||
Net income (loss) attributable to UNBC | $ | 28,810 | $ | 53,771 | $ | 95,222 | $ | 130,983 | ||||||
Total assets, end of period—Market View (dollars in millions): | $ | 21,679 | $ | 22,567 | $ | 35,007 | $ | 32,594 | ||||||
50
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 17—Business Segments (Continued)
| Other | Reconciling Items | UnionBanCal Corporation | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of and for the Three Months Ended March 31, | As of and for the Three Months Ended March 31, | As of and for the Three Months Ended March 31, | |||||||||||||||||
| 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | ||||||||||||||
Results of operations—Market View (dollars in thousands): | ||||||||||||||||||||
Net interest income (expense) | $ | 87,453 | $ | (35,551 | ) | $ | (10,731 | ) | $ | (17,769 | ) | $ | 560,003 | $ | 574,353 | |||||
Noninterest income (expense) | 3,072 | 38,557 | (10,692 | ) | (12,519 | ) | 174,716 | 209,905 | ||||||||||||
Total revenue | 90,525 | 3,006 | (21,423 | ) | (30,288 | ) | 734,719 | 784,258 | ||||||||||||
Noninterest expense (income) | 109,552 | 76,510 | (9,042 | ) | (10,573 | ) | 521,383 | 524,572 | ||||||||||||
Credit expense (income) | 172,675 | 83,620 | (197 | ) | (132 | ) | 249,000 | 170,000 | ||||||||||||
Income (loss) before income taxes and including noncontrolling interests | (191,702 | ) | (157,124 | ) | (12,184 | ) | (19,583 | ) | (35,664 | ) | 89,686 | |||||||||
Income tax expense (benefit) | (65,282 | ) | (58,581 | ) | (4,764 | ) | (7,657 | ) | (25,856 | ) | 15,401 | |||||||||
Net income (loss) including noncontrolling interests | (126,420 | ) | (98,543 | ) | (7,420 | ) | (11,926 | ) | (9,808 | ) | 74,285 | |||||||||
Less: Net loss from noncontrolling interests | — | (3,059 | ) | — | — | — | (3,059 | ) | ||||||||||||
Net income (loss) attributable to UNBC | $ | (126,420 | ) | $ | (95,484 | ) | $ | (7,420 | ) | $ | (11,926 | ) | $ | (9,808 | ) | $ | 77,344 | |||
Total assets, end of period—Market View (dollars in millions): | $ | 13,572 | $ | 32,225 | $ | (1,533 | ) | $ | (1,915 | ) | $ | 68,725 | $ | 85,471 | ||||||
Tamalpais Bank
On April 16, 2010, the Bank entered into a Purchase and Assumption Agreement (Tamalpais Agreement) with the Federal Deposit Insurance Corporation (FDIC) as receiver of Tamalpais Bank of San Rafael, California to purchase certain assets and assume certain deposits and other liabilities of Tamalpais Bank.
Of the approximately $0.6 billion in total assets acquired, the Bank acquired approximately $0.5 billion in loans and other real estate owned which are covered under a loss share agreement with the FDIC. The Bank also assumed more than $0.4 billion in deposits. These amounts are estimates, subject to adjustment based upon final settlement with the FDIC. Certain of the assumed deposits were acquired at a premium of 2 percent and the assets were acquired at a discount to Tamalpais Bank's book value of 10 percent.
During the second quarter of 2010, the Bank will record the purchased assets and assumed liabilities at fair value. Due to substantial effort required to estimate the fair values of the assets purchased and liabilities assumed, the contingencies resulting from the acquisition, and various other calculations, the accounting for the acquisition is not complete at the time the accompanying financial statements are filed. Until the fair values are established, any gain or goodwill to be recognized during the second quarter of 2010 resulting from the acquisition cannot be calculated.
The Tamalpais Agreement only covers designated assets and liabilities of Tamalpais Bank. None of the assets, liabilities or common stock of Tamalpais Bank's former parent company, Tamalpais Bancorp, were purchased or assumed by the Bank.
51
UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 18—Subsequent Events (Continued)
Frontier Bank
On April 30, 2010, the Bank entered into a Purchase and Assumption Agreement (Frontier Agreement) with the FDIC as receiver of Frontier Bank of Everett, Washington to purchase certain assets and assume certain deposit and other liabilities of Frontier Bank.
Of the approximately $3.2 billion in assets acquired, the Bank acquired approximately $2.8 billion in loans and other real estate owned which are covered under a loss share agreement with the FDIC. The Bank also assumed approximately $2.5 billion in deposits. These amounts are estimates, subject to adjustment based upon final settlement with the FDIC. The deposits were acquired without a premium and the assets were acquired at a discount to Frontier Bank's book value of 11 percent.
During the second quarter of 2010, the Bank will record the purchased assets and assumed liabilities at fair value. Due to substantial effort required to estimate the fair values of the assets purchased and liabilities assumed, the contingencies resulting from the acquisition, and various other calculations, the accounting for the acquisition is not complete at the time the accompanying financial statements are filed. Until the fair values are established, any gain or goodwill to be recognized during the second quarter of 2010 resulting from the acquisition cannot be calculated.
The Frontier Agreement only covers designated assets and liabilities of Frontier Bank. None of the assets, liabilities or common stock of Frontier Bank's former parent company, Frontier Financial Corporation, were purchased or assumed by the Bank.
Additional Subsequent Event Review
In addition to the subsequent events listed above, the Company has evaluated the potential disclosure of subsequent events through the filing date of this Form 10-Q and has determined that there are no additional subsequent events required to be disclosed.
52
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This report includes forward-looking statements, which include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts and expectations. Please refer to Part II Item 1A "Risk Factors" of our Quarterly Report on Form 10-Q (this Form 10-Q) for a discussion of some factors that may cause results to differ.
Please refer to our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K) along with the following discussion and analysis of our consolidated financial condition and results of operations for the period ended March 31, 2010 in this Form 10-Q. Averages, as presented in the following tables, are substantially all based upon daily average balances.
As used in this Form 10-Q, the term "UnionBanCal" and terms such as "we," "us" and "our" refer to UnionBanCal Corporation, Union Bank, N.A., one or more of their condensed consolidated subsidiaries, or to all of them together.
We are a California-based financial holding company and bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington and Texas as well as nationally and internationally. We had consolidated assets of $85.5 billion at March 31, 2010.
On November 4, 2008, we became a privately held company (privatization transaction). All of our issued and outstanding shares of common stock are owned by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU). Prior to the transaction, BTMU owned approximately 64 percent of our outstanding shares of common stock. Refer to Note 3 to our condensed consolidated financial statements in this Form 10-Q for further information on UnionBanCal's privatization transaction.
We are providing you with an overview of what we believe are the most significant factors and developments that impacted our first quarter 2010 results and that could impact our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties that impact us.
In 2008 and 2009, the U.S. and global economies experienced a serious recession and unprecedented volatility in the financial markets, and there was significant deterioration in sectors of the U.S consumer and business economy, all of which continue to present challenges for the banking and financial services industry.
Our sources of revenue are net interest income (predominantly from loans and deposits, and also from investment securities and other funding sources) and noninterest income. For the first quarter of 2010, total revenue was comprised of 73 percent net interest income and 27 percent noninterest income. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that impact our revenue sources.
Our primary sources of liquidity are core deposits and wholesale funding. Core deposits consist of total deposits, excluding brokered deposits and time deposits of $100,000 and over. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international, and secured funds raised by selling securities under repurchase agreements and by borrowing from the Federal Home Loan Bank
53
of San Francisco (FHLB). We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse situations.
Performance Highlights
In the first quarter of 2010, our net interest income (on a taxable-equivalent basis) increased 3 percent from the first quarter of 2009 to $576.8 million, primarily due to lower rates paid on interest bearing liabilities, investment securities growth, and purchase price accounting accretions related to our privatization, partially offset by lower yields on earning assets. However, our net interest margin of 2.95 percent contracted 84 basis points compared to the same period last year, primarily as a result of a decrease in our interest rate spread (the difference between our earning assets yield and total interest bearing liabilities rate) attributable to a significant growth in our average interest bearing deposit liabilities, which was primarily used to invest in lower yielding U.S. government securities and interest bearing deposits in banks.
In the first quarter of 2010, our noninterest income of $209.9 million increased 20 percent from the first quarter of 2009, primarily due to a gain of $35.2 million on the sale of agency mortgage-backed securities. In the first quarter of 2010, our noninterest expense of $524.6 million was relatively flat compared to the first quarter of 2009.
Our effective tax rate was 17.2 percent in the first quarter of 2010, compared to (72.5) percent in the first quarter of 2009. The change in the effective tax rate was primarily due to pre-tax loss in the prior year compared to pre-tax income in the current year, as well as the impact of tax credits and state income taxes.
Balance Sheet Highlights
Our total assets at March 31, 2010 of $85.5 billion grew $16.7 billion, or 24 percent, from March 31, 2009 primarily due to higher securities balances. Our stockholder's equity of $9.7 billion at March 31, 2010 grew $2.2 billion from March 31, 2009 primarily due to a $2.0 billion capital contribution from BTMU in September 2009.
In first quarter of 2010, our average total loans decreased 6 percent from the first quarter of 2009 to $46.8 billion. This decrease was primarily in the construction and commercial, financial and industrial sectors, due to tighter underwriting standards, proactive portfolio management, and a decrease in loan demand.
In the first quarter of 2010, our average total deposits increased 45 percent to $67.8 billion compared to the first quarter of 2009. In the first quarter of 2010, our average noninterest bearing deposits increased 15 percent to $14.4 billion compared to the first quarter of 2009. In the first quarter of 2010, our average interest bearing deposits increased by 57 percent to $53.5 billion compared to the first quarter of 2009. These increases reflect the results of targeted retail and corporate deposit-gathering marketing initiatives throughout Union Bank, including a new industry strategy targeting retail brokerage firm clients and other long standing industry markets, as well as significant growth in money market account deposits from state and local governments, and institutional escrow clients. Average noninterest bearing deposits represented 21 percent of average total deposits in the first quarter of 2010, compared to 27 percent in the first quarter of 2009. The annualized average all-in-cost of funds improved to 0.62 percent in the first quarter of 2010, compared to 1.03 percent in the first quarter of 2009.
Credit Quality
During the first quarter of 2010, we provided $165 million for our allowances for credit losses compared to $275 million in the first quarter of 2009. The decrease was primarily attributable to a decrease in criticized assets and commitments and lower loss content in our nonaccrual loans, partially offset by higher loss content in the residential mortgage and consumer loan portfolios during the first quarter of 2010 versus an increase in
54
criticized assets and commitments during the first quarter of 2009. See further discussion below in "Allowances for Credit Losses."
Our nonperforming assets totaled $835 million, $1.4 billion and $1.5 billion at March 31, 2009, December 31, 2009 and March 31, 2010, respectively. The increase in nonperforming assets resulted from weak economic conditions which drove higher levels of nonaccrual loans primarily in our commercial mortgage and residential mortgage portfolios. Net charge offs were $116 million, $95 million and $119 million in first quarter 2009, fourth quarter 2009 and first quarter 2010, respectively.
At March 31, 2009, December 31, 2009 and March 31, 2010, our allowances for credit losses as a percent of total loans were 2.07 percent, 3.25 percent and 3.38 percent, respectively. At March 31, 2009, December 31, 2009 and March 31, 2010, our allowances for credit losses as a percent of nonaccrual loans were 126 percent, 116 percent and 111 percent, respectively. At March 31, 2009, December 31, 2009 and March 31, 2010, our allowance for loan losses as a percent of total loans was 1.76 percent, 2.87 percent and 3.01 percent, respectively. At March 31, 2009, December 31, 2009 and March 31, 2010, our allowance for loan losses as a percent of nonaccrual loans was 107 percent, 103 percent and 99 percent, respectively.
Subsequent Events
See our discussion of subsequent events in Note 18 to our condensed consolidated financial statements in this Form 10-Q regarding Tamalpais Bank and Frontier Bank.
UnionBanCal Corporation's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and the general practices of the banking industry, which include management estimates and judgments.
Our most significant estimates are approved by our Risk & Capital Committee, which is comprised of selected senior officers of the Bank. For each financial reporting period, a review of these estimates is presented to and discussed with the Audit & Finance Committee of our Board of Directors.
Understanding our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our Critical Accounting Policies and our significant accounting policies are discussed in detail in our 2009 Form 10-K filed with the Securities and Exchange Commission (the SEC). There have been no material changes to these critical accounting estimates during the three months ended March 31, 2010.
55
Summary of Financial Performance
| | | Increase (Decrease) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Three Months Ended March 31, | ||||||||||||||
| 2010 versus 2009 | ||||||||||||||
(Dollars in thousands) | 2009 | 2010 | Amount | Percent | |||||||||||
Results of Operations | |||||||||||||||
Net interest income(1) | $ | 560,003 | $ | 574,353 | $ | 14,350 | 2.6 | % | |||||||
Noninterest income | |||||||||||||||
Service charges on deposit accounts | 71,322 | 66,140 | (5,182 | ) | (7.3 | ) | |||||||||
Securities gains, net | — | 33,893 | 33,893 | nm | |||||||||||
Trust and investment management fees | 33,907 | 31,420 | (2,487 | ) | (7.3 | ) | |||||||||
Other noninterest income | 69,487 | 78,452 | 8,965 | 12.9 | |||||||||||
Total noninterest income | 174,716 | 209,905 | 35,189 | 20.1 | |||||||||||
Total revenue | 734,719 | 784,258 | 49,539 | 6.7 | |||||||||||
Provision for loan losses | 249,000 | 170,000 | (79,000 | ) | (31.7 | ) | |||||||||
Noninterest expense | |||||||||||||||
Salaries and other compensation | 188,223 | 224,400 | 36,177 | 19.2 | |||||||||||
Employee benefits | 55,340 | 55,186 | (154 | ) | (0.3 | ) | |||||||||
Salaries and employee benefits | 243,563 | 279,586 | 36,023 | 14.8 | |||||||||||
Intangible asset amortization | 40,887 | 31,793 | (9,094 | ) | (22.2 | ) | |||||||||
Regulatory agencies | 17,938 | 29,848 | 11,910 | 66.4 | |||||||||||
Outside services | 18,834 | 22,785 | 3,951 | 21.0 | |||||||||||
Low income housing credit investment amortization | 10,166 | 13,526 | 3,360 | 33.1 | |||||||||||
(Reversal of) provision for losses on off-balance sheet commitments | 26,000 | (5,000 | ) | (31,000 | ) | nm | |||||||||
Expenses related to consolidated VIEs | — | 5,039 | 5,039 | nm | |||||||||||
Privatization-related expense | 26,819 | 5,153 | (21,666 | ) | (80.8 | ) | |||||||||
Other noninterest expense | 137,176 | 141,842 | 4,666 | 3.4 | |||||||||||
Total noninterest expense | 521,383 | 524,572 | 3,189 | 0.6 | |||||||||||
Income (loss) before income taxes and including noncontrolling interest | (35,664 | ) | 89,686 | 125,350 | nm | ||||||||||
Income tax expense (benefit) | (25,856 | ) | 15,401 | 41,257 | nm | ||||||||||
Net Income (Loss) including Noncontrolling Interests | (9,808 | ) | 74,285 | 84,093 | nm | ||||||||||
Less: Net loss from noncontrolling interests | — | (3,059 | ) | (3,059 | ) | nm | |||||||||
Net Income (Loss) attributable to UNBC | $ | (9,808 | ) | $ | 77,344 | $ | 87,152 | nm | % | ||||||
- (1)
- Net interest income does not include any adjustments for fully taxable equivalence.
- nm
- = not meaningful
The primary contributors to our financial performance for the first quarter of 2010 compared to the first quarter of 2009 are presented below.
- •
- We provided a total of $165 million for credit losses ($170 million for loan losses and a $5 million reversal for losses on off-balance sheet commitments) in the first quarter of 2010, compared to a total of $275 million provision for credit losses in the first quarter of 2009 ($249 million for loan losses and $26 million for losses on off-balance sheet commitments). The provision decreases were primarily due to a decrease in criticized assets and commitments and lower loss content in our nonaccrual loans, partially offset by higher loss content in the residential mortgage and consumer loan portfolios during
56
- •
- Our net interest income was favorably influenced by higher volumes in our securities and interest-bearing deposits in banks, as well as by lower average rates on our interest bearing liabilities. Additionally, net interest income increased due to the accretion of fair value adjustments on loans and securities related to our privatization. Partly offsetting these positive influences to our net interest income were lower average yields on our earning assets and higher level of interest bearing liabilities. Our net interest margin of 2.95 percent contracted 84 basis points compared to the same period last year primarily as a result of a decrease in our interest rate spread (the difference between our earning assets yield and total interest bearing liabilities rate) attributable to a significant growth in our average interest bearing deposit liabilities, which was primarily used to invest in lower yielding U.S. government securities and interest bearing deposits in banks (see discussion under "Net Interest Income").
the first quarter of 2010 versus an increase in criticized assets and commitments during the first quarter of 2009.
The increase in our noninterest income was due to several factors:
- —
- Securities gains increased primarily due to a $35.2 million gain on the sale of mortgage-backed securities;
- —
- Service charges on deposit accounts decreased primarily due to lower overdraft fees resulting from a change in overdraft fee pricing and changes in customer behavior; and
- —
- Trust and investment management fees were lower primarily due to a decline in mutual fund revenues. This decline reflects lower fees charged on certain of our managed assets, while our average managed assets were relatively unchanged.
The increase in our noninterest expense was due to several factors:
- —
- Salaries and other compensation expenses increased due to higher base salaries and higher incentive compensation accruals;
- —
- Regulatory agency expenses increased as a result of higher FDIC deposit insurance assessment rates, which increased from the first quarter of 2009 and higher deposit balances;
- —
- Expenses related to consolidated VIEs increased $5.0 million, as the result of the adoption of a new accounting standard; partially offset by
- —
- Provision for losses on off-balance sheet commitments decreased $31.0 million; and
- —
- Expenses related to our privatization transaction included a $9.1 million decrease in amortization of intangibles and a decrease in other privatization related costs of $21.7 million, primarily due to higher amortization of bridge award compensation for the first quarter of 2009.
57
The following table shows the major components of net interest income and net interest margin.
| For the Three Months Ended | Increase (Decrease) in | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2009 | March 31, 2010 | | | Interest Income/ Expense(1) | ||||||||||||||||||||||||||||
| Average Balance | ||||||||||||||||||||||||||||||||
| Average Balance | Interest Income/ Expense(1) | Average Yield/ Rate(1)(2) | Average Balance | Interest Income/ Expense(1) | Average Yield/ Rate(1)(2) | |||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||
Loans:(3) | |||||||||||||||||||||||||||||||||
Commercial, financial and industrial | $ | 18,503,965 | $ | 193,787 | 4.25 | % | $ | 14,954,956 | $ | 161,889 | 4.39 | % | $ | (3,549,009 | ) | (19 | )% | $ | (31,898 | ) | (16 | )% | |||||||||||
Construction | 2,733,630 | 19,261 | 2.86 | 2,308,856 | 16,890 | 2.97 | (424,774 | ) | (16 | ) | (2,371 | ) | (12 | ) | |||||||||||||||||||
Residential mortgage | 15,923,191 | 234,438 | 5.89 | 16,784,420 | 227,489 | 5.42 | 861,229 | 5 | (6,949 | ) | (3 | ) | |||||||||||||||||||||
Commercial mortgage | 8,253,324 | 102,389 | 4.96 | 8,234,255 | 86,393 | 4.20 | (19,069 | ) | (0 | ) | (15,996 | ) | (16 | ) | |||||||||||||||||||
Consumer | 3,722,252 | 46,539 | 5.07 | 3,915,724 | 42,809 | 4.43 | 193,472 | 5 | (3,730 | ) | (8 | ) | |||||||||||||||||||||
Lease financing | 652,684 | 7,653 | 4.69 | 649,312 | 6,181 | 3.81 | (3,372 | ) | (1 | ) | (1,472 | ) | (19 | ) | |||||||||||||||||||
Total Loans | 49,789,046 | 604,067 | 4.88 | 46,847,523 | 541,651 | 4.65 | (2,941,523 | ) | (6 | ) | (62,416 | ) | (10 | ) | |||||||||||||||||||
Securities—taxable | 8,319,754 | 102,256 | 4.92 | 23,504,338 | 142,774 | 2.43 | 15,184,584 | nm | 40,518 | 40 | |||||||||||||||||||||||
Securities—tax-exempt | 50,417 | 1,025 | 8.13 | 42,327 | 885 | 8.37 | (8,090 | ) | (16 | ) | (140 | ) | (14 | ) | |||||||||||||||||||
Interest bearing deposits in banks | 4,220 | 900 | 0.48 | 6,596,843 | 4,055 | 0.25 | 6,592,623 | nm | 3,155 | nm | |||||||||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 196,567 | 141 | 0.29 | 461,098 | 119 | 0.10 | 264,531 | nm | (22 | ) | (16 | ) | |||||||||||||||||||||
Trading account assets | 1,266,203 | 158 | 0.05 | 859,727 | 860 | 0.41 | (406,476 | ) | (32 | ) | 702 | nm | |||||||||||||||||||||
Total earning assets | 59,626,207 | 708,547 | 4.78 | 78,311,856 | 690,344 | 3.54 | 18,685,649 | 31 | (18,203 | ) | (3 | ) | |||||||||||||||||||||
Allowance for loan losses | (708,736 | ) | (1,407,252 | ) | (698,516 | ) | (99 | ) | |||||||||||||||||||||||||
Cash and due from banks | 2,142,198 | 1,205,261 | (936,937 | ) | (44 | ) | |||||||||||||||||||||||||||
Premises and equipment, net | 674,021 | 673,907 | (114 | ) | (0 | ) | |||||||||||||||||||||||||||
Other assets | 5,338,809 | 6,026,337 | 687,528 | 13 | |||||||||||||||||||||||||||||
Total assets | $ | 67,072,499 | $ | 84,810,109 | $ | 17,737,610 | 26 | % | |||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||
Deposits: | |||||||||||||||||||||||||||||||||
Transaction accounts | $ | 22,497,062 | $ | 61,097 | 1.10 | $ | 39,861,094 | $ | 63,079 | 0.64 | $ | 17,364,032 | 77 | % | $ | 1,982 | 3 | ||||||||||||||||
Savings and consumer time | 4,367,945 | 15,939 | 1.48 | 5,971,776 | 11,945 | 0.81 | 1,603,831 | 37 | (3,994 | ) | (25 | ) | |||||||||||||||||||||
Large time | 7,232,767 | 28,002 | 1.57 | 7,621,415 | 10,538 | 0.56 | 388,648 | 5 | (17,464 | ) | (62 | ) | |||||||||||||||||||||
Total interest bearing deposits | 34,097,774 | 105,038 | 1.25 | 53,454,285 | 85,562 | 0.65 | 19,356,511 | 57 | (19,476 | ) | (19 | ) | |||||||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements | 251,946 | 53 | 0.09 | 205,765 | 37 | 0.07 | (46,181 | ) | (18 | ) | (16 | ) | (30 | ) | |||||||||||||||||||
Commercial paper | 721,416 | 1,592 | 0.89 | 576,429 | 240 | 0.17 | (144,987 | ) | (20 | ) | (1,352 | ) | (85 | ) | |||||||||||||||||||
Other borrowed funds(4) | 5,083,086 | 11,477 | 0.92 | 713,687 | 1,202 | 0.68 | (4,369,399 | ) | (86 | ) | (10,275 | ) | (90 | ) | |||||||||||||||||||
Medium- and long-term debt | 4,743,352 | 27,529 | 2.35 | 4,560,180 | 26,241 | 2.33 | (183,172 | ) | (4 | ) | (1,288 | ) | (5 | ) | |||||||||||||||||||
Trust notes | 13,922 | 238 | 6.84 | 13,475 | 268 | 7.95 | (447 | ) | (3 | ) | 30 | 13 | |||||||||||||||||||||
Total borrowed funds | 10,813,722 | 40,889 | 1.53 | 6,069,536 | 27,988 | 1.87 | (4,744,186 | ) | (44 | ) | (12,901 | ) | (32 | ) | |||||||||||||||||||
Total interest bearing liabilities | 44,911,496 | 145,927 | 1.32 | 59,523,821 | 113,550 | 0.77 | 14,612,325 | 33 | (32,377 | ) | (22 | ) | |||||||||||||||||||||
Noninterest bearing deposits | 12,535,399 | 14,383,860 | 1,848,461 | 15 | |||||||||||||||||||||||||||||
Other liabilities | 2,289,392 | 1,276,119 | (1,013,273 | ) | (44 | ) | |||||||||||||||||||||||||||
Total liabilities | 59,736,287 | 75,183,800 | 15,447,513 | 26 | |||||||||||||||||||||||||||||
Equity | |||||||||||||||||||||||||||||||||
UNBC Stockholder's equity | 7,336,212 | 9,532,428 | 2,196,216 | 30 | |||||||||||||||||||||||||||||
Noncontrolling interests | — | 93,881 | 93,881 | nm | |||||||||||||||||||||||||||||
Total equity | 7,336,212 | 9,626,309 | 2,290,097 | 31 | |||||||||||||||||||||||||||||
Total liabilities and equity | $ | 67,072,499 | $ | 84,810,109 | $ | 17,737,610 | 26 | % | |||||||||||||||||||||||||
Net Interest Income/Margin | |||||||||||||||||||||||||||||||||
Net interest income/margin (taxable-equivalent basis) | 562,620 | 3.79 | % | 576,794 | 2.95 | % | 14,174 | 3 | |||||||||||||||||||||||||
Less: taxable-equivalent adjustment | 2,617 | 2,441 | (176 | ) | (7 | ) | |||||||||||||||||||||||||||
Net interest income | $ | 560,003 | $ | 574,353 | $ | 14,350 | 3 | % | |||||||||||||||||||||||||
- (1)
- Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
- (2)
- Annualized.
- (3)
- Average balances on loans outstanding include all nonperforming loans and loans held for sale. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.
- (4)
- Includes interest bearing trading liabilities.
- nm
- = not meaningful
58
Net interest income in the first quarter of 2010, on a taxable-equivalent basis, increased $14.2 million, or 3 percent, compared to the first quarter of 2009. Our net interest margin in the first quarter of 2010 decreased by 84 basis points to 2.95 percent compared to the first quarter of 2009. These results were primarily due to the following:
- •
- Average earning assets increased $18.7 billion, or 31 percent, primarily due to an increase in interest-bearing deposits in banks and average investment securities. As our average interest bearing deposit liabilities grew by $19.4 billion, or 57 percent, which far outpaced our loan demand, we expanded our purchases of securities, increasing our net average securities by $15.2 billion. We also increased our average interest bearing deposits in banks by $6.6 billion, primarily relating to balances with the Federal Reserve Bank of San Francisco;
- •
- Yields on our average earning assets declined 124 basis points as a result of the decreasing interest rate environment and included the shift to lower yielding assets primarily due to a decline in loan demand;
- •
- Net interest income decreased $16.1 million due to the accretion of fair value adjustments on loans, and securities related to our privatization transaction;
- •
- Average interest bearing deposits increased $19.4 billion, or 57 percent. Average noninterest bearing deposits represented 21 percent of average total deposits in the first quarter of 2010, compared to 27 percent in the first quarter of 2009; and
- •
- In the first quarter of 2010, the annualized average all-in cost of funds was 0.62 percent, reflecting an average deposit-to-loan ratio of 145 percent and what we believe is a relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers. In the first quarter of 2009, the annualized all-in cost of funds was 1.03 percent and our average deposit-to-loan ratio was 94 percent.
Noninterest Income and Noninterest Expense
The following tables detail our noninterest income and noninterest expense that exceeded 1 percent of our total revenues for the three months ended March 31, 2009 and 2010.
Noninterest Income
| For the Three Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Increase (Decrease) | |||||||||||
| March 31, 2009 | March 31, 2010 | ||||||||||||
(Dollars in thousands) | Amount | Percent | ||||||||||||
Service charges on deposit accounts | $ | 71,322 | $ | 66,140 | $ | (5,182 | ) | (7.3 | )% | |||||
Securities gains, net | — | 33,893 | 33,893 | nm | ||||||||||
Trust and investment management fees | 33,907 | 31,420 | (2,487 | ) | (7.3 | ) | ||||||||
Trading account activities | 22,692 | 21,093 | (1,599 | ) | (7.0 | ) | ||||||||
Merchant banking fees | 13,832 | 13,676 | (156 | ) | (1.1 | ) | ||||||||
Card processing fees, net | 7,536 | 8,620 | 1,084 | 14.4 | ||||||||||
Brokerage commissions and fees | 8,307 | 8,528 | 221 | 2.7 | ||||||||||
Losses on private capital investments, net | (2,121 | ) | (192 | ) | 1,929 | (90.9 | ) | |||||||
Other | 19,241 | 26,727 | 7,486 | 38.9 | ||||||||||
Total noninterest income | $ | 174,716 | $ | 209,905 | $ | 35,189 | 20.1 | % | ||||||
nm = not meaningful
59
Noninterest Expense
| For the Three Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Increase (Decrease) | |||||||||||
| March 31, 2009 | March 31, 2010 | ||||||||||||
(Dollars in thousands) | Amount | Percent | ||||||||||||
Salaries and other compensation | $ | 188,223 | $ | 224,400 | $ | 36,177 | 19.2 | % | ||||||
Employee benefits | 55,340 | 55,186 | (154 | ) | (0.3 | ) | ||||||||
Salaries and employee benefits | 243,563 | 279,586 | 36,023 | 14.8 | ||||||||||
Net occupancy | 41,921 | 43,380 | 1,459 | 3.5 | ||||||||||
Intangible asset amortization | 40,887 | 31,793 | (9,094 | ) | (22.2 | ) | ||||||||
Regulatory agencies | 17,938 | 29,848 | 11,910 | 66.4 | ||||||||||
Outside services | 18,834 | 22,785 | 3,951 | 21.0 | ||||||||||
Professional services | 15,938 | 16,361 | 423 | 2.7 | ||||||||||
Equipment | 15,413 | 15,811 | 398 | 2.6 | ||||||||||
Software | 15,038 | 14,728 | (310 | ) | (2.1 | ) | ||||||||
Low income housing credit investment amortization | 10,166 | 13,526 | 3,360 | 33.1 | ||||||||||
Advertising and public relations | 10,621 | 10,165 | (456 | ) | (4.3 | ) | ||||||||
Communications | 8,718 | 9,529 | 811 | 9.3 | ||||||||||
Data processing | 8,575 | 8,110 | (465 | ) | (5.4 | ) | ||||||||
Foreclosed asset expense (income) | 886 | (198 | ) | (1,084 | ) | nm | ||||||||
(Reversal of) provision for losses on off-balance sheet commitments | 26,000 | (5,000 | ) | (31,000 | ) | nm | ||||||||
Expenses related to consolidated VIEs | — | 5,039 | 5,039 | nm | ||||||||||
Privatization-related expense | 26,819 | 5,153 | (21,666 | ) | (80.8 | ) | ||||||||
Other | 20,066 | 23,956 | 3,890 | 19.4 | ||||||||||
Total noninterest expense | $ | 521,383 | $ | 524,572 | $ | 3,189 | 0.6 | % | ||||||
nm = not meaningful
Our effective tax rate in the first quarter of 2010 was 17.2 percent, compared to (72.5) percent for the first quarter of 2009. A negative effective tax rate indicates a net income tax benefit. The change in the effective tax rate was primarily due to a pre-tax loss in the prior year compared to pre-tax income in the current year, as well as the impact of tax credits and state income taxes.
Our quarterly effective tax rate for the first quarters of 2009 and 2010 was computed on an individual quarterly basis.
For further information regarding income tax expense, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Income Tax Expense" in our 2009 Form 10-K and Note 9 to the condensed consolidated financial statements in this Form 10-Q.
60
The following table shows loans outstanding by loan type at the end of each period presented.
| | | | Increase (Decrease) March 31, 2010 From: | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | March 31, 2009 | December 31, 2009 | ||||||||||||||||||||
| March 31, 2009 | December 31, 2009 | March 31, 2010 | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | |||||||||||||||||||||
Commercial, financial and industrial | $ | 17,902,431 | $ | 15,258,081 | $ | 14,870,549 | $ | (3,031,882 | ) | (16.9 | )% | $ | (387,532 | ) | (2.5 | )% | |||||||||
Construction | 2,781,192 | 2,429,009 | 2,151,432 | (629,760 | ) | (22.6 | ) | (277,577 | ) | (11.4 | ) | ||||||||||||||
Mortgage: | |||||||||||||||||||||||||
Residential | 15,998,637 | 16,716,048 | 16,892,822 | 894,185 | 5.6 | 176,774 | 1.1 | ||||||||||||||||||
Commercial | 8,233,371 | 8,245,778 | 8,248,574 | 15,203 | 0.2 | 2,796 | 0.0 | ||||||||||||||||||
Total mortgage | 24,232,008 | 24,961,826 | 25,141,396 | 909,388 | 3.8 | 179,570 | 0.7 | ||||||||||||||||||
Consumer: | |||||||||||||||||||||||||
Installment | 2,336,931 | 2,244,239 | 2,185,539 | (151,392 | ) | (6.5 | ) | (58,700 | ) | (2.6 | ) | ||||||||||||||
Revolving lines of credit | 1,451,193 | 1,672,842 | 1,728,828 | 277,635 | 19.1 | 55,986 | 3.3 | ||||||||||||||||||
Total consumer | 3,788,124 | 3,917,081 | 3,914,367 | 126,243 | 3.3 | (2,714 | ) | (0.1 | ) | ||||||||||||||||
Lease financing | 662,295 | 653,743 | 640,741 | (21,554 | ) | (3.3 | ) | (13,002 | ) | (2.0 | ) | ||||||||||||||
Total loans held for investment | 49,366,050 | 47,219,740 | 46,718,485 | (2,647,565 | ) | (5.4 | ) | (501,255 | ) | (1.1 | ) | ||||||||||||||
Total loans held for sale | 75,013 | 8,768 | 2,725 | (72,288 | ) | (96.4 | ) | (6,043 | ) | (68.9 | ) | ||||||||||||||
Total loans | $ | 49,441,063 | $ | 47,228,508 | $ | 46,721,210 | $ | (2,719,853 | ) | (5.5 | )% | $ | (507,298 | ) | (1.1 | )% | |||||||||
Commercial, Financial and Industrial Loans
Commercial, financial and industrial loans represent one of the largest categories in our loan portfolio. These loans are extended principally to corporations, middle-market businesses and small businesses, with no industry concentration exceeding 10 percent of total loans.
Our commercial market lending originates primarily through our commercial banking offices. These offices, which rely extensively on relationship-oriented banking, provide a variety of services including cash management services, lines of credit, accounts receivable and inventory financing. Separately, we originate or participate in a wide variety of financial services to major corporations. These services include traditional commercial banking and specialized financing tailored to the needs of each customer's specific industry. We are active in, among other sectors, the oil and gas, communications, entertainment, healthcare, retailing, power and utilities and financial services industries.
The commercial, financial and industrial loan portfolio decreases from March 31, 2009 to March 31, 2010 and from December 31, 2009 to March 31, 2010 are mainly due to a decline in the utilization rate of revolving credit lines by existing customers, our proactive portfolio management, our tighter underwriting standards, and a decline in loan demand in many sectors as a result of the difficult economic environment.
Construction and Commercial Mortgage Loans
We engage in real estate lending that includes commercial mortgage loans and construction loans secured by deeds of trust.
Construction loans are extended primarily to commercial property developers and to residential builders. As of March 31, 2010, the construction loan portfolio consisted of approximately 90 percent in the commercial income producing real estate industry and 10 percent with residential homebuilders. The construction loan portfolio decreased 23 percent from March 31, 2009 to March 31, 2010 due to declines of approximately $290 million, or 60 percent, in the homebuilder portfolio and $340 million, or 16 percent, in the income property portfolio. The income property reductions were concentrated mostly in the retail and industrial property types. The construction loan portfolio decreased 11 percent from December 31, 2009 to
61
March 31, 2010 due to reductions primarily in the income property portfolio that were spread across almost all property types.
Geographically, the outstanding construction loan portfolio was concentrated 43 percent in California and 57 percent out of state as of March 31, 2010. The largest out of state concentration was 14 percent in Washington. The California outstandings are distributed as follows: 39 percent in the Los Angeles/Orange County region, including the Inland Empire, 25 percent in the San Francisco Bay Area, 15 percent in Sacramento and the Central Valley, 16 percent in San Diego, and 5 percent in the Central Coast region.
The commercial mortgage loan portfolio consists of loans secured by commercial income properties primarily in California. The commercial mortgage portfolio increased slightly from March 31, 2009 to March 31, 2010 due to continued moderate originations and a reduced rate of early loan repayments associated with the tightening of the credit markets.
Residential Mortgage Loans
We originate residential mortgage loans, secured by one-to-four family residential properties, through our multiple channel network (including branches, private bankers, mortgage brokers, and loan-by-phone) throughout California, Oregon and Washington, and we periodically purchase loans in our market area.
At March 31, 2010, 71 percent of our residential mortgage loans were interest only, none of which are negative amortizing. At origination, these interest only loans had relatively high credit scores and had weighted average loan-to-value (LTV) ratios of approximately 66 percent. The remainder of the portfolio consists of a small amount of balloon loans and regular amortizing loans.
We do not have a program for originating or purchasing subprime loan products. However, we have loan products that allow a customer to move more quickly through the loan origination process by reducing the need to verify the income or assets of the customer. We refer to these as Portfolio Express loans. Portfolio Express loans are only available to existing clients for no-cash-out/rate and term refinance of existing residential mortgages with the Bank and eliminate the verification of both income and assets but must pass a reasonability test. "Low doc" and "no doc" (discontinued in 2008) loans comprise less than half of our residential loan portfolio, and the delinquency rates relative to the outstanding balances at March 31, 2010 were slightly higher than fully documented loans. At March 31, 2010, the total amount of "no doc" and "low doc" loans past due 30 days or more was $176.7 million, compared to $122.6 million at March 31, 2009. The total amount of residential mortgages delinquent 30 days or more was $374.7 million at March 31, 2010, compared to $242.7 million at March 31, 2009. Although delinquencies have risen since March 31, 2009 as a result of the declining real estate market and downturn in the economy, the delinquency rate remains low compared to the industry average for California prime loans. We believe that our underwriting standards remain conservative and as described above, programs with higher risk have been discontinued.
We hold most of the loans we originate. However, we do sell our 30-year, fixed rate loans, except for Community Reinvestment Act (CRA) qualifying loans.
62
Consumer Loans
We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network, Private Banking Offices and via the internet. The increase in consumer loans from March 31, 2009 was primarily in our FlexEquity line/loan product. The FlexEquity line/loan allows our customers the flexibility to manage a line of credit with as many as four fixed rate loans under a single product. When customers convert all or a portion of their FlexEquity lines to fixed rate loans, these new loans are classified as installment loans. As a result of the continuing decline in the overall property values in California, we have reduced our maximum loan to value limits on all second trust deed programs we offer. At origination, these loans had relatively high credit scores and had weighted-average loan-to-value (LTV) ratios of approximately 60 percent. Our total home equity loans and lines delinquent 30 days or more were $42.2 million at March 31, 2010, compared to $36.2 million at March 31, 2009. Our annual review program reviews all equity secured lines with a commitment amount of $200,000 or more and an origination date between 2004-2008, and includes obtaining an updated credit report as well as an updated value on the property to reassess our LTV position. Action is taken to reduce or freeze limits, as applicable and pursuant to applicable laws and regulations, to minimize additional exposure in a declining market.
Lease Financing
We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. At March 31, 2010, we had leveraged leases of $543.7 million, which were net of non-recourse debt of approximately $1.1 billion. We utilize a number of special purpose entities for our leveraged leases. These entities do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP and by law, the gross lease receivable is offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased assets for repayment.
Our 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 our cross-border outstandings as of March 31 and December 31, 2009 and March 31, 2010 for Canada, the only 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 account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. For the country shown in the table below, any significant local currency outstandings are funded by local currency borrowings.
(Dollars in millions) | Financial Institutions | Public Sector Entities | Corporations and Other Borrowers | Total Outstandings | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2009 | $ | 124 | $ | — | $ | 813 | $ | 937 | |||||
December 31, 2009 | $ | 88 | $ | — | $ | 837 | $ | 925 | |||||
March 31, 2010 | $ | 70 | $ | — | $ | 789 | $ | 859 |
63
We recorded a provision for loan losses of $249 million and $170 million in the first quarter of 2009 and 2010, respectively. We recorded a provision (reversal) for losses on off-balance sheet commitments of $26 million and ($5) million in the first quarter of 2009 and 2010, respectively. The provisions for loan losses and for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowances for Credit Losses" below.
Allowance Policy and Methodology
We maintain allowances for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. Understanding our policies on the allowances for credit losses is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, our significant policies and methodology on the allowances for credit losses are discussed in detail in Note 1 to our Consolidated Financial Statements and in the section "Allowances for Credit Losses" included in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2009 Form 10-K.
Comparison of the Total Allowances and Related Provision for Credit Losses Compared to December 31, 2009
At March 31, 2010, our total allowances for credit losses were $1,579 million, which consisted of $1,408 million for loan losses and $171 million for losses on off-balance sheet commitments. The allowances for credit losses consisted of $1,281 million and $298 million of allocated and unallocated allowance, respectively. At March 31, 2010, our allowances for credit loss coverage ratios were 3.38 percent of total loans and 111 percent of total nonaccrual loans. At December 31, 2009, our total allowances for credit losses were $1,533 million, or 3.25 percent of total loans, and 116 percent of total nonaccrual loans.
In addition, the allowances incorporate the results of measuring impairment for specifically identified impaired loans utilizing a methodology based on the present value of the remaining expected cash flows or as a practical expedient, the loan's observable market price or the underlying collateral securing the loan (provided that the loan is collateral dependent). At March 31, 2010 and December 31, 2009, total impaired loans were $1,421 million and $1,317 million, respectively, and the associated impairment allowances were $199 million and $223 million, respectively.
At March 31, 2010 and December 31, 2009, the allowance for losses on off-balance sheet commitments included within our total allowances for credit losses was $171 million and $176 million, respectively. In determining the adequacy of our allowances for credit losses, we consider both the allowance for loan losses and for off-balance sheet commitment losses. Net charge offs were $119 million in the first quarter of 2010, compared to $116 million in the first quarter of 2009. We expect the elevated level of charge offs, which we began to experience in the latter half of 2008, to continue during the remainder of 2010.
As a result of management's assessment of the relevant factors, including the credit quality of our loan portfolio, the negative impact from the economic slowdown on our lending portfolios (especially our commercial real estate portfolio) and changes in the composition of the loan portfolio, we recorded a provision for loan losses of $170 million in the first quarter of 2010, compared to a provision for loan losses of $249 million in the first quarter of 2009. The decrease was primarily attributable to a decrease in criticized assets and lower loss content in our nonaccrual loans, partially offset by higher loss content in the residential mortgage and consumer loan portfolios during the first quarter of 2010 versus an increase in criticized assets during the first quarter of 2009.
64
During the first quarter of 2010, the loss factors for certain loan portfolios were increased based on management's judgment, largely due to changes in the competitive environment and increasing concentrations of credit risk. We also increased commercial loss factors based on past loss experience over a slightly longer economic time frame. Other than the change in our loss factors, as well as for the refinement in estimates and assumptions regarding the effects of economic and business conditions on borrowers and other factors, there were no other significant changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the formula and specific or unallocated allowances for credit losses.
Changes in the Allocated (Formula and Specific) Allowance
At March 31, 2010, the formula allowance decreased to $1,071 million, compared to $1,110 million at December 31, 2009. The net decrease was primarily due to a decrease in criticized assets and lower loss content in the non-accrual loans, partially offset by changes in our loss factors. At March 31, 2010, the specific allowance was $210 million, compared to $232 million at December 31, 2009.
Changes in the Unallocated Allowance
At March 31, 2010, the unallocated allowance increased to $298 million, compared to $191 million at December 31, 2009 primarily due to the negative impact of high unemployment on residential real estate loans, the effect of continued fiscal challenges for the State of California and California local governments and the effect of commercial real estate property devaluations.
65
Change in the Total Allowances for Credit Losses
The following table sets forth a reconciliation of changes in our allowances for credit losses.
| For the Three Months Ended March 31, | Increase (Decrease) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2009 | 2010 | Amount | Percent | ||||||||||||
Balance, beginning of period | $ | 737,767 | $ | 1,357,000 | $ | 619,233 | 83.9 | % | ||||||||
Loans charged off: | ||||||||||||||||
Commercial, financial and industrial | 95,768 | 67,160 | (28,608 | ) | (29.9 | ) | ||||||||||
Construction | 2,316 | 16,552 | 14,236 | nm | ||||||||||||
Commercial mortgage | 4,336 | 31,869 | 27,533 | nm | ||||||||||||
Residential mortgage | 6,053 | 10,276 | 4,223 | 69.8 | ||||||||||||
Consumer | 9,410 | 9,763 | 353 | 3.8 | ||||||||||||
Total loans charged off | 117,883 | 135,620 | 17,737 | 15.0 | ||||||||||||
Recoveries of loans previously charged off: | ||||||||||||||||
Commercial, financial and industrial | 1,151 | 13,119 | 11,968 | nm | ||||||||||||
Construction | — | 2,391 | 2,391 | nm | ||||||||||||
Commercial mortgage | 207 | 236 | 29 | 14 | ||||||||||||
Residential mortgage | 15 | 28 | 13 | 87 | ||||||||||||
Consumer | 132 | 435 | 303 | nm | ||||||||||||
Total recoveries of loans previously charged off | 1,505 | 16,209 | 14,704 | nm | ||||||||||||
Net loans charged off | 116,378 | 119,411 | 3,033 | 2.6 | ||||||||||||
Provision for loan losses | 249,000 | 170,000 | (79,000 | ) | (31.7 | ) | ||||||||||
Foreign translation adjustment and other net additions | (204 | ) | 424 | 628 | nm | |||||||||||
Ending balance of allowance for loan losses | $ | 870,185 | $ | 1,408,013 | $ | 537,828 | 61.8 | % | ||||||||
Allowance for losses on off-balance sheet commitments | 151,374 | 171,374 | 20,000 | 13.2 | ||||||||||||
Allowances for credit losses | $ | 1,021,559 | $ | 1,579,387 | $ | 557,828 | 54.6 | % | ||||||||
Allowance for loan losses to total loans(1) | 1.76 | % | 3.01 | % | ||||||||||||
Allowances for credit losses to total loans(2) | 2.07 | 3.38 | ||||||||||||||
Provision for loan losses to net loans charged off | 213.96 | 142.37 | ||||||||||||||
Net loans charged off to average loans outstanding for the period(3) | 0.95 | 1.03 |
- (1)
- The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonperforming loans, as appropriate.
- (2)
- The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate.
- (3)
- Annualized.
nm = not meaningful
Nonperforming assets consist of nonaccrual loans, restructured loans that are nonperforming 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 Consolidated Financial Statements included in the Company's 2009 Form 10-K.
66
Restructured loans are loans in which the Bank has formally restructured all or a significant portion of the loan and provided a concession in the form of debt forgiveness, a modification of interest rate and/or payment terms. Any impairment, not previously recorded, is accounted for at the time of restructuring. Restructured loans are separately disclosed as nonperforming assets for the calendar year of restructuring. If a restructured loan was negotiated at a market rate at the date of restructuring and performs under the modified terms for a sustained period, it may be disclosed as performing assets in the subsequent calendar year.
Foreclosed assets include property where the Bank acquired title through foreclosure or "deed in lieu" of foreclosure.
The following table sets forth an analysis of nonperforming assets.
| | | | Increase (Decrease) March 31, 2010 From: | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | March 31, 2009 | December 31, 2009 | ||||||||||||||||||
| March 31, 2009 | December 31, 2009 | March 31, 2010 | ||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | |||||||||||||||||||
Commercial, financial and industrial | $ | 347,073 | $ | 335,581 | $ | 251,611 | $ | (95,462 | ) | (27.5 | )% | $ | (83,970 | ) | (25.0 | )% | |||||||
Construction | 218,228 | 335,085 | 412,083 | 193,855 | 88.8 | 76,998 | 23.0 | ||||||||||||||||
Commercial mortgage | 124,772 | 414,429 | 500,632 | 375,860 | nm | 86,203 | 20.8 | ||||||||||||||||
Residential mortgage | 101,810 | 194,482 | 217,392 | 115,582 | nm | 22,910 | 11.8 | ||||||||||||||||
Consumer | 18,256 | 20,492 | 24,046 | 5,790 | 31.7 | 3,554 | 17.3 | ||||||||||||||||
Lease financing | — | 108 | 108 | 108 | nm | — | — | ||||||||||||||||
Restructured—nonaccrual | — | 16,954 | 15,573 | 15,573 | nm | (1,381 | ) | (8.1 | ) | ||||||||||||||
Total nonaccrual loans | 810,139 | 1,317,131 | 1,421,445 | 611,306 | 75.5 | 104,314 | 7.9 | ||||||||||||||||
Foreclosed assets | 21,809 | 32,662 | 45,492 | 23,683 | nm | 12,830 | 39.3 | ||||||||||||||||
Restructured—nonperforming | 2,790 | — | — | (2,790 | ) | (100.0 | ) | — | — | ||||||||||||||
Total nonperforming assets | $ | 834,738 | $ | 1,349,793 | $ | 1,466,937 | $ | 632,199 | 75.7 | % | $ | 117,144 | 8.7 | % | |||||||||
Restructured loans that continue to accrue interest | $ | — | $ | 3,811 | $ | 6,692 | $ | 6,692 | nm | $ | 2,881 | 75.6 | % | ||||||||||
Allowance for loan losses | $ | 870,185 | $ | 1,357,000 | $ | 1,408,013 | $ | 537,828 | 61.8 | % | $ | 51,013 | 3.8 | % | |||||||||
Allowances for credit losses | $ | 1,021,559 | $ | 1,533,374 | $ | 1,579,387 | $ | 557,828 | 54.6 | % | $ | 46,013 | 3.0 | % | |||||||||
Nonaccrual loans to total loans | 1.64 | % | 2.79 | % | 3.04 | % | |||||||||||||||||
Allowance for loan losses to nonaccrual loans(1) | 107.41 | 103.03 | 99.06 | ||||||||||||||||||||
Allowances for credit losses to nonaccrual loans(2) | 126.10 | 116.42 | 111.11 | ||||||||||||||||||||
Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale | 1.69 | 2.86 | 3.14 | ||||||||||||||||||||
Nonperforming assets to total assets | 1.21 | 1.58 | 1.72 |
- (1)
- The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total nonperforming loans, as appropriate.
- (2)
- The allowances for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonaccrual loans, as appropriate.
nm = not meaningful
The increase in nonaccrual loans from March 31, 2009 to March 31, 2010 was primarily due to an increase in construction and commercial mortgage loans, primarily within the commercial real estate industry sector. During the first quarters of 2009 and 2010, we had $6.9 million and $34.4 million in sales of nonperforming loans, respectively. Losses from these sales were reflected in charge offs.
67
Loans 90 Days or More Past Due and Still Accruing
| | | | Increase (Decrease) March 31, 2010 From: | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | March 31, 2009 | December 31, 2009 | |||||||||||||||||||
| March 31, 2009 | December 31, 2009 | March 31, 2010 | |||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | ||||||||||||||||||||
Commercial, financial and industrial | $ | 3,262 | $ | 4,393 | $ | 3,196 | $ | (66 | ) | (2.0 | )% | $ | (1,197 | ) | (27.2 | )% | ||||||||
Construction | 18,421 | — | 4,380 | (14,041 | ) | (76.2 | ) | 4,380 | nm | |||||||||||||||
Mortgage: | ||||||||||||||||||||||||
Residential(1) | — | — | 1,289 | 1,289 | nm | 1,289 | nm | |||||||||||||||||
Commercial | 1,468 | 413 | 5,726 | 4,258 | nm | 5,313 | nm | |||||||||||||||||
Total mortgage | 1,468 | 413 | 7,015 | 5,547 | nm | 6,602 | nm | |||||||||||||||||
Consumer and other(1) | 427 | 229 | 434 | 7 | 1.6 | 205 | 89.5 | |||||||||||||||||
Total loans 90 days or more past due and still accruing | $ | 23,578 | $ | 5,035 | $ | 15,025 | $ | (8,553 | ) | (36.3 | ) | $ | 9,990 | nm | ||||||||||
nm = not meaningful
- (1)
- Effective January 1, 2009, the Company changed its nonaccrual accounting policy to place consumer home equity loans and one-to-four single family residential loans on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure.
Management of the securities portfolio involves the maximization of return while maintaining prudent levels of quality, market risk and liquidity. At March 31, 2010, approximately 97 percent of our securities, based upon carrying value, were investment grade. The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities are detailed in Note 4 to our condensed consolidated financial statements included in this Form 10-Q.
Our securities available for sale are recorded at fair value with the change in fair value recognized in accumulated other comprehensive income. Our ALM Securities portfolio, which consists of available for sale U.S. government, state and municipal, and mortgage-backed securities held for Asset and Liability Management (ALM) purposes, totaled $22.0 billion at March 31, 2010. ALM Securities are valued at fair value by a pricing service whose prices can be corroborated by recent security trading activities.
Our asset-backed securities primarily consist of collateralized loan obligations (CLO) securities, which are known as Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, we reclassified our CLOs from available for sale to held to maturity. We consider the held to maturity classification to be more appropriate because we have the ability and the intent to hold these securities to maturity.
At March 31, 2010, the fair value of our CLO securities had increased by approximately $43.0 million from December 31, 2009, primarily due to an increase in liquidity in the marketplace. We estimate the fair value of our CLOs using a pricing model, as well as broker quotes. The model is based on internally-developed assumptions, utilizing market data derived from market participants and credit rating agencies. These assumptions include, but are not limited to, estimated default rates, recovery rates, prepayment rates and reinvestment rates.
We conduct a formal review of our securities available for sale and securities held to maturity portfolios on a quarterly basis for the presence of other-than-temporary impairment (OTTI). We recognized an insignificant amount of impairment on two non-agency residential mortgage-backed securities during the first quarter of 2010. There was no observable credit quality issues present in the remaining securities available for sale
68
portfolio at March 31, 2010. Since no observable credit quality issues were present in the CLO portfolio at March 31, 2010, we concluded that these securities were not other-than-temporarily impaired.
The following tables show the remaining contractual maturities and expected yields of the securities based upon amortized cost at March 31, 2010.
Securities Available For Sale
| March 31, 2010 | | | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Maturity | | | |||||||||||||||||||||||||||||
| One Year or Less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Total Amortized Cost | |||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||
U.S. Treasury | $ | 299,724 | 0.32 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 299,724 | 0.32 | % | ||||||||||||
Other U.S. government | 3,511,170 | 0.60 | 9,510,793 | 1.55 | — | — | — | — | 13,021,963 | 1.29 | ||||||||||||||||||||||
Residential mortgage-backed securities—agency(1)(2) | 8 | 4.41 | 283,233 | 3.69 | 1,246,155 | 3.84 | 6,526,861 | 3.92 | 8,056,257 | 3.90 | ||||||||||||||||||||||
Residential mortgage-backed securities—non-agency(1)(2) | — | — | — | — | 12,107 | 5.07 | 405,987 | 5.33 | 418,094 | 5.32 | ||||||||||||||||||||||
State and municipal | 2,005 | 7.43 | 9,670 | 6.81 | 11,058 | 3.58 | 21,155 | 5.41 | 43,888 | 5.35 | ||||||||||||||||||||||
Asset-backed and debt securities | — | — | 23,563 | 7.25 | 21,350 | 3.94 | 66,671 | 7.03 | 111,584 | 6.49 | ||||||||||||||||||||||
Equity securities(3) | — | — | — | — | — | — | — | 88,521 | — | |||||||||||||||||||||||
Total securities available for sale | $ | 3,812,907 | 0.58 | % | $ | 9,827,259 | 1.63 | % | $ | 1,290,670 | 3.85 | % | $ | 7,020,674 | 4.04 | % | $ | 22,040,031 | 2.34 | % | ||||||||||||
| March 31, 2010 | | | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Maturity | | | |||||||||||||||||||||||||||||
| One Year or Less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Total Amortized Cost | |||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||
Collateralized loan obligations | $ | — | — | % | $ | 15,467 | 3.43 | % | $ | 1,399,187 | 1.08 | % | $ | 347,614 | 1.01 | % | $ | 1,762,268 | 1.09 | % | ||||||||||||
Foreign securities | 99 | 0.25 | — | — | — | — | — | — | 99 | 0.25 | ||||||||||||||||||||||
Total securities held to maturity | $ | 99 | 0.25 | % | $ | 15,467 | 3.43 | % | $ | 1,399,187 | 1.08 | % | $ | 347,614 | 1.01 | % | $ | 1,762,367 | 1.09 | % | ||||||||||||
- (1)
- Although the residential mortgage-backed securities have been ascribed to periods based upon their contractual maturities, principal payments are received prior to maturity because borrowers have the right to repay their obligations at any time.
- (2)
- See discussion of expected duration in "Quantitative and Qualitative Disclosures About Market Risk."
- (3)
- Equity securities do not have a stated maturity and are included in the total column only.
Our securities available for sale portfolio at March 31, 2010 included ALM Securities of $22.0 billion. These securities had an expected weighted average maturity of 2.7 years.
69
The table below provides information on our deposits for the periods ending March 31, 2009, December 31, 2009 and March 31, 2010.
| | | | Increase (Decrease) March 31, 2010 From 31, 2009 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2009 | December 31, 2009 | March 31, 2010 | ||||||||||||||||
(Dollars in thousands) | Amount | Percent | |||||||||||||||||
Interest checking | $ | 773,744 | $ | 849,283 | $ | 1,376,854 | $ | 527,571 | 62 | % | |||||||||
Money market | 23,054,423 | 39,952,337 | 36,572,409 | (3,379,928 | ) | (8 | ) | ||||||||||||
Total interest bearing transaction accounts | 23,828,167 | 40,801,620 | 37,949,263 | (2,852,357 | ) | (7 | ) | ||||||||||||
Savings | 2,056,676 | 3,716,566 | 4,270,607 | 554,041 | 15 | ||||||||||||||
Time | 9,450,875 | 9,440,478 | 9,972,462 | 531,984 | 6 | ||||||||||||||
Total interest bearing deposits(1) | 35,335,718 | 53,958,664 | 52,192,332 | (1,766,332 | ) | (3 | ) | ||||||||||||
Noninterest bearing deposits | 13,543,015 | 14,558,989 | 14,389,261 | (169,728 | ) | (1 | ) | ||||||||||||
Total deposits | $ | 48,878,733 | $ | 68,517,653 | $ | 66,581,593 | $ | (1,936,060 | ) | (3 | )% | ||||||||
(1) Total interest bearing deposits include: | |||||||||||||||||||
Brokered deposits: | |||||||||||||||||||
Interest bearing transaction accounts | $ | 25,691 | $ | 5,340,452 | $ | 5,488,615 | $ | 148,163 | 3 | % | |||||||||
Time | 637,313 | 979,352 | 901,177 | (78,175 | ) | (8 | ) | ||||||||||||
Total brokered deposits | 663,004 | 6,319,804 | 6,389,792 | 69,988 | 1 | ||||||||||||||
Nonbrokered deposits | 34,672,714 | 47,638,860 | 45,802,540 | (1,836,320 | ) | (4 | ) | ||||||||||||
Total interest bearing deposits | $ | 35,335,718 | $ | 53,958,664 | $ | 52,192,332 | $ | (1,766,332 | ) | (3 | )% | ||||||||
Core Deposits: | |||||||||||||||||||
Total deposits | $ | 48,878,733 | $ | 68,517,653 | $ | 66,581,593 | $ | (1,936,060 | ) | (3 | )% | ||||||||
Less: Total brokered deposits | 663,004 | 6,319,804 | 6,389,792 | 69,988 | 1 | ||||||||||||||
Less: Total nonbrokered time deposits of $100,000 and over | 6,553,565 | 6,510,741 | 7,118,392 | 607,651 | 9 | ||||||||||||||
Total core deposits | $ | 41,662,164 | $ | 55,687,108 | $ | 53,073,409 | $ | (2,613,699 | ) | (5 | )% | ||||||||
70
Fair Value of Financial Instruments
The following table reflects financial instruments measured at fair value on a recurring basis as of March 31, 2009, December 31, 2009 and March 31, 2010. For additional information on the fair value of financial instruments, see Note 13 to the condensed consolidated financial statements in this Form 10-Q.
| March 31, 2009 | December 31, 2009 | March 31, 2010 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Fair Value | Percentage of Total | Fair Value | Percentage of Total | Fair Value | Percentage of Total | |||||||||||||||
Financial instruments recorded at fair value on a recurring basis | |||||||||||||||||||||
Assets: | |||||||||||||||||||||
Level 1 | $ | 874,927 | 10 | % | $ | 12,696,149 | 55 | % | $ | 13,537,382 | 59 | % | |||||||||
Level 2 | 8,015,815 | 91 | 10,746,219 | 46 | 9,555,180 | 42 | |||||||||||||||
Level 3 | 4,731 | — | 6,878 | — | 8,182 | — | |||||||||||||||
Netting Adjustment(1) | (105,333 | ) | (1 | ) | (135,885 | ) | (1 | ) | (88,421 | ) | (1 | ) | |||||||||
Total | $ | 8,790,140 | 100 | % | $ | 23,313,361 | 100 | % | $ | 23,012,323 | 100 | % | |||||||||
As a percentage of total Company assets | 13 | % | 27 | % | 27 | % | |||||||||||||||
Liabilities: | |||||||||||||||||||||
Level 1 | $ | 21,126 | 2 | % | $ | 9,901 | 2 | % | $ | 98,152 | 13 | % | |||||||||
Level 2 | 1,049,312 | 109 | 643,115 | 119 | 720,589 | 98 | |||||||||||||||
Level 3 | — | — | — | — | — | — | |||||||||||||||
Netting Adjustment(1) | (105,333 | ) | (11 | ) | (111,885 | ) | (21 | ) | (81,928 | ) | (11 | ) | |||||||||
Total | $ | 965,105 | 100 | % | $ | 541,131 | 100 | % | $ | 736,813 | 100 | % | |||||||||
As a percentage of total Company liabilities | 2 | % | 1 | % | 1 | % | |||||||||||||||
- (1)
- Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.
71
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk primarily exists in interest rate risk in our non-trading balance sheet and, to a much lesser degree, in price risk in our trading portfolio. The objective of market risk management is to mitigate any undue adverse impact on earnings and capital arising from changes in interest rates and other market variables and to ensure the Bank has adequate sources of liquidity. This risk management objective supports our broad objective of enhancing shareholder value, which encompasses stable earnings growth over time and capital stability.
The Board of Directors, directly or through its appropriate committee, approves our Asset and Liability Management, Investment and Derivatives Policy (ALM Policy), which governs the management of market risk and guides our investment, derivatives and trading activities. The ALM Policy establishes the Bank's risk tolerance guidelines by outlining standards for measuring market risk, creates Board-level limits for specific market risks, establishes guidelines for reporting market risk and requires independent review and oversight of market risk activities.
The Risk & Capital Committee (RCC), comprised of selected senior officers of the Bank, among other things, strives to ensure that the Bank has an effective process to identify, measure, monitor, and manage market risk as required by the ALM Policy. The RCC provides the broad and strategic guidance of market risk management by formulating high-level strategies for market risk management and defining the risk/return direction for the Bank, and by approving the investment, derivatives and trading policies that govern the Bank's activities. The Asset Liability Management Committee (ALCO) as instructed by RCC, is responsible for the management of market risk and approves specific risk management programs to be recommended to RCC for approval, including those related to interest rate hedging, investment securities, wholesale funding and trading activities. The RCC may delegate to ALCO various decisions pertaining to market risk management as it deems appropriate.
The Treasurer is primarily responsible for the implementation of risk management strategies approved by RCC and for operational management of market risk through the funding, investment and derivatives hedging activities of Corporate Treasury. The managers of the Global Markets Division and the Capital Markets Division are responsible for operational management of price risk through the trading activities conducted in their respective divisions. The Market Risk Management (MRM) unit is responsible for the monitoring of market risk and MRM functions independently of all operating and management units.
We have separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below. For additional information about our market risk management, please see "Quantitative and Qualitative Disclosures about Market Risk" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2009 Form 10-K.
Interest Rate Risk Management (Other Than Trading)
During the first quarter of 2010, our interest rate risk profile was proactively increased in asset sensitivity as measured by earnings at risk by the termination of positions in receive fixed swaps and floor portfolios and the repositioning of mortgage securities from longer to shorter durations and the execution of term funding. Additionally, increased deposit balances and cash holdings contributed to the asset sensitive position.
During the first quarter of 2010, under RCC delegated authority to approve temporary changes to risk measurement, the -200 basis point parallel scenario was replaced with a - -100 basis point parallel scenario. This change reflects the low probability associated with rate reductions of 200 basis point in the current extremely low rate environment, and the acceptance of a scenario that better reflects historically low rate levels achieved in the past. The RCC will monitor the rate environment and will consider restoring the measure in the future when deemed appropriate.
72
At March 31, 2010, Economic NII sensitivity was asset sensitive to parallel rate shifts. A +200 basis point parallel shift in rates would increase 12-month Economic NII by 2.88 percent, while a -100 bp downward shift in rates would decrease it by 2.07 percent. At December 31, 2009, a +200 basis point parallel shift in rates would increase 12-month Economic NII by 0.03 percent, while a -100 bp downward shift in rates would reduce it by 1.65 percent. We caution that significant low levels of current interest rates and ongoing enhancements to our interest rate risk modeling may make prior year comparisons of Economic NII less meaningful. Economic NII adjusts our reported NII for the effect of certain noninterest bearing deposit related fee and expense items. Those adjustment items are innately liability sensitive, meaning that reported NII is less liability sensitive than Economic NII.
Economic NII
(Dollars in millions) | March 31, 2009 | December 31, 2009 | March 31, 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
+200 basis points | $ | 19.9 | $ | 0.9 | $ | 75.7 | ||||
as a percentage of base case NII | 0.81 | % | 0.03 | % | 2.88 | % | ||||
-100 basis points | N/A | $ | (44.7 | ) | $ | (54.4 | ) | |||
as a percentage of base case NII | N/A | (1.65 | )% | (2.07 | )% |
In the case of non-parallel yield curve changes, our Economic NII will benefit from curve steepening with short-term rates dropping and long-term rates rising. Conversely, Economic NII will contract if the curve is inverted with short-term rates rising and long-term rates dropping.
ALM Activities
During the first quarter of 2010, the Bank increased its sensitive interest rate risk profile to position the Bank for rising rates in the future. The termination of positions in receive fixed swaps and floor portfolios, the repositioning of mortgage securities from longer to shorter durations and the execution of term funding were the main contributing factors. Additionally, increased deposit balances and cash holdings continue to contribute to the asset sensitive position. In managing the interest rate sensitivity of our balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our interest rate risk profile, if necessary.
ALM Securities
At March 31, 2009 and 2010, our available for sale securities portfolio included $7.4 billion and $21.9 billion, respectively, of securities for ALM purposes. At March 31, 2010, approximately $5.4 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the first quarter of 2010, we purchased $1.6 billion and sold $1.0 billion par value of securities, as part of our investment portfolio strategy, while $1.1 billion par value of ALM securities matured or were called.
Based on current prepayment projections, the estimated ALM Securities portfolio's effective duration was 2.1 at March 31, 2010, compared to 1.9 at March 31, 2009. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 2.1 suggests an expected price decrease of approximately 2.1 percent for an immediate 1.0 percent parallel increase in interest rates.
ALM Derivatives
During the first quarter of 2010, the ALM derivatives portfolio decreased by $4.8 billion notional amount due to terminations of received fixed interest rate swaps and LIBOR floor contracts.
73
The fair value of the ALM derivatives portfolio decreased primarily due to the termination of LIBOR floor contracts and the impact of a decline in interest rates on cap contracts, which benefit from the expectation of higher future interest rates. The decrease was partially offset by the termination of receive fixed interest rate swaps. For additional discussion of derivative instruments and our hedging strategies, see Note 14 to the condensed consolidated financial statements in this Form 10-Q and Note 18 to our consolidated financial statements included in our 2009 Form 10-K.
The following table provides the notional value and the fair value of our ALM derivatives portfolio as of March 31, 2009, December 31, 2009 and March 31, 2010 and the change in fair value between December 31, 2009 and March 31, 2010.
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | Increase (Decrease) From December 31, 2009 to March 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total gross notional amount of positions held for purposes other than trading: | $ | 5,000,000 | $ | 8,800,000 | $ | 4,000,000 | $ | (4,800,000 | ) | |||||
of which, interest rate swaps pay fixed rates of interest | — | — | — | — | ||||||||||
Fair value of positions held for purposes other than trading: | ||||||||||||||
Gross positive fair value | $ | 130,045 | $ | 97,186 | $ | 29,989 | $ | (67,197 | ) | |||||
Gross negative fair value | — | 12,164 | — | (12,164 | ) | |||||||||
Positive (negative) fair value of positions, net | $ | 130,045 | $ | 85,022 | $ | 29,989 | $ | (55,033 | ) | |||||
Trading Activities
We enter into trading account activities primarily as a financial intermediary for customers and, to some extent, for our own account. By acting as a financial intermediary, we are able to provide our customers with access to a range of products supporting the securities, foreign exchange and derivatives markets. In acting for our own account, we may take positions in certain securities, foreign exchange and interest rate instruments, subject to various limits in amount, tenor and other respects, with the objective of generating trading profits.
As of March 31, 2010, we had $25.7 billion notional amount of interest rate derivative contracts. We enter into these agreements for customer accommodations and for our own account, accepting risks up to management approved Value-at-Risk levels.
We market energy derivative contracts to existing energy industry customers, primarily oil and gas producers, in order to meet their hedging needs. All transactions are fully matched to offsetting (mirror) derivative contracts with third parties to remove our exposure to market risk, with income earned on the credit spread. As of March 31, 2010, we had $3.4 billion notional amount of energy derivative contracts with approximately half of these energy derivative contracts entered into as an accommodation for customers and the remaining half entered into as matching contracts to remove our exposure to market risk on our customer accommodation transactions.
74
The following table provides the notional value and the fair value of our trading derivatives portfolio as of March 31, 2009, December 31, 2009 and March 31, 2010 and the change in fair value between December 31, 2009 and March 31, 2010.
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | Increase (Decrease) From December 31, 2009 to March 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total gross notional amount of positions held for trading purposes: | ||||||||||||||
Interest rate | $ | 23,304,525 | $ | 25,226,564 | $ | 25,727,337 | $ | 500,773 | ||||||
Foreign exchange(1) | 3,739,319 | 2,407,178 | 2,214,354 | (192,824 | ) | |||||||||
Equity | 53,910 | 254,372 | 433,378 | 179,006 | ||||||||||
Energy | 3,214,646 | 3,405,389 | 3,445,900 | 40,511 | ||||||||||
Total | $ | 30,312,400 | $ | 31,293,503 | $ | 31,820,969 | $ | 527,466 | ||||||
Fair value of positions held for trading purposes: | ||||||||||||||
Gross positive fair value | $ | 1,104,592 | $ | 649,300 | $ | 730,421 | $ | 81,121 | ||||||
Gross negative fair value | 1,047,509 | 632,426 | 721,481 | 89,055 | ||||||||||
Positive fair value of positions, net | $ | 57,083 | $ | 16,874 | $ | 8,940 | $ | (7,934 | ) | |||||
- (1)
- Excludes spot contracts with notional amounts of $0.4 billion, $0.3 billion and $0.3 billion at March 31, 2009, December 31, 2009 and March 31, 2010, respectively.
Liquidity risk is the risk that the Bank's financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its contractual obligations. The objective of liquidity risk management is to maintain a sufficient amount of liquidity and diversity of funding sources to allow the Bank to meet expected and unexpected obligations in both stable and adverse conditions.
The management of liquidity risk is governed by the ALM Policy under the oversight of the RCC and the Audit & Finance Committee of the Board. ALCO oversees liquidity risk management activities. Corporate Treasury formulates the Bank's liquidity and contingency planning strategies and is responsible for identifying, monitoring and reporting on liquidity risk. Market Risk Management, which is part of the Enterprise Wide Risk Reporting and Analysis unit, partners with Corporate Treasury to establish sound policy and effective risk controls. RCC and ALCO also maintain a Contingency Funding Plan that identifies actions to be taken to help ensure adequate liquidity if an event should occur that disrupts or adversely affects the Bank's normal funding activities.
Liquidity risk is managed using a total balance sheet perspective that analyzes all sources and uses of liquidity including loans, investments, deposits and borrowings, as well as off-balance sheet exposures. Various tools are used to measure and monitor liquidity, including pro-forma forecasting of the sources and uses of cash flow over a 12 month time horizon, stress-testing of the pro-forma forecast and assessment of the Bank's capacity to raise incremental unsecured and secured funding. Stress-testing, which incorporates both bank-specific and systemic market scenarios that would adversely affect the Bank's liquidity position, facilitates the identification of appropriate remediary measures to help ensure that the Bank maintains adequate liquidity in adverse conditions. Such measures may include extending the maturity profile of liabilities, adding new funding sources, altering dependency on certain funding sources and/or selling assets.
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In March 2010, the federal bank regulators adopted (effective May 21, 2010) an Interagency Policy Statement of Funding and Liquidity Risk Management which sets forth the regulators' supervisory expectations for all insured depository institutions for management of funding and liquidity risk. Under the guidance of this policy statement, banks are expected, among other measures, to adopt and observe sound practices for liquidity risk management, ensure oversight through the board of directors or appropriate committees, conduct regular stress testing, monitor and effectively manage collateral positions, ensure diversification in funding sources, to develop a formal contingency funding plan that clearly sets out the institution's strategies for addressing liquidity shortfalls in emergency situations and to establish a monitoring framework for contingent events by using early-warning indicators and event triggers. The Bank's Board of Directors has approved a number of measures aimed at assuring compliance with the policy statement, including a formal ALM Policy with specific governance on liquidity risk management.
Our primary sources of liquidity are core deposits and wholesale funding. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international. Also included are secured funds raised by selling securities under repurchase agreements and by borrowing from the FHLB. We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse circumstances. We generally view our core deposits to be relatively stable. Secured borrowings via repurchase agreements and advances from the FHLB are also recognized as highly reliable funding sources and we therefore maintain these sources primarily to meet our contingency funding needs.
Total deposits declined $1.9 billion from $68.5 billion at December 31, 2009 to $66.6 billion at March 31, 2010. The decline in deposits was partially offset by an increase in wholesale funding of $0.8 billion from $8.9 billion at December 31, 2009 to $9.7 billion at March 31, 2010.
Core deposits, which consist of total deposits excluding brokered deposits and time deposits of $100,000 and over, provide us with a sizable source of relatively stable and low-cost funds. At March 31, 2010, our core deposits totaled $53.1 billion, and combined with our stockholder's equity, funded 73.5 percent of our $85.5 billion in total assets. Most of the remaining funding was provided by wholesale borrowings from secured and unsecured sources of varying maturities, as follows:
- •
- The Bank has pledged collateral under secured borrowing facilities with the FHLB and the Federal Reserve Bank (FRB). As of March 31, 2010, the Bank had $2.5 billion of borrowings outstanding with the FHLB and the Bank had a remaining combined unused borrowing capacity of $20.3 billion from the FHLB and the FRB.
- •
- Our securities portfolio provides liquidity through either securities sales or repurchase agreements. During the first quarter of 2010, capacity under repurchase agreements increased $0.6 billion from $17.1 billion at December 31, 2009 to $17.7 billion at March 31, 2010.
- •
- The Bank has a $4.0 billion unsecured Bank Note Program. As of March 31, 2010, the remaining available funding under the Bank Note Program was approximately $2.6 billion. We do not have any firm commitments in place to sell securities under the Bank Note Program. At March 31, 2010, a total of $1.0 billion of TLG Program guaranteed debt was outstanding which consisted entirely of medium-term notes.
- •
- In addition to the funding provided by the Bank, we raise funds at the holding company level. UnionBanCal Corporation has in place a shelf registration with the SEC permitting ready access to the public debt markets. As of March 31, 2010, $1.5 billion of debt or other securities were available for issuance under this shelf registration. We do not have firm commitments in place to sell securities under this shelf registration.
We believe that these sources, in addition to our core deposits and equity capital, provide a stable funding base. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.
76
Our costs and ability to raise funds in the capital markets are influenced by our credit ratings. Our credit ratings could be impacted by changes in the credit ratings of BTMU and MUFG. The following table provides our credit ratings as of March 31, 2010.
| | Union Bank, N.A. | UnionBanCal Corporation | |||
---|---|---|---|---|---|---|
Standard & Poor's | Long-term | A+ | A | |||
Short-term | A-1 | A-1 | ||||
Moody's | Long-term | A2 | — | |||
Short-term | P-1 | — | ||||
Fitch | Long-term | A | A | |||
Short-term | F1 | F1 | ||||
DBRS | Long-term | A (high) | A | |||
Short-term | R-1 (middle) | R-1 (low) |
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The following tables summarize our risk-based capital, risk-weighted assets, and risk-based capital ratios.
UnionBanCal Corporation
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | Minimum Regulatory Requirement | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Capital Components | |||||||||||||
Tier 1 capital | $ | 5,470,880 | $ | 7,484,516 | $ | 7,581,313 | |||||||
Tier 2 capital | 1,781,977 | 1,718,807 | 1,720,441 | ||||||||||
Total risk-based capital | $ | 7,252,857 | $ | 9,203,323 | $ | 9,301,754 | |||||||
Risk-weighted assets | $ | 62,605,281 | $ | 63,298,173 | $ | 63,293,568 | |||||||
Quarterly average assets | $ | 64,643,660 | $ | 79,226,967 | $ | 82,225,643 | |||||||
Capital Ratios | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total capital (to risk-weighted assets) | $ | 7,252,857 | 11.59 | % | $ | 9,203,323 | 14.54 | % | $ | 9,301,754 | 14.70 | % | ³$ | 5,063,485 | 8.0 | % | |||||||||
Tier 1 capital (to risk-weighted assets) | 5,470,880 | 8.74 | 7,484,516 | 11.82 | 7,581,313 | 11.98 | ³ | 2,531,743 | �� | 4.0 | |||||||||||||||
Leverage(1) | 5,470,880 | 8.46 | 7,484,516 | 9.45 | 7,581,313 | 9.22 | ³ | 3,289,026 | 4.0 |
- (1)
- Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
Union Bank, N.A.
(Dollars in thousands) | March 31, 2009 | December 31, 2009 | March 31, 2010 | Minimum Regulatory Requirement | "Well-Capitalized" Regulatory Requirement | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Capital Components | ||||||||||||||||
Tier 1 capital | $ | 5,345,825 | $ | 7,207,264 | $ | 6,868,995 | ||||||||||
Tier 2 capital | 1,465,276 | 1,478,697 | 1,475,627 | |||||||||||||
Total risk-based capital | $ | 6,811,101 | $ | 8,685,961 | $ | 8,344,622 | ||||||||||
Risk-weighted assets | $ | 62,436,991 | $ | 63,272,931 | $ | 62,896,095 | ||||||||||
Quarterly average assets | $ | 64,807,704 | $ | 79,609,326 | $ | 82,144,353 | ||||||||||
Capital Ratios | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total capital (to risk-weighted assets) | $ | 6,811,101 | 10.91 | % | $ | 8,685,961 | 13.73 | % | $ | 8,344,622 | 13.27 | % | ³$ | 5,031,688 | 8.0 | % | ³$ | 6,289,610 | 10.0 | % | |||||||||||
Tier 1 capital (to risk-weighted assets) | 5,345,825 | 8.56 | 7,207,264 | 11.39 | 6,868,995 | 10.92 | ³ | 2,515,844 | 4.0 | ³ | 3,773,766 | 6.0 | |||||||||||||||||||
Leverage(1) | 5,345,825 | 8.25 | 7,207,264 | 9.05 | 6,868,995 | 8.36 | ³ | 3,285,774 | 4.0 | ³ | 4,107,218 | 5.0 |
- (1)
- Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
We and Union Bank are subject to various regulations of the federal banking agencies, including minimum capital requirements. We both are required to maintain minimum ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the Leverage ratio).
As of March 31, 2010, management believes the capital ratios of Union Bank met all regulatory requirements of "well-capitalized" institutions, which are 10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverage ratio.
As a result of a corporate reorganization in the fourth quarter of 2009, we reevaluated our business segments. Under the new organizational structure, we have three operating segments: Retail Banking Group, Corporate Banking Group and Pacific Rim Corporate Group. The Corporate Banking Group and Pacific Rim
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Corporate Group segments have been aggregated together. We have two reportable business segments: Retail Banking and Corporate Banking.
Prior to this reorganization, the various operating segments were aggregated into two reportable business segments formerly known as "Retail Banking" and "Wholesale Banking." Our new reportable business segment structure is similar to the previous structure. However, the Global and Wealth Markets Division, which was previously included in Retail Banking, is now included in Corporate Banking. Additionally, the goodwill, intangible assets, and related amortization/accretion associated with our privatization transaction previously were included in our segment results. To align with the chief operating decision maker's view of our segments, we have adjusted our 2009 reportable business segment results to exclude privatization-related goodwill, intangible assets, and related amortization/accretion from our reportable business segment results and included such amounts in "Other."
The risk-adjusted return on capital (RAROC) methodology used seeks to attribute economic capital to business units consistent with the level of risk they assume. These risks are primarily credit and operational, given that market risk is not assumed by the business unit. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Operational risk is the potential loss due to all other factors, such as failures in internal control, system failures or external events. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and equity prices. RAROC may be one of several measures that is used to measure business unit compensation.
The table that follows reflects the condensed income statements, selected average balance sheet items, and selected financial ratios, including changes from the prior year, for each of our reportable business segments. The information presented does not necessarily represent the businesses' financial condition and results of operations as if they were independent entities. We reflect a "market view" perspective in measuring our business segments. The market view is a measurement of our customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are reflected in "Reconciling Items." The market view approach fosters cross-selling with a total profitability view of the products and services being managed. For example, the Securities Trading and Sales unit within the Global and Wealth Markets Division is a business unit that manages the fixed income securities activities for all retail and corporate customers throughout the Bank. This unit retains and also allocates revenues and expenses to divisions responsible for such retail and commercial customer relationships.
Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies.
The RAROC measurement methodology recognizes credit expense for expected losses arising from credit risk and attributes economic capital related to unexpected losses arising from credit, market and operational risks. As a result of the methodology used by the RAROC model to calculate expected losses, differences between the provision for credit losses and credit expense in any one period could be significant.
However, over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same. Business unit results are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal as a whole. Our management reporting system identifies balance sheet and income statement items for each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing system, which assigns a cost of funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. During the first quarter of 2010, we refined our transfer pricing methodology with respect to reference rates for deposits and to include additional assumptions about liquidity premiums, benefits granted for eligible loan collateral and charges for collateral requirements on
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deposits. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. The business units are assigned the costs of products and services directly attributable to their business activity through standard unit cost accounting based on volume of usage. All other corporate expenses (overhead) are allocated to the business units based on a predetermined percentage of usage.
The reportable business segment results for the prior periods have been adjusted to reflect changes in the transfer pricing methodology, the organizational changes that have occurred and the market view contribution.
| Retail Banking | | | Corporate Banking | | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of and for the Three Months Ended March 31, | Increase/ (decrease) | As of and for the Three Months Ended March 31, | Increase/ (decrease) | ||||||||||||||||||||||
| 2009 | 2010 | Amount | Percent | 2009 | 2010 | Amount | Percent | ||||||||||||||||||
Results of operations—Market View (dollars in thousands): | ||||||||||||||||||||||||||
Net interest income (expense) | $ | 190,443 | $ | 243,032 | $ | 52,589 | 28 | % | $ | 292,838 | $ | 384,641 | $ | 91,803 | 31 | % | ||||||||||
Noninterest income (expense) | 67,320 | 65,952 | (1,368 | ) | (2 | ) | 115,016 | 117,915 | 2,899 | 3 | ||||||||||||||||
Total revenue | 257,763 | 308,984 | 51,221 | 20 | 407,854 | 502,556 | 94,702 | 23 | ||||||||||||||||||
Noninterest expense (income) | 203,018 | 214,077 | 11,059 | 5 | 217,855 | 244,558 | 26,703 | 12 | ||||||||||||||||||
Credit expense (income) | 7,438 | 6,613 | (825 | ) | (11 | ) | 69,084 | 79,899 | 10,815 | 16 | ||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests | 47,307 | 88,294 | 40,987 | 87 | 120,915 | 178,099 | 57,184 | 47 | ||||||||||||||||||
Income tax expense (benefit) | 18,497 | 34,523 | 16,026 | 87 | 25,693 | 47,116 | 21,423 | 83 | ||||||||||||||||||
Net income (loss) including noncontrolling interests | 28,810 | 53,771 | 24,961 | 87 | 95,222 | 130,983 | 35,761 | 38 | ||||||||||||||||||
Less: Net loss from noncontrolling interests(2) | — | — | — | na | — | — | — | na | ||||||||||||||||||
Net income (loss) attributable to UNBC | $ | 28,810 | $ | 53,771 | $ | 24,961 | 87 | % | $ | 95,222 | $ | 130,983 | $ | 35,761 | 38 | % | ||||||||||
Average balances—Market View (dollars in millions): | ||||||||||||||||||||||||||
Total loans | $ | 20,732 | $ | 21,610 | $ | 878 | 4 | $ | 30,760 | $ | 27,223 | $ | (3,537 | ) | (11 | ) | ||||||||||
Total assets | 21,538 | 22,450 | 912 | 4 | 36,144 | 32,735 | (3,409 | ) | (9 | ) | ||||||||||||||||
Total deposits | 18,401 | 20,236 | 1,835 | 10 | 26,924 | 45,598 | 18,674 | 69 | ||||||||||||||||||
Financial ratios—Market View | ||||||||||||||||||||||||||
Risk adjusted return on capital(1) | 22 | % | 40 | % | 12 | % | 15 | % | ||||||||||||||||||
Return on average assets(1) | 0.54 | 0.97 | 1.07 | 1.62 | ||||||||||||||||||||||
Efficiency ratio(3) | 78.59 | 69.12 | 50.92 | 45.97 |
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| Other | | | Reconciling Items | UnionBanCal Corporation | | | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of and for the Three Months Ended March 31, | Increase/ (decrease) | As of and for the Three Months Ended March 31, | As of and for the Three Months Ended March 31, | Increase/ (decrease) | |||||||||||||||||||||||||||
| 2009 | 2010 | Amount | Percent | 2009 | 2010 | 2009 | 2010 | Amount | Percent | ||||||||||||||||||||||
Results of operations—Market View (dollars in thousands): | ||||||||||||||||||||||||||||||||
Net interest income (expense) | $ | 87,453 | $ | (35,551 | ) | $ | (123,004 | ) | (141 | )% | $ | (10,731 | ) | $ | (17,769 | ) | $ | 560,003 | $ | 574,353 | $ | 14,350 | 3 | % | ||||||||
Noninterest income (expense) | 3,072 | 38,557 | 35,485 | nm | (10,692 | ) | (12,519 | ) | 174,716 | 209,905 | 35,189 | 20 | ||||||||||||||||||||
Total revenue | 90,525 | 3,006 | (87,519 | ) | (97 | ) | (21,423 | ) | (30,288 | ) | 734,719 | 784,258 | 49,539 | 7 | ||||||||||||||||||
Noninterest expense (income) | 109,552 | 76,510 | (33,042 | ) | (30 | ) | (9,042 | ) | (10,573 | ) | 521,383 | 524,572 | 3,189 | 1 | ||||||||||||||||||
Credit expense (income) | 172,675 | 83,620 | (89,055 | ) | (52 | ) | (197 | ) | (132 | ) | 249,000 | 170,000 | (79,000 | ) | (32 | ) | ||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests | (191,702 | ) | (157,124 | ) | 34,578 | 18 | (12,184 | ) | (19,583 | ) | (35,664 | ) | 89,686 | 125,350 | nm | |||||||||||||||||
Income tax expense (benefit) | (65,282 | ) | (58,581 | ) | 6,701 | 10 | (4,764 | ) | (7,657 | ) | (25,856 | ) | 15,401 | 41,257 | nm | |||||||||||||||||
Net income (loss) including noncontrolling interests | (126,420 | ) | (98,543 | ) | 27,877 | 22 | (7,420 | ) | (11,926 | ) | (9,808 | ) | 74,285 | 84,093 | nm | |||||||||||||||||
Less: Net loss from noncontrolling interests(2) | — | (3,059 | ) | (3,059 | ) | nm | — | — | — | (3,059 | ) | (3,059 | ) | nm | ||||||||||||||||||
Net income (loss) attributable to UNBC | $ | (126,420 | ) | $ | (95,484 | ) | $ | 30,936 | 24 | % | $ | (7,420 | ) | $ | (11,926 | ) | $ | (9,808 | ) | $ | 77,344 | $ | 87,152 | nm | ||||||||
Average balances—Market View (dollars in millions): | ||||||||||||||||||||||||||||||||
Total loans | $ | (318 | ) | $ | (109 | ) | $ | 209 | 66 | $ | (1,385 | ) | $ | (1,876 | ) | $ | 49,789 | $ | 46,848 | $ | (2,941 | ) | (6 | ) | ||||||||
Total assets | 10,799 | 31,519 | 20,720 | nm | (1,409 | ) | (1,894 | ) | 67,072 | 84,810 | 17,738 | 26 | ||||||||||||||||||||
Total deposits | 2,431 | 3,539 | 1,108 | 46 | (1,123 | ) | (1,535 | ) | 46,633 | 67,838 | 21,205 | 45 | ||||||||||||||||||||
Financial ratios—Market View | ||||||||||||||||||||||||||||||||
Risk adjusted return on capital(1) | na | na | na | na | na | na | ||||||||||||||||||||||||||
Return on average assets(1) | na | na | na | na | (0.06 | )% | 0.37 | % | ||||||||||||||||||||||||
Efficiency ratio(3) | na | na | na | na | 65.69 | 64.98 |
- (1)
- Annualized.
- (2)
- Reflects net loss attributed to noncontrolling interest related to our consolidated variable interest entities (VIE).
- (3)
- The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance sheet commitments, low income housing investment credit (LIHC) amortization expense, and expenses of the consolidated VIE's, as a percentage of net interest income and noninterest income.
na = not applicable
nm = not meaningful
Retail Banking
Retail Banking provides deposit and credit financial products delivered through our branches and relationship managers to individuals and small businesses. Retail banking is focused on executing a strategy that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and sales strategies to attract new customers in these identified target markets.
During the first quarter of 2010, net income of Retail Banking increased compared to the same period in 2009, resulting from a 28 percent increase in net interest income, partially offset by a 2 percent decrease in noninterest income and a 5 percent increase in noninterest expense. The increase in net interest income was primarily due to increased margin combined with the growth in loans and interest bearing deposits.
Average asset growth for the three months ended March 31, 2010 compared to the same period in 2009 was primarily driven by a 4 percent growth in average loans, mainly in residential mortgages.
Average deposits increased 10 percent during the three months ended March 31, 2010 compared to the same period in 2009. This increase was primarily due to the Retail Banking's strategy, which continues to focus on attracting consumer and small business deposits through marketing activities, increasing customer cross-sell, relationship management, increasing and improving sales resources, establishing new locations and products. We expect that a larger branch network, along with this Retail Banking strategy, will improve growth prospects when combined with more robust efforts in the telephone and internet channels.
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Noninterest income decreased during the three months ended March 31, 2010 compared to the same period in 2009 by 2 percent mainly as a result of lower service charges on deposits resulting from changes in customer overdraft behavior. Noninterest expense increased by 5 percent during the three months ended March 31, 2010 compared to the same period in 2009. This increase was primarily due to higher FDIC deposit insurance assessment rates, direct expenses, and increased staff costs.
Retail Banking is comprised of the following major divisions: Retail Banking Branches and Consumer Asset Management.
- •
- theRetail Banking Branches Division serves its customers through 334 full-service branches in California and 4 full-service branches in Oregon and Washington. Customers may also access our services 24 hours-a-day by telephone or through our website at www.unionbank.com. In addition, the branches offer automated teller and point-of-sale merchant services.
The Retail Banking Branches Division is organized geographically. We serve our customers in the following ways:
- —
- through conveniently located banking branches and ATMs which serve consumers and businesses with checking and deposit products and services, as well as various types of consumer financing and investment services; and
- —
- through our call center and internet banking services, which augment our physical delivery channels by providing an array of customer transaction, bill payment and loan payment services.
- •
- theConsumer Asset Management Division provides the centralized origination, underwriting, processing, servicing, collection and administration for consumer assets including residential mortgages.
Through alliances with other financial institutions, the Consumer Asset Management Division offers additional products and services, such as credit cards and merchant services.
Our Retail Banking Branches and Consumer Asset Management Divisions compete with larger banks by attempting to provide service quality superior to that of our major competitors. The primary means of competing with community banks include our branch network and our technology to deliver banking services. We also offer convenient banking hours to consumers through our drive-through banking locations and selected branches that are open seven days a week.
These divisions compete with a number of commercial banks, internet banks, savings associations and credit unions, as well as more specialized financial service providers such as investment brokerage companies, consumer finance companies, and residential real estate lenders.
Corporate Banking
Corporate Banking offers financing, depository and cash management services to middle market and large corporate businesses primarily headquartered in the western U.S. Corporate Banking continues to focus on specific geographic markets and industry segments such as energy, institutional trusts, entertainment and real estate. Relationship managers provide credit services, including commercial loans, accounts receivable and inventory financing, project financing, lease financing, trade financing and real estate financing. In addition to credit services, Corporate Banking offers a broad range of depository and global treasury solutions delivered through deposit managers with significant industry expertise and experience in businesses of all sizes including numerous vertical industry niches such as U.S. correspondent banks and government entities, as well as investment and risk management products.
The main strategy of our Corporate Banking business units is to target industries and companies for which we can reasonably expect to be one of a customer's primary banks. Consistent with this strategy, Corporate
82
Banking business units attempt to serve a large part of the targeted customers' credit and depository needs. The Corporate Banking business units compete with other banks primarily on the basis of the quality of our relationship managers, the level of industry expertise, the delivery of quality customer service, and our reputation as a "business bank." We also compete with a variety of other financial services companies as well as non-bank companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies and insurance companies.
During the first quarter of 2010, net income of Corporate Banking increased 38 percent, compared to the same period of 2009, resulting from a 31 percent increase in net interest income and 3 percent increase in noninterest income, partially offset by a 12 percent increase in noninterest expense and higher credit expense. The increase in net interest income was mainly due to higher deposits.
During the first quarter of 2010, average loans decreased 11 percent compared to the same period of 2009 and includes decreases in our commercial and industrial loan portfolio, our real estate construction portfolio, and our commercial real estate portfolio, mainly related to Energy Capital Services and Real Estate Industries groups.
During the first quarter of 2010, average deposits increased 69 percent compared to the same period of 2009. Money market deposits experienced significant growth as a result of long-term corporate deposit-gathering strategies, a "flight to quality" and entry into new business niches. These new niches provided funding from large institutional accounts, including brokerage firms. These relationships reflect execution of a business strategy to obtain deposits from brokerage and institutional clients. In addition, state and local government and Corporate Banking deposits experienced significant growth.
Noninterest income increased 3 percent during the first quarter of 2010, compared to the same period of 2009, primarily due to higher amortized fees on standby letters of credit, and gain on sale on leases, partially offset by lower trading income. Noninterest expense increased 12 percent during the first quarter of 2010 compared to the same period of 2009 primarily due to higher FDIC deposit insurance assessment rates and increased staff costs.
Corporate Banking initiatives continue to include expanding commercial and loan relationship strategies that include originating, underwriting and syndicating loans in core competency markets, such as the California middle market, corporate banking, commercial real estate, institutional trusts, energy, equipment leasing and commercial finance. Corporate Deposits and Global Treasury Management Division provides a full range of depository and treasury management products and solutions.
Corporate Banking is comprised of the following main divisions:
- •
- theCommercial Banking Division, which serves California, Oregon, and Washington middle market and large corporate companies with commercial lending, trade financing and asset-based loans;
- •
- theReal Estate Industries Division, which provides real estate lending products such as construction loans, commercial mortgages and bridge financing;
- •
- theSpecialized Financial Services Division, which provides customized lending products to target markets, nationwide, through the following operating units;
- —
- Energy Capital Services provides corporate financing and project financing to oil and gas companies, as well as power and utility companies;
- —
- National Banking provides financing, deposits and traditional banking services to corporate clients in defined industries. Its Equipment Leasing arm provides lease financing services to corporate customers;
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- —
- Capital Markets provides financing to Middle Market and large corporate clients in their defined industries and geographic markets, together with limited merchant and investment banking related products and services.
- •
- Corporate Deposit and Global Treasury Management Division targets numerous industry relationship markets with deep industry and product expertise. Corporate Deposit and Global Treasury Management Division provides working capital solutions to meet deposit, investment and global treasury management services to businesses of all sizes. This division also manages Union Bank's web strategies for retail, small business, wealth management and commercial clients, as well as commercial product development;
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- theGlobal and Wealth Markets Division, which serves our customers with their foreign exchange, interest rate and energy risk management and investment needs. The Global and Wealth Markets Division offers energy derivative contracts, on a limited basis, to serve our energy sector client base. The division takes market risk when buying and selling securities and foreign exchange contracts for its own account and accepts limited market risk when providing derivative contracts, since a significant portion of the market risk for these products is offset with third parties. The division also includes our registered broker-dealer and investment advisor, UnionBanc Investment Services LLC, which is a subsidiary of Union Bank;
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- Wealth Management Services Division provides comprehensive financial services to our wealthy clientele. The Private Bank focuses primarily on delivering financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms, foundations and endowments. Specific products and services include trust and estate services, financial planning, investment account management services, and deposit and credit products. A key strategy of The Private Bank is to expand its business by acquiring new client relationships, as well as leveraging existing Bank client relationships. Through 15 existing locations, Private Bank relationship managers offer all of our available products and services; and
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- Institutional Services and Asset Management Services Division provides investment management and administration services for a broad range of individuals and institutions;
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- HighMark Capital Management, Inc., a subsidiary of Union Bank and a registered investment advisor, provides investment management and advisory services to institutional clients as well as investment advisory, administration and support services to our proprietary mutual funds, the affiliated HighMark Funds. It also provides investment management services to Union Bank with respect to most of its trust and agency clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc.'s strategy is to expand distribution, to broaden its client base and to increase its assets under management; and
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- Institutional Services provides custody, corporate trust, and retirement plan services. Custody Services provides both domestic and international safekeeping/settlement services in addition to securities lending. Corporate Trust acts as trustee for corporate and municipal debt issues, and provides escrow services and trustee services for project finance. Institutional Services provides defined benefit services, including trustee services and investment management. The client base of Institutional Services includes financial institutions, corporations, government agencies, unions, insurance companies, mutual funds, investment managers and non-profit organizations. Institutional Services' strategy is to continue to leverage and expand its position in our target markets.
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- thePacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies headquartered in either Japan or the U.S.
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Other
Our net loss decreased by $30.9 million in the three months ended March 31, 2010, compared to the same period in 2009, primarily due to higher noninterest income, lower noninterest expense and loan loss provision; partially offset by lower net interest income.
"Other" includes the following items:
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- the funds transfer pricing results for our entire company, which allocates to the other business segments their cost of funds on all asset categories and credit for funds on all liability categories;
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- Corporate Treasury, which is responsible for our ALM, wholesale funding and the ALM investment and derivatives hedging portfolios. These Treasury management activities are carried out to counter-balance the residual risk positions of our balance sheet and to manage those risks within the guidelines established by ALCO. (For additional discussion regarding these risk management activities, see "Quantitative and Qualitative Disclosures About Market Risk");
- •
- the adjustment between the credit expense under RAROC and the provision for credit losses under US GAAP;
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- the residual costs of support groups;
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- corporate activities that are not directly attributable to one of the two business segments. Included in this category are certain other items such as the results of operations of certain non-bank subsidiaries of UnionBanCal and the elimination of the fully taxable-equivalent basis amount;
- •
- Goodwill, intangible assets, and related amortization/accretion associated with our privatization transaction; and
- •
- the adjustment between the tax expense calculated using the marginal tax rate of 39.1 percent and our effective tax rates.
The financial results for the three months ended March 31, 2010 were impacted by the following factors:
- •
- credit expense of $83.6 million was due to the difference between the $170.0 million provision for loan losses calculated under our US GAAP methodology and the $86.4 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;
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- net interest income (expense) decreased $123.0 million to $(35.6) million compared to the same period in 2009 primarily due to the changes in transfer pricing rates, market rates, and a change in transfer pricing methodology;
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- noninterest income of $38.6 million, which includes a $35.2 million gain on the sale of mortgage-backed securities;
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- noninterest expense (income) of $76.5 million related to residual costs of support groups and corporate activities not directly related to either of the two reportable business segments. The decrease in noninterest expense includes lower amortization related to our privatization transaction and a $31.0 million decrease in provision for losses on off-balance sheet commitments; and
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- income tax expense (benefit) of $(58.6) million was due to the difference between the $15.4 million or a 17.2 percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable business segments (including reconciling items) of $74.0 million using the marginal tax rate.
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The financial results for the three months ended March 31, 2009 were impacted by the following factors:
- •
- credit expense of $172.7 million was due to the difference between the $249.0 million provision for loan losses calculated under our US GAAP methodology and the $76.3 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;
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- net interest income of $87.5;
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- noninterest income of $3.1 million;
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- noninterest expense of $109.6 million related to residual costs of support groups and corporate activities not directly related to either of the two reportable business segments including $26.8 million in privatization-related expenses; and
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- income tax expense (benefit) of ($65.3) million was due to the difference between the ($25.9) million or a 73 percent effective tax rate for our consolidated results and the actual tax expense calculated for reportable segments (including reconciling items) of $39.4 million using the RAROC effective rate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion of our market risk exposure is incorporated by reference to Part I, Item 2 of this Form 10-Q under the caption "Quantitative and Qualitative Disclosures About Market Risk" and to Part II, Item 1A of this Form 10-Q under the caption "Risk Factors."
Item 4. Controls and Procedures
Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of March 31, 2010. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.
During the quarter ended March 31, 2010, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain reserves for losses from legal actions that are both probable and estimable. In addition, we believe the disposition of all claims currently pending will not have a material adverse effect on our consolidated financial condition, operating results or liquidity.
For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our 2009 Form 10-K, which is incorporated by reference herein.
No. | Description | ||
---|---|---|---|
3.2 | Bylaws of the Registrant(1) | ||
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2) | ||
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2) | ||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2) | ||
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2) |
- (1)
- Incorporated by reference to the exhibit of the same number to the UnionBanCal Corporation Current Report on Form 8-K dated January 27, 2010 (SEC File No. 001-15081).
- (2)
- Filed herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION (Registrant) | ||||
Date: May 13, 2010 | By: | /s/ MASAAKI TANAKA Masaaki Tanaka President and Chief Executive Officer (Principal Executive Officer) | ||
Date: May 13, 2010 | By: | /s/ JOHN F. WOODS John F. Woods Vice Chairman and Chief Financial Officer (Principal Financial Officer) | ||
Date: May 13, 2010 | By: | /s/ DAVID A. ANDERSON David A. Anderson Executive Vice President and Controller (Chief Accounting Officer) |
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No. | Description | ||
---|---|---|---|
3.2 | Bylaws of the Registrant(1) | ||
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2) | ||
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2) | ||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2) | ||
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2) |
- (1)
- Incorporated by reference to the exhibit of the same number to the UnionBanCal Corporation Current Report on Form 8-K dated January 27, 2010 (SEC File No. 001-15081).
- (2)
- Filed herewith.
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