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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 1-15081
UnionBanCal Corporation
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1234979
(State of incorporation) (I.R.S. Employer Identification No.)
400 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104-1302
(Address and zip code of principal executive offices)
Registrant's telephone number: (415) 765-2969
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no stated value
(Title of each class)
New York Stock Exchange
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
As of June 28, 2002, the aggregate market value of voting and non-voting
common equity held by non-affiliates of the registrant was $2,443,293,746. The
aggregate market value was computed by reference to the last sales price of such
stock.
As of January 31, 2003, the number of shares outstanding of the
registrant's Common Stock was 150,694,382.
DOCUMENTS INCORPORATED BY REFERENCE
INCORPORATED DOCUMENT LOCATION IN FORM 10-K
Portions of the Proxy Statement for the April 23, 2003 Part III
Annual Meeting of Shareholders
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INDEX
PAGE
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PART I
ITEM 1. BUSINESS..................................................... 2
General........................................................... 2
Banking........................................................... 3
Employees......................................................... 4
Competition....................................................... 4
Monetary Policy................................................... 4
Supervision and Regulation........................................ 4
ITEM 2. PROPERTIES................................................... 7
ITEM 3. LEGAL PROCEEDINGS............................................ 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 8
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT........................ 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS........................................................... 10
ITEM 6. SELECTED FINANCIAL DATA...................................... 11, F-1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 11, F-1
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 11, F-36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 11, F-47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................... 11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 11
ITEM 11. EXECUTIVE COMPENSATION...................................... 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS........................ 11
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 12
PART IV
ITEM 14. CONTROLS AND PROCEDURES..................................... 12
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................... 12
SIGNATURES............................................................. II-1
CERTIFICATIONS......................................................... II-4
PART I
ITEM 1. BUSINESS
This document includes forward-looking information, which is 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 other United States Securities and Exchange
Commission (SEC) filings, press releases, news articles, conference calls with
Wall Street analysts and shareholders 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," "anticipate," "intend," "plan,"
"estimate," "project," or words of similar meaning, or future or conditional
verbs such as "will," "would," "should," "could," 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 at the date such statements are issued.
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.
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 stock price, financial
condition, and results of operations or prospects. Such risks and uncertainties
include, but are not limited to, the following factors: adverse economic
conditions in California, global political and general economic conditions
related to the terrorist attacks on September 11, 2001, and their aftermath,
adverse economic conditions affecting certain industries, including power
companies, fluctuations in interest rates, the controlling interest in us of The
Bank of Tokyo-Mitsubishi, Ltd. (BTM), which is a wholly-owned subsidiary of
Mitsubishi Tokyo Financial Group, Inc., competition in the banking industry,
restrictions on dividends, adverse effects of current and future banking rules,
regulations and legislation, and risks associated with various strategies we may
pursue, including potential acquisitions, divestitures and restructurings. See
also the section entitled "Certain Business Risk Factors" located near the end
of the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
All reports that we file electronically with the SEC, including the Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form
8-K, as well as any amendments to those reports, are accessible at no cost on
our internet website at WWW.UBOC.COM. These filings are also accessible on the
SEC's website at WWW.SEC.GOV.
GENERAL
UnionBanCal Corporation and its banking subsidiary, Union Bank of
California, N.A., were created on April 1, 1996, by the combination of Union
Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of
California, N.A. The combination was accounted for as a reorganization of
entities under common control, similar to a pooling of interests.
Since November 1999, we have announced stock repurchase plans totaling $400
million. We repurchased $131 million, $108 million and $86 million in 2000,
2001, and 2002, respectively, as part of these repurchase plans. As of December
31, 2002, $59 million of common stock is authorized for repurchase. In addition,
on August 27, 2002, we announced that we purchased $300 million of our common
stock from our majority owner, BTM. At December 31, 2002, BTM owned
approximately 65 percent of our outstanding common stock.
We provide a wide range of financial services to consumers, small
businesses, middle-market companies and major corporations, primarily in
California, Oregon, and Washington, but nationally and internationally as well.
2
BANKING
Our operations are divided into four primary segments, which are described
more fully in our Management's Discussion and Analysis of Financial Condition
and Results of Operation and Note 23 to our Consolidated Financial Statements
included in this Form 10-K.
THE COMMUNITY BANKING AND INVESTMENT SERVICES GROUP. This group offers its
customers a broad spectrum of financial products under one convenient umbrella.
With a broad line of checking and savings, investment, loan and fee-based
banking products, individual and business clients, including not-for-profit,
small and institutional investors, can each have their specific needs met. These
products are offered in 265 full-service branches, primarily in California, as
well as in Oregon and Washington. In addition, the group offers international
and settlement services, e-banking through our web site, check cashing services
at our Cash & Save(R) locations and tailored loan and investment products to our
high net worth consumer customers through the Private Bank. Institutional
customers are offered employee benefit, 401(k) administration, corporate trust,
securities lending and custody (global and domestic) services. The group also
includes a registered broker-dealer and a registered investment advisor, which
provide investment advisory services and manage a proprietary mutual fund
family.
In the fourth quarter of 2001, we acquired the Fullerton, California-based
Armstrong/Robitaille, Inc. This regional insurance broker, founded in 1979, is
one of the top 100 insurance brokers in the United States. In December 2002, we
acquired the San Diego, California-based John Burnham & Company. This regional
insurance broker, founded in 1891, is one of San Diego's oldest locally founded
companies and through affiliates, the firm provides a range of insurance
services to its clients, including risk management, liability, employee
benefits, surety, workers' compensation, group medical and life, and personal
lines. With offices in California and Oregon, these acquisitions allow us to
offer an extensive array of cost-effective risk management services and
insurance products to business and retail customers.
During 2002, we acquired the Simi Valley, California-based First Western
Bank and Santa Clarita, California-based Valencia Bank & Trust. These
acquisitions added $490 million in assets to our balance sheet and 12 branches.
The integration of these two banks expanded our geographic footprint in the
greater Los Angeles area and provides us the opportunity to both increase our
prospect opportunities and offer our existing consumer and commercial customer
relationships a fuller range of financial services.
The Armstrong/Robitaille, Inc., First Western Bank, Valencia Bank & Trust
and John Burnham & Company transactions are examples of our commitment to
expansion through targeted acquisitions, and are consistent with our strategies
to diversify earnings and broaden our branch network.
THE COMMERCIAL FINANCIAL SERVICES GROUP. This group offers a variety of
commercial financial services, including commercial loans and project financing,
real estate financing, asset-based financing, trade finance and letters of
credit, lease financing, customized cash management services and selected
capital markets products. The group's customers include middle-market companies,
large corporations, real estate companies and other more specialized industry
customers. In addition, specialized depository services are offered to title and
escrow companies, retailers, domestic financial institutions, bankruptcy
trustees and other customers with significant deposit volumes.
THE INTERNATIONAL BANKING GROUP. This group primarily provides
correspondent banking and trade finance-related products and services to
financial institutions worldwide, primarily in Asia. The group also serves
selected foreign firms and U.S. corporate clients in various countries
worldwide, particularly in Asia. This group has a long and stable history of
providing correspondent and trade-related services to international financial
institutions.
THE GLOBAL MARKETS GROUP. This group, in collaboration with our other
business groups, offers customers a broad range of products. They include a
variety of foreign exchange products and risk management products, such as
interest rate swaps and options. The group trades money market and fixed
3
income securities in the secondary market and serves institutional investment
needs. The group also manages market-related risks for us as part of its
responsibilities for asset/liability management, including funding our own
liquidity needs and addressing our interest rate risk.
EMPLOYEES
At January 31, 2003, we had 9,472 full-time equivalent employees.
COMPETITION
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, Oregon, and
Washington, as well as nationally and internationally. Our competitors include a
large number of state and national banks and major foreign-affiliated or foreign
banks, as well as many financial and nonfinancial firms, which offer services
similar to those offered by our subsidiaries or us.
We believe that continued emphasis on enhanced services and distribution
systems, an expanded customer base, increased productivity and strong credit
quality, together with an established capital base, will position us to meet the
challenges provided by this competition.
MONETARY POLICY
The operations of bank holding companies and their subsidiaries are
affected by the credit and monetary policies of the Federal Reserve Board (FRB).
The FRB influences the financial performance of bank holding companies and their
subsidiaries through its management of the federal funds market rate, the money
supply, and reserve requirements on bank deposits. Monetary policies of the FRB
have had, and will continue to have, a significant effect on the operating
results of financial institutions, including us.
SUPERVISION AND REGULATION
We, the Mitsubishi Tokyo Financial Group, Inc. and BTM are subject to
regulation under the Bank Holding Company Act of 1956 (BHCA), as amended, which
subjects us to FRB reporting and examination requirements. Generally, the BHCA
restricts any investment that we may make to no more than 5 percent of the
voting shares of any non-banking entity, and we may not acquire more than 5
percent of the voting shares of any domestic bank without the prior approval of
the FRB. Our activities are limited, with some exceptions, to banking, the
business of managing or controlling banks, and other activities, which the
regulatory authorities deem to be so closely related to banking as to be a
"proper incident thereto."
Union Bank of California, N.A. and most of its subsidiaries are regulated
by the Office of the Comptroller of the Currency (OCC). Our subsidiaries are
also subject to extensive regulation, supervision, and examination by various
other federal and state regulatory agencies. In addition, Union Bank of
California, N.A. and its subsidiaries are subject to certain restrictions under
the Federal Reserve Act, including restrictions on affiliate transactions.
Dividends payable by Union Bank of California, N.A. to us are subject to
restrictions under a formula imposed by the OCC unless express approval is given
to exceed these limitations. For more information regarding restrictions on
loans and dividends by Union Bank of California, N.A. to its affiliates and on
transactions with affiliates, see Notes 17 and 22 to our Consolidated Financial
Statements included in this Form 10-K.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal bank regulatory authorities to take "prompt corrective action"
in dealing with inadequately capitalized banks. FDICIA established five tiers of
capital measurement ranging from "well- capitalized" to "critically
undercapitalized." It is our policy to maintain capital ratios above the minimum
regulatory requirements for "well-capitalized" institutions for both Union Bank
of California, N.A. and us. Management believes that, at
4
December 31, 2002, Union Bank of California, N.A. and we met the requirements of
"well-capitalized" institutions.
Furthermore, the activities of HighMark Capital Management, Inc. and UBOC
Investment Services, Inc. are subject to the rules and regulations of the
Securities and Exchange Commission as well as state securities regulators. UBOC
Investment Services, Inc. is also subject to the rules and regulations of the
National Association of Securities Dealers (NASD).
Armstrong/Robitaille, Inc. and John Burnham & Company, both indirect
subsidiaries of Union Bank of California, N.A., are subject to the rules and
regulations of the California Department of Insurance, as well as insurance
regulators of other states.
Deposits of Union Bank of California, N.A. are insured up to regulatory
limits by the Federal Deposit Insurance Corporation (FDIC), and, accordingly,
are subjected to deposit insurance assessments to maintain the Bank Insurance
Fund (BIF) administered by the FDIC. Union Bank of California, N.A. currently
pays no insurance assessments on these deposits under the FDIC's risk-related
assessment system. Although there are no definite plans to raise assessment
rates in 2003, we can give no assurance as to the future level of such insurance
premiums.
There are additional requirements and restrictions in the laws of the
United States and the states of California, Oregon, and Washington, as well as
other states in which Union Bank of California, N.A. and its subsidiaries may
conduct operations. These include restrictions on the amount of loans and the
nature and amount of investments, as well as activities as an underwriter of
securities, the opening and closing of branches and the acquisition of other
financial institutions. Union Bank of California, N.A. is subject to certain
fair lending requirements and reporting obligations involving home mortgage
lending operations and is also subject to the Community Reinvestment Act (CRA)
activities. The CRA generally requires the federal banking agencies to evaluate
the record of a financial institution in meeting the credit needs of their local
communities, including low and moderate-income neighborhoods. In addition to
substantive penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities, including engaging in new activities or acquisitions of other
banks or companies.
The international activities of Union Bank of California, N.A. are subject
to the laws and regulations of the jurisdiction where business is being
conducted, which may change from time to time and affect Union Bank of
California, N.A.'s business opportunities and competitiveness in these
jurisdictions. Furthermore, due to BTM's controlling ownership of us, regulatory
requirements adopted or enforced by the Government of Japan may have an effect
on the activities and investments of Union Bank of California, N.A. and us in
the future.
The Gramm-Leach-Bliley (GLB) Act allows "financial holding companies"
(FHCs) to offer banking, insurance, securities and other financial products.
Specifically, the GLB Act amends section 4 of the BHCA in order to provide a
framework for the engagement in new financial activities. Bank holding companies
(BHCs) such as we may elect to become an FHC if all of their subsidiary
depository institutions are well-capitalized and well-managed. Under current FRB
interpretations, a foreign bank, such as BTM, which owns a subsidiary U.S. bank
holding company, must make the election on behalf of itself and its U.S. holding
company. In addition, the foreign bank must be well-capitalized and well managed
in accordance with standards comparable to those required of U.S. banks as
determined by the FRB and must have a satisfactory or better CRA rating. We do
not expect that BTM will make an FHC election in the immediate future.
Under the GLB Act, "financial subsidiaries" of banks may engage in some
types of activities beyond those permitted to banks themselves, provided certain
conditions are met. In 2000, Union Bank of California, N.A. filed a "Financial
Subsidiary Certification" with the OCC indicating that the applicable conditions
were met at that time. Although Union Bank of California N.A. does not presently
have any "financial subsidiaries," this certification would expedite the process
for the Bank to form or acquire "financial subsidiaries," if it decided to do
so. Under the GLB Act, national banks (as well as FDIC-insured state banks,
subject to various
5
requirements), such as Union Bank of California, N.A., are permitted to engage,
through these "financial subsidiaries," in certain financial activities
permissible for affiliates of FHCs. However, to be able to engage in such
activities, the national bank must also be well-capitalized and well-managed and
receive at least a "satisfactory" rating in its most recent CRA examination. In
addition, if the national bank ranks as one of the 50 largest insured banks in
the United States, as ours does, it must have an issue of outstanding long-term
debt, which we presently do not, rated in one of the 3 highest rating categories
by an independent rating agency. If the national bank falls within the next
group of 50, it must either meet the debt rating test described above or satisfy
a comparable test jointly agreed to by the FRB and the Treasury Department. No
debt rating is required for a national bank not within the top 100 largest
insured banks in the United States.
The terrorist attacks in September, 2001, have impacted the financial
services industry and have already led to federal legislation that attempts to
address certain issues involving financial institutions. On October 26, 2001,
President Bush signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the USA Patriot Act).
Part of the USA Patriot Act is the International Money Laundering Abatement
and Financial Anti-Terrorism Act of 2001 (IMLAFATA). Among its provisions,
IMLAFATA requires each financial institution to: (i) establish an anti-money
laundering program; (ii) establish due diligence policies, procedures and
controls with respect to its private banking accounts and correspondent banking
accounts involving foreign individuals and certain foreign banks; and (iii)
avoid establishing, maintaining, administering, or managing correspondent
accounts in the United States for, or on behalf of, a foreign bank that does not
have a physical presence in any country. In addition, IMLAFATA contains a
provision encouraging cooperation among financial institutions, regulatory
authorities and law enforcement authorities with respect to individuals,
entities and organizations engaged in, or reasonably suspected of engaging in,
terrorist acts or money laundering activities. IMLAFATA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours.
IMLAFATA also amends the BHCA and the Bank Merger Act to require the federal
banking agencies to consider the effectiveness of a financial institution's
anti-money laundering activities when reviewing an application under these acts.
Pursuant to IMLAFATA, the Secretary of the Treasury, in consultation with
the heads of other government agencies, has adopted and proposed special
measures applicable to banks, bank holding companies, and/or other financial
institutions. These measures include enhanced record keeping and reporting
requirements for certain financial transactions that are of primary money
laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
On July 30, 2002, in response to various high profile corporate scandals,
the United States Congress enacted the Sarbanes-Oxley Act of 2002. The
Sarbanes-Oxley Act aims to restore the credibility lost as a result of these
scandals by addressing, among other issues, corporate governance, auditing and
accounting, executive compensation, and enhanced and timely disclosure of
corporate information. The New York Stock Exchange has proposed additional
corporate governance rules that have been presented to the SEC for review and
approval. The proposed changes are intended to allow stockholders to more easily
and effectively monitor the performance of companies and directors.
Among other provisions, Section 302(a) of the Sarbanes-Oxley Act requires
that our Chief Executive Officer and Chief Financial Officer certify that our
quarterly and annual reports do not contain any untrue statement of a material
fact. Specific requirements of the certifications include having these officers
confirm that they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of our disclosure controls and procedures; they
have made certain disclosures to our auditors and Audit Committee about our
internal controls; and they have included information in our quarterly and
annual reports about their evaluation and whether there have been significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to their evaluation.
6
In response to these requirements, we have established a Disclosure
Committee to monitor compliance with these new rules. Membership of the
Disclosure Committee is comprised of senior management from throughout the
organization who we believe collectively provide an extensive understanding of
our corporate operations.
UnionBanCal Corporation and Union Bank of California, N.A. cannot be
certain of the effect, if any, of the foregoing legislation on their business.
Future changes in the laws, regulations, or policies that impact Union Bank of
California, N.A. and us cannot necessarily be predicted and may have a material
effect on our business and earnings.
See our Consolidated Financial Statements starting on page F-47 for
specific financial information on UnionBanCal Corporation and its subsidiaries.
ITEM 2. PROPERTIES
At December 31, 2002, we operated 259 full service branches in California,
6 full service branches in Oregon and Washington, and 18 international offices.
In addition, we have another 44 limited service branches, including 5 Cash &
Save facilities, and 3 Private Bank offices. We own the property occupied by 92
of the domestic offices and lease the remaining properties for periods of five
to twenty years.
We own two administrative facilities in San Francisco, two in Los Angeles,
and three in San Diego. Other administrative offices in San Francisco, Los
Angeles, Portland, Seattle, and New York operate under long-term leases expiring
in one to twenty-six years.
Rental expense for branches and administrative premises is described in
Note 5 to our Consolidated Financial Statements included in this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
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.
Union Bank of California, our major subsidiary (the Bank), has been named
in two suits pending in the United States District Court for the Central
District of California, Christensen v. Union Bank of California (formerly
captioned as Rockoff v Union Bank of California et al)(filed December 21, 2001)
and Neilson v Union Bank of California et al (filed September 4, 2002), in which
the plaintiffs seek in excess of $250 million alleged to have been lost by those
who invested money in various investment arrangements conducted by an individual
named Reed Slatkin. Mr. Slatkin is alleged to have been operating a fraudulent
investment scheme commonly referred to as a "Ponzi" scheme. The plaintiffs in
the Christensen case are various investors in the arrangements conducted by Mr.
Slatkin and the plaintiffs in the Neilson case include both investors and the
trustee of Mr. Slatkin's bankruptcy estate. A substantial majority of those who
invested with Mr. Slatkin had no relationship with the Bank. A small minority,
comprising less than five percent of the investors, had custodial accounts with
the Bank. The Neilson case seeks to impose liability upon the Bank and two other
financial institutions for both the losses suffered by those custodial customers
as well as investors who had no relationship with the Bank.
The Bank has also been named in a suit, which is pending in the Superior
Court for Alameda County, California, entitled Grafton Partners L.P. et al v
Union Bank of California (filed March 12, 2003). The Plaintiffs in this action
allege that they are the victims of a Ponzi scheme perpetrated by the management
of PinnFund, USA and that they have suffered losses of $235 million. This Ponzi
scheme is not related to the Slatkin Ponzi scheme. The Plaintiffs assert that
the Bank improperly opened and administered deposit accounts which were used by
PinnFund, USA in furtherance of the fraud.
Although these claims are in the preliminary stages, the Bank has numerous
legal defenses, which it will invoke. Based on our evaluation to date of these
claims, management believes that they will not result in a material adverse
effect on our financial position or results of operations. In addition, we
believe that the disposition of all other claims currently pending will also not
have a material adverse effect on our financial position or results of
operations.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following information pertains to our executive officers as of December
31, 2002:
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- --------------------- --- -----------------------------------------------------
Kaoru Hayama......... 68 Mr. Hayama has served as Chairman of UnionBanCal
Corporation and Union Bank of California, N.A. since
September 1998. He served as Deputy President of The
Bank of Tokyo-Mitsubishi, Ltd. from April 1996 to
June 1998. Mr. Hayama has served as a Director of
UnionBanCal Corporation and Union Bank of California,
N.A. since September 1998.
Norimichi Kanari..... 56 Mr. Kanari has served as President and Chief
Executive Officer of UnionBanCal Corporation and
Union Bank of California, N.A. since July 2001 and
served as Vice Chairman of UnionBanCal Corporation
and Union Bank of California, N.A. from July 2000 to
July 2001. From May 1999 to July 2000, he served as
General Manager of the Corporate Banking Division in
the Osaka Branch of The Bank of Tokyo-Mitsubishi,
Ltd., after serving from August 1997 to May 1999 as
General Manager of The Bank of Tokyo-Mitsubishi,
Ltd.'s New York Branch and Cayman Branch. He has
served as a Director of The Bank of Tokyo-Mitsubishi,
Ltd. since June 1997. Mr. Kanari has been a Director
of UnionBanCal Corporation and Union Bank of
California, N.A. since July 2000.
Takaharu Saegusa..... 50 Mr. Saegusa has served as Deputy Chairman of
UnionBanCal Corporation and Union Bank of California,
N.A. since March 2001 and served as Executive Vice
President of UnionBanCal Corporation and Union Bank
of California, N.A. from February 2001 to March 2001.
He served as Deputy General Manager, Japanese
Corporate Banking Group at The Bank of
Tokyo-Mitsubishi, Ltd.'s New York Branch from June
1998 to February 2001. From January 1997 to May 1998,
he served as General Manager of The Bank of
Tokyo-Mitsubishi, Ltd.'s Shimo-Akatsuka Branch. Mr.
Saegusa has been a Director of UnionBanCal
Corporation and Union Bank of California, N.A. since
March 2001.
Richard C. Hartnack.. 57 Mr. Hartnack has served as Vice Chairman and head
of the Community Banking and Investment Services
Group for UnionBanCal Corporation and Union Bank of
California, N.A. since September 1999, and from April
1996 to September 1999 as head of the Community
Banking Group. Mr. Hartnack has served as a Director
of UnionBanCal Corporation since June 1991.
Robert M. Walker..... 61 Mr. Walker has served as Vice Chairman and head of
the Commercial Financial Services Group for
UnionBanCal Corporation and Union Bank of California,
N.A. since April 1996. Mr. Walker has served as a
Director of UnionBanCal Corporation since July 1992.
8
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- --------------------- --- -----------------------------------------------------
Linda Betzer......... 56 Ms. Betzer has served as Executive Vice President
and head of the Operations and Customer Services
Group for UnionBanCal Corporation and Union Bank of
California, N.A. since January 2000. She served as
Executive Vice President of Commercial Customer
Services from April 1996 to January 2000.
Paul E. Fearer....... 59 Mr. Fearer has served as Executive Vice President
and Director of Human Resources for UnionBanCal
Corporation and Union Bank of California, N.A. since
April 1996.
Philip B. Flynn...... 45 Mr. Flynn has served as Executive Vice President and
Chief Credit Officer of UnionBanCal Corporation and
Union Bank of California, N.A. since September 2000.
He served as Executive Vice President and head of
Specialized Lending from May 2000 to September 2000
and as Executive Vice President and head of the
Commercial Banking Group from June 1998 to May 2000.
He served as Executive Vice President and head of
Energy Capital Services from September 1996 to April
2000.
Katsuyoshi Hamahashi. 53 Mr. Hamahashi has served as head of Global Markets
Group for UnionBanCal Corporation and Union Bank of
California, N.A. since October 1998 and as Executive
Vice President and Treasurer of UnionBanCal
Corporation and Union Bank of California, N.A. since
April 1996.
Ronald H. Kendrick... 61 Mr. Kendrick has served as Executive Vice President
and head of the Community Banking Group for
UnionBanCal Corporation and Union Bank of California,
N.A. since December 2000. He served as Executive Vice
President and Southern California Area Executive for
Union Bank of California, N.A. from March 1994 to
December 2000.
David I. Matson...... 58 Mr. Matson has served as Executive Vice President and
Chief Financial Officer of UnionBanCal Corporation
and Union Bank of California, N.A. since July 1998.
He served as Executive Vice President and Director of
Finance of UnionBanCal Corporation and Union Bank of
California, N.A. from August 1997 to July 1998. He
served as Executive Vice President and head of the
Institutional and Deposit Markets Division from April
1996 until July 1997.
John H. McGuckin, Jr. 56 Mr. McGuckin has served as Executive Vice President,
General Counsel and Secretary for UnionBanCal
Corporation and Union Bank of California, N.A. since
September 2000. He served as Executive Vice President
and General Counsel of UnionBanCal Corporation from
January 1998 to September 2000 and served as
Executive Vice President and General Counsel of Union
Bank of California, N.A. from April 1996 until
September 2000.
Magan C. Patel....... 65 Mr. Patel has served as Executive Vice President and
head of the International Banking Group for
UnionBanCal Corporation and Union Bank of California,
N.A. since April 1996.
Charles L. Pedersen.. 59 Mr. Pedersen has served as Executive Vice President
and head of the Systems Technology and Item
Processing Group for UnionBanCal Corporation and
Union Bank of California, N.A. since April 1996.
9
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- --------------------- --- -----------------------------------------------------
Osamu Uno............ 50 Mr. Uno has served as Executive Vice President and
head of the Pacific Rim Corporate Group of
UnionBanCal Corporation and Union Bank of California,
N.A. and General Manager of the Los Angeles Branch of
The Bank of Tokyo-Mitsubishi, Ltd. since March 2001.
He served as General Manager, Corporate Banking
Credit Division of The Bank of Tokyo-Mitsubishi, Ltd.
from July 2000 to February 2001 and Co-General
Manager, Credit Supervision Division No. 2 of The
Bank of Tokyo-Mitsubishi, Ltd. from April 1996 to
June 2000.
The term of office of the executive officer extends until the officer
resigns, is removed, retires, or is otherwise disqualified for service. There is
no family relationship among the executive officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
UB. As of January 31, 2003, our common stock was held by approximately 2,457
registered shareholders. At December 31, 2002, The Bank of Tokyo-Mitsubishi,
Ltd. (BTM) held approximately 65 percent of our common stock. During 2001 and
2002, the average daily trading volume of our common stock was approximately
418,531 shares and 443,032 shares, respectively. At December 31, 2000, 2001 and
2002, our common stock closed at $24.06 per share, $38.00 per share, and $39.27
per share, respectively. The following table presents stock quotations for each
quarterly period for the two years ended December 31, 2001 and 2002.
2001 2002
_________________ _________________
HIGH LOW HIGH LOW
______ ______ ______ ______
First quarter................... $30.26 $24.81 $44.02 $34.98
Second quarter.................. 34.67 26.38 49.60 43.30
Third quarter................... 38.70 32.15 48.40 38.70
Fourth quarter.................. 39.14 28.92 44.40 35.65
The following table presents quarterly per share cash dividends declared
for 2001 and 2002:
2001 2002
_____ _____
First quarter............................................. $0.25 $0.25
Second quarter............................................ 0.25 0.28
Third quarter............................................. 0.25 0.28
Fourth quarter............................................ 0.25 0.28
On October 23, 2002, our Board of Directors approved a quarterly common
stock dividend of $0.28 per share for the fourth quarter of 2002. Future
dividends will depend upon our earnings, financial condition, capital
requirements and other factors as our Board of Directors may deem relevant.
We offer a dividend reinvestment and stock purchase plan that allows
shareholders to reinvest dividends in our common stock at market price. BTM did
not participate in the plan during 2001 and 2002. For further information about
these plans, see Note 13 to our Consolidated Financial Statements included in
this Form 10-K.
The availability of our retained earnings for the payment of dividends is
affected by certain legal restrictions. See Note 17 to our Consolidated
Financial Statements included in this Form 10-K.
10
ITEM 6. SELECTED FINANCIAL DATA
See page F-1 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages F-1 through F-45 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages F-36 through F-39 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-46 through F-96 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information contained in the sections entitled
"Election of Directors" and "Compliance with Section 16 of the 1934 Act" of our
Proxy Statement for the April 23, 2003 Annual Meeting of Shareholders for
incorporation by reference of information concerning directors and persons
nominated to become directors of UnionBanCal Corporation. Information concerning
our executive officers as of December 31, 2002, is included in Part I above in
accordance with Instruction 3 to Item 401(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the text under the captions "Executive Compensation" and "Director
Compensation" in the Proxy Statement for the April 23, 2003 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning ownership of the equity stock of UnionBanCal
Corporation by certain beneficial owners and management is incorporated by
reference from page 1 and the text under the caption "Security Ownership by
Management" in the Proxy Statement for the April 23, 2003 Annual Meeting of
Shareholders.
11
The following table provides information relating to our equity
compensation plans as of December 31, 2002:
Number of securities remaining
available for future issuance
Number of securities to be Weighted-average exercise under equity compensation
issued upon exercise of price of outstanding plans (excluding securities
outstanding options options reflected in column a)
(a) (b) (c)
---------------------------- ------------------------- -----------------------------
Equity compensation approved by
shareholders .............. 8,515,469 $ 34.71 2,890,182
Equity compensation not approved
by shareholders ........... - - -
--------------------------- ------------------------- -----------------------------
8,515,469 $ 34.71 2,890,182
=========================== ========================= =============================
All equity compensation plans have been approved by the shareholders. At
December 31, 2002, there were 2,890,182 shares of common stock available for
future issuance as either stock options or restricted stock under the Stock
Plans. For additional information concerning our equity compensation plans, see
Note 14 to our Consolidated Financial Statements included in this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
officers, directors, and The Bank of Tokyo-Mitsubishi, Ltd. is incorporated by
reference from the text under the caption "Transactions with Management and
Others" in the Proxy Statement for the April 23, 2003 Annual Meeting of
Shareholders.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation as of December 31, 2002, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (Exchange Act)) are effective to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange
Act is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission (SEC) rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. These officers have also concluded that
there were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation and that there were no significant deficiencies or material
weaknesses in such controls, and therefore there were no corrective actions
taken.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
Our Consolidated Financial Statements, the Management Statement, and the
independent auditors' report are set forth on pages F-47 through F-98. (See
index on page F-46).
(A)(2) FINANCIAL STATEMENT SCHEDULES
All schedules to our Consolidated Financial Statements are omitted because
of the absence of the conditions under which they are required or because the
required information is included in our Consolidated Financial Statements or
accompanying notes.
12
(A)(3) EXHIBITS
NO. DESCRIPTION
- ---- ---------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Registrant, as amended(1)
3.2 By-laws of the Registrant, as amended December 4, 2002(2)
10.1 UnionBanCal Corporation Management Stock Plan. (As restated effective
June 1, 1997)*(3)
10.2 Union Bank of California Deferred Compensation Plan. (January 1,1997,
Restatement, as amended November 21, 1996)*(4)
10.3 Union Bank of California Senior Management Bonus Plan. (Effective
January 1, 2000)*(5)
10.4 Richard C. Hartnack Employment Agreement. (Effective January 1, 1998)
*(6)
10.5 Robert M. Walker Employment Agreement.(Effective January 1, 1998)*(6)
10.6 Union Bank of California, N.A. Supplemental Executive Retirement
Plan. (Effective January 1, 1988) (Amended and restated as of January
1, 1997)*(3)
10.7 Union Bank Financial Services Reimbursement Program. (Effective
January 1, 1996)*(7)
10.8 1997 UnionBanCal Corporation Performance Share Plan, as amended. (As
amended, effective January 1, 2001)*(5)
10.9 Service Agreement Between Union Bank of California and The Bank of
Tokyo-Mitsubishi Ltd. (Effective October 1, 1997)*(3)
10.10 Year 2000 UnionBanCal Corporation Management Stock Plan. (As restated
effective January 1, 2000)*(8)
10.11 Union Bank of California, N.A. Supplemental Retirement Plan for
Policy Making Officers (Effective November 1, 1999)(9)
10.12 Philip B. Flynn Employment Agreement (Effective September 21, 2000)*
(10)
10.13 David I. Matson Employment Agreement (Effective January 1, 1998)*(2)
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements(2)
21.1 Subsidiaries of the Registrant(2)
23.1 Consent of Deloitte & Touche LLP(2)
24.1 Power of Attorney(2)
24.2 Resolution of Board of Directors(2)
__________
(1) Incorporated by reference to the UnionBanCal Corporation Annual Report on
Form 10-K for the year ended December 31, 1998.
(2) Filed herewith.
(3) Incorporated by reference to the UnionBanCal Corporation Annual Report on
Form 10-K for the year ended December 31, 1997.
(4) Incorporated by reference to the UnionBanCal Corporation Annual Report on
Form 10-K for the year ended December 31, 1996.
(5) Incorporated by reference to the UnionBanCal Corporation Definitive Proxy
Statement on Form 14A filed on March 27, 2001.
(6) Incorporated by reference to the UnionBanCal Corporation Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to the UnionBanCal Corporation Current Report on
Form 8-K dated April 1, 1996.
(8) Incorporated by reference to the UnionBanCal Corporation Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.
(9) Incorporated by reference to the UnionBanCal Corporation Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.
(10) Incorporated by reference to the UnionBanCal Corporation Annual Report on
Form 10-K for the year ended December 31, 2001.
* Management contract or compensatory plan, contract or arrangement.
(B) REPORTS ON FORM 8-K
We filed a report on Form 8-K on October 17, 2002, reporting under Item 5
thereof that UnionBanCal Corporation issued a press release concerning earnings
for the third quarter of 2002.
13
We filed a report on Form 8-K on November 13, 2002, reporting under Item 9
thereof, which included the written certification statements of our chief
executive officer and chief financial officer with respect to our quarterly
report on Form 10-Q for the period ended September 30, 2002, filed with the SEC
on November 13, 2002, as required by section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. section 1350).
14
UNIONBANCAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
_______________________________________________________________________________
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 1998 1999 2000 2001 2002
______________________________ ____________ ____________ ____________ ____________ ____________
RESULTS OF OPERATIONS:
Net interest income(1)...... $ 1,322,655 $ 1,419,019 $ 1,587,008 $ 1,526,099 $ 1,564,556
Provision for credit losses. 45,000 65,000 440,000 285,000 175,000
Noninterest income.......... 533,531 586,759 647,180 716,404 735,976
Noninterest expense......... 1,135,218 1,281,973 1,130,185 1,240,174 1,347,666
____________ ____________ ____________ ____________ ____________
Income before income taxes(1) 675,968 658,805 664,003 717,329 777,866
Taxable-equivalent adjustment 4,432 3,186 2,568 2,057 2,587
Income tax expense.......... 205,075 213,888 221,535 233,844 247,376
____________ ____________ ____________ ____________ ____________
Net income.................. $ 466,461 $ 441,731 $ 439,900 $ 481,428 $ 527,903
============ ============ ============ ============ ============
PER COMMON SHARE:
Net income (basic).......... $ 2.66 $ 2.65 $ 2.72 $ 3.05 $ 3.41
Net income (diluted)........ 2.65 2.64 2.72 3.04 3.38
Dividends(2)................ 0.61 0.82 1.00 1.00 1.09
Book value (end of period).. 17.45 18.18 20.17 22.66 24.94
Common shares outstanding
(end of period)............. 175,259,919 164,282,622 159,234,454 156,483,511 150,702,363
Weighted average common
shares outstanding (basic).. 175,127,487 166,382,074 161,604,648 157,844,745 154,757,817
Weighted average common
shares outstanding (diluted) 175,737,303 167,149,207 161,989,388 158,623,454 156,414,940
BALANCE SHEET (END OF PERIOD):
Total assets................ $ 32,276,316 $ 33,684,776 $ 35,162,475 $ 36,038,746 $ 40,169,773
Total loans................. 24,296,111 25,912,958 26,010,398 24,994,030 26,438,083
Nonperforming assets........ 89,850 169,780 408,304 492,482 337,404
Total deposits.............. 24,507,879 26,256,607 27,283,183 28,556,199 32,840,815
Medium and long-term debt... 298,000 298,000 200,000 399,657 418,360
Trust preferred securities.. -- 350,000 350,000 363,928 365,696
Shareholders' equity........ 3,058,244 2,987,468 3,211,565 3,546,242 3,758,189
BALANCE SHEET (PERIOD AVERAGE):
Total assets................ $ 30,523,806 $ 32,141,497 $ 33,672,058 $ 34,619,222 $ 36,108,496
Total loans................. 23,215,504 25,024,777 26,310,420 25,951,021 25,807,190
Earning assets.............. 27,487,390 29,017,122 30,379,730 31,291,782 32,983,371
Total deposits.............. 22,654,714 23,893,045 25,527,547 26,542,312 28,753,185
Shareholders' equity........ 2,845,964 2,939,591 3,139,844 3,467,719 3,739,530
FINANCIAL RATIOS:
Return on average assets.... 1.53% 1.37% 1.31% 1.39% 1.46%
Return on average
shareholders' equity........ 16.39 15.03 14.01 13.88 14.12
Efficiency ratio(3)......... 61.31 63.98 50.59 55.30 58.57
Net interest margin(1)...... 4.81 4.89 5.22 4.87 4.74
Dividend payout ratio....... 22.93 30.94 36.76 32.79 31.96
Tangible equity ratio....... 9.30 8.70 9.01 9.62 8.93
Tier 1 risk-based capital
ratio....................... 9.64 9.94 10.24 11.47 11.18
Total risk-based capital
ratio....................... 11.61 11.79 12.07 13.35 12.93
Leverage ratio.............. 9.38 10.10 10.19 10.53 9.75
Allowance for credit losses
to total loans.............. 1.89 1.82 2.36 2.54 2.30
Allowance for credit losses
to nonaccrual loans......... 585.50 281.00 153.48 129.00 180.94
Net loans charged off to
average total loans......... 0.15 0.22 1.13 1.02 0.80
Nonperforming assets to
total loans, distressed
loans held for sale, and
foreclosed assets........... 0.37 0.66 1.57 1.97 1.28
Nonperforming assets to
total assets................ 0.28 0.50 1.16 1.37 0.84
<FN>
__________
(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) Dividends per share reflect dividends declared on UnionBanCal Corporation's
common stock outstanding as of the declaration date.
(3) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income. Foreclosed asset expense
(income) was $(2.8) million, $(1.3) million, $(0.1) million, $(0.0)
million, and $0.1 million for 1998 through 2002, respectively.
</FN>
F-1
THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION, WHICH IS 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 OTHER UNITED STATES SECURITIES AND EXCHANGE
COMMISSION (SEC) FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH
WALL STREET ANALYSTS AND SHAREHOLDERS 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," "ANTICIPATE," "INTEND," "PLAN,"
"ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL
VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," 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 AT THE DATE SUCH STATEMENTS ARE ISSUED.
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.
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 STOCK PRICE, FINANCIAL
CONDITION, AND RESULTS OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC
CONDITIONS IN CALIFORNIA, GLOBAL POLITICAL AND GENERAL ECONOMIC CONDITIONS
RELATED TO THE TERRORIST ATTACKS ON SEPTEMBER 11, 2001, AND THEIR AFTERMATH,
ADVERSE ECONOMIC CONDITIONS AFFECTING CERTAIN INDUSTRIES, INCLUDING POWER
COMPANIES, FLUCTUATIONS IN INTEREST RATES, THE CONTROLLING INTEREST IN US OF THE
BANK OF TOKYO-MITSUBISHI, LTD. (BTM), WHICH IS A WHOLLY-OWNED SUBSIDIARY OF
MITSUBISHI TOKYO FINANCIAL GROUP, INC., COMPETITION IN THE BANKING INDUSTRY,
RESTRICTIONS ON DIVIDENDS, ADVERSE EFFECTS OF CURRENT AND FUTURE BANKING RULES,
REGULATIONS AND LEGISLATION, AND RISKS ASSOCIATED WITH VARIOUS STRATEGIES WE MAY
PURSUE, INCLUDING POTENTIAL ACQUISITIONS, DIVESTITURES AND RESTRUCTURINGS. SEE
ALSO THE SECTION ENTITLED "CERTAIN BUSINESS RISK FACTORS" LOCATED NEAR THE END
OF THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION."
ALL REPORTS THAT WE FILE ELECTRONICALLY WITH THE SEC, INCLUDING THE ANNUAL
REPORT ON FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q, AND CURRENT REPORTS ON FORM
8-K, AS WELL AS ANY AMENDMENTS TO THOSE REPORTS, ARE ACCESSIBLE AT NO COST ON
OUR INTERNET WEBSITE AT WWW.UBOC.COM. THESE FILINGS ARE ALSO ACCESSIBLE ON THE
SEC'S WEBSITE AT WWW.SEC.GOV.
You should read the following discussion and analysis of our consolidated
financial position and the results of our operations for the years ended
December 31, 2000, 2001 and 2002 together with our Consolidated Financial
Statements and the Notes to Consolidated Financial Statements included in this
Form 10-K. Averages, as presented in the following tables, are substantially all
based upon daily average balances.
INTRODUCTION
We are a California-based, commercial bank holding company incorporated in
California, with consolidated assets of $40.2 billion at December 31, 2002. At
year-end 2002, Union Bank of California, N.A. (the Bank) was the fourth largest
commercial bank in California, based on total assets and total deposits in
California.
UnionBanCal Corporation and its banking subsidiary, Union Bank of
California, N.A., were created on April 1, 1996, by the combination of Union
Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of
California, N.A. The combination was accounted for as a reorganization of
entities under common control, similar to a pooling of interests.
Since November 1999, we have announced stock repurchase plans totaling $400
million. We repurchased $131 million, $108 million and $86 million in 2000,
2001, and 2002, respectively, as part of these repurchase plans. As of December
31, 2002, $59 million of our common stock is authorized for repurchase. In
addition, on August 27, 2002, we announced that we purchased $300 million of our
common
F-2
stock from our majority owner, BTM. At December 31, 2002, BTM owned
approximately 65 percent of our outstanding common stock.
CRITICAL ACCOUNTING POLICIES
GENERAL
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. The
financial information contained within our statements is, to a significant
extent, financial information that is based on approximate measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. In many instances, we use a discount factor to determine the present
value of assets and liabilities. A change in the discount factor could increase
or decrease the values of those assets and liabilities and such a change would
result in either a beneficial or adverse impact to our financial results. We use
historical loss factors, adjusted for current conditions, to determine the
inherent loss that may be present in our loan and lease portfolio. Actual losses
could differ significantly from the loss factors that we use. Other estimates
that we use are employee turnover factors for pension purposes, residual values
in our leasing portfolio, fair value of our derivatives and securities and
expected useful lives of our depreciable assets. We enter into derivative
contracts to accommodate our customers and for our own risk management purposes.
The derivative contracts are generally foreign exchange, interest rate swap and
interest rate option contracts, although we could enter into other types of
derivative contracts. We value these contracts at fair value, using readily
available, market quoted prices. We have not historically entered into
derivative contracts for our customers or for ourselves, which relate to credit,
equity, commodity, energy, or weather-related indices. We are subject to US GAAP
that may change from one previously acceptable method to another method.
Although the economics of our transactions would be the same, the timing of
events that would impact our transactions could change.
Our most significant estimates are approved by our Chief Executive Officer
Forum, which is comprised of our most senior officers. At each financial
reporting period, a review of these estimates is then presented to the Audit
Committee of our Board of Directors.
As of December 31, 2002, we have not created any special purpose entities
to securitize assets or to obtain off-balance sheet funding. Although we have
sold a number of loans in the past three years, those loans have been sold to
third parties without recourse, subject to customary representations and
warranties. Please see our disclosure regarding contractual obligations and
commitments entitled, "Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations and Commitments."
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is an estimate of the losses that may be
sustained in our loan and lease portfolio. The allowance is based on two
principles of accounting: (1) Statement of Financial Accounting Standards (SFAS)
No. 5, "Accounting for Contingencies," which requires that losses be accrued
when they are probable of occurring and estimable; and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures,"
which requires that losses be accrued based on the differences between the value
of collateral, present value of future cash flows or values that are observable
in the secondary market and the loan balance.
Our allowance for credit losses has three components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a model based, in part, on
historical losses as an indicator of future losses and, as a result, could
differ from the loss incurred in the future. However, since this history is
updated with the most recent loss information, the differences that might
otherwise occur are mitigated. Moreover, management adjusts the historical loss
estimates for current conditions in order to more
F-3
accurately assess probable losses inherent in the portfolio. The specific
allowance uses various techniques to arrive at an estimate of loss. Historical
loss information, discounted cash flows, fair market value of collateral and
secondary market information are all used to estimate those losses. The use of
these values is inherently subjective and our actual losses could be greater or
less than the estimates. The unallocated allowance captures losses that are
attributable to various economic events, industry or geographic sectors whose
impact on the portfolio have occurred but have yet to be recognized in either
the formula or specific allowances. We have recorded an allowance for credit
losses of $609 million as of December 31, 2002, based upon our assessment of the
probability of loss. We estimate, based on our review of our portfolio, that the
range of loss in our total allowance for credit losses at December 31, 2002,
could be $437 million to $644 million. For further information regarding our
allowance for credit losses, see page F-23.
FINANCIAL SUMMARY
Net income was $527.9 million, or $3.38 per diluted common share, in 2002
compared with $481.4 million, or $3.04 per diluted common share, in 2001. This
increase in diluted earnings per share of $0.34, or 11 percent, was due to a
$110.0 million, or 39 percent, decrease in provision for credit losses, a $19.6
million, or 3 percent, increase in noninterest income, and a $38.5 million, or 3
percent, increase in net interest income (on a taxable-equivalent basis), partly
offset by a $107.5 million, or 9 percent, increase in noninterest expense. Other
highlights in 2002 include:
o Net interest income, on a taxable-equivalent basis, was $1,564.6
million in 2002, an increase of $38.5 million over 2001. Net interest
margin in 2002 was 4.74 percent, a decrease of 13 basis points from
2001.
o A provision for credit losses of $175.0 million was recorded in 2002,
compared with $285.0 million in 2001.
o Noninterest income was $736.0 million in 2002, an increase of $19.6
million, or 3 percent, from 2001. Noninterest income, excluding a
$20.7 million gain recognized on the exchange of our STAR System stock
and a $10.9 million gain on the sale of our Guam and Saipan branches,
both in the prior year, increased $51.2 million, or 7 percent. This
growth was mainly attributable to a $30.7 million increase in service
charges on deposit accounts and $26.3 million in insurance commissions
and fees mainly associated with our acquisition of
Armstrong/Robitaille, Inc., partly offset by a $10.1 million decrease
in trust and investment management fees. In 2002, securities losses,
net were $3.8 million compared to securities gains, net of $8.7
million in 2001. In addition, we had residual value writedowns in our
auto lease portfolio of $9.0 million in 2002 compared with $28.3
million in 2001.
o Noninterest expense was $1,347.7 million in 2002, an increase of
$107.5 million, or 9 percent, over 2001. Excluding the effect of a
$15.3 million amortization adjustment related to the standardization
of our accounting for low-income housing tax credit investments
(LIHC), noninterest expense increased $92.2 million, or 7.4 percent.
Salaries and employee benefits increased $71.3 million, or 11 percent,
primarily attributable to higher personnel expenses related to
acquisitions, higher incentives, merit increases, and increasing heath
care costs.
o Income tax expense in 2002 was $247.4 million, a 32 percent effective
income tax rate, which included a reduction in income tax expense
resulting from a tax credit adjustment of $9.8 million related to the
standardization of our accounting for low-income housing credit (LIHC)
investments and a $3.3 million net reduction in income tax expense
resulting from a change in California state tax law concerning loan
loss reserves. For 2001, the effective income tax rate was 33 percent.
o Return on average assets increased to 1.46 percent in 2002 compared to
1.39 percent in 2001. Our return on average shareholders' equity
increased to 14.12 percent in 2002 compared to 13.88 percent in 2001.
F-4
BUSINESS SEGMENTS
We segregate our operations into four primary business units for the
purpose of management reporting, as shown in the table on the following page.
The results show the financial performance of our major business units.
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 risk, market risk and operational
risk. Credit risk is the potential loss in economic value due to the likelihood
that the obligor will not perform as agreed. Market risk is the potential loss
in fair value due to changes in interest rates, currency rates and equity
prices. Operational risk is the potential loss due to failures in internal
control, system failures, or external events.
The following table reflects the condensed income statements, selected
average balance sheet items and selected financial ratios for each of our
primary business units. The information presented does not necessarily represent
the business units' financial condition and results of operations as if they
were independent entities. Also, the tables have been expanded to include
performance center earnings. A performance center is a special unit of the Bank
whose income generating activities, unlike typical profit centers, are based on
other business segment units' customer base. The revenues generated and expenses
incurred for those transactions entered into to accommodate our customers are
allocated to other business segments where the customer relationships reside. A
performance center's purpose is to foster cross selling with a total
profitability view of the products and services it manages. For example, the
Global Markets Trading and Sales unit, within the Global Markets Group, is a
performance center that manages the foreign exchange, derivatives, and fixed
income securities activities within the Global Markets organization. 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 Corporation as a whole. Our management reporting system
identifies balance sheet and income statement items to 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. 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 assigned
to the business units based on a predetermined percentage of usage.
F-5
We have restated the business units' results for the prior periods to
reflect changes in the transfer pricing methodology and any reorganization
changes that may have occurred.
COMMUNITY BANKING COMMERCIAL FINANCIAL
AND INVESTMENT SERVICES GROUP SERVICES GROUP
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
____________________________________________ ____________________________________
2000 2001 2002 2000 2001 2002
__________ __________ __________ _________ _________ _________
RESULTS OF OPERATIONS AFTER
PERFORMANCE CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income............. $ 738,709 $ 704,258 $ 797,592 $ 764,370 $ 697,533 $ 656,902
Noninterest income.............. 412,199 432,012 445,569 173,140 158,459 195,546
__________ __________ __________ _________ _________ _________
Total revenue................... 1,150,908 1,136,270 1,243,161 937,510 855,992 852,448
Noninterest expense(1).......... 722,525 750,908 790,508 303,210 316,890 347,148
Credit expense.................. 48,655 41,725 33,692 120,670 149,522 190,337
__________ __________ __________ _________ _________ _________
Income before income tax expense 379,728 343,637 418,961 513,630 389,580 314,963
Income tax expense.............. 145,246 131,441 160,253 184,172 131,565 101,304
__________ __________ __________ _________ _________ _________
Net income (loss)............... $ 234,482 $ 212,196 $ 258,708 $ 329,458 $ 258,015 $ 213,659
========== ========== ========== ========= ========= =========
PERFORMANCE CENTER EARNINGS
(dollars in thousands):
Net interest income............. $ 1,079 $ 873 $ 816 $ (1,927) $ (1,269) $ (1,234)
Noninterest income.............. 9,398 (10,609) (42,567) 8,453 27,966 55,091
Noninterest expense............. 1,879 (7,223) (32,824) 66 9,119 28,665
Net Income...................... 5,208 (1,659) (5,617) 4,183 11,035 15,754
Total loans (dollars in millions) 25 19 26 (49) (38) (44)
AVERAGE BALANCES (DOLLARS IN
MILLIONS):
Total loans(2).................. $ 8,114 $ 8,899 $ 10,095 $ 16,778 $ 15,635 $ 14,102
Total assets.................... 9,040 9,861 10,986 18,577 17,481 15,806
Total deposits(2)............... 14,155 14,256 15,733 6,394 7,173 8,729
FINANCIAL RATIOS:
Risk adjusted return on capital. 41% 37% 45% 20% 14% 14%
Return on average assets........ 2.59 2.15 2.35 1.77 1.48 1.35
Efficiency ratio(3)............. 62.8 66.1 63.6 32.3 37.0 40.7
INTERNATIONAL
BANKING GROUP
YEARS ENDED DECEMBER 31,
______________________________________
2000 2001 2002
________ ________ ________
RESULTS OF OPERATIONS AFTER
PERFORMANCE CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income............. $ 34,987 $ 39,498 $ 38,196
Noninterest income.............. 60,114 59,022 68,049
________ ________ ________
Total revenue................... 95,101 98,520 106,245
Noninterest expense(1).......... 54,299 57,364 63,005
Credit expense.................. 7,008 4,424 1,904
________ ________ ________
Income before income tax expense 33,794 36,732 41,336
Income tax expense.............. 12,926 14,050 15,811
________ ________ ________
Net income (loss)............... $ 20,868 $ 22,682 $ 25,525
======== ======== ========
PERFORMANCE CENTER EARNINGS
(dollars in thousands):
Net interest income............. $ -- $ -- $ --
Noninterest income.............. 134 372 4,256
Noninterest expense............. 669 471 3,396
Net Income...................... (331) (61) 531
Total loans (dollars in millions) -- -- --
AVERAGE BALANCES (DOLLARS IN
MILLIONS):
Total loans(2).................. $ 959 $ 987 $ 1,175
Total assets.................... 1,489 1,342 1,500
Total deposits(2)............... 1,029 1,419 1,492
FINANCIAL RATIOS:
Risk adjusted return on capital. 22% 27% 38%
Return on average assets........ 1.40 1.69 1.70
Efficiency ratio(3)............. 57.1 58.2 59.3
GLOBAL
MARKETS GROUP OTHER
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
________________________________ __________________________________
2000 2001 2002 2000 2001 2002
________ ________ ________ _________ ________ ________
RESULTS OF OPERATIONS AFTER
PERFORMANCE CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income............. $ (8,850) $ 16,505 $(18,478) $ 55,224 $ 66,248 $ 87,757
Noninterest income.............. (7,083) 19,633 10,104 8,810 47,278 16,708
________ ________ ________ _________ ________ ________
Total revenue................... (15,933) 36,138 (8,374) 64,034 113,526 104,465
Noninterest expense (1)......... 15,757 24,064 15,548 34,394 90,948 131,457
Credit expense (income)......... -- 200 200 263,667 89,129 (51,133)
________ ________ ________ _________ ________ ________
Income (loss) before income tax
expense (benefit)............... (31,690) 11,874 (24,122) (234,027) (66,551) 24,141
Income tax expense (benefit).... (12,122) 4,542 (9,227) (108,687) (47,754) (20,765)
________ ________ ________ _________ ________ ________
Net income (loss)............... $(19,568) $7,332 $(14,895) $(125,340) $(18,797) $ 44,906
======== ======== ======== ========= ======== ========
PERFORMANCE CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income............. $ -- $ -- $ -- $ 848 $ 396 $ 418
Noninterest income.............. (23,741) (25,347) (30,242) 5,756 7,618 13,462
Noninterest expense............. (2,860) (4,914) (5,422) 246 2,547 6,185
Net Income...................... (12,894) (12,617) (15,326) 3,834 3,302 4,658
Total loans (dollars in millions) -- -- -- 24 19 18
AVERAGE BALANCES (DOLLARS IN
MILLIONS):
Total loans(2).................. $ -- $ 80 $ 113 $ 459 $ 350 $ 322
Total assets.................... 3,740 5,210 7,000 826 725 816
Total deposits(2)............... 3,235 2,928 1,810 715 766 989
FINANCIAL RATIOS:
Risk adjusted return on capital. (13)% 2% (2)% na na na
Return on average assets........ (0.56) 0.12 (0.22) na na na
Efficiency ratio(3)............. (98.9) 66.6 (185.7) na na na
UNIONBANCAL
CORPORATION
YEARS ENDED DECEMBER 31,
________________________________________________
2000 2001 2002
__________ __________ __________
RESULTS OF OPERATIONS AFTER
PERFORMANCE CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income............. $1,584,440 $1,524,042 $1,561,969
Noninterest income.............. 647,180 716,404 735,976
__________ __________ __________
Total revenue................... 2,231,620 2,240,446 2,297,945
Noninterest expense (1)......... 1,130,185 1,240,174 1,347,666
Credit expense (income)......... 440,000 285,000 175,000
__________ __________ __________
Income (loss) before income tax
expense (benefit)............... 661,435 715,272 775,279
Income tax expense (benefit).... 221,535 233,844 247,376
__________ __________ __________
Net income (loss)............... $ 439,900 $ 481,428 $ 527,903
========== ========== ==========
PERFORMANCE CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income............. $ -- $ -- $ --
Noninterest income.............. -- -- --
Noninterest expense............. -- -- --
Net Income...................... -- -- --
Total loans (dollars in millions) -- -- --
AVERAGE BALANCES (DOLLARS IN
MILLIONS):
Total loans(2).................. $ 26,310 $25,951 $25,807
Total assets.................... 33,672 34,619 36,108
Total deposits(2)............... 25,528 26,542 28,753
FINANCIAL RATIOS:
Risk adjusted return on capital. na na na
Return on average assets........ 1.31% 1.39% 1.46%
Efficiency ratio(3)............. 50.6 55.3 58.6
<FN>
__________
(1) "Other" includes the 2000 restructuring credits of $19.0 million
($11.8 million, net of taxes).
(2) Represents loans and deposits for each business segment after
allocation between the segments of loans and deposits originated in
one segment but managed by another segment.
(3) The efficiency ratio is noninterest expense, excluding foreclosed
asset expense (income), as a percentage of net interest income and
noninterest income. Foreclosed asset expense (income) was $(0.1)
million in 2000, $(0.0) million in 2001 and 0.1 million for 2002.
na = not applicable
</FN>
F-6
COMMUNITY BANKING AND INVESTMENT SERVICES GROUP
The Community Banking and Investment Services Group provides financial
products including a set of credit, deposit, trust, risk management, and
insurance products delivered through branches, relationship managers, private
bankers, trust administrators, and insurance agents to individuals and small
businesses.
In 2002, net income increased $46.5 million, or 22 percent, compared to
2001. Total revenue increased $106.9 million, or 9.4 percent, compared to a year
earlier. Increased asset and deposit volumes offset the effect of a
significantly lower interest rate environment leading to an increase of $93.3
million, or 13 percent, in net interest income over the prior year. Excluding
auto lease residual writedowns of $28.3 million and $9.0 million, in 2001 and
2002, respectively, and a $10.9 million gain on the sale of our Guam and Saipan
branches in 2001 and the impact of performance center earnings, noninterest
income was $37.1 million, or 8 percent, higher than the prior year primarily due
to our acquisition of Armstrong/Robitaille, Inc. and higher deposit-related
service fees. Noninterest expense increased $39.6 million, or 5 percent, in 2002
compared to 2001 with the majority of that increase being attributable to higher
salaries and employee benefits mainly related to deposit gathering, small
business growth, acquisitions and residential loan growth over 2001.
In 2002, the Community Banking and Investment Services Group emphasized
growth in the consumer asset portfolio, expanding wealth management services,
extending the small business franchise, expanding the branch network, and
expanding cross selling activities throughout the bank. The strategy for growing
the consumer asset portfolio primarily focused on mortgage and home equity
products that may be originated through the branch network, as well as through
channels such as wholesalers, correspondents, and whole loan purchases. As of
December 31, 2002, residential loans have grown by $1.6 billion, or 33 percent,
from the prior year. The Wealth Management division is focused on becoming a
growing provider of banking and investment products for affluent individuals in
geographic areas already served by us. We seek to provide quality service
superior to that of our competitors and offer our customers an attractive
product suite. Core elements of the initiative to extend our small business
franchise include improving our sales force, increasing marketing activities,
adding new locations, and developing online capabilities to complement physical
distribution. Expansion of the distribution network will be achieved through
acquisitions and de novo branching. During 2002, we completed our acquisitions
of Valencia Bank and Trust, a commercial bank with $266 million in assets and
five branches, and First Western Bank, a commercial bank with $224 million in
assets and seven branches.
The Community Banking and Investment Services Group is comprised of six
major divisions: Community Banking, Wealth Management, Institutional Services
and Asset Management, Consumer Asset Management, Government and Not-For-Profit
Markets, and Insurance Services.
COMMUNITY BANKING serves its customers through 259 full-service branches in
California, 6 full-service branches in Oregon and Washington, and a network of
520 proprietary ATMs. Customers may also access our services 24 hours a day by
telephone or through our BANK@HOME product at WWW.UBOC.COM. In addition, the
division offers automated teller and point-of-sale merchant services.
This division is organized by service delivery method, by markets and by
geography. We serve our customers in the following ways:
o through community banking branches, which serve consumers and
businesses with checking and deposit services, as well as various
types of consumer financing;
o through on-line access to our internet banking services, which augment
our physical delivery channels by providing an array of customer
transaction, bill payment and loan payment services;
o through branches and business banking centers, which serve businesses
with annual sales up to $5 million; and
o through in-store branches, which also serve consumers and businesses.
F-7
WEALTH MANAGEMENT provides private banking services to our affluent
clientele as well as brokerage products and services.
o 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. Specific products and services
include trust and estate services, investment account management
services, and deposit and credit products. A key strategy of The
Private Bank is to expand its business by leveraging existing Bank
client relationships. Through 13 existing locations, The Private Bank
relationship managers offer all of our available products and
services.
o Our brokerage products and services are provided through UBOC
Investment Services, Inc., a registered broker/dealer offering
investment products to individuals and institutional clients. Its
primary strategy is to further penetrate our existing client base.
INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment management
and administration services for a broad range of individuals and institutions.
o HighMark Capital Management, Inc., a registered investment advisor,
provides investment advisory services to institutional clients and
mutual funds, including the affiliated HighMark Funds. It also
provides advisory services to Union Bank of California, N.A. trust and
agency clients, including corporations, pension funds and individuals.
HighMark Capital Management, Inc. also provides mutual fund support
services. HighMark Capital Management Inc.'s strategy is to increase
assets under management by broadening its client base and helping to
expand the distribution of shares of its mutual fund clients.
o 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. Retirement Services provides a full range of
defined benefit and defined contribution administrative services,
including trustee services, administration, investment management, and
401(k) valuation services. 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 our position in our target markets. As
we announced on April 30, 2002, we acquired a substantial portion of
the trust and institutional custody business of a bank located in
Southern California.
CONSUMER ASSET MANAGEMENT is the centralized underwriting, processing,
servicing, collection and administration for consumer assets including
residential loans and merchant bank cards.
o Consumer Asset Management is centralized in two California sites, one
in San Diego and one in Brea, and
o provides customer and credit management services for consumer loan
products.
GOVERNMENT AND NOT-FOR-PROFIT MARKETS provides a full range of treasury
management, investment, and trust services to government entities and
not-for-profit organizations.
The division, which primarily focuses on local, state, and federal
agencies, includes an expanding product offering to the Native American
government market. Niche markets have been developed that service colleges and
universities, trade associations, cultural institutions, and religious
non-profit organizations. The division's strategy is to expand its market
presence by continued delivery of cash management products, internet based
technology solutions, and expanding its tax-exempt lending capabilities to meet
existing clients' needs.
F-8
INSURANCE SERVICES provides a range of risk management services and
insurance products to business and retail customers.
o The group, which includes our fourth quarter 2001 acquisition of
Armstrong/Robitaille, Inc., a regional insurance broker, and our
fourth quarter 2002 acquisition of John Burnham & Company, offers its
risk management and insurance products through offices in California
and Oregon.
Through alliances with other financial institutions, the Community Banking
and Investment Services Group offers additional products and services, such as
credit cards, leasing, and asset-based and leveraged financing.
The group competes with larger banks by attempting to provide service
quality superior to that of its major competitors. The group's primary means of
competing with community banks include its branch network and its 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.
The group competes 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. The group's primary competitors
are other major depository institutions such as Bank of America, Citibank,
Washington Mutual and Wells Fargo, as well as smaller community banks in the
markets in which we operate.
COMMERCIAL FINANCIAL SERVICES GROUP
The Commercial Financial Services Group offers financing and cash
management services to middle-market and large corporate businesses primarily
headquartered in the western United States. The Commercial Financial Services
Group has continued to focus specialized financing expertise to specific
geographic markets and industry segments such as energy, entertainment, and real
estate. Relationship managers in the Commercial Financial Services Group 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, the group offers its customers access
to cash management services delivered through deposit managers with experience
in cash management solutions for businesses.
In 2002, net income decreased $44.4 million, or 17 percent, compared to
2001. Net interest income decreased $40.6 million, or 6 percent, primarily
attributable to the lower interest rate environment, wherein our wholesale
liabilities are closely tied to the effects of the lower treasury bill rates.
The impact on earnings of decreasing earning asset balances was mitigated by a
significantly lower cost of funds resulting from this lower interest rate
environment. Excluding lower net losses in the private equity portfolio of $3.4
million in 2002, noninterest income increased $33.6 million, or 19 percent. This
19 percent increase was mainly attributable to higher deposit-related service
fees. Noninterest expense increased $30.3 million, or 10 percent, compared to a
year earlier due to higher expenses to support increased product sales and
deposit volume. Credit expense increased $40.8 million due to a refinement in
the RAROC credit metrics that were implemented in late 2001 and not reflected in
our first, second and third quarters 2001 results.
The group's initiatives during 2002 included expanding wholesale deposit
activities and increasing domestic trade financing. Loan growth strategies
included originating, underwriting and syndicating loans in core competency
markets, such as the California middle-market, commercial real estate, energy,
entertainment, equipment leasing and commercial finance. The Commercial
Financial Services Group provides strong processing services, including services
such as check processing, front-end item processing, cash vault services and
digital imaging.
The Commercial Financial Services Group is comprised of the following
business units:
o the Commercial Banking Division, which serves California middle-market
and large corporate companies with commercial lending, trade
financing, and asset-based loans;
F-9
o the Corporate Deposit Services Division, which provides deposit and
cash management expertise to clients in the middle-market, large
corporate market and specialized industries;
o the Institutional and Deposit Services Division, which provides
deposit and cash management expertise to clients in specific
deposit-intensive industries;
o the Corporate Capital Markets Division, which provides limited
merchant and investment banking related products and services;
o the Real Estate Industries Division, which provides real estate
lending products such as construction loans, commercial mortgages and
bridge financing;
o the Energy Capital Services Division, which provides custom financing
and project financing to oil and gas companies, as well as power and
utility companies, nationwide; and
o the National Banking Division, which provides custom financing to
middle-market and large corporate clients in their defined industries
and geographic markets.
The group competes with other banks primarily on the basis of the quality
of its relationship managers, the delivery of quality customer service, and its
reputation as a "business bank."
The group's main strategy is to target industries and companies for which
the group can reasonably expect to be one of a customer's primary banks.
Consistent with its strategy, the group attempts to serve a large part of its
targeted customers' credit and depository needs.
The group competes with a variety of other financial services 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.
INTERNATIONAL BANKING GROUP
The International Banking Group focuses on providing correspondent banking
and trade finance related products and services to international financial
institutions worldwide, primarily in Asia. This focus includes products and
services such as letters of credit, international payments, collections and
financing of mostly short-term transactions. The group also serves certain
foreign firms and US corporate clients in selected countries where we have
branches, including Hong Kong, Japan, Korea, the Philippines and Taiwan. In the
US, the group serves mostly subsidiaries and affiliates of non-Japanese Asian
companies and US branches/agencies of foreign banks. The majority of the revenue
generated by the International Banking Group is from customers domiciled outside
of the US.
In 2002, net income increased $2.8 million, or 13 percent, compared to
2001. Total revenue in 2002 increased $7.7 million, or 8 percent, compared to
2001. Net interest income decreased $1.3 million, or 3 percent, from 2001,
mainly due to the lower interest rate environment. Noninterest income was $9.0
million, or 15 percent, higher than 2001, mainly attributable to higher foreign
remittance and collection commissions, reflecting a strategic focus on this
business, and merchant card activity in the current year. Noninterest expense
increased $5.6 million, or 10 percent, compared to 2001, with the majority of
that increase attributable to merchant card activity. Also contributing to the
group's overall increase in net income was a reduction in credit expense of $2.5
million, or 57 percent, compared to 2001. The International Banking Group's
business revolves around short-term, trade financing, mostly to banks, which we
believe tends to result in significantly lower credit risk when compared to
other lending activities and service-related income.
The group has a long and stable history of providing correspondent banking
and trade-related products and services to international financial institutions.
We believe the group continues to be a market leader, achieving strong customer
loyalty in the correspondent banking market. The International Banking Group,
F-10
headquartered in San Francisco, also maintains representative offices in Asia
and Latin America and an international banking subsidiary in New York.
GLOBAL MARKETS GROUP
The Global Markets Group conducts business activities primarily to support
the previously described business groups and their customers. This group offers
a broad range of risk management products, such as foreign exchange contracts
and interest rate swaps and options. It trades money market, government, agency,
and other securities to meet investment needs of our institutional and business
clients. Another primary area of the group is treasury management for our
company, which encompasses wholesale funding, liquidity management, interest
rate risk management, including securities portfolio management, and hedging
activities.
In 2002, net loss was $14.9 million compared to net income of $7.3 million
in 2001. Total revenue in 2002 decreased $44.5 million, or 123 percent, compared
to 2001, resulting from a $35.0 million decrease in net interest income and a
$9.5 million, or 49 percent, decrease in noninterest income. The decrease in net
interest income from 2001 was mainly attributable to a declining interest rate
environment, offset in part by reduced volume and costs of wholesale funding and
increased income from hedged positions. Compared to 2001, the noninterest income
decrease was mainly attributable to lower net gains on the sale of securities in
our securities portfolio of $7.7 million in 2002 and to higher distribution of
performance center earnings to other business segments of the bank during 2002.
Compared to 2001, noninterest expense decreased $8.5 million, or 35 percent, as
higher expenses were recorded in the prior year at the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
OTHER
"Other" includes the following items:
o corporate activities that are not directly attributable to one of the
four major business units. Included in this category are goodwill
amortization for periods prior to January 1, 2002, and certain other
nonrecurring items such as merger and integration expense, certain
parent company non-bank subsidiaries, and the elimination of the fully
taxable-equivalent basis amount;
o the adjustment between the credit expense under RAROC and the
provision for credit losses under US GAAP and earnings associated with
unallocated equity capital;
o the Pacific Rim Corporate Group, which offers a range of credit,
deposit, and investment management products and services to companies
in the US, which are affiliated with companies headquartered in Japan;
and
o the residual costs of support groups.
Net income for "Other" in 2002 was $44.9 million. The results were impacted
by the following factors:
o Credit expense (income) of ($51.1) million was due to the difference
between the $175.0 million in provision for credit losses calculated
under our US GAAP methodology and the $226.1 million in expected
losses for the reportable business segments, which utilizes the RAROC
methodology;
o Net interest income of $87.8 million, which resulted from the
differences between the credit for equity for the reportable segments
under RAROC and the net interest income earned by UnionBanCal
Corporation, and a credit for deposits in the Pacific Rim Corporate
Group;
o Noninterest income of $16.7 million; and
o Noninterest expense of $131.5 million that included a $15.3 million
amortization adjustment related to the standardization of our
accounting for LIHC investments.
F-11
Net loss for "Other" in 2001 was $18.8 million. The results were impacted
by the following factors:
o Credit expense of $89.1 million due to the difference between the
$285.0 million in provision for credit losses calculated under our US
GAAP methodology and the $195.9 million in expected losses for the
reportable business segments, which utilizes the RAROC methodology;
offset by
o Net interest income of $66.2 million, which resulted from the
differences between the credit for equity for the reportable segments
under RAROC and the net interest income earned by UnionBanCal
Corporation, and a credit for deposits in the Pacific Rim Corporate
Group;
o Noninterest income of $47.3 million included a $20.7 million gain
recognized when our stock holding in STAR System was exchanged for
Concord EFS stock, a net gain of $13.9 million from the sale of
securities obtained from the sale of collateral, and a $6.1 million
gain on the sale of a distressed loan held for sale; and
o Noninterest expense of $90.9 million.
FINANCIAL PERFORMANCE GOALS
In connection with our strategic initiatives, we have established long-term
financial performance goals, which serve as a tool for measuring long-term
success of our operating strategies. Presently, these long-term financial
performance goals include:
PERFORMANCE RATIO GOAL
_______________________________________________________________ ____________
o Return on average shareholders' equity...................... 15% to 17%
o Earnings per share growth................................... 10% to 12%
o Efficiency ratio............................................ 54% to 56%
o Tangible shareholders' equity to assets..................... 7.5% to 8.5%
Achievement of our long-term financial performance goals is subject to many
risks and uncertainties, including those described under "Certain Business Risk
Factors" beginning on page F-41. In particular, our achievement of the
efficiency ratio goal has been adversely impacted by the significant reductions
in interest rates. Beginning in 2000, these rate changes have negatively
impacted our annual efficiency ratio by as little as 300 basis points to as much
as 400 basis points, which will continue to be felt in 2003. Absent the impact
on net interest income from the lower interest rate environment, we would have
met or exceeded our financial performance goals for our efficiency ratio.
Additionally, over the past three years, we have shifted our focus to increasing
the growth rate of fee-oriented and deposit-related businesses and to growing
the share of earnings streams from businesses with diversified credit exposures.
The resulting business mix has produced less volatility in our earnings and
credit risk, but is accompanied by higher labor costs. Though these businesses
have resultant higher efficiency ratios, their year over year efficiency ratios
are declining as these businesses take advantage of scale and other back office
consolidations. We continue to look for opportunities to reduce our expenses and
increase our revenues in order to meet all of our financial performance goals
during these challenging times.
We periodically re-evaluate the various elements of our strategic plan,
including our long-term financial performance goals. We expect to engage in such
re- evaluation of these goals over the course of 2003 and continuing into 2004
as we develop the next phase of our strategic plan. Accordingly, such goals
could well change as a result of this process and may change from time-to-time
thereafter.
F-12
NET INTEREST INCOME
The table below shows the major components of net interest income and net
interest margin for the periods presented.
YEARS ENDED DECEMBER 31,
_______________________________________________________________________
2000 2001
__________________________________ _________________________________
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1)
__________________________________ ___________ __________ ________ ___________ __________ _______
ASSETS
Loans:(2)
Domestic........................ $25,260,924 $2,170,653 8.59% $24,898,011 $1,828,004 7.34%
Foreign(3)...................... 1,049,496 71,812 6.84 1,053,010 56,030 5.32
Securities--taxable............... 3,426,164 221,606 6.47 4,669,695 290,019 6.21
Securities--tax-exempt............ 68,759 6,772 9.85 53,334 5,768 10.81
Interest bearing deposits in banks 174,769 9,126 5.22 70,510 2,850 4.04
Federal funds sold and securities
purchased under resale agreements 131,449 8,160 6.21 217,369 6,844 3.15
Trading account assets............ 268,169 15,519 5.79 329,853 7,853 2.38
___________ __________ ___________ __________
Total earning assets.......... 30,379,730 2,503,648 8.24 31,291,782 2,197,368 7.02
Allowance for credit losses....... (509,653) (635,063)
Cash and due from banks........... 2,140,369 2,203,075
Premises and equipment, net....... 429,668 487,842
Other assets...................... 1,231,944 1,271,586
___________ ___________
Total assets...................... $33,672,058 $34,619,222
=========== ===========
LIABILITIES
Domestic deposits:
Interest bearing................ $ 6,039,773 163,446 2.71 $6,211,821 138,457 2.23
Savings and consumer time....... 3,371,948 119,910 3.56 3,421,933 106,177 3.10
Large time...................... 4,550,938 274,052 6.02 4,432,365 200,852 4.53
Foreign deposits(3)............... 1,924,839 107,183 5.57 1,931,190 69,830 3.62
___________ __________ ___________ __________
Total interest bearing deposits. 15,887,498 664,591 4.18 15,997,309 515,316 3.22
___________ __________ ___________ __________
Federal funds purchased and
securities sold under repurchase
agreements...................... 1,548,730 96,606 6.24 1,243,933 52,153 4.19
Commercial paper.................. 1,521,614 94,905 6.24 1,287,603 52,439 4.07
Other borrowed funds.............. 314,425 16,709 5.31 464,033 20,180 4.35
Medium and long-term debt......... 255,426 17,617 6.90 217,534 10,445 4.80
UnionBanCal Corporation-obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust........................... 350,000 26,212 7.49 352,345 20,736 5.88
___________ __________ ___________ __________
Total borrowed funds............ 3,990,195 252,049 6.32 3,565,448 155,953 4.37
___________ __________ ___________ __________
Total interest bearing liabilities 19,877,693 916,640 4.61 19,562,757 671,269 3.43
Noninterest bearing deposits...... 9,640,049 10,545,003
Other liabilities................. 1,014,472 1,043,743
___________ ___________
Total liabilities............. 30,532,214 31,151,503
SHAREHOLDERS' EQUITY
Common equity..................... 3,139,844 3,467,719
___________ ___________
Total shareholders' equity.... 3,139,844 3,467,719
___________ ___________
Total liabilities and
shareholders' equity........ $33,672,058 $34,619,222
=========== ===========
Net interest income/margin
(taxable-equivalent basis)...... 1,587,008 5.22% 1,526,099 4.87%
Less: taxable-equivalent adjustment 2,568 2,057
__________ __________
Net interest income............... $1,584,440 $1,524,042
========== ==========
YEARS ENDED DECEMBER 31,
_____________________________________
2002
__________________________________
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1)
__________________________________ ___________ __________ ________
ASSETS
Loans:(2)
Domestic........................ $24,634,530 $1,487,767 6.04%
Foreign(3)...................... 1,172,660 32,285 2.75
Securities--taxable............... 5,858,193 313,232 5.35
Securities--tax-exempt............ 37,835 3,968 10.49
Interest bearing deposits in banks 124,023 2,806 2.26
Federal funds sold and securities
purchased under resale agreements 840,320 13,895 1.65
Trading account assets............ 315,810 4,606 1.46
___________ __________
Total earning assets.......... 32,983,371 1,858,559 5.63
Allowance for credit losses....... (635,057)
Cash and due from banks........... 1,928,821
Premises and equipment, net....... 498,454
Other assets...................... 1,332,907
___________
Total assets...................... $36,108,496
===========
LIABILITIES
Domestic deposits:
Interest bearing................ $8,159,892 89,952 1.10
Savings and consumer time....... 3,632,748 60,758 1.67
Large time...................... 2,958,162 64,428 2.18
Foreign deposits(3)............... 1,535,837 21,110 1.37
___________ __________
Total interest bearing deposits. 16,286,639 236,248 1.45
___________ __________
Federal funds purchased and
securities sold under repurchase
agreements...................... 427,610 6,030 1.41
Commercial paper.................. 997,543 16,645 1.67
Other borrowed funds.............. 469,877 10,111 2.15
Medium and long-term debt......... 399,769 9,344 2.34
UnionBanCal Corporation-obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust........................... 352,106 15,625 4.44
___________ __________
Total borrowed funds............ 2,646,905 57,755 2.18
___________ __________
Total interest bearing liabilities 18,933,544 294,003 1.55
Noninterest bearing deposits...... 12,466,546
Other liabilities................. 968,876
___________
Total liabilities............. 32,368,966
SHAREHOLDERS' EQUITY
Common equity..................... 3,739,530
___________
Total shareholders' equity.... 3,739,530
___________
Total liabilities and
shareholders' equity........ $36,108,496
===========
Net interest income/margin
(taxable-equivalent basis)...... 1,564,556 4.74%
Less: taxable-equivalent adjustment 2,587
__________
Net interest income............... $1,561,969
==========
<FN>
__________
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming loans. The
amortized portion of net loan origination fees (costs) is included in
interest income on loans, representing an adjustment to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
</FN>
F-13
Net interest income, on a taxable-equivalent basis, was $1,564.6 million in
2002, compared with $1,526.1 million in 2001. This increase of $38.5 million, or
3 percent, was attributable primarily to the impact of the decreasing interest
rate environment throughout the prior year on interest bearing liabilities,
increasing average noninterest bearing deposits, and higher earning assets,
partly offset by significantly lower yields on our earning assets. Decreasing
market rates resulted in lower rates on our interest bearing liabilities of 188
basis points on average balances of $18.9 billion, which was partly offset by a
lower average yield of 139 basis points on average earning assets of $33.0
billion, which was favorably impacted by higher interest rate derivatives income
of $64.4 million. Mitigating the impact of the lower interest rate environment
on our net interest margin was an increase in average earning assets of $1.7
billion, primarily in securities, funded by a $1.9 billion, or 18 percent,
increase in average noninterest bearing deposits. The resulting impact of these
changes on our net interest margin was a decrease of 13 basis points to 4.74
percent.
Average earning assets were $33.0 billion in 2002, compared with $31.3
billion in 2001. This growth was attributable to a $1.2 billion, or 25 percent,
increase in average securities, partly offset by a $143.8 million, or 1 percent,
decrease in average loans. The increase in average securities, which were
comprised primarily of fixed rate securities, reflected liquidity and interest
rate risk management actions. The decline in average loans was mostly due to a
$1.9 billion decrease in average commercial loans mainly attributable to slower
loan growth due to economic conditions, loan sales, and a reduction in our
exposure to nonrelationship syndicated loans. The decrease in commercial loans
was partly offset by an increase in average residential mortgages of $1.5
billion, which was a result of a strategic portfolio shift from more volatile
commercial loans. Other loan activities included an increase in average
commercial mortgages of $442.1 million and a decrease in average consumer loans
and lease financing of $233.6 million and $149.5 million, respectively.
Deposit growth, especially in our title and escrow industries, has been a
continued strength, contributing significantly to our lower cost of funds
year-over-year. Average noninterest bearing deposits were $1.9 billion, or 18
percent, higher in 2002 over the prior year, which included a $0.7 billion
increase in average title and escrow deposits.
F-14
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table shows the changes in the components of net interest
income on a taxable-equivalent basis for 2002 and 2001. The changes in net
interest income between periods have been reflected as attributable either to
volume or to rate changes. For purposes of this table, changes that are not
solely due to volume or rate changes are allocated to rate.
YEARS ENDED DECEMBER 31,
_______________________________________________________________________________________
2001 VERSUS 2000 2002 VERSUS 2001
_________________________________________ ________________________________________
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN CHANGE IN
_________________________________________ ________________________________________
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
___________________________________ _________ _________ _________ ________ _________ __________
CHANGES IN INTEREST INCOME
Loans:
Domestic......................... $ (31,174) $(311,475) $(342,649) $(19,340) $(320,897) $(340,237)
Foreign(1)....................... 240 (16,022) (15,782) 6,365 (30,110) (23,745)
Securities--taxable................ 80,456 (12,043) 68,413 73,806 (50,593) 23,213
Securities--tax-exempt............. (1,519) 515 (1,004) (1,675) (125) (1,800)
Interest bearing deposits in banks. (5,442) (834) (6,276) 2,162 (2,206) (44)
Federal funds sold and securities
purchased under resale agreements 5,336 (6,652) (1,316) 19,623 (12,572) 7,051
Trading account assets............. 3,572 (11,238) (7,666) (334) (2,913) (3,247)
_________ _________ _________ ________ _________ __________
Total earning assets........... 51,469 (357,749) (306,280) 80,607 (419,416) (338,809)
_________ _________ _________ ________ _________ __________
CHANGES IN INTEREST EXPENSE
Domestic deposits:
Interest bearing................. 4,663 (29,652) (24,989) 43,442 (91,947) (48,505)
Savings and consumer time........ 1,779 (15,512) (13,733) 6,535 (51,954) (45,419)
Large time....................... (7,138) (66,062) (73,200) (66,781) (69,643) (136,424)
Foreign deposits(1)................ 354 (37,707) (37,353) (14,312) (34,408) (48,720)
_________ _________ _________ ________ _________ __________
Total interest bearing deposits (342) (148,933) (149,275) (31,116) (247,952) (279,068)
_________ _________ _________ ________ _________ __________
Federal funds purchased and
securities sold under repurchase
agreements....................... (19,019) (25,434) (44,453) (34,204) (11,919) (46,123)
Commercial paper................... (14,602) (27,864) (42,466) (11,805) (23,989) (35,794)
Other borrowed funds............... 7,944 (4,473) 3,471 254 (10,323) (10,069)
Medium and long-term debt.......... (2,615) (4,557) (7,172) 8,747 (9,848) (1,101)
UnionBanCal Corporation-obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust............................ 176 (5,652) (5,476) (14) (5,097) (5,111)
_________ _________ _________ ________ _________ __________
Total borrowed funds........... (28,116) (67,980) (96,096) (37,022) (61,176) (98,198)
_________ _________ _________ ________ _________ __________
Total interest bearing liabilities (28,458) (216,913) (245,371) (68,138) (309,128) (377,266)
_________ _________ _________ ________ _________ __________
Changes in net interest income $ 79,927 $(140,836) $ (60,909) $148,745 $(110,288) $ 38,457
========= ========= ========= ======== ========= ==========
<FN>
__________
(1) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
</FN>
F-15
NONINTEREST INCOME
INCREASE (DECREASE)
_______________________________________________
YEARS ENDED DECEMBER 31,
_______________________________________________
YEARS ENDED DECEMBER 31, 2001 VERSUS 2000 2002 VERSUS 2001
_______________________________ ____________________ ____________________
(DOLLARS IN THOUSANDS) 2000 2001 2002 AMOUNT PERCENT AMOUNT PERCENT
______________________________________ ________ ________ ________ ________ _______ ________ _______
Service charges on deposit accounts $210,257 $245,116 $275,820 $ 34,859 17% $ 30,704 13%
Trust and investment management fees 154,387 154,092 143,953 (295) -- (10,139) (7)
Merchant transaction processing fees 73,521 80,384 87,961 6,863 9 7,577 9
International commissions and fees.. 71,189 71,337 76,956 148 -- 5,619 8
Brokerage commissions and fees...... 35,755 36,317 36,301 562 2 (16) --
Merchant banking fees............... 48,985 33,532 32,314 (15,453) (32) (1,218) (4)
Foreign exchange trading gains, net 28,057 26,565 28,548 (1,492) (5) 1,983 7
Insurance commissions............... -- 920 27,208 920 nm 26,288 nm
Gain on exchange of STAR System stock -- 20,700 -- 20,700 nm (20,700) (100)
Securities gains (losses), net...... 8,784 8,654 (3,796) (130) (1) (12,450) nm
Other............................... 16,245 38,787 30,711 22,542 139 (8,076) (21)
________ ________ ________ ________ ________
Total noninterest income.......... $647,180 $716,404 $735,976 $ 69,224 11% $ 19,572 3%
======== ======== ======== ======== ========
<FN>
__________
nm = not meaningful
</FN>
In 2002, noninterest income was $736.0 million, an increase of $19.6
million, or 3 percent, over 2001. Excluding a $20.7 million gain when our stock
holding in STAR System was exchanged for Concord EFS stock and a $10.9 million
gain on the sale of our Guam and Saipan branches both in the prior year,
noninterest income increased $51.2 million, or 7 percent. This increase was
mainly attributable to a $30.7 million increase in service charges on deposit
accounts, incremental insurance commissions of $26.3 million related to our
insurance agency acquisitions, lower residual value writedowns in our auto lease
portfolio of $19.3 million, a $7.6 million increase in merchant transaction
processing fees, and a $5.6 million increase in international commissions and
fees, partly offset by a $10.1 million decrease in trust and investment
management fees. In addition, securities losses, net, were $3.8 million in 2002,
compared to securities gains, net, of $8.7 million in 2001.
o Revenue from service charges on deposit accounts was $275.8 million,
an increase of 13 percent over 2001. This increase was primarily
attributable to an 18 percent increase in average demand deposits and
reductions in the earnings credit rates, caused by the lower interest
rate environment on analyzed deposit accounts, which resulted in
customers paying fees for services rather than increasing required
deposit balances.
o Trust and investment management fees were $144.0 million, a decrease
of 7 percent over 2001. This decrease is attributable to declining
market conditions and their impact on asset-based fees. Assets under
management declined to $133.3 billion, a decline of 5 percent from
2001.
o Merchant transaction processing fees were $88.0 million, an increase
of 9 percent over 2001. This increase was primarily attributable to an
increase in the volume of credit card drafts deposited by merchants
and increased consumer usage of our enhanced Gold and Platinum version
of our standard MasterMoney Card (debit card) aimed at stimulating
consumer usage for higher dollar purchases.
o Insurance commissions were $27.2 million representing a full year of
revenue from our fourth quarter 2001 acquisition of
Armstrong/Robitaille, Inc.
o Securities losses, net, were $3.8 million compared to securities
gains, net, of $8.7 million in the prior year. In 2002, we recorded
permanent writedowns on private capital securities of $11.9 million
and a $1.0 million writedown on a collateralized loan obligation,
partly offset by realized gains on private capital securities of $7.1
million and a gain on the securities in our securities available for
sale portfolio of $2.0 million, which were sold as part of our
asset/liability management strategy. In 2001, we had
F-16
realized gains of $29.9 million including gains of $9.8 million on the
securities in our securities available for sale portfolio, which were
sold as part of our asset/liability management strategy, a $9.5
million gain on the sale of our Concord EFS stock, and $6.0 million in
realized gains on venture capital and equity investments, which were
partially offset by permanent writedowns on venture capital and equity
investments of $21.3 million.
o Other noninterest income was $30.7 million, a decrease of $8.1 million
over 2001. Excluding a $10.9 million gain on the sale of our Guam and
Saipan branches in the prior year, other noninterest income increased
$2.8 million. This increase was mainly attributable to lower residual
value writedowns in our auto lease portfolio of $9.0 million in 2002
compared to $28.3 million in 2001, which was partly offset by higher
unrealized losses on private capital securities of $11.7 million in
the current year compared to an unrealized loss of $4.7 million in
2001, and $5.0 million in higher valuation reserve for loans held for
sale in the current year.
NONINTEREST EXPENSE
INCREASE (DECREASE)
_________________________________________________
YEARS ENDED DECEMBER 31,
_________________________________________________
YEARS ENDED DECEMBER 31, 2001 VERSUS 2000 2002 VERSUS 2001
______________________________________ ______________________ ____________________
(DOLLARS IN THOUSANDS) 2000 2001 2002 AMOUNT PERCENT AMOUNT PERCENT
_____________________________ __________ __________ __________ ___________ _______ ________ _______
Salaries and other
compensation.......... $ 517,459 $ 547,549 $ 599,617 $30,090 6% $ 52,068 10%
Employee benefits....... 83,003 112,291 131,549 29,288 35 19,258 17
__________ __________ __________ _______ ________
Salaries and employee
benefits.............. 600,462 659,840 731,166 59,378 10 71,326 11
Net occupancy........... 92,567 95,152 106,592 2,585 3 11,440 12
Equipment............... 63,290 64,357 66,160 1,067 2 1,803 3
Merchant transaction
processing............ 49,609 52,789 55,767 3,180 6 2,978 6
Communications.......... 43,744 50,439 53,382 6,695 15 2,943 6
Professional services... 42,042 38,480 44,851 (3,562) (8) 6,371 17
Software................ 24,037 31,766 42,850 7,729 32 11,084 35
Advertising and public
relations............. 29,125 37,710 37,510 8,585 29 (200) (1)
Data processing......... 34,803 35,732 32,589 929 3 (3,143) (9)
Intangible asset
amortization.......... 15,061 16,012 5,485 951 6 (10,527) (66)
Foreclosed asset income. (80) (13) 146 67 nm 159 nm
Restructuring credit.... (19,000) -- -- 19,000 nm -- --
Other................... 154,525 157,910 171,168 3,385 2 13,258 8
__________ __________ __________ ________ ________
Total noninterest expense $1,130,185 $1,240,174 $1,347,666 $109,989 10% $107,492 9%
========== ========== ========== ======== ========
<FN>
__________
nm = not meaningful
</FN>
In 2002, noninterest expense was $1.3 billion, an increase of $107.5
million, or 9 percent, over 2001. This increase was primarily due to a $71.3
million increase in salaries and employee benefits, an $11.4 million increase in
net occupancy expense, a $6.4 million increase in professional services expense,
and a $13.2 million increase in other noninterest expense. These increases were
partly offset by an $10.5 million decrease in intangible asset amortization
expense mostly attributable to the adoption, in the first quarter of 2002, of
SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminated the
amortization of goodwill.
o Salaries and employee benefits were $731.2 million, an increase of 11
percent over 2001. This increase was primarily attributable to
increases in staff necessary to achieve our strategic goals to expand
key businesses (including acquisitions), higher incentive expense of
$20.2 million, higher other benefit expenses of $11.1 million,
including heath care costs, and merit increases.
o Net occupancy expense was $106.6 million, an increase of 12 percent
over 2001. This increase was primarily attributable to higher building
rent, depreciation, leasehold amortization, maintenance
F-17
expenses primarily associated with the opening of new branches and our
bank and insurance agency acquisitions and a $2.7 million charge
related to an initiative to tighten our business focus in Oregon and
Washington.
o Professional services expense was $44.9 million, an increase of 17
percent over 2001. This increase was primarily attributable to higher
consulting expenses related to process improvement projects.
o Software expense was $42.9 million, an increase of 35 percent over
prior year. This increase was primarily from higher software
depreciation and software maintenance contract expenses related to the
implementation of customer relationship management productivity
projects and other automation initiatives.
o Intangible asset amortization expense was $5.5 million, a decrease of
66 percent from 2001. This decrease reflected the adoption of SFAS No.
142 in the first quarter of 2002, which eliminated the amortization of
goodwill, offset by the amortization of identifiable assets acquired
in our most recent acquisitions.
o Other noninterest expense was $171.2 million, an increase of 8 percent
from 2001. This increase was mainly attributable to a $15.3 million
amortization adjustment related to the standardization of our
accounting for LIHC investments, partly offset by the recognition of a
$6.2 million loss at the adoption of SFAS No.133, "Accounting for
Derivative Instruments and Hedging Activities," and higher
derivative-related expenses of $3.7 million due to changes in the
value of a portion of the interest rate options that were excluded
from hedge accounting under SFAS No. 133, both of which occurred in
the prior year.
We maintain the Union Bank of California, N.A. Retirement Plan (the Plan),
which is a noncontributory defined benefit plan covering substantially all of
our employees. We estimate the 2003 net periodic pension cost will be
approximately $13.6 million, assuming a 2003 contribution of $100 million. The
primary reason for the increase from 2002 net periodic pension cost is the
decrease in the assumed discount rate from 7.25 percent to 6.75 percent. The
2003 estimate for net periodic pension cost was actuarially determined using a
discount rate of 6.75 percent and an expected return of 8.25 percent. A 25 basis
point increase in either the discount rate or expected return on plan assets
would decrease 2003 periodic pension cost by $4 million and $2 million,
respectively. A 25 basis point decrease in either the discount rate or expected
return on plan assets would increase 2003 periodic pension cost by $4 million
and $2 million, respectively.
INCOME TAX EXPENSE
YEARS ENDED DECEMBER 31,
___________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
________________________________________ ________ ________ ________
Income before income taxes.............. $661,435 $715,272 $775,279
Income tax expense...................... 221,535 233,844 247,376
Effective tax rate...................... 33% 33% 32%
Income tax expense in 2002 was $247.4 million, a 32 percent effective
income tax rate, which included a tax credit adjustment of $9.8 million related
to the standardization of our accounting for LIHC investments and a $3.3 million
net reduction in income tax expense resulting from a change in California state
tax law concerning loan loss reserves. In 2001, the effective income tax rate
was 33 percent. We filed our 2000 and 2001, and intend to file our 2002,
California franchise tax returns on a worldwide unitary basis, incorporating the
financial results of BTM and its worldwide affiliates. For additional
information regarding income tax expense, see Note 9 to our Consolidated
Financial Statements included in this Form 10-K.
F-18
CREDIT RISK MANAGEMENT
Our principal business activity is the extension of credit in the form of
loans and credit substitutes to individuals and businesses. Our policies and
applicable laws and regulations governing the extension of credit require risk
analysis including an extensive evaluation of the purpose of the request and the
borrower's ability and willingness to repay us as scheduled. Our evaluation also
includes ongoing portfolio and credit management through portfolio
diversification, lending limit constraints, credit review and approval policies,
and extensive internal monitoring.
We manage and control credit risk through diversification of the portfolio
by type of loan, industry concentration, dollar limits on multiple loans to the
same borrower, geographic distribution and type of borrower. Geographic
diversification of loans originated through our branch network is generally
within California, Oregon and Washington, which we consider to be our principal
markets. In addition, we originate and participate in lending activities outside
these states, as well as internationally.
In analyzing our existing loan portfolios, we apply specific monitoring
policies and procedures that vary according to the relative risk profile and
other characteristics of the loans within the various portfolios. Our
residential and consumer loans and leases are relatively homogeneous and no
single loan is individually significant in terms of its size or potential risk
of loss. Therefore, we review our residential and consumer portfolios by
analyzing their performance as a pool of loans. In contrast, our monitoring
process for the commercial, financial and industrial, construction, commercial
mortgage, leases, and foreign loan portfolios includes a periodic review of
individual loans. Loans that are performing but have shown some signs of
weakness are subjected to more stringent reporting and oversight. We review
these loans to assess the ability of the borrowing entity to continue to service
all of its interest and principal obligations and as a result may adjust the
risk grade accordingly. In the event that we believe that full collection of
principal and interest is not reasonably assured, the loan will be appropriately
downgraded and, if warranted, placed on nonaccrual status, even though the loan
may be current as to principal and interest payments.
We have a Credit Review and Management Committee chaired by the Chief
Credit Officer and composed of the Chief Executive Officer and other executive
officers that establishes overall risk appetite, portfolio concentration limits,
and credit risk rating methodology. This committee is supported by the Credit
Policy Forum, composed of lending group Senior Credit Officers that have
responsibility for establishing credit policy, credit underwriting criteria, and
other risk management controls including the approval of business strategies.
Credit Administration under the direction of the Senior Credit Officers has
responsibility for administering the credit approval process and related
policies. Policies require an evaluation of credit requests and continuing
review of existing credit in order to promptly identify, monitor, and quantify
evidence of deterioration in asset credit quality or potential loss.
As another part of the control process, an internal credit examination
function provides the Board of Directors with an independent assessment of both
the level of portfolio quality and the effectiveness of the Bank's credit
management process. At the portfolio level, the Credit Examination Group reviews
existing and proposed credit policies, underwriting guidelines, and portfolio
management practices to determine that credit risks are appropriately defined
and controlled. In addition, this group routinely reviews the accuracy and
timeliness of risk grades assigned to individual borrowers to ensure that the
line driven credit risk identification and grading process is functioning
properly. The Credit Examination Group summarizes its significant findings on a
regular basis and provides recommendations for corrective action when credit
management or control deficiencies are identified.
F-19
LOANS
The following table shows loans outstanding by loan type and as a
percentage of total loans for 1998 through 2002.
DECEMBER 31,
__________________________________________________________________________________
(DOLLARS IN MILLIONS) 1998 1999 2000 2001 2002
___________________________________ ______________ ______________ ______________ ______________ ______________
Domestic:
Commercial, financial and
industrial..................... $13,120 54% $14,177 55% $13,749 53% $11,476 46% $10,339 39%
Construction..................... 440 2 648 3 939 4 1,060 4 1,285 5
Mortgage:
Residential.................... 2,628 11 2,581 10 3,295 13 4,788 19 6,382 24
Commercial..................... 2,975 12 3,572 14 3,348 13 3,591 15 4,150 16
_______ _______ _______ _______ _______
Total mortgage............... 5,603 23 6,153 24 6,643 26 8,379 34 10,532 40
Consumer:
Installment...................... 1,985 8 1,922 7 1,656 6 1,200 5 910 3
Revolving lines of credit........ 818 4 728 3 755 3 859 3 1,103 4
_______ _______ _______ _______ _______
Total consumer............... 2,803 12 2,650 10 2,411 9 2,059 8 2,013 7
Lease financing.................... 1,032 4 1,149 4 1,134 4 979 4 813 3
_______ _______ _______ _______ _______
Total loans in domestic offices 22,998 95 24,777 96 24,876 96 23,953 96 24,982 94
Loans originated in foreign branches 1,298 5 1,136 4 1,134 4 1,041 4 1,456 6
_______ _______ _______ _______ _______
Total loans.................. $24,296 100% $25,913 100% $26,010 100% $24,994 100% $26,438 100%
======= ======= ======= ======= =======
Our lending activities are predominantly domestic, with such loans
comprising 94 percent of the total loan portfolio at December 31, 2002. Total
loans at December 31, 2002, were $26.4 billion, an increase of 6 percent, from
December 31, 2001. The increase was mainly attributable to an increase in the
residential mortgage portfolio of $1.6 billion and an increase in the commercial
mortgage portfolio of $559 million, partly offset by a decline in the
commercial, financial and industrial loan portfolio of $1.1 billion and a
decline in the consumer loan portfolio of $46 million.
COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS
Commercial, financial and industrial loans represent one of the largest
categories in the 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. This portfolio has a high
degree of geographic diversification based upon our customers' revenue bases,
which we believe lowers our vulnerability to changes in the economic outlook of
any particular region of the U.S.
Our commercial market lending originates primarily through our banking
office network. These offices, which rely extensively on relationship-oriented
banking, provide many services including cash management services, lines of
credit, accounts receivable and inventory financing. Separately, 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. Presently, we are
active in, among other sectors, the oil and gas, communications, media,
entertainment, retailing and financial services industries.
The commercial, financial and industrial loan portfolio was $10.3 billion,
or 39 percent of total loans, at December 31, 2002, compared with $11.5 billion,
or 46 percent of total loans, at December 31, 2001. The decrease of $1.1
billion, or 10 percent, from the prior year was primarily attributable to
current economic conditions, loan sales, and reductions in our exposure in
nonrelationship syndicated loans. The reduction in commercial, financial, and
industrial loans is consistent with our strategy to reduce our exposure to more
volatile commercial loans and increase the percentage of more stable consumer
loans (including residential mortgages). We expect to continue pursuing this
strategy into 2004.
F-20
CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS
We engage in non-residential real estate lending that includes commercial
mortgage loans and construction loans secured by deeds of trust. Construction
loans are made primarily to commercial property developers and to residential
builders.
The construction loan portfolio totaled $1.3 billion, or 5 percent of total
loans, at December 31, 2002, compared with $1.1 billion, or 4 percent of total
loans, at December 31, 2001. This growth of $225 million, or 21 percent, from
the prior year was primarily attributable to a reasonably stable Southern
California housing market during 2002, despite the slowdown in the economy.
Commercial mortgages were $4.2 billion, or 16 percent of total loans, at
December 31, 2002, compared with $3.6 billion, or 15 percent, at December 31,
2001. The mortgage loan portfolio consists of loans on commercial and industrial
projects primarily in California. The increase in commercial mortgages of $559
million, or 16 percent, from December 31, 2001, was primarily due to demand in
the Southern California real estate market.
RESIDENTIAL MORTGAGE LOANS
We originate residential mortgage loans, secured by one-to-four family
residential properties, through our multiple channel network (including
branches, mortgage brokers, and loan-by-phone) throughout California, Oregon and
Washington, and we periodically purchase loans in our market area.
Residential mortgages were $6.4 billion, or 24 percent of total loans, at
December 31, 2002, compared with $4.8 billion, or 19 percent of total loans, at
December 31, 2001. The increase in residential mortgages of $1.6 billion, or 33
percent, from December 31, 2001, continues to be influenced by our strategic
decision to increase our residential mortgage portfolio through increased
in-house production and additional wholesale and correspondent channels. While
we hold most of the loans we originate, we sell most of our 30-year, fixed rate
residential mortgage loans.
CONSUMER LOANS
We originate consumer loans, such as auto loans and home equity loans and
lines, through our branch network. Consumer loans totaled $2.0 billion, or 7
percent of total loans, at December 31, 2002, compared with $2.1 billion, or 8
percent of total loans, at December 31, 2001. The decrease of $46 million, or 2
percent, was primarily attributable to exiting the automobile dealer lending
business in the third quarter of 2000, partially offset by an increase in home
equity loans.
LEASE FINANCING
We enter into direct financing and leveraged leases through our Equipment
Leasing Division. Lease financing totaled $0.8 billion, or 3 percent of total
loans, at December 31, 2002, compared with $1.0 billion, or 4 percent of total
loans, at December 31, 2001. As we previously announced, effective April 20,
2001, we discontinued our auto leasing activity. As of December 31, 2002, our
remaining auto lease portfolio was $279 million, reflecting writedowns of auto
lease residuals of $48 million. Included in our lease portfolio are leveraged
leases of $514 million, which are, net of non-recourse debt of approximately
$1.2 billion. We utilize a number of special purpose entities for our leveraged
leases. These entities serve legal and tax purposes and 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.
F-21
LOANS ORIGINATED IN FOREIGN BRANCHES
Our loans originated in foreign branches consist primarily of short-term
extensions of credit to financial institutions located primarily in Asia and to
corporations in Japan, Korea and Taiwan.
Loans originated in foreign branches totaled $1.5 billion, or 6 percent of
total loans, at December 31, 2002, compared with $1.0 billion, or 4 percent, at
December 31, 2001. The increase in loans originated in foreign branches of $415
million, or 40 percent, from December 31, 2001, was primarily attributable to
increased lending to financial institutions during periods of low US interest
rates, which made financing of trade transactions more attractive.
CROSS-BORDER OUTSTANDINGS
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 December 31, 2000, 2001 and 2002, for any country where such outstandings
exceeded 1 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. The amounts
outstanding exclude local currency outstandings. For any country shown in the
table below, we do not have significant local currency outstandings that are not
hedged or are not funded by local currency borrowings.
PUBLIC
FINANCIAL SECTOR CORPORATIONS AND TOTAL
(DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES OTHER BORROWERS OUTSTANDINGS
________________________________________________ ____________ ________ ________________ ____________
December 31, 2000
Korea......................................... $507 $-- $46 $553
December 31, 2001
Korea......................................... $468 $-- $46 $514
December 31, 2002
Korea......................................... $599 $-- $75 $674
PROVISION FOR CREDIT LOSSES
We recorded a $175 million provision for credit losses in 2002, compared
with a $285 million provision for credit losses in 2001. Provisions for credit
losses are charged to income to bring our allowance for credit losses to a level
deemed appropriate by management based on the factors discussed under "Allowance
for Credit Losses" below.
F-22
ALLOWANCE FOR CREDIT LOSSES
The following table reflects the allowance allocated to each respective
loan category at period end and as a percentage of the total period end balance
of that loan category, as set forth in the "Loans" table on page F-20.
DECEMBER 31,
_________________________________________________________________________________________
(DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002
__________________________________ _________________ ________________ ________________ _______________ ________________
Domestic:
Commercial, financial and
industrial...................... $145,100 1.11% $238,200 1.68% $452,400 3.29% $399,900 3.48% $314,873 3.05%
Construction.................... 5,500 1.25 10,000 1.54 10,200 1.09 12,300 1.16 24,900 1.94
Mortage:
Residential................... 1,100 0.04 800 0.03 1,000 0.03 1,400 0.03 1,900 0.03
Commercial.................... 17,500 0.59 21,900 0.61 19,100 0.57 21,100 0.59 28,519 0.69
________ ________ ________ ________ ________
Total mortgage.............. 18,600 0.33 22,700 0.37 20,100 0.30 22,500 0.27 30,419 0.29
Consumer:
Installment..................... 20,900 1.05 14,900 0.78 17,500 1.06 13,600 1.13 13,800 1.52
Revolving lines of credit....... 3,800 0.46 900 0.12 1,000 0.13 900 0.10 700 0.06
________ ________ ________ ________ ________
Total consummer............. 24,700 0.88 15,800 0.60 18,500 0.77 14,500 0.70 14,500 0.72
Lease financing................... 3,800 0.37 4,600 0.40 7,900 0.70 12,000 1.23 28,690 3.53
________ ________ ________ ________ ________
Total domestic allowance.... 197,700 0.86 291,300 1.18 509,100 2.05 461,200 1.93 413,382 1.65
Foreign allowance................. 47,000 3.62 17,200 1.51 3,400 0.30 1,800 0.17 1,400 0.10
Unallocated....................... 214,628 161,878 101,402 171,509 194,408
________ ________ ________ ________ ________
Total allowance for credit
losses $459,328 1.89% $470,378 1.82% $613,902 2.36% $634,509 2.54% $609,190 2.30%
======== ======== ======== ======== ========
ALLOWANCE POLICY AND METHODOLOGY
We maintain an allowance for credit losses to absorb losses inherent in the
loan portfolio. The allowance is based on our regular, quarterly assessments of
the probable estimated losses inherent in the loan portfolio, and to a lesser
extent, unused commitments to provide financing. Our methodology for measuring
the appropriate level of the allowance relies on several key elements, which
include the formula allowance, specific allowances for identified problem loans
and portfolio segments, and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans, leases and commitments. Changes in risk grades affect the
amount of the formula allowance. Loss factors are based on our historical loss
experience and may be adjusted for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are developed in the following ways:
o pass graded loss factors for commercial, financial, and industrial
loans, as well as all problem graded loan loss factors, are derived
from a migration model that tracks historical losses over a period,
which we believe captures the inherent losses in our loan portfolio;
o pass graded loss factors for commercial real estate loans and
construction loans are based on the average annual net charge-off rate
over a period reflective of a full economic cycle; and
o pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs for one year. Pooled loans are loans that are
homogeneous in nature, such as consumer installment, home equity,
residential mortgage loans and automobile leases.
We believe that an economic cycle is a period in which both upturns and
downturns in the economy have been reflected. We calculate loss factors over a
time interval that spans what we believe constitutes a complete and
representative economic cycle.
F-23
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit or a
portfolio segment that management believes indicate the probability that a loss
has been incurred. This amount may be determined either by a method prescribed
by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," or methods
that include a range of probable outcomes based upon certain qualitative
factors.
The unallocated allowance is based on management's evaluation of conditions
that are not directly reflected in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to these conditions
is subject to a higher degree of uncertainty because they may not be identified
with specific problem credits or portfolio segments. The conditions evaluated in
connection with the unallocated allowance include the following, which existed
at the balance sheet date:
o general economic and business conditions affecting our key lending
areas;
o credit quality trends (including trends in nonperforming loans
expected to result from existing conditions);
o collateral values;
o loan volumes and concentrations;
o seasoning of the loan portfolio;
o specific industry conditions within portfolio segments;
o recent loss experience in particular segments of the portfolio;
o duration of the current economic cycle;
o bank regulatory examination results; and
o findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion with
our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of such conditions
may be reflected as a specific allowance, applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan portfolio. The actual losses can vary from the estimated
amounts. Our methodology includes several features that are intended to reduce
the differences between estimated and actual losses. The loss migration model
that is used to establish the loan loss factors for problem graded loans and
pass graded commercial, financial, and industrial loans is designed to be
self-correcting by taking into account our loss experience over prescribed
periods. Similarly, by basing the pass graded loan loss factors over a period
reflective of an economic cycle, the methodology is designed to take into
account our recent loss experience for commercial real estate mortgages and
construction loans. Pooled loan loss factors are adjusted quarterly primarily
based upon the level of net charge-offs expected by management in the next
twelve months. Furthermore, based on management's judgement, our methodology
permits adjustments to any loss factor used in the computation of the formula
allowance for significant factors, which affect the collectibility of the
portfolio as of the evaluation date, but are not reflected in the loss factors.
By assessing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, we are able to adjust specific and inherent loss estimates
based upon the most recent information that has become available.
F-24
COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES
At December 31, 2000, our total allowance for credit losses was $614
million, or 2.36 percent of the total loan portfolio and 153 percent of total
nonaccrual loans. At December 31, 2001, our total allowance for credit losses
was $635 million, or 2.54 percent of the total loan portfolio and 129 percent of
total nonaccrual loans. At December 31, 2002, our total allowance for credit
losses was $609 million or 2.30 percent of the total loan portfolio and 181
percent of total nonaccrual loans. In addition, the allowance incorporates the
results of measuring impaired loans as provided in SFAS No. 114 and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." These accounting standards prescribe the measurement methods,
income recognition and disclosures related to impaired loans. At December 31,
2000, total impaired loans were $400 million, and the associated impairment
allowance was $118 million, compared with $492 million and $98 million,
respectively, at December 31, 2001 and $337 million and $121 million,
respectively, at December 31, 2002. The impairment allowance at December 31,
2002, reflected a refinement of methodology for estimating losses for impaired
loans. The December 31, 2000 and 2001 impairment allowances have not been
restated.
During 2000, 2001 and 2002, there were no changes in estimation methods or
assumptions that affected our methodology for assessing the appropriateness of
the formula and specific allowances for credit losses, except for a refinement
of our allowance estimations for impaired loans during the second quarter of
2002. Changes in estimates and assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
also affected the assessment of the unallocated allowance.
As a result of management's assessment of factors, including the continued
slow US economy, uncertainty in the communications/media, power, real estate,
airlines, and other sectors in domestic markets in which we operate, and growth
and changes in the composition of the loan portfolio, we recorded a $175 million
provision in 2002. This compares favorably to our $285 million provision in 2001
and our $440 million provision in 2000.
The following table sets forth the allowance for credit losses.
DECEMBER 31,
_____________________
(DOLLARS IN MILLIONS) 2000 2001 2002
____________________________________________________ _____ _____ _____
Allocated allowance:
Formula........................................... $380 $325 $294
Specific.......................................... 133 138 121
_____ _____ _____
Total allocated allowance....................... 513 463 415
Unallocated allowance............................... 101 172 194
_____ _____ _____
Total allowance for credit losses................... $614 $635 $609
===== ===== =====
CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES
At December 31, 2002, the formula allowance decreased by $31 million from
the prior year. At December 31, 2001, the formula allowance declined by $55
million from the prior year. The declining levels of formula allowance are
primarily due to a higher level of charge-offs, improving migration within the
criticized range, and lower default loss rates.
At December 31, 2002, the specific allowance decreased by $17 million. The
decline was primarily due to charge-offs recognized year-to-date as well as a
refinement in our estimated losses for impaired loans and a decline in
nonaccrual loans. At December 31, 2001, the specific allowance increased by $5
million from the prior year as impaired loans continued to rise. At December 31,
2002, the specific allowance includes $18 million related to off-balance sheet
exposures of criticized creditors.
F-25
At December 31, 2002, the allocated portion of the allowance for credit
losses included $304 million related to special mention and classified credits,
compared to $345 million at December 31, 2001, and $346 million at December 31,
2000. Special mention and classified credits are those that are internally risk
graded as "special mention," "substandard" or "doubtful." Special mention
credits are potentially weak, as the borrower has begun to exhibit deteriorating
trends which, if not corrected, could jeopardize repayment of the loan and
result in further downgrade. Substandard credits have well-defined weaknesses,
which, if not corrected, could jeopardize the full satisfaction of the debt. A
credit classified as "doubtful" has critical weaknesses that make full
collection improbable.
CHANGES IN THE UNALLOCATED ALLOWANCE
At December 31, 2002, the unallocated allowance was $194 million compared
to $172 million at December 31, 2001, an increase of $22 million. The increase
primarily reflected the continued weak, uncertain economy and the heightened
concerns for borrowers in the power and airline sectors.
At December 31, 2001, the unallocated allowance was $172 million compared
to $101 million at December 31, 2000, an increase of $71 million. This increase
reflected the uncertainties in the economic environment and the impact it might
have had on our borrowers.
The following table identifies the components of the attribution of the
unallocated allowance and the range of inherent loss.
DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002
_____________________________ _____________________________ _____________________________
(DOLLARS IN MILLIONS)
CONCENTRATION COMMITMENTS(1) LOW HIGH COMMITMENTS(1) LOW HIGH COMMITMENTS(1) LOW HIGH
____________________________ ______________ ___ ____ ______________ ___ ____ ______________ ___ ____
Power Companies/
Utilities................... $3,401 $17 $ 31 $3,767 $ 4 $ 10 $ 3,805 $25 $ 50
Communications/Media........ 2,713 21 35 2,006 20 46 1,907 18 40
Real Estate................. na -- -- 5,086 16 32 6,186 16 32
Foreign..................... 823 5 10 1,347 10 19 620 9 19
Leasing..................... 471 1 3 590 6 12 662 8 16
Retail...................... 1,906 6 13 1,719 17 34 1,668 8 16
Technology.................. 1,547 4 7 1,169 5 9 782 5 10
Other....................... 1,980 4 9 2,651 10 22 11,676 8 17
___ ____ ___ ____ ___ ____
Total Attributed............ $58 $108 $88 $184 $97 $200
=== ==== === ==== === ====
<FN>
__________
(1) Includes loans outstanding and unused commitments.
na = not applicable to this assessment
</FN>
In our assessment as of December 31, 2000, management focused, in
particular, on the following factors:
o With respect to the communications/media industry, management
considered the adverse effects of changes in the economic, regulatory
and technology environments, which could be in the range of $21
million to $35 million.
o With respect to the utilities industry, management considered the
adverse effects of rising fuel prices and government regulation, which
could be in the range of $17 million to $31 million.
o With respect to the retail industry, management considered the adverse
effects of recent slowing trends in same-store sales and softening
consumer confidence, which could be in the range of $6 million to $13
million.
F-26
o With respect to cross-border loans and acceptances to certain foreign
countries, management considered the lingering effects of the Asian
financial crisis, which could be in the range of $5 million to $10
million.
o With respect to the technology industry, management considered the
adverse effects of export market conditions and cyclical
over-capacity, which could be in the range of $4 million to $7
million.
In our assessment as of December 31, 2001, management focused, in
particular, on the following factors:
o With respect to the communications/media industry, management
considered the continued adverse effects of changes in the economic,
regulatory and technology environments, which could be in the range of
$20 million to $46 million.
o With respect to the retail sector, management considered the adverse
effects of the economic recession and slowing trends in consumer
spending, which could be in the range of $17 million to $34 million.
o With respect to the real estate sector, management considered the
general weakening in real estate markets as well as the specific
deterioration in Northern California, which could be in the range of
$16 million to $32 million.
o With respect to cross-border loans and acceptances to certain
Asia/Pacific Rim countries, management considered the weakening
economic conditions in that region and the reduced strength of
Japanese corporate parents, which could be in the range of $10 million
to $19 million.
o With respect to utilities, management considered the well-publicized
problems of the large public utilities and the independent power
producers in California, which, although improving, could be in the
range of $4 million to $10 million.
o With respect to the technology industry, management considered the
adverse effects of declining product life cycles and a slowing demand
for personal computers, which could be in the range of $5 million to
$9 million.
In our assessment as of December 31, 2002, management focused, in
particular, on the following factors:
o With respect to power companies and utilities, management considered
the adverse effects of declining wholesale power prices, continued
accounting concerns, and uncertainties regarding the course of
deregulation on borrowers in the power industry, which could be in the
range of $25 million to $50 million.
o With respect to the communications/media industry, management
considered the continued adverse effects of changes in the economic,
regulatory and technology environments, which could be in the range of
$18 million to $40 million.
o With respect to the real estate sector, management considered the
general weakening in commercial real estate markets reflecting weak
demand, as well as the specific deterioration in Northern California,
which could be in the range of $16 million to $32 million.
o With respect to cross-border loans and acceptances to certain
Asia/Pacific Rim countries, management considered the weak economic
conditions in that region and the reduced strength of Japanese
corporate parents, which could be in the range of $8 million to $16
million.
o With respect to leasing, management considered the growing problems of
the airline industry including weakness in financial performance and
in collateral values, which could be in the range of $8 million to $16
million.
F-27
o With respect to the retail sector, management considered the adverse
effects of the weak economy and the expected fallout from poor
Christmas sales results, which could be in the range of $8 million to
$16 million.
o With respect to the technology industry, management considered the
adverse effects of continuing excess capacity and cyclical weak demand
for personal computers and other products, which could be in the range
of $5 million to $10 million.
There can be no assurance that the adverse impact of any of these
conditions on us will not be in excess of the ranges set forth above.
Although in certain instances the downgrading of a loan resulting from
these effects was reflected in the formula allowance, management believes that
in most instances the impact of these events on the collectibility of the
applicable loans may not have been reflected in the level of nonperforming loans
or in the internal risk grading process with respect of such loans. Accordingly,
our evaluation of the probable losses related to these factors was reflected in
the unallocated allowance. The evaluations of the inherent losses with respect
to these factors were subject to higher degrees of uncertainty because they were
not identified with specific problem credits.
F-28
CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES
The following table sets forth a reconciliation of changes in our allowance
for credit losses.
YEARS ENDED DECEMBER 31,
_____________________________________________________
(DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002
______________________________________________________________ ________ ________ ________ ________ ________
Balance, beginning of period.................................. $451,692 $459,328 $470,378 $613,902 $634,509
Loans charged off:
Commercial, financial and industrial........................ 38,219 48,597 302,152 300,521 212,675
Construction................................................ 3 -- -- 567 --
Mortgage.................................................... 6,547 747 174 5,113 1,591
Consumer.................................................... 29,312 15,009 11,760 12,667 11,220
Lease financing............................................. 2,709 3,232 2,925 3,601 19,856
Foreign(1).................................................. -- 14,100 5,352 -- --
________ ________ ________ ________ ________
Total loans charged off................................... 76,790 81,685 322,363 322,469 245,342
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF:
Commercial, financial and industrial........................ 23,762 17,851 16,440 48,321 34,075
Construction................................................ 3 -- -- -- 40
Mortgage.................................................... 2,857 521 2,394 32 405
Consumer.................................................... 14,021 8,356 6,882 4,289 4,436
Lease financing............................................. 501 811 581 754 590
Foreign(1).................................................. -- -- -- 4,974 --
________ ________ ________ ________ ________
Total recoveries of loans previously charged off.......... 41,144 27,539 26,297 58,370 39,546
________ ________ ________ ________ ________
Net loans charged off..................................... 35,646 54,146 296,066 264,099 205,796
Provision for credit losses................................... 45,000 65,000 440,000 285,000 175,000
Transfer of reserve for trading account assets................ (1,911) -- -- -- --
Foreign translation adjustment and other net additions
(deductions)................................................ 193 196 (410) (294) 5,477
________ ________ ________ ________ ________
Balance, end of period........................................ $459,328 $470,378 $613,902 $634,509 $609,190
======== ======== ======== ======== ========
Allowance for credit losses to total loans.................... 1.89% 1.82% 2.36% 2.54% 2.30%
Provision for credit losses to net loans charged off.......... 126.24 120.05 148.62 107.91 85.04
Net loans charged off to average total loans.................. 0.15 0.22 1.13 1.02 0.80
<FN>
__________
(1) Foreign loans are those loans originated in foreign branches.
</FN>
Total loans charged off in 2002 declined by $77 million from 2001, as loan
quality improved. Charge-offs reflect the realization of losses in the portfolio
that were recognized previously through provisions for credit losses. Loans
charged off in 2001 were relatively unchanged compared to 2000. Loan recoveries
in 2002 decreased by $19 million from 2001, while loan recoveries in 2001
increased by $32 million over 2000. Due to our higher sales of troubled credits,
we expect recoveries to be a lower percentage of charge-offs than in the prior
years. At December 31, 2002, the allowance for credit losses exceeded the net
loans charged off during 2002, reflecting management's belief, based on the
foregoing analysis, that there are additional losses inherent in the portfolio.
At December 31, 2000, our average annual net charge-offs for the past five
years were $106 million, compared with $144 million at December 31, 2001 and
$171 million at December 31, 2002. These net charge-offs represent 5.8 years,
4.4 years and 3.6 years of losses based on the level of the allowance for credit
losses at December 31, 2000, 2001 and 2002, respectively. Historical net
charge-offs are not necessarily indicative of the amount of net charge-offs that
we will realize in the future.
F-29
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, distressed loans held for
sale, 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 our Consolidated Financial Statements included in this Form 10-K.
Distressed loans held for sale are loans, which would otherwise be included
in nonaccrual loans, but that have been identified for accelerated disposition.
Disposition of these assets is contemplated within a short period of time, not
to exceed one year.
Foreclosed assets include property where we acquired title through
foreclosure or "deed in lieu" of foreclosure.
The following table sets forth an analysis of nonperforming assets.
DECEMBER 31,
______________________________________________________________
(DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002
______________________________________________________________ ________ ________ ________ ________ ________
Commercial, financial and industrial.......................... $ 60,703 $159,479 $385,263 $471,509 $276,415
Construction.................................................. 4,359 4,286 3,967 -- --
Mortgage--Commercial........................................... 8,254 3,629 10,769 17,430 23,980
Lease financing............................................... -- -- -- 2,946 36,294
Other......................................................... 5,134 -- -- -- --
________ ________ ________ ________ ________
Total nonaccrual loans...................................... 78,450 167,394 399,999 491,885 336,689
Foreclosed assets............................................. 11,400 2,386 1,181 597 715
Distressed loans held for sale................................ -- -- 7,124 -- --
________ ________ ________ ________ ________
Total nonperforming assets.................................. $ 89,850 $169,780 $408,304 $492,482 $337,404
======== ======== ======== ======== ========
Allowance for credit losses................................... $459,328 $470,378 $613,902 $634,509 $609,190
======== ======== ======== ======== ========
Nonaccrual loans to total loans............................... 0.32% 0.65% 1.54% 1.97% 1.27%
Allowance for credit losses to nonaccrual loans............... 585.50 281.00 153.48 129.00 180.94
Nonperforming assets to total loans, distressed loans held for
sale, and foreclosed assets................................. 0.37 0.66 1.57 1.97 1.28
Nonperforming assets to total assets.......................... 0.28 0.50 1.16 1.37 0.84
At December 31, 2002, nonaccrual loans totaled $337 million, a decrease of
$155 million, or 31 percent, from December 31, 2001. Our nonperforming assets
are concentrated in our non-agented syndicated loan portfolio and approximately
59 percent of our total nonaccrual loans are syndicated loans. Also, our
nonaccrual loans included $34 million related to aircraft leases. The decrease
in nonaccrual loans was primarily due to moderate inflows of nonaccrual loans,
coupled with pay-downs, charge-offs, and loan sales. During 2001 and 2002,
respectively, we sold $425 million and $220 million of loan commitments with
discounts related to credit quality.
Nonaccrual loans as a percentage of total loans were 1.27 percent at
December 31, 2002, compared with 1.97 percent at December 31, 2001.
Nonperforming assets as a percentage of total loans, distressed loans held for
sale, and foreclosed assets decreased to 1.28 percent at December 31, 2002, from
1.97 percent at December 31, 2001. At December 31, 2002, approximately 82
percent of nonaccrual loans were related to commercial, financial and industrial
counterparties.
F-30
The following table sets forth an analysis of loans contractually past due
90 days or more as to interest or principal and still accruing, but not included
in nonaccrual loans above.
DECEMBER 31,
________________________________________________________
(DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002
________________________________________________________________ _______ _______ ______ _______ ______
Commercial, financial and industrial............................ $ 913 $ 2,729 $1,713 $26,571 $1,705
Construction.................................................... -- -- -- -- 679
Mortgage:
Residential................................................... 9,338 5,830 2,699 4,854 3,211
Commercial.................................................... 13,955 442 -- 2,356 506
_______ _______ ______ _______ ______
Total mortgage.............................................. 23,293 6,272 2,699 7,210 3,717
Consumer and other.............................................. 7,292 2,932 2,921 2,579 2,072
_______ _______ ______ _______ ______
Total loans 90 days or more past due and still accruing....... $31,498 $11,933 $7,333 $36,360 $8,173
======= ======= ====== ======= ======
CASH-BASIS INTEREST ON NONACCRUAL LOANS
After designation as a nonaccrual loan, we recognized interest income on a
cash basis of $5.4 million and $10.8 million for loans that were on nonaccrual
status at December 31, 2001 and December 31, 2002, respectively.
SECURITIES
The following tables summarize the composition of the securities portfolio
and the gross unrealized gains and losses within the portfolio. Substantially
all of our equity securities represent investments in venture capital
activities, with no single company holding exceeding 5% of that company's shares
outstanding. We also have commitments to invest additional funds. The amount
unfunded as of December 31, 2001 was approximately $55 million, and $59 million
as of December 31, 2002.
SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
___________________________________________________________________________________________________
2000 2001 2002
__________ __________________________________________ ___________________________________________
GROSS GROSS GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) VALUE COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
_____________________________ __________ __________ ________ _______ __________ __________ ________ _______ __________
U.S. Treasury................ $ 440,097 $ 214,249 $ 7,957 $ -- $ 222,206 $ 332,169 $ 12,220 $ -- $ 344,389
Other U.S. government........ 1,273,755 1,902,001 91,315 303 1,993,013 2,560,420 126,886 -- 2,687,306
Mortgage-backed securities... 2,151,032 3,293,857 48,138 14,127 3,327,868 3,902,879 115,738 80 4,018,537
State and municipal.......... 61,789 40,116 5,897 80 45,933 42,917 6,182 8 49,091
Corporate debt securities.... 98,723 129,314 -- 4,152 125,162 181,345 19 25,565 155,799
Equity securities............ 95,647 78,810 133 -- 78,943 73,559 3,598 241 76,916
Foreign securities........... 6,627 5,883 92 18 5,957 6,425 94 57 6,462
__________ __________ ________ _______ __________ __________ ________ _______ __________
Total securities available
for sale................... $4,127,670 $5,664,230 $153,532 $18,680 $5,799,082 $7,099,714 $264,737 $25,951 $7,338,500
========== ========== ======== ======= ========== ========== ======== ======= ==========
At January 1, 2001, all of our securities held to maturity were transferred
to securities available for sale in conjunction with the adoption of SFAS No.
133.
Management of the securities portfolio involves the maximization of return
while maintaining prudent levels of quality, market risk, and liquidity. At
December 31, 2002, approximately 96 percent of total securities were investment
grade.
F-31
ANALYSIS OF SECURITIES AVAILABLE FOR SALE
The following table shows the remaining contractual maturities and expected
yields of the securities available for sale at December 31, 2002.
SECURITIES AVAILABLE FOR SALE
MATURITY
____________________________________________________________________________________________
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR THROUGH THROUGH OVER
OR LESS FIVE YEARS TEN YEARS TEN YEARS
___________________ _____________________ ___________________ ______________________
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4)
__________________________________ ________ ______ __________ ______ ________ ______ __________ _______
U.S. Treasury..................... $ 61,063 6.65% $ 271,106 3.86% $ -- --% $ -- --%
Other U.S. government............. 186,715 6.82 2,373,705 5.02 -- -- -- --
Mortgage-backed securities(1)..... 280,707 1.84 56,817 6.49 216,659 5.62 3,348,696 5.24
State and municipal(2)............ 2,359 9.53 15,225 7.51 13,992 10.67 11,341 10.51
Corporate debt securities......... 7,398 3.58 39,733 5.00 64,950 5.09 69,264 5.09
Equity securities(3).............. -- -- -- -- -- -- -- --
Foreign securities................ 64 2.05 6,361 1.92 -- -- -- --
________ __________ ________ __________
Total securities available for
sale............................ $538,306 4.17% $2,762,947 4.94% $295,601 5.74% $3,429,301 5.25%
======== ========== ======== ==========
TOTAL
AMORTIZED COST
_____________________
AMOUNT YIELD(4)
__________ ______
U.S. Treasury..................... $ 332,169 4.37%
Other U.S. government............. 2,560,420 5.15
Mortgage-backed securities(1)..... 3,902,879 5.03
State and municipal(2)............ 42,917 9.44
Corporate debt securities......... 181,345 5.01
Equity securities(3).............. 73,559 --
Foreign securities................ 6,425 1.92
__________
Total securities available for
sale............................ $7,099,714 5.07%
==========
<FN>
__________
(1) The remaining contractual maturities of mortgage-backed securities were
allocated assuming no prepayments. The contractual maturity of these
securities is not a reliable indicator of their expected life because
borrowers have the right to repay their obligations at any time.
(2) Yields on tax-exempt municipal securities are presented on a
taxable-equivalent basis using the current federal statutory rate of 35
percent.
(3) Equity securities do not have a stated maturity and are included in the
total column only.
(4) For the purposes of the analysis of the securities portfolio, yields are
based on amortized cost.
</FN>
F-32
LOAN MATURITIES
The following table presents our loans by maturity.
DECEMBER 31, 2002
______________________________________________________________
OVER
ONE YEAR
ONE YEAR THROUGH OVER
(DOLLARS IN THOUSANDS) OR LESS FIVE YEARS FIVE YEARS TOTAL
__________________________________________________________ __________ __________ ___________ ___________
Domestic:
Commercial, financial and industrial.................... $3,263,616 $5,894,239 $ 1,180,653 $10,338,508
Construction............................................ 805,308 463,445 16,451 1,285,204
Mortgage:
Residential........................................... 638 11,488 6,370,101 6,382,227
Commercial............................................ 279,004 1,549,742 2,321,432 4,150,178
__________ __________ ___________ ___________
Total mortgage...................................... 279,642 1,561,230 8,691,533 10,532,405
Consumer:
Installment.......................................... 11,827 206,521 691,439 909,787
Home equity.......................................... 994,659 108,112 -- 1,102,771
__________ __________ ___________ ___________
Total consumer...................................... 1,006,486 314,633 691,439 2,012,558
Lease financing......................................... 113,327 152,384 547,207 812,918
__________ __________ ___________ ___________
Total loans in domestic offices..................... 5,468,379 8,385,931 11,127,283 24,981,593
Loans originated in foreign branches...................... 1,455,033 113 1,344 1,456,490
__________ __________ ___________ ___________
Total loans......................................... $6,923,412 $8,386,044 $11,128,627 26,438,083
========== ========== ===========
Allowance for credit losses....................... 609,190
___________
Loans, net.......................................... $25,828,893
===========
Total fixed rate loans due after one year................. $8,976,749
Total variable rate loans due after one year.............. 10,537,922
___________
Total loans due after one year...................... $19,514,671
===========
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
The following table presents domestic certificates of deposit of $100,000
and over by maturity.
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002
________________________________________________________ __________
Three months or less.................................... $1,516,086
Over three months through six months.................... 269,327
Over six months through twelve months................... 385,265
Over twelve months...................................... 109,579
__________
Total domestic certificates of deposit of
$100,000 and over.................................... $2,280,257
==========
We offer certificates of deposit of $100,000 and over at market rates of
interest. Many of these certificates are issued to customers, both public and
private, who have done business with us for an extended period. Based on our
historical experience, we expect that as these deposits come due, the majority
will continue to be renewed at market rates of interest.
All of our deposits in foreign branches are certificates of deposit of
$100,000 and over and mature in less than one year.
F-33
BORROWED FUNDS
The following table presents information on our borrowed funds.
DECEMBER 31,
__________________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
_________________________________________________________________________________ __________ __________ __________
Federal funds purchased and securities sold under repurchase agreements with
weighted average interest rates of 6.52%, 1.41% and 0.88% at December 31, 2000,
2001 and 2002, respectively.................................................... $1,387,667 $ 418,814 $ 334,379
Commercial paper, with weighted average interest rates of 6.49%, 1.89%, and 1.21%
at December 31, 2000, 2001 and 2002, respectively.............................. 1,385,771 830,657 1,038,982
Other borrowed funds, with weighted average interest rates of 5.64% 2.96% and
2.25% at December 31, 2000, 2001 and 2002, respectively........................ 249,469 700,403 267,047
__________ __________ __________
Total borrowed funds............................................................. $3,022,907 $1,949,874 $1,640,408
========== ========== ==========
Federal funds purchased and securities sold under repurchase agreements:
Maximum outstanding at any month end........................................... $2,095,868 $1,575,938 $428,808
Average balance during the year................................................ 1,548,730 1,243,933 427,610
Weighted average interest rate during the year................................. 6.24% 4.19% 1.41%
Commercial paper:
Maximum outstanding at any month end........................................... $1,525,932 $1,572,029 $1,107,578
Average balance during the year................................................ 1,521,614 1,287,603 997,543
Weighted average interest rate during the year................................. 6.24% 4.07% 1.67%
Other borrowed funds:
Maximum outstanding at any month end........................................... $507,782 $702,511 $942,627
Average balance during the year................................................ 314,425 464,033 469,877
Weighted average interest rate during the year................................. 5.31% 4.35% 2.15%
CAPITAL ADEQUACY AND DIVIDENDS
Our principal capital objectives are to support future growth, to protect
depositors, to absorb any unanticipated losses and to comply with various
regulatory requirements. Since November 1999, we announced stock repurchase
plans totaling $400 million. We repurchased $131 million, $108 million and $86
million in 2000, 2001 and 2002, respectively, as part of these repurchase plans.
As of December 31, 2002, $59 million of common stock is authorized for
repurchase. In addition, on August 27, 2002, we announced that we purchased $300
million of our common stock from our majority owner, BTM.
Total shareholders' equity was $3.8 billion at December 31, 2002, an
increase of $212 million from December 31, 2001. This change was primarily a
result of $528 million of net income for 2002, exercised stock options of $75
million, stock issued in bank acquisitions of $55 million, net unrealized gains
on securities available for sale of $64 million, and net unrealized gains on
cash flow hedges of $42 million, partially offset by dividends on our common
stock of $168 million and repurchases of our common stock of $386 million.
We offer a dividend reinvestment plan that allows shareholders to reinvest
dividends in our common stock at market price. During 2002 and 2001, BTM did not
participate in this plan.
Capital adequacy depends on a variety of factors including asset quality
and risk profile, liquidity, earnings stability, competitive and economic
conditions, and management. We believe that the current level of profitability,
coupled with a prudent dividend policy, is adequate to support normal growth in
operations while meeting regulatory capital guidelines.
F-34
The following table summarizes our risk-based capital, risk-weighted
assets, and risk-based capital ratios.
DECEMBER 31,
_________________________________________________________________________________
MINIMUM
REGULATORY
(DOLLARS IN THOUSANDS) 1998 1999 2000 2001 2002 REQUIREMENT
________________________ ___________ ___________ ___________ ___________ ___________ ___________
CAPITAL COMPONENTS
Tier 1 capital.......... $ 2,965,865 $ 3,308,912 $ 3,471,289 $ 3,661,231 $ 3,667,237
Tier 2 capital.......... 604,938 616,772 620,102 598,812 573,858
___________ ___________ ___________ ___________ ___________
Total risk-based capital $ 3,570,803 $ 3,925,684 $ 4,091,391 $ 4,260,043 $ 4,241,095
=========== =========== =========== =========== ===========
Risk-weighted assets.... $30,753,030 $33,288,167 $33,900,404 $31,906,438 $32,811,441
=========== =========== =========== =========== ===========
Quarterly average assets $31,627,022 $32,765,347 $34,075,813 $34,760,203 $37,595,002
=========== =========== =========== =========== ===========
CAPITAL RATIOS
Total risk-based capital 11.61% 11.79% 12.07% 13.35% 12.93% 8.0%
Tier 1 risk-based capital 9.64 9.94 10.24 11.47 11.18 4.0
Leverage ratio(1)....... 9.38 10.10 10.19 10.53 9.75 4.0
<FN>
__________
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
</FN>
We and Union Bank of California, N.A. 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).
Compared with December 31, 2001, our Tier 1 risk-based capital ratio at
December 31, 2002, decreased 29 basis points to 11.18 percent, our total
risk-based capital ratio decreased 42 basis points to 12.93 percent, and our
leverage ratio decreased 78 basis points to 9.75 percent. The decrease in our
capital ratios was primarily attributable to an increase in risk-weighted
assets, partly offset by an increase in shareholders' equity (as described
above).
As of December 31, 2002, management believes the capital ratios of Union
Bank of California, N.A. 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.
COMPARISON OF FINANCIAL RESULTS OF 2000 TO 2001
Reported net income was $481.4 million, or $3.04 per diluted common share,
in 2001, compared with $439.9 million, or $2.72 per diluted common share, in
2000. Excluding the effect of $19.0 million of restructuring credits ($11.8
million net of tax), 2000 earnings were $428.1 million, or $2.64 per diluted
common share. The increase in 2001 diluted earnings per share of 15 percent
above the prior year's diluted earnings per share, excluding the effect of the
restructuring credits in 2000, was mainly attributable to a $155.0 million, or
35 percent, decrease in the provision for credit losses and a $69.2 million, or
11 percent, increase in noninterest income, partially offset by a $91.0 million,
or 8 percent, increase in noninterest expense and a $60.9 million, or 4 percent,
decrease in net interest income (on a taxable-equivalent basis). Other
highlights of 2001 include:
o Net interest income, on a taxable-equivalent basis, was $1,526.1
million in 2001, a decrease of $60.9 million, or 4 percent, from the
prior year. Net interest margin in 2001 was 4.87 percent, a decrease
of 35 basis points from the prior year, reflecting the compression
caused by lower interest rates.
o A provision for credit losses of $285.0 million was recorded in 2001,
compared with $440.0 million in the prior year. This resulted from
management's regular assessment of overall credit quality, loan
portfolio composition and business and economic conditions in relation
to the level of the allowance for credit losses.
F-35
o Noninterest income was $716.4 million in 2001, an increase of $69.2
million, or 11 percent, over the prior year.
o Noninterest expense was $1.2 billion in 2001, an increase of $91.0
million, or 8 percent, over the prior year, excluding the
restructuring credits in 2000.
o Income tax expense in 2001 was $233.8 million, representing a 33
percent effective income tax rate. For 2000, the effective income tax
rate was also 33 percent.
o Reported return on average assets increased to 1.39 percent from 1.27
percent a year earlier, adjusting for the effect of the restructuring
credits in 2000, and reported return on average shareholders' equity
increased to 13.88 percent from 13.63 percent a year earlier,
adjusting for the effect of the restructuring credits in 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices, and other market changes that affect market risk sensitive
instruments. Market risk is attributable to all market risk sensitive financial
instruments, including securities, loans, deposits, and borrowings, as well as
derivative instruments. Our exposure to market risk is a function of our asset
and liability management activities, our trading activities for our own account,
and our role as a financial intermediary in customer-related transactions. The
objective of market risk management is to avoid excessive exposure of our
earnings and equity to loss and to reduce the volatility inherent in certain
financial instruments.
The management of market risk is governed by policies reviewed and approved
annually by our Board of Directors (Board). The Board assigns responsibility for
market risk management to the Asset & Liability Management Committee (ALCO),
which is composed of UnionBanCal Corporation executives. ALCO meets monthly and
reports quarterly to the Finance and Capital Committee of the Board on
activities related to the management of market risk. As part of the management
of our market risk, ALCO may direct changes in the mix of assets and liabilities
and the use of derivative instruments such as interest rate swaps, caps and
floors. ALCO also reviews and approves market risk-management programs and
market risk limits. The ALCO Chairman is responsible for the company-wide
management of market risk. The Treasurer is responsible for implementing
funding, investing, and hedging strategies designed to manage this risk. On a
day-to-day basis, the monitoring of market risk takes place at a centralized
level within the Market Risk Monitoring unit (MRM). MRM is responsible for
measuring risks to ensure compliance with all market risk limits and guidelines
incorporated within the policies and procedures established by ALCO. MRM reports
monthly to ALCO on trading risk exposures and on compliance with interest rate
risk, securities portfolio and derivatives policy limits. MRM also reports
quarterly to ALCO on the effectiveness of our hedging activities. In addition,
periodic reviews by internal audit and regulators provide further evaluation of
controls over the risk management process.
We have separate and distinct methods for managing the market risk
associated with our trading activities and our asset and liability management
activities, as described below.
INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING)
We engage in asset and liability management activities with the primary
purposes of managing the sensitivity of net interest income (NII) to changes in
interest rates within limits established by the Board and maintaining a risk
profile that is consistent with management's strategic objectives.
F-36
The Asset & Liability Management (ALM) Policy approved by the Board
requires monthly monitoring of interest rate risk by ALCO. As part of the
management of our interest rate risk, ALCO may direct changes in the composition
of the balance sheet and the extent to which we utilize investment securities
and derivative instruments such as interest rate swaps, floors, and caps to
hedge our interest rate exposures.
Our unhedged NII remains inherently asset sensitive, as it was in 2001,
meaning that our assets generally reprice more quickly than our liabilities,
particularly our core deposits. Since the NII associated with an asset sensitive
balance sheet tends to decrease when interest rates decline and increase when
interest rates rise, hedges and the securities portfolio are used to manage this
risk. In 2002, as in the past, we entered into derivative hedges to offset the
adverse impact that declining interest rates would have on the interest income
generated by our variable rate commercial loans, resulting in an essentially
neutral risk profile for the hedged balance sheet. (For a further discussion of
derivative instruments and our hedging strategies, see Note 16--"Derivative
Instruments" of the Notes to Consolidated Financial Statements included in this
Form 10-K). In addition, we increased the size of our securities portfolio in
response to strong growth in core deposits, which tend to reprice more slowly
than wholesale liabilities.
We use a variety of techniques to quantify the sensitivity of NII to
changes in interest rates. Our official NII policy measure, adopted by the
Finance and Capital Committee of the Board in December 2002, involves a
simulation of "Earnings-at-Risk" (EaR) in which we estimate the impact that
gradual, ramped-on parallel shifts in the yield curve would have on NII over a
12-month horizon. As directed by ALCO, NII is adjusted in the risk modeling to
incorporate the effect of certain noninterest expense items related to demand
deposit accounts that are nevertheless sensitive to changes in interest rates.
Under the Board's policy limits, the negative change in simulated NII in either
the up or down 200 basis point shock scenarios may not exceed 4 percent of NII
as measured in the flat rate, or no change, scenario. The following table sets
forth the simulation results in both the up and down 200 basis point ramp
scenarios as of December 31, 2002:
(DOLLARS IN MILLIONS) DECEMBER 31, 2002
_____________________________________________________ _________________
+200 basis points.................................... $16.9
as a percentage of flat rate scenario NII............ 1.13%
!200 basis points.................................... $(17.4)
as a percentage of flat rate scenario NII............ 1.16%
EaR in the down 200 basis point scenario was $17.4 million, or 1.16% of
flat rate NII, well within the Board's guidelines.
Prior to December, our official policy measure was based on a shock
simulation methodology, in which the 12-month impact on Adjusted NII was
measured with respect to instantaneous, rather than gradual, parallel shifts in
the yield curve. By policy, the negative change in simulated NII in either the
up or down 200 basis point scenarios could not exceed 8 percent of flat rate
NII. Although the shock simulations will no longer have a policy role, the
simulation results will continue to be reported to ALCO on a monthly basis and
used by management as a key decision-making tool. The following table sets forth
the shock sensitivity results in both the up and down 200 basis point scenarios
as of December 31, 2001 and December 31, 2002.
(DOLLARS IN MILLIONS) DECEMBER 31, DECEMBER 31,
________________________________________________ ____________ ____________
+200 basis points instantaneous shock........... $15.0 $29.2
as a percentage of flat rate scenario NII....... 0.99% 1.96%
!200 basis points instantaneous shock........... $(81.1) $(20.8)
as a percentage of flat rate scenario NII....... 5.35% 1.39%
Asset sensitivity in the minus 200 basis point shock simulation decreased
in 2002, primarily as a result of derivative hedges executed in the second and
third quarters, including $1 billion in floors, $1 billion in "zero cost"
collars and $1 billion in receive-fixed swaps. All three types of hedges will
generate income in a declining
F-37
interest rate environment, thereby offsetting the reduction in interest income
from our LIBOR-based commercial loans. However, the floors and collars, which
involve the simultaneous purchase of at-the-money floors and sale of
out-of-the-money caps, have less of a negative impact on interest income than
swaps when interest rates rise. Overall, the flattening of the yield curve in
the second and third quarters of 2002, and the associated increase in prepayment
activity in our residential loan, mortgage-backed securities (MBS) and
collateralized mortgage obligations (CMO) portfolios, had a negative effect on
our NII. However, our NII sensitivity profile indicates that our exposure to
further acceleration of prepayment speeds has diminished. With Treasury yields
nearing all-time lows, the prepayment levels projected by our model do not
increase significantly from current levels, even if interest rates decline
further. Consequently, the assumed loss of income from reinvesting prepaid cash
flows at lower rates decreased. However, in formulating our interest rate risk
management strategy we will continue to closely monitor prepayment activity in
our securities and residential mortgage portfolios and test our model
assumptions against actual data.
With federal funds and LIBOR rates at the end of 2002 already below two
percent, a downward shock scenario of 200 basis points would result in
short-term rate levels below zero percent. As a result, we believe that a
downward shock scenario of 100 basis points provides a more reasonable measure
of asset sensitivity in a falling interest rate environment. As of December 31,
2002, the difference between flat rate Adjusted NII and Adjusted NII after a 100
basis point downward shock was plus $5.1 million, or .34% percent of flat rate
NII, in the ramp simulation, and plus $8.7 million, or .58% of flat rate NII, in
the shock simulation. In the shock simulation, this represents a favorable
change of $29 million from 2001, when the difference was ($20.3) million, and is
due to the execution of $3 billion in interest rate derivative hedges and
slowing prepayment speeds, described previously.
Management's goal in the NII simulations is to capture the risk embedded in
the balance sheet. As a result, asset and liability balances are kept constant
throughout the analysis horizon. Two exceptions are non-maturity deposits, which
vary with levels of interest rates according to statistically derived balance
equations, and discretionary derivative hedges and fixed income portfolios,
which are allowed to run off. Additional assumptions are made to model the
future behavior of deposit rates and loan spreads based on statistical analysis,
management's outlook, and historical experience. The prepayment risks related to
residential loans and mortgage-backed securities are measured using industry
estimates of prepayment speeds. The sensitivity of the simulation results to the
underlying assumptions is tested as a regular part of the risk measurement
process by running simulations with different assumptions. In addition,
management supplements the official risk measures based on the constant balance
sheet assumption with volume-based simulations based on forecasted balances. We
believe that, together, these simulations provide management with a reasonably
comprehensive view of the sensitivity of our operating results to changes in
interest rates, at least over the measurement horizon. However, as with any
financial model, the underlying assumptions are inherently uncertain and subject
to refinement as modeling techniques and theory improve and historical data
becomes more readily accessible. Consequently, our simulation models cannot
predict with certainty how rising or falling interest rates might impact net
interest income. Actual and simulated NII results will differ to the extent
there are differences between actual and assumed interest rate changes, balance
sheet volumes, and management strategies, among other factors.
TRADING ACTIVITIES
We enter into trading account activities primarily as a financial
intermediary for customers, and, to a minor extent, for our own account. By
acting as a financial intermediary, we are able to provide our customers with
access to a wide range of products from the securities, foreign exchange, and
derivatives markets. In acting for our own account, we may take positions in
some of these instruments with the objective of generating trading profits.
These activities expose us to two primary types of market risk: interest rate
and foreign currency exchange risk.
In order to manage interest rate and foreign currency exchange risk
associated with our trading activities, we utilize a variety of non-statistical
methods including: position limits for each trading activity, daily marking
F-38
of all positions to market, daily profit and loss statements, position reports,
and independent verification of all inventory pricing. Additionally, MRM reports
positions and profits and losses daily to the Treasurer and trading managers and
weekly to the ALCO Chairman. ALCO is provided reports on a monthly basis. We
believe that these procedures, which stress timely communication between MRM and
senior management, are the most important elements of the risk management
process.
We use a form of Value at Risk (VaR) methodology to measure the overall
market risk inherent in our trading account activities. Under this methodology,
management statistically calculates, with 97.5 percent confidence, the potential
loss in fair value that we might experience if an adverse shift in market prices
or rates were to occur within a period of 5 business days. The amount of VaR is
managed within limits well below the maximum limit established by Board policy
at 0.5 percent of shareholders' equity. The VaR model incorporates a number of
key assumptions, including assumed holding period and historical volatility
based on 3 years of historical market data updated quarterly. The following
table sets forth the average, high and low VaR during the year for our trading
activities.
DECEMBER 31,
_______________________________________________________________
2001 2002
______________________________ ___________________________
AVERAGE HIGH LOW AVERAGE HIGH LOW
(DOLLARS IN THOUSANDS) VAR VAR VAR VAR VAR VAR
_________________________________ _______ ____ ___ _______ ____ ___
Foreign exchange................. $205 $552 $70 $256 $546 $88
Securities....................... 292 556 108 213 543 45
Consistent with our business strategy of focusing on the sale of capital
markets products to customers, we manage our trading risk exposures at
conservative levels, well below the trading risk policy limits established by
the Board. As a result, our foreign exchange business continues to derive the
bulk of its revenue from customer-related transactions. We take inter-bank
trading positions only on a limited basis and we do not take any large or
long-term strategic positions in the market for the Bank's own portfolio. In
2002, we continued to grow our customer-related foreign exchange business while
maintaining an essentially unchanged inter-bank trading risk profile as measured
under our VaR methodology.
The Securities Trading & Institutional Sales group serves the fixed income
needs of our institutional clients and acts as the fixed income wholesaler for
our broker/dealer subsidiary, UBOC Investment Services, Inc. As with our foreign
exchange business, we continue to generate the vast majority of our securities
income from customer-related transactions.
Our interest rate derivative contracts include $4.2 billion of derivative
contracts entered into as an accommodation for customers. We act as an
intermediary and match these contracts at a profit with contracts with major
dealers, thus neutralizing the related market risk.
LIQUIDITY RISK
Liquidity risk represents the potential for loss as a result of limitations
on our ability to adjust our future cash flows to meet the needs of depositors
and borrowers and to fund operations on a timely and cost-effective basis. The
ALM Policy approved by the Board requires quarterly reviews of our liquidity by
ALCO. Additionally, ALCO conducts monthly ongoing reviews of our liquidity
situation. Liquidity is managed through this ALCO coordination process on a
Bank-wide basis, encompassing all major business units. The operating management
of liquidity is implemented through the funding and investment functions of the
Global Markets Group. Our liquidity management draws upon the strengths of our
extensive retail and commercial core deposit franchise, coupled with the ability
to obtain funds for various terms in a variety of domestic and international
money markets. Our securities portfolio represents a significant source of
additional liquidity.
F-39
Core deposits provide us with a sizable source of relatively stable and
low-cost funds. Our average core deposits, which include demand deposits, money
market demand accounts, savings, and consumer time deposits, combined with
average common shareholders' equity, funded 78 percent of average total assets
of $36.1 billion for the year ended December 31, 2002. Most of the remaining
funding was provided by short-term borrowings in the form of negotiable
certificates of deposit, large time deposits, foreign deposits, federal funds
purchased, securities sold under repurchase agreements, commercial paper, and
other borrowings. In the fourth quarter of 2001, we issued $200 million in
medium-term notes, the proceeds of which were used for general corporate
purposes. The securities portfolio provides additional enhancement to our
liquidity position, which may be created through either securities sales, or
repurchase agreements. Liquidity may also be provided by the sale or maturity of
assets. Such assets include interest-bearing deposits in banks, federal funds
sold, securities purchased under resale agreements, and trading account
securities. The aggregate of these assets averaged $1.3 billion during 2002.
Additional liquidity may be provided through loan maturities and sales.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS AND
COMMITMENTS
Off-balance sheet arrangements are any contractual arrangement to which an
unconsolidated entity is a party, under which we have: (1) any obligation under
a guarantee contract; (2) a retained or contingent interest in assets
transferred to an unconsolidated entity or similar arrangement that serves as
credit, liquidity or market risk support to that entity for such assets; (3) any
obligation under certain derivative instruments; or (4) any obligation under a
material variable interest held by us in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to us, or engages in
leasing, hedging or research and development services with us.
Our most significant off-balance sheet arrangements are limited to
obligations under guarantee contracts such as financial and performance standby
letters of credit for our credit customers, commercial letters of credit,
unfunded commitments to lend, commitments to sell mortgage loans and commitments
to fund investments in various Community Redevelopment Act (CRA) investments and
venture capital investments. To a lesser extent, we enter into contractual
guarantees of agented sales of low-income housing tax credit investments that
require us to perform under those guarantees if there are breaches of
performance of the underlying income-producing properties. As part of our
leasing activities, we may be lessor to special purpose entities to which we
provide financing for large equipment leasing projects.
It is our belief that none of these arrangements expose us to any greater
risk of loss than is already reflected on our balance sheet. We do not have any
off-balance sheet arrangements in which we have any retained or contingent
interest (as we do not transfer or sell our assets to entities in which we have
a continuing involvement), any exposure to derivative instruments that are
indexed to stock indices nor any variable interests in any unconsolidated entity
to which we may be a party, except for those leasing arrangements described
previously.
The following table presents, as of December 31, 2002, our significant and
determinable contractual obligations by payment date. The payment amounts
represent those amounts contractually due to the recipient and do not include
any unamortized premiums or discounts, hedge basis adjustment or other similar
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carrying value adjustments. For further information on the nature of each
obligation type, see applicable note disclosure in "Notes to Consolidated
Financial Statements" included in this Form 10-K.
DECEMBER 31, 2002
________________________________________________________________________
LESS THAN ONE THROUGH FOUR TO FIVE AFTER FIVE
(DOLLARS IN THOUSANDS) ONE YEAR THREE YEARS YEARS YEARS TOTAL
_________________________________________________ _________ ___________ ____________ __________ __________
Medium and long-term debt........................ $ -- $218,584 $199,776 $ -- $ 418,360
UnionBanCal Corporation-obligated mandatorily
redeemable preferred securities of subsidiary
grantor trust.................................. -- -- -- 365,696 365,696
Other long-term liabiliities
Operating leases (premises).................... 53,538 86,530 58,858 90,712 289,638
_______ ________ ________ ________ __________
Total long-term debt and operating leases........ $53,538 $305,114 $258,634 $456,408 $1,073,694
======= ======== ======== ======== ==========
The following table presents our significant commitments as of December 31,
2002:
(DOLLARS IN THOUSANDS) DECEMBER 31, 2002
___________________________________________________ _________________
Commitments to extend credit....................... $12,872,063
Standby letters of credit.......................... 2,483,871
Commercial letters of credit....................... 279,653
Commitments to fund principal investments.......... 58,556
CERTAIN BUSINESS RISK FACTORS
ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS
A substantial majority of our assets, deposits and fee income are generated
in California. As a result, poor economic conditions in California may cause us
to incur losses associated with higher default rates and decreased collateral
values in our loan portfolio. Economic conditions in California are subject to
various uncertainties at this time, including the long-term impact of the
California energy crisis and the decline in the technology sector. If economic
conditions in California continue to decline, we expect that our level of
problem assets could increase.
THE CONTINUING WAR ON TERRORISM CONTRIBUTES TO THE CONTINUING DOWNTURN IN
US ECONOMIC CONDITIONS
On-going acts or threats of terrorism and actions taken by the US or other
governments as a result of such acts or threats, including possible military
action in Iraq, have contributed to the continuing downturn in US economic
conditions and could further adversely affect business and economic conditions
in the US generally and in our principal markets. For example, the events of
September 11, 2001, caused a decrease in air travel in the US, which adversely
affected the airline industry and many other travel-related industries,
including those operating in California. The possibility of war with Iraq also
could contribute to adverse economic conditions and disruptions of the capital
markets with resultant adverse effects on our principal markets.
ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD ADVERSELY
AFFECT OUR BUSINESS
We are subject to certain industry-specific economic factors. For example,
a significant and increasing portion of our total loan portfolio is related to
residential real estate. Accordingly, a downturn in the real estate and housing
industries in California could have an adverse effect on our operations.
Similarly, a portion of our total loan portfolio is to borrowers in the
agricultural industry. Adverse weather conditions, combined with low commodity
prices, may adversely affect the agricultural industry and, consequently, may
impact our business negatively. In addition, auto leases comprise a declining
portion of our total loan portfolio. We ceased originating auto leases in April
2001; however, continued deterioration in the used car market may result in
additional losses on the valuation of auto lease residuals on our remaining auto
leases. We provide financing to
F-41
businesses in a number of other industries that may be particularly vulnerable
to industry-specific economic factors, including the communications/media
industry, the retailing industry, the airlines industry, the power industry and
the technology industry. Industry-specific risks are beyond our control and
could adversely affect our portfolio of loans, potentially resulting in an
increase in nonperforming loans or charge-offs.
RISKS ASSOCIATED WITH CURTAILED MARKET ACCESS OF POWER COMPANIES COULD
AFFECT OUR PORTFOLIO CREDIT QUALITY
The failure of Enron Corporation, coupled with continued turbulence in the
energy markets, has significantly impacted debt ratings and equity valuations of
a broad spectrum of power companies, particularly those involved in energy
trading and in deregulated or non-regulated markets. These developments have
sharply reduced these companies' ability to access public debt and equity
markets, contributing to heightened liquidity pressures. Should these negative
trends continue and/or intensify, the credit quality of certain of our borrowers
could be adversely affected.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS
Significant increases in market interest rates, or the perception that an
increase may occur, could adversely affect both our ability to originate new
loans and our ability to grow. Conversely, a decrease in interest rates could
result in an acceleration in the prepayment of loans. An increase in market
interest rates could also adversely affect the ability of our floating-rate
borrowers to meet their higher payment obligations. If this occurred, it could
cause an increase in nonperforming assets and charge-offs, which could adversely
affect our business.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD
Changes in market interest rates, including changes in the relationship
between short-term and long-term market interest rates or between different
interest rate indices, can impact our margin spread, that is, the difference
between the interest rates we charge on interest earning assets, such as loans,
and the interest rates we pay on interest bearing liabilities, such as deposits
or other borrowings. The impact, particularly in a falling interest rate
environment, could result in a decrease in our interest income relative to
interest expense.
SHAREHOLDER VOTES ARE CONTROLLED BY BTM; OUR INTERESTS MAY NOT BE THE SAME
AS BTM'S INTERESTS
BTM, a wholly owned subsidiary of Mitsubishi Tokyo Financial Group, Inc.,
owns a majority (approximately 65 percent as of December 31, 2002) of the
outstanding shares of our common stock. As a result, BTM can elect all of our
directors and, as a result, can control the vote on all matters, including
determinations such as: approval of mergers or other business combinations;
sales of all or substantially all of our assets; any matters submitted to a vote
of our shareholders; issuance of any additional common stock or other equity
securities; incurrence of debt other than in the ordinary course of business;
the selection and tenure of our Chief Executive Officer; payment of dividends
with respect to common stock or other equity securities; and other matters that
might be favorable to BTM.
A majority of our directors are not officers or employees of UnionBanCal
Corporation or any of our affiliates, including BTM. However, because of BTM's
control over the election of our directors, BTM could change the composition of
our Board of Directors so that the Board would not have a majority of outside
directors. BTM's ability to prevent an unsolicited bid for us or any other
change in control could have an adverse effect on the market price for our
common stock.
POSSIBLE FUTURE SALES OF SHARES BY BTM COULD ADVERSELY AFFECT THE MARKET
FOR OUR STOCK
BTM may sell shares of our common stock in compliance with the federal
securities laws. By virtue of BTM's current control of us, BTM could sell large
amounts of shares of our common stock by causing us to file a registration
statement that would allow them to sell shares more easily. In addition, BTM
could sell shares of
F-42
our common stock without registration. Although we can make no prediction as to
the effect, if any, that such sales would have on the market price of our common
stock, sales of substantial amounts of our common stock, or the perception that
such sales could occur, could adversely affect the market price of our common
stock. If BTM sells or transfers shares of our common stock as a block, another
person or entity could become our controlling shareholder.
BTM'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS
Although we fund our operations independently of BTM and believe our
business is not necessarily closely related to BTM's business or outlook, BTM's
credit ratings may affect our credit ratings. BTM is also subject to regulatory
oversight and review by Japanese and US regulatory authorities. Our business
operations and expansion plans could be negatively affected by regulatory
concerns related to the Japanese financial system and BTM.
POTENTIAL CONFLICTS OF INTEREST WITH BTM COULD ADVERSELY AFFECT US
As part of BTM's normal risk management processes, BTM manages global
credit exposures and concentrations on an aggregate basis, including UnionBanCal
Corporation. Therefore, at certain levels, our ability to approve certain
credits or other banking transactions and categories of customers is subject to
concurrence of BTM. We may wish to extend credit or furnish other banking
services to the same customer as BTM. Our ability to do so may be limited for
various reasons, including BTM's aggregate credit exposure and marketing
policies. Certain directors' and officers' ownership interests in BTM's common
stock or service as a director or officer or other employee of both us and BTM
could create or appear to create potential conflicts of interest, especially
since both of us compete in the US banking industry.
SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY
AFFECT US
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, as well as
nationally and internationally. Our competitors include a large number of state
and national banks, thrift institutions and major foreign-affiliated or foreign
banks, as well as many financial and non-financial firms that offer services
similar to those offered by us. Some of our competitors are community banks that
have strong local market positions. Other competitors include large financial
institutions (such as Bank of America, Citibank, Washington Mutual, and Wells
Fargo) that have substantial capital, technology and marketing resources. Such
large financial institutions may have greater access to capital at a lower cost
than us, which may adversely affect our ability to compete effectively.
Banks, securities firms, and insurance companies can now combine in a new
type of financial services company called a "financial holding company."
Financial holding companies can offer virtually any type of financial service,
including banking, securities underwriting, insurance (both agency and
underwriting), and merchant banking. Recently, a number of foreign banks have
acquired financial services companies in the US, further increasing competition
in the US market.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS
PAYABLE TO US
As a holding company, a substantial portion of our cash flow typically
comes from dividends our bank and nonbank subsidiaries pay to us. Various
statutory provisions restrict the amount of dividends our subsidiaries can pay
to us without regulatory approval. In addition, if any of our subsidiaries
liquidate, that subsidiary's creditors will be entitled to receive distributions
from the assets of that subsidiary to satisfy their claims against it before we,
as a holder of an equity interest in the subsidiary, will be entitled to receive
any of the assets of the subsidiary.
F-43
ADVERSE EFFECTS OF, OR CHANGES IN, BANKING OR OTHER LAWS AND REGULATIONS OR
GOVERNMENTAL FISCAL OR MONETARY POLICIES COULD ADVERSELY AFFECT US
We are subject to significant federal and state regulation and supervision,
which is primarily for the benefit and protection of our customers and not for
the benefit of investors. In the past, our business has been materially affected
by these regulations. This trend is likely to continue in the future. Laws,
regulations or policies, including accounting standards and interpretations,
currently affecting us and our subsidiaries may change at any time. Regulatory
authorities may also change their interpretation of these statutes and
regulations. Therefore, our business may be adversely affected by any future
changes in laws, regulations, policies or interpretations, including legislative
and regulatory reactions to the terrorist attack on September 11, 2001, and
future acts of terrorism, and the Enron Corporation, WorldCom, Inc. and other
major US corporate bankruptcies and reports of accounting irregularities at US
public companies, including various large and publicly traded companies.
Additionally, our international activities may be subject to the laws and
regulations of the jurisdiction where business is being conducted. International
laws, regulations and policies affecting us and our subsidiaries may change at
any time and affect our business opportunities and competitiveness in these
jurisdictions. Due to BTM's controlling ownership of us, laws, regulations and
policies adopted or enforced by the Government of Japan may adversely affect our
activities and investments and those of our subsidiaries in the future.
Additionally, our business is affected significantly by the fiscal and
monetary policies of the federal government and its agencies. We are
particularly affected by the policies of the Federal Reserve Board (FRB), which
regulates the supply of money and credit in the US. Under long-standing policy
of the FRB, a bank holding company is expected to act as a source of financial
strength for its subsidiary banks. As a result of that policy, we may be
required to commit financial and other resources to our subsidiary bank in
circumstances where we might not otherwise do so. Among the instruments of
monetary policy available to the FRB are (a) conducting open market operations
in US government securities, (b) changing the discount rates of borrowings by
depository institutions, (c) imposing or changing reserve requirements against
certain borrowings by banks and their affiliates. These methods are used in
varying degrees and combinations to directly affect the availability of bank
loans and deposits, as well as the interest rates charged on loans and paid on
deposits. The policies of the FRB may have a material effect on our business,
results of operations and financial condition.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR OPERATING STRATEGIES
From time to time, we develop long-term financial performance goals to
guide and measure the success of our operating strategies. We can make no
assurances that we will be successful in achieving these long-term goals or that
our operating strategies will be successful. Achieving success in these areas is
dependent on a number of factors, many of which are beyond our direct control.
Factors that may adversely affect our ability to attain our long-term financial
performance goals include:
o deterioration of our asset quality;
o our inability to control noninterest expense, including, but not
limited to, rising employee and healthcare costs;
o our inability to increase noninterest income;
o our inability to decrease reliance on revenues generated from assets;
o our ability to manage loan growth;
o our ability to find acquisition targets at valuation levels we find
attractive;
o regulatory and other impediments associated with making acquisitions;
o deterioration in general economic conditions, especially in our core
markets;
F-44
o decreases in our net interest margin;
o increases in competition;
o adverse regulatory or legislative developments; and
o unexpected increases in costs related to acquisitions.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR
RESTRUCTURING MAY ADVERSELY AFFECT US
We may seek to acquire or invest in companies, technologies, services or
products that complement our business. There can be no assurance that we will be
successful in completing any such acquisition or investment as this will depend
on the availability of prospective target companies at valuation levels we find
attractive and the competition for such opportunities from other bidders. In
addition, we continue to evaluate the performance of all of our businesses and
business lines and may sell a business or business line. Any acquisitions,
divestitures or restructuring may result in the issuance of potentially dilutive
equity securities, significant write-offs, including those related to goodwill
and other intangible assets, and/or the incurrence of debt, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Acquisitions, divestitures or restructuring could involve
numerous additional risks including difficulties in obtaining any required
regulatory approvals and in the assimilation or separation of operations,
services, products and personnel, the diversion of management's attention from
other business concerns, higher than expected deposit attrition (run-off),
divestitures required by regulatory authorities, the disruption of our business,
and the potential loss of key employees. There can be no assurance that we will
be successful in overcoming these or any other significant risks encountered.
WRITTEN STATEMENTS UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The written statements of our chief executive officer and chief financial
officer with respect to this report on Form 10-K, as required by section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), have been submitted to
the Securities and Exchange Commission as additional correspondence accompanying
this report.
F-45
UNIONBANCAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Statements of Income for the Years Ended December 31,
2000, 2001, and 2002.................................................... F-47
Consolidated Balance Sheets as of December 31, 2001 and 2002.............. F-48
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2000, 2001, and 2002........................... F-49
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 2001, and 2002................................................ F-50
Notes to Consolidated Financial Statements................................ F-51
Management Statement...................................................... F-97
Independent Auditors' Report.............................................. F-98
F-46
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
__________________________________________
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002
____________________________________________________________________________ __________ __________ __________
INTEREST INCOME
Loans....................................................................... $2,242,182 $1,883,835 $1,518,918
Securities.................................................................. 226,194 294,066 315,956
Interest bearing deposits in banks.......................................... 9,126 2,850 2,806
Federal funds sold and securities purchased under resale agreements......... 8,160 6,844 13,895
Trading account assets...................................................... 15,418 7,716 4,397
__________ __________ __________
Total interest income..................................................... 2,501,080 2,195,311 1,855,972
__________ __________ __________
INTEREST EXPENSE
Domestic deposits........................................................... 557,408 445,486 215,138
Foreign deposits............................................................ 107,183 69,830 21,110
Federal funds purchased and securities sold under repurchase
agreements................................................................ 96,606 52,153 6,030
Commercial paper............................................................ 94,905 52,439 16,645
Medium and long-term debt................................................... 17,617 10,445 9,344
UnionBanCal Corporation-obligated mandatorily redeemable preferred
securities of subsidiary grantor trust.................................... 26,212 20,736 15,625
Other borrowed funds........................................................ 16,709 20,180 10,111
__________ __________ __________
Total interest expense.................................................... 916,640 671,269 294,003
__________ __________ __________
NET INTEREST INCOME......................................................... 1,584,440 1,524,042 1,561,969
Provision for credit losses................................................. 440,000 285,000 175,000
__________ __________ __________
Net interest income after provision for credit losses..................... 1,144,440 1,239,042 1,386,969
__________ __________ __________
NONINTEREST INCOME
Service charges on deposit accounts......................................... 210,257 245,116 275,820
Trust and investment management fees........................................ 154,387 154,092 143,953
Merchant transaction processing fees........................................ 73,521 80,384 87,961
International commissions and fees.......................................... 71,189 71,337 76,956
Brokerage commissions and fees.............................................. 35,755 36,317 36,301
Merchant banking fees....................................................... 48,985 33,532 32,314
Foreign exchange trading gains, net......................................... 28,057 26,565 28,548
Insurance commissions....................................................... -- 920 27,208
Securities gains (losses), net.............................................. 8,784 8,654 (3,796)
Other....................................................................... 16,245 59,487 30,711
__________ __________ __________
Total noninterest income.................................................. 647,180 716,404 735,976
__________ __________ __________
NONINTEREST EXPENSE
Salaries and employee benefits.............................................. 600,462 659,840 731,166
Net occupancy............................................................... 92,567 95,152 106,592
Equipment................................................................... 63,290 64,357 66,160
Merchant transaction processing............................................. 49,609 52,789 55,767
Communications.............................................................. 43,744 50,439 53,382
Professional services....................................................... 42,042 38,480 44,851
Data processing............................................................. 34,803 35,732 32,589
Foreclosed asset expense (income)........................................... (80) (13) 146
Restructuring credit........................................................ (19,000) -- --
Other....................................................................... 222,748 243,398 257,013
__________ __________ __________
Total noninterest expense................................................. 1,130,185 1,240,174 1,347,666
__________ __________ __________
Income before income taxes.................................................. 661,435 715,272 775,279
Income tax expense.......................................................... 221,535 233,844 247,376
__________ __________ __________
NET INCOME.................................................................. $ 439,900 $ 481,428 $ 527,903
========== ========== ==========
NET INCOME PER COMMON SHARE--BASIC.......................................... $2.72 $3.05 $3.41
========== ========== ==========
NET INCOME PER COMMON SHARE--DILUTED........................................ $2.72 $3.04 $3.38
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC........................... 161,605 157,845 154,758
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED......................... 161,989 158,623 156,415
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-47
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
_____________________________
(DOLLARS IN THOUSANDS) 2001 2002
_______________________________________________________________________________________________ ___________ ___________
ASSETS
Cash and due from banks........................................................................ $ 2,682,392 $ 2,823,573
Interest bearing deposits in banks............................................................. 64,162 278,849
Federal funds sold and securities purchased under resale agreements............................ 918,400 1,339,700
___________ ___________
Total cash and cash equivalents............................................................ 3,664,954 4,442,122
Trading account assets......................................................................... 229,697 276,021
Securities available for sale:
Securities pledged as collateral............................................................. 137,922 157,823
Held in portfolio............................................................................ 5,661,160 7,180,677
Loans (net of allowance for credit losses: 2001, $634,509; 2002, $609,190)..................... 24,359,521 25,828,893
Due from customers on acceptances.............................................................. 182,440 62,469
Premises and equipment, net.................................................................... 494,534 504,666
Intangible assets.............................................................................. 16,176 38,518
Goodwill....................................................................................... 68,623 150,542
Other assets................................................................................... 1,223,719 1,528,042
___________ ___________
Total assets............................................................................... $36,038,746 $40,169,773
=========== ===========
LIABILITIES
Domestic deposits:
Noninterest bearing.......................................................................... $12,314,150 $15,537,906
Interest bearing............................................................................. 14,160,113 15,258,479
Foreign deposits:
Noninterest bearing.......................................................................... 404,708 583,836
Interest bearing............................................................................. 1,677,228 1,460,594
___________ ___________
Total deposits............................................................................. 28,556,199 32,840,815
Federal funds purchased and securities sold under repurchase agreements........................ 418,814 334,379
Commercial paper............................................................................... 830,657 1,038,982
Other borrowed funds........................................................................... 700,403 267,047
Acceptances outstanding........................................................................ 182,440 62,469
Other liabilities.............................................................................. 1,040,406 1,083,836
Medium and long-term debt...................................................................... 399,657 418,360
UnionBanCal Corporation-obligated mandatorily redeemable preferred securities
of subsidiary grantor trust.................................................................. 363,928 365,696
___________ ___________
Total liabilities.......................................................................... 32,492,504 36,411,584
___________ ___________
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares, no shares issued or outstanding at December 31,
2001 or 2002............................................................................... -- --
Common stock-- no stated value:
Authorized 300,000,000 shares, issued 156,483,511 shares in 2001 and 150,702,363
shares in 2002............................................................................. 1,181,925 926,460
Retained earnings.............................................................................. 2,231,384 2,591,635
Accumulated other comprehensive income......................................................... 132,933 240,094
___________ ___________
Total shareholders' equity................................................................. 3,546,242 3,758,189
___________ ___________
Total liabilities and shareholders' equity................................................. $36,038,746 $40,169,773
=========== ===========
See accompanying notes to consolidated financial statements.
F-48
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
___________________________________________________________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA) 2000 2001 2002
_________________________________ __________________________ ___________________________ __________________________
COMMON STOCK
Balance, beginning of year...... $1,404,155 $1,275,587 $1,181,925
Dividend reinvestment plan...... 52 44 99
Deferred compensation--restricted
stock awards.................. 238 190 255
Stock options exercised......... 1,784 13,733 75,311
Stock issued in bank acquisitions -- -- 54,830
Common stock repurchased(1)..... (130,642) (107,629) (385,960)
__________ __________ __________
Balance, end of year........ $1,275,587 $1,181,925 $926,460
__________ __________ __________
RETAINED EARNINGS
Balance, beginning of year...... $1,625,263 $1,906,093 $2,231,384
Net income...................... 439,900 $439,900 481,428 $481,428 527,903 $527,903
Dividends on common stock(2).... (161,227) (157,736) (167,593)
Deferred compensation--restricted
stock awards.................. 2,157 1,599 (59)
__________ __________ __________
Balance, end of year............ $1,906,093 $2,231,384 $2,591,635
__________ __________ __________
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Balance, beginning of year...... $ (41,950) $ 29,885 $ 132,933
Cumulative effect of accounting
change (SFAS No.133)(3), net of
tax expense of $13,754........ -- 22,205 --
Unrealized net gains on cash flow
hedges, net of tax expense of
$45,015 in 2001, and $70,195 in
2002.......................... -- 72,672 113,322
Less: reclassification adjustment
for net gains on cash flow
hedges included in net income,
net of tax expense of $19,844
in 2001, and $44,472 in 2002 -- (32,037) (71,794)
________ ________ ________
Net unrealized gains on cash flow
hedges........................ -- 62,840 41,528
Unrealized holding gains arising
during the year on securities
available for sale, net of tax
expense of $49,462 in 2000,
$28,950 in 2001, and $38,303 in
2002.......................... 79,851 46,736 61,835
Less: reclassification adjustment
for losses (gains) on
securities available for sale
included in net income, net of
tax expense (benefit) of $3,360
in 2000, $3,310 in 2001, and
$(1,452) in 2002.............. (5,424) (5,344) 2,344
________ ________ ________
Net unrealized gains on
securities available for sale. 74,427 41,392 64,179
Foreign currency translation
adjustment, net of tax expense
(benefit) of $(1,535) in 2000,
$(628) in 2001, and $964 in 2002 (2,478) (1,014) 1,556
Minimum pension liability
adjustment, net of tax benefit
of $71 in 2000, $105 in 2001,
and $63 in 2002............... (114) (170) (102)
________ ________ ________
Other comprehensive income...... 71,835 71,835 103,048 103,048 107,161 107,161
__________ ________ __________ ________ __________ ________
Total comprehensive income...... $511,735 $584,476 $635,064
======== ======== ========
Balance, end of year.......... $ 29,885 $ 132,933 $ 240,094
__________ __________ __________
TOTAL SHAREHOLDERS' EQUITY...... $3,211,565 $3,546,242 $3,758,189
========== ========== ==========
<FN>
__________
(1) Common stock repurchased includes commission costs.
(2) Dividends per share were $1.00 in 2000, $1.00 in 2001, and $1.09 in 2002.
Dividends are based on UnionBanCal Corporation's shares outstanding as of
the declaration date.
(3) Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
</FN>
See accompanying notes to consolidated financial statements.
F-49
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
_________________________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
________________________________________________________________________ ___________ ___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 439,900 $ 481,428 $ 527,903
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses......................................... 440,000 285,000 175,000
Depreciation, amortization and accretion............................ 72,710 81,487 87,040
Provision for deferred income taxes................................. 13,709 58,655 38,448
Loss (gain) on sales of securities available for sale, net.......... (8,784) (8,654) 3,796
Net increase in prepaid expenses.................................... (23,724) (44,746) (167,188)
Net increase (decrease) in accrued expenses......................... (85,537) 172,605 144,329
Net (increase) decrease in trading account assets................... (159,760) 109,998 (46,324)
Other, net of acquisitions.......................................... (88,398) (46,174) 288,369
___________ ___________ ___________
Total adjustments................................................. 160,216 608,171 523,470
___________ ___________ ___________
Net cash provided by operating activities............................... 600,116 1,089,599 1,051,373
___________ ___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale.................. 422,881 931,479 187,556
Proceeds from matured and called securities available for sale........ 847,158 1,007,273 1,472,573
Purchases of securities available for sale............................ (2,056,594) (3,510,621) (3,116,001)
Proceeds from matured and called securities held to maturity.......... 23,003 -- --
Net purchases of premises and equipment............................... (163,716) (95,041) (87,521)
Net decrease (increase) in loans...................................... (391,672) 766,089 (1,917,646)
Net cash received in acquisitions..................................... -- -- 86,590
Other, net............................................................ 5,433 7,313 12,425
___________ ___________ ___________
Net cash used in investing activities................................. (1,313,507) (893,508) (3,362,024)
___________ ___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............................................. 1,026,576 1,273,016 3,852,835
Net increase (decrease) in federal funds purchased and securities sold
under repurchase agreements........................................... 230,868 (968,853) (84,435)
Net increase (decrease) in commercial paper and other borrowed funds.. 34,441 (104,180) (225,031)
Proceeds from issuance of medium-term debt............................ -- 200,000 --
Maturity and redemption of subordinated debt.......................... (98,000) -- --
Common stock repurchased.............................................. (130,642) (107,629) (385,960)
Payments of cash dividends............................................ (162,575) (158,406) (164,440)
Stock options exercised............................................... 1,784 13,733 75,311
Other, net............................................................ (2,426) 11,577 1,655
___________ ___________ ___________
Net cash provided by financing activities............................. 900,026 159,258 3,069,935
___________ ___________ ___________
Net increase in cash and cash equivalents............................... 186,635 355,349 759,284
Cash and cash equivalents at beginning of year.......................... 3,158,133 3,322,979 3,664,954
Effect of exchange rate changes on cash and cash equivalents............ (21,789) (13,374) 17,884
___________ ___________ ___________
Cash and cash equivalents at end of year................................ $ 3,322,979 $ 3,664,954 $ 4,442,122
=========== =========== ===========
CASH PAID DURING THE YEAR FOR:
Interest.............................................................. $ 883,706 $ 747,271 $ 311,299
Income taxes.......................................................... 260,117 99,735 166,875
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
Fair value of assets acquired....................................... -- -- $ 571,065
Purchase price:
Cash.................................................................. -- -- (52,524)
Stock issued.......................................................... -- -- (54,830)
___________ ___________ ___________
Fair value of liabilities assumed................................... $ -- $ -- $ 463,711
=========== =========== ===========
Loans transferred to foreclosed assets (OREO) and/or distressed
loans held for sale................................................. $ 9,924 $ 1,677 $ 826
Securities transferred from held to maturity to available for sale.... -- 23,529 --
Debt assumed in purchase of building.................................. 47,955 -- --
See accompanying notes to consolidated financial statements.
F-50
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
INTRODUCTION
UnionBanCal Corporation is a commercial bank holding company and has, as
its major subsidiary, a banking subsidiary, Union Bank of California, N.A. (the
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, and
Washington, but also nationally and internationally.
Since November 1999, the Company has announced stock repurchase plans
totaling $400 million. The Company repurchased $131 million, $108 million and
$86 million in 2000, 2001, and 2002, respectively, as part of these repurchase
plans. As of December 31, 2002, $59 million of the Company's common stock is
authorized for repurchase. In addition, on August 27, 2002, the Company
announced that it purchased $300 million of its common stock from its majority
owner, The Bank of Tokyo-Mitsubishi, Ltd. (BTM), which is a wholly-owned
subsidiary of Mitsubishi Tokyo Financial Group, Inc. At December 31, 2002, BTM
owned approximately 65 percent of the Company's outstanding common stock.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America (US GAAP) and
general practice within the banking industry. Those policies that materially
affect the determination of financial position, results of operations, and cash
flows are summarized below.
The Consolidated Financial Statements include the accounts of the Company,
and all material intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Certain amounts for prior periods have been reclassified to conform
with current financial statement presentation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest bearing deposits in banks, and federal funds
sold and securities purchased under resale agreements, substantially all of
which have maturities less than 90 days.
TRADING ACCOUNT ASSETS
Trading account assets are those financial instruments that management
acquires with the intent to hold for short periods of time in order to take
advantage of anticipated changes in market values. Substantially all of these
assets are securities with a high degree of liquidity and a readily determinable
market value. Interest earned, paid, or accrued on trading account assets is
included in interest income using a method that produces a level yield. Realized
gains and losses from the close-out of trading account positions and unrealized
market value adjustments are recognized in noninterest income. The reserve for
derivative and foreign exchange contracts is presented as an offset to trading
account assets. Changes in the reserve as a result of changes in
F-51
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
the positive replacement cost of those contracts are provided as an offset to
trading gains and losses in noninterest income.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The Company's securities portfolios consist of debt and equity securities
that are classified either as securities available for sale or securities held
to maturity.
Debt securities for which the Company has the positive intent and ability
to hold until maturity are classified as securities held to maturity and carried
at amortized cost.
Debt securities and equity securities with readily determinable market
values that are not classified as either securities held to maturity or trading
account assets are classified as securities available for sale and carried at
fair value, with the unrealized gains or losses reported net of taxes as a
component of accumulated other comprehensive income (loss) in shareholders'
equity until realized.
Realized gains and losses on the sale of and other-than-temporary
impairment charges on available for sale securities are included in noninterest
income as securities gains (losses), net. The specific identification method is
used to calculate realized gains or losses.
Interest income on debt securities includes the amortization of premiums
and the accretion of discounts using the effective interest method and is
included in interest income on securities. Dividend income on equity securities
is included in noninterest income.
Securities available for sale that are pledged under an agreement to
repurchase and which may be sold or repledged under that agreement have been
separately identified as pledged as collateral.
LOANS
Loans are reported at the principal amounts outstanding, net of unamortized
nonrefundable loan fees and related direct loan origination costs. Deferred net
fees and costs are recognized in interest income over the loan term using a
method that generally produces a level yield on the unpaid loan balance.
Nonrefundable fees and direct loan origination costs related to loans held for
sale are deferred and recognized as a component of the gain or loss on sale.
Interest income is accrued principally on a simple interest basis.
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists significant uncertainty as to the full and timely
collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest.
Interest accruals are continued for certain small business loans that are
processed centrally, consumer loans, and one-to-four family residential mortgage
loans. These loans are charged off or written down to their net realizable value
based on delinquency time frames that range from 120 to 270 days, depending on
the type of credit that has been extended. Interest accruals are also continued
for loans that are both well-secured and in the process of collection. For this
purpose, loans are considered well-secured if they are collateralized by
property having a net realizable value in excess of the amount of principal and
accrued interest outstanding or are guaranteed by a financially responsible and
willing party. Loans are considered "in the process of collection" if collection
is proceeding in due course either through legal action or other actions that
are reasonably expected to result in the prompt repayment of the debt or in its
restoration to current status.
F-52
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
When a loan is placed on nonaccrual, all previously accrued but uncollected
interest is reversed against current period operating results. All subsequent
payments received are first applied to unpaid principal and then to uncollected
interest. Interest income is accrued at such time as the loan is brought fully
current as to both principal and interest, and, in management's judgment, such
loans are considered to be fully collectible. However, Company policy also
allows management to continue the recognition of interest income on certain
loans designated as nonaccrual. This portion of the nonaccrual portfolio is
referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans
that are well secured and in management's judgment are considered to be fully
collectible. Although the accrual of interest is suspended, any payments
received may be applied to the loan according to its contractual terms and
interest income recognized when cash is received.
Loans are considered impaired when, based on current information, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including interest payments.
Impaired loans are carried at the lower of the recorded investment in the loan,
the estimated present value of total expected future cash flows, discounted at
the loan's effective rate, or the fair value of the collateral, if the loan is
collateral dependent. Additionally, some impaired loans with commitments of less
than $1 million are aggregated for the purpose of measuring impairment using
historical loss factors as a means of measurement. Excluded from the impairment
analysis are large groups of smaller balance homogeneous loans such as consumer
and residential mortgage loans, and automobile leases.
The Company offers primarily two types of leases to customers: 1) direct
financing leases where the assets leased are acquired without additional
financing from other sources, and 2) leveraged leases where a substantial
portion of the financing is provided by debt with no recourse to the Company.
Direct financing leases are carried net of unearned income, unamortized
nonrefundable fees and related direct costs associated with the origination or
purchase of leases. Leveraged leases are carried net of nonrecourse debt.
ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. The allowance is based on ongoing, quarterly
assessments of the probable estimated losses inherent in the loan portfolio, and
to a lesser extent, unused commitments to provide financing. The allowance is
increased by the provision for credit losses, which is charged against current
period operating results and decreased by the amount of charge-offs, net of
recoveries. The Company's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula allowance,
the specific allowance and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and unused commitments. Loss factors are based on the Company's historical
loss experience and may be adjusted for significant factors that, in
management's judgement, affect the collectibility of the portfolio as of the
evaluation date. The Company derives the loss factors for all commercial loans
from a loss migration model and for pooled loans by using expected net
charge-offs for one year. Pooled loans are homogeneous in nature and include
consumer and residential mortgage loans, and automobile leases.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss has been incurred in
excess of the amount determined by the application of the formula allowance.
F-54
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
The unallocated allowance is composed of attribution factors, which are
based upon management's evaluation of various conditions that are not directly
measured in the determination of the formula and specific allowances. The
conditions evaluated in connection with the unallocated allowance may include
existing general economic and business conditions affecting the key lending
areas of the Company, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the loan portfolio, specific industry conditions
within portfolio segments, recent loss experience in particular segments of the
portfolio, duration of the current business cycle, bank regulatory examination
results and findings of the Company's internal credit examiners.
The allowance also incorporates the results of measuring impaired loans as
provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans. A loan is considered impaired when
management determines that it is probable that the Company will be unable to
collect all amounts due according to the original contractual terms of the loan
agreement. Impairment is measured by the difference between the recorded
investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount) and the estimated present value of
total expected future cash flows, discounted at the loan's effective rate, or
the fair value of the collateral, if the loan is collateral dependent.
Additionally, some impaired loans with commitments of less than $1 million are
aggregated for the purpose of measuring impairment using historical loss factors
as a means of measurement. In addition, the impairment allowance may include
amounts related to certain qualitative factors that have yet to manifest
themselves in the other measurements. Impairment is recognized by adjusting an
allocation of the existing allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful life of each asset. Lives of
premises range from ten to forty years; lives of furniture, fixtures and
equipment range from three to eight years. Leasehold improvements are amortized
over the term of the respective lease or ten years, whichever is shorter.
Long-lived assets that are held or that are to be disposed of and certain
intangibles are evaluated periodically for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. The
impairment is calculated as the difference between the expected undiscounted
future cash flows of a long-lived asset, if lower, and its carrying value. In
the event of an impairment, the Company recognizes a loss for the difference
between the carrying amount and the estimated value of the asset as measured
using a quoted market price or, in the absence of a quoted market price, a
discounted cash flow analysis. The impairment loss is reflected in noninterest
expense.
OTHER ASSETS
As of January 1, 2002 with the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets," goodwill is no longer amortized, but instead tested
for impairment at least annually. Prior to January 1, 2002, goodwill was
amortized using the straight-line method over its estimated period of benefit,
generally fifteen years.
F-54
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
Intangible assets are amortized either using the straight-line method or a
method that patterns the manner in which the economic benefit is consumed.
Intangible assets are amortized over their estimated period of benefit ranging
from six to fifteen years. The Company periodically evaluates the recoverability
of intangible assets and takes into account events or circumstances that warrant
revised estimates of useful lives or that indicate that impairment exists. As of
December 31, 2002, intangible assets are subject to amortization.
Other real estate owned (OREO) represents the collateral acquired through
foreclosure in full or partial satisfaction of the related loan. OREO is
recorded at the lower of the loan's unpaid principal balance or its fair value
as established by a current appraisal, adjusted for disposition costs. Any
write-down at the date of transfer is charged to the allowance for credit
losses. OREO values, recorded in other assets, are reviewed on an ongoing basis
and any decline in value is recognized as foreclosed asset expense in the
current period. The net operating results from these assets are included in the
current period in noninterest expense as foreclosed asset expense (income).
Distressed loans held for sale are included in other assets in the
consolidated financial statements and represent loans that the Company has
identified as available for accelerated disposition. These are loans that would
otherwise be included in nonaccrual loans. Distressed loans are recorded at the
lower of the loans' unpaid principal balance or their fair value. Any write-down
at the date of transfer is charged to the allowance for credit losses.
Distressed loans' values, recorded in other assets, are reviewed on a quarterly
basis and any decline in value is recognized in other noninterest income during
the period in which the decline occurs.
DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION
The Company enters into a variety of interest rate derivative contracts,
primarily swaps and options, and foreign exchange contracts, either for trading
purposes, based on management's intent at inception, or as an accommodation to
customers.
Derivatives held or issued for trading or customer accommodation are
carried at fair value, with realized and unrealized changes in fair values on
contracts included in noninterest income in the period in which the changes
occur. Unrealized gains and losses are reported gross and included in trading
account assets and other liabilities, respectively. Cash flows are reported net
as operating activities.
DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into a variety of derivative contracts as a means of
reducing the Company's interest rate and foreign exchange exposures. At
inception these contracts, i.e., hedging instruments, are evaluated in order to
determine if they qualify for hedge accounting. With the adoption of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," on January
1, 2001, the hedging instrument must be highly effective in achieving offsetting
changes in the hedge instrument and hedged item attributable to the risk being
hedged. Any ineffectiveness, which arises during the hedging relationship, is
recognized in noninterest expense in the period in which it arises. All
qualifying hedges are valued at fair value and included in other assets or other
liabilities. For fair value hedges of interest bearing assets or liabilities,
the change in the fair value of the hedged item and the hedging instrument to
the extent effective is recognized in net interest income. For all other fair
value hedges, the changes in the fair value of the hedged item and changes in
fair value of the derivative are recognized in noninterest income. For cash flow
hedges, the unrealized changes in fair value to the extent effective are
recognized in other comprehensive income. Amounts realized on cash flow
F-55
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
hedges related to variable rate loans are recognized in net interest income in
the period when the cash flow from the hedged item is realized. The fair value
of cash flow hedges related to forecasted transactions is recognized in
noninterest expense in the period when the forecasted transaction occurs.
FOREIGN CURRENCY TRANSLATION
Assets, liabilities and results of operations for foreign branches are
recorded based on the functional currency of each branch. Since the functional
currency of the branches is the local currency, the net assets are remeasured
into U.S. dollars using a combination of current and historical exchange rates.
The resulting gains or losses are included in shareholders' equity, as a
component of accumulated other comprehensive income (loss), on a net of tax
basis.
INCOME TAXES
The Company files consolidated federal and combined state income tax
returns. Amounts provided for income tax expense are based on income reported
for financial statement purposes and do not necessarily represent amounts
currently payable under tax laws. Deferred taxes, which arise principally from
temporary differences between the period in which certain income and expenses
are recognized for financial accounting purposes and the period in which they
affect taxable income, are included in the amounts provided for income taxes.
Under this method, the computation of the net deferred tax liability or asset
gives current recognition to changes in the tax laws.
NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS incorporates the dilutive effect of common stock equivalents outstanding on
an average basis during the period. Stock options are a common stock equivalent.
See discussion under "Stock-Based Compensation-Transition and Disclosure," which
follows below and Note 19.
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure requirements to require
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The disclosure requirements under this
Statement are effective for financial statements issued after December 15, 2002.
As allowed under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended, the Company has chosen to continue to
recognize compensation expense using the intrinsic value-based method of valuing
stock options prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations. Under
the intrinsic value-based method, compensation cost is measured as the amount by
which the quoted market price of the Company's stock at the date of grant
exceeds the stock option exercise price.
F-56
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
At December 31, 2002, the Company has two stock-based employee compensation
plans, which are described more fully in Note 14. Only restricted stock awards
have been reflected in compensation expense,while all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
YEAR ENDED DECEMBER 31,
___________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
________________________________________________________________ ________ ________ ________
As reported net income.......................................... $439,900 $481,428 $527,903
Stock-based employee compensation expense (determined
under fair value based method for all awards, net
of taxes)..................................................... (10,170) (16,678) (23,844)
________ ________ ________
Pro forma net income, after stock-based employee
compensation expense..................... $429,730 $464,750 $504,059
======== ======== ========
Earnings per share--basic
As reported $2.72 $3.05 $3.41
Pro forma $2.66 $2.94 $3.26
Earnings per share--diluted
As reported $2.72 $3.04 $3.38
Pro forma $2.65 $2.93 $3.22
Compensation cost associated with the Company's unvested restricted stock
issued under the management stock plan is measured based on the market price of
the stock at the grant date and is expensed over the vesting period.
Compensation expense related to restricted stock awards for the years ended
December 31, 2000, 2001, and 2002 was not significant.
EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company provides a variety of benefit and incentive compensation plans
for eligible employees and retirees. Provisions for the costs of these employee
benefit and incentive plans and postretirement benefit plans are accrued and
charged to expense when the benefit is earned.
On January 1, 2000, the Company changed the method it uses to calculate the
market-related value of its pension plan assets. This change increased the value
of plan assets on which the expected returns are based and, therefore, results
in lower net periodic pension cost. This change in methodology resulted in a
one-time credit to salaries and benefits of $16.0 million. The impact on future
years is not considered significant.
SEGMENT REPORTING
Business unit results are based on an internal management reporting system
used by management to measure the performance of the units and the Company as a
whole. The management reporting system identifies balance sheet and income
statement items to each business unit based on internal management accounting
policies. Net interest income is determined using the Company's 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. Noninterest income and expense directly or indirectly
attributable to a
F-57
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
business unit are assigned to that business. Economic capital is attributed to
each business unit using a Risk Adjusted Return on Capital (RAROC) methodology,
which seeks to allocate capital to each business unit consistent with the level
of risk they assume. These risks are primarily credit risk, market risk and
operational risk. Credit risk is the potential loss in economic value due to the
likelihood that the obligor will not perform as agreed. Market risk is the
potential loss in fair value due to changes in interest rates, currency rates
and volatilities. Operational risk is the potential loss due to failures in
internal controls, system failures, or external events.
RESALE AND REPURCHASE AGREEMENTS
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.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
GRANTOR TRUST
Company-obligated mandatorily redeemable preferred securities of subsidiary
grantor trust (trust preferred securities) are accounted for as a liability on
the balance sheet. Dividends (or distributions) on trust preferred securities
are treated as interest expense on an accrual basis.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations be
accounted for by a single method--the purchase method. This Statement eliminates
the pooling-of-interests method but carries forward without reconsideration of
the guidance in Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises," related to the application of the purchase method of
accounting. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
Goodwill and intangible assets acquired in transactions completed after June 30,
2001 are accounted for in accordance with the amortization and nonamortization
provisions of SFAS No. 142. SFAS No. 142 significantly changes the accounting
for goodwill and other intangible assets subsequent to their initial
recognition. This Statement requires that goodwill and some intangible assets no
longer be amortized, but tested for impairment at least annually by comparing
the fair value of those assets with their recorded amounts. Note 4 includes a
summary of the Company's goodwill and other intangible assets as well as the
impact of the adoption of SFAS No. 142.
F-58
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to the legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the normal operation of a
long-lived asset. A legal obligation is an obligation that a party is required
to settle as a result of an existing or enacted law, statute, ordinance, or
written or oral contract, or by legal construction of a contract under the
doctrine of promissory estoppel. This Statement is effective for fiscal years
beginning after June 15, 2002. Management believes adoption of this Statement
will not have a material impact on the Company's financial position or results
of operations.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. This
Statement carries over the framework established in SFAS No. 121, and was
adopted by the Company on January 1, 2002. The adoption of this Statement had no
material impact on the Company's financial position or results of operations.
RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.13
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44,
and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement requires
that capital leases that are modified so that the resulting lease agreement is
classified as an operating lease be accounted for under the sale-leaseback
provisions of SFAS No. 98, "Accounting for Leases." This Statement also amends
other existing authoritative pronouncements to make technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of SFAS No. 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to SFAS No. 13 are effective for transactions occurring after
May 15, 2002. All other provisions of this Statement are effective for financial
statements issued on or after May 15, 2002, with early application encouraged.
The adoption of this Statement did not have a material impact on the Company's
financial position or results of operations.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement replaces the
accounting and reporting provisions of Emerging Issues Task Force
F-59
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." It requires that costs associated with an exit or disposal
activity be recognized when a liability is incurred rather than at the date an
entity commits to an exit plan. This Statement is effective after December 31,
2002. Management believes that adopting this Statement will not have a material
impact on the Company's financial position or results of operations.
ACCOUNTING FOR ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." This Statement amended SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and
Interpretation No. 9, "Applying APB Opinion No. 16 and 17, "When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method." The requirement in paragraph 5 of
Statement 72 to recognize any excess of the fair value of liabilities assumed
over the fair value of tangible and identifiable intangible assets acquired as
an unidentifiable intangible asset no longer applies to acquisitions within the
scope of this Statement. The acquisition of all or part of a financial
institution that meets the definition of a business combination shall be
accounted for by the purchase method in accordance with SFAS No. 141, "Business
Combinations." In addition, this Statement amends SFAS No. 144, to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor and borrower-relationship intangible assets and
credit cardholder intangible assets. As a result, those intangible assets are
now subject to the impairment test in accordance with the provisions in SFAS No.
144. The provisions of this Statement that relate to the application of the
purchase method of accounting apply to all acquisitions of financial
institutions, except transactions between two or more mutual enterprises. This
Statement was effective October 1, 2002 and had no material impact on the
Company's financial position or results of operations.
ACCOUNTING FOR GUARANTORS AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Interpretation expands on
the accounting guidance of Statements No. 5, 57, and 107 and incorporates
without change the provisions of FASB Interpretation No. 34, which is being
superseded. The Interpretation elaborates on the existing disclosure
requirements for most guarantees and requires that guarantors recognize a
liability for the fair value of guarantees at inception. The disclosure
requirements of this Interpretation are effective for financial statements
periods ending after December 15, 2002. The initial recognition and measurement
provisions of this Interpretation are to be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. Significant guarantees
that have been entered into by the Company are disclosed in Note 21. Management
believes that adopting the measurement provisions of this Interpretation will
not have a material impact on the Company's financial position or results of
operations.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." The purpose of this interpretation is to provide guidance on
how to identify a variable interest entity (VIE) and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE need
to be included in a
F-60
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
company's consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate that entity if
the company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the VIE's
expected residual returns, if they occur. New disclosure requirements are also
prescribed by FIN 46. FIN 46 became effective upon its issuance. As of December
31, 2002, the Company does not believe it has any VIE's for which this
interpretation would be applicable.
NOTE 2--SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of securities are presented below. At January 1, 2001, all of our
securities held to maturity were transferred to securities available for sale in
conjunction with the adoption of SFAS No. 133, and therefore, no information is
provided for December 31, 2001 or December 31, 2002 in the securities held to
maturity table.
SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
_____________________________________________________________________________________________
2001 2002
_____________________________________________ _____________________________________________
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
__________________________________ __________ ________ _______ __________ __________ ________ _______ __________
U.S. Treasury..................... $ 214,249 $ 7,957 $ -- $ 222,206 $ 332,169 $ 12,220 $ -- $ 344,389
Other U.S. government............. 1,902,001 91,315 303 1,993,013 2,560,420 126,886 -- 2,687,306
Mortgage-backed securities........ 3,293,857 48,138 14,127 3,327,868 3,902,879 115,738 80 4,018,537
State and municipal............... 40,116 5,897 80 45,933 42,917 6,182 8 49,091
Corporate debt securities......... 129,314 -- 4,152 125,162 181,345 19 25,565 155,799
Equity securities................. 78,810 133 -- 78,943 73,559 3,598 241 76,916
Foreign securities................ 5,883 92 18 5,957 6,425 94 57 6,462
__________ ________ _______ __________ __________ ________ _______ __________
Total securities available for
sale.......................... $5,664,230 $153,532 $18,680 $5,799,082 $7,099,714 $264,737 $25,951 $7,338,500
========== ======== ======= ========== ========== ======== ======= ==========
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.
F-61
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 2--SECURITIES (CONTINUED)
MATURITY SCHEDULE OF SECURITIES
SECURITIES
AVAILABLE FOR SALE(1)
__________________________
DECEMBER 31, 2002
__________________________
AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE
_________________________________________________ __________ __________
Due in one year or less.......................... $ 538,306 $ 543,794
Due after one year through five years............ 2,762,947 2,900,345
Due after five years through ten years........... 295,601 286,489
Due after ten years.............................. 3,429,301 3,530,956
Equity securities(2)............................. 73,559 76,916
__________ __________
Total securities............................... $7,099,714 $7,338,500
========== ==========
__________
(1) The remaining contractual maturities of 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.
In 2000, proceeds from sales of securities available for sale were $423
million with gross realized gains of $27 million and $18 million of gross
realized losses. In 2001, proceeds from sales of securities available for sale
were $931 million with gross realized gains of $31 million and gross realized
losses of $22 million. In 2002, proceeds from sales of securities available for
sale were $188 million with gross realized gains of $9 million and gross
realized losses of $13 million.
COLLATERAL
The Company reports securities pledged as collateral in secured borrowings
and other arrangements when the secured party can sell or repledge the
securities. These securities have been separately identified. If the secured
party cannot resell or repledge the securities of the Company, those securities
are not separately identified. As of December 31, 2001 and 2002, the Company had
no pledged collateral to secured parties who are not permitted to resell or
repledge those securities.
As of December 31, 2001 and 2002, the Company had not accepted any
collateral that it is permitted by contract to sell or repledge.
F-62
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of loans, net of unearned interest and fees of $56 million and
$45 million, at December 31, 2001 and 2002, respectively, is as follows:
DECEMBER 31,
_____________________________
(DOLLARS IN THOUSANDS) 2001 2002
___________________________________________ ___________ ___________
Domestic:
Commercial, financial and industrial..... $11,476,361 $10,338,508
Construction............................. 1,059,847 1,285,204
Mortgage:
Residential............................ 4,788,219 6,382,227
Commercial............................. 3,590,318 4,150,178
___________ ___________
Total mortgage....................... 8,378,537 10,532,405
Consumer:
Installment............................ 1,200,047 909,787
Revolving lines of credit.............. 859,021 1,102,771
___________ ___________
Total consumer....................... 2,059,068 2,012,558
Lease financing.......................... 979,242 812,918
___________ ___________
Total loans in domestic offices...... 23,953,055 24,981,593
Loans originated in foreign branches....... 1,040,975 1,456,490
___________ ___________
Total loans.......................... 24,994,030 26,438,083
Allowance for credit losses.......... 634,509 609,190
___________ ___________
Loans, net........................... $24,359,521 $25,828,893
=========== ===========
Changes in the allowance for credit losses were as follows:
YEARS ENDED DECEMBER 31,
____________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
_______________________________________________________ _________ _________ _________
Balance, beginning of year............................. $ 470,378 $ 613,902 $ 634,509
Loans charged off...................................... (322,363) (322,469) (245,342)
Recoveries of loans previously charged off............. 26,297 58,370 39,546
_________ _________ _________
Total net loans charged off........................ (296,066) (264,099) (205,796)
Provision for credit losses............................ 440,000 285,000 175,000
Foreign translation adjustment and other net
additions (deductions)............................... (410) (294) 5,477
_________ _________ _________
Balance, end of year................................... $ 613,902 $ 634,509 $ 609,190
========= ========= =========
Nonaccrual loans totaled $492 million and $337 million at December 31, 2001
and 2002, respectively. There were no renegotiated loans at December 31, 2001
and 2002.
F-63
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
LOAN IMPAIRMENT
Impaired loans of the Company include commercial, financial and industrial,
construction and commercial mortgage loans designated as nonaccrual. When the
value of an impaired loan is less than the recorded investment in the loan, a
portion of the Company's allowance for credit losses is allocated as an
impairment allowance.
The Company's policy for recognition of interest income, charge-offs of
loans, and application of payments on impaired loans is the same as the policy
applied to nonaccrual loans.
The following table sets forth information about the Company's impaired
loans.
DECEMBER 31,
___________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
_____________________________________________________________ ________ ________ ________
Impaired loans with an allowance............................. $318,418 $383,967 $306,693
Impaired loans without an allowance(1)....................... 81,581 107,918 29,996
________ ________ ________
Total impaired loans(2).................................. $399,999 $491,885 $336,689
======== ======== ========
Allowance for impaired loans................................. $118,378 $97,651 $120,682
Average balance of impaired loans during the year............ $257,650 $455,168 $399,703
Interest income recognized during the year on nonaccrual
loans at December 31....................................... $ 1,221 $ 5,442 $ 10,842
<FN>
__________
(1) These loans do not require an allowance for credit losses under SFAS No.
114 since the fair values of the impaired loans equal or exceed the
recorded investments in the loans.
(2) This amount was evaluated for impairment using three measurement methods as
follows: $361 million, $452 million, and $300 million was evaluated using
the present value of the expected future cash flows at December 31, 2000,
2001 and 2002, respectively; $13 million, $15 million, and $22 million was
evaluated using the fair value of the collateral at December 31, 2000, 2001
and 2002, respectively; and $26 million, $25 million, and $15 million was
evaluated using historical loss factors at December 31, 2000, 2001 and
2002, respectively.
</FN>
RELATED PARTY LOANS
In some cases, the Company makes loans to related parties including its
directors, executive officers, and their affiliated companies. At December 31,
2001, related party loans outstanding to individuals who served as directors or
executive officers at anytime during the year totaled $33 million, as compared
to $28 million at December 31, 2002. In the opinion of management, these related
party loans were made on substantially the same terms, including interest rates
and collateral requirements, as those terms prevailing at the date these loans
were made. During 2001 and 2002, there were no loans to related parties that
were charged off. Additionally, at December 31, 2001 and 2002, there were no
loans to related parties that were nonperforming.
NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS
Upon adoption of SFAS No. 142 on January 1, 2002, the amortization of
existing goodwill ceased and the carrying amount of goodwill was allocated to
the applicable reporting units. The allocation was based on the sources of
previously recognized goodwill as well as the reporting units to which the
related acquired net assets
F-64
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
were assigned. Management's expectations of which reporting units had benefited
from the synergies of acquired businesses were considered in the allocation
process. The Company performed a transitional impairment test during May 2002,
measured as of the date of adoption. The fair market value of the reporting
units tested for impairment exceeded its carrying value, including goodwill;
therefore, no impairment loss was recognized. As of December 31, 2002, goodwill
was $151 million.
Net income and earnings per share for the year ending December 31, 2000 and
2001, were adjusted, on a pro forma basis, to exclude $14 million in goodwill
amortization expense (net of taxes of $0.6 million) and $15 million in goodwill
amortization expense (net of taxes of $0.6 million) for the years ended December
31, 2000 and 2001, respectively, as follows:
FOR THE YEARS ENDED DECEMBER 31,
___________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002
__________________________________________________ ________ ________ ________
NET INCOME:
As reported....................................... $439,900 $481,428 $527,903
Goodwill amortization, net of income tax.......... 13,723 14,788 --
As adjusted....................................... $453,623 $496,216 $527,903
BASIC EARNINGS PER SHARE:
As reported....................................... $2.72 $3.05 $3.41
Goodwill amortization............................. .09 .09 --
As adjusted....................................... $2.81 $3.14 $3.41
DILUTED EARNINGS PER SHARE:
As reported....................................... $2.72 $3.04 $3.38
Goodwill amortization............................. .08 .09 --
As adjusted....................................... $2.80 $3.13 $3.38
On May 13, 2002, the Company completed its acquisition of First Western
Bank and recorded approximately $24 million of goodwill and $11 million of core
deposit intangible. The core deposit intangible is being amortized on an
accelerated basis over an estimated life of 12.5 years.
On November 1, 2002, the Company completed its acquisition of Valencia Bank
& Trust and recorded approximately $37 million of goodwill and $9 million of
core deposit intangible. The core deposit intangible is being amortized on an
accelerated basis over an estimated life of 6 years.
On December 18, 2002, the Company completed its acquisition of John Burnham
& Company, and recorded approximately $18 million of goodwill and $8 million of
rights-to-expiration. The rights-to-expiration will be amortized on an
accelerated basis over its useful economic life.
F-65
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
Intangible assets amortization expense for 2002, was $5 million. No
residual value is expected for these intangible assets. The components of
intangible assets were as follows:
DECEMBER 31, 2002
______________________________________________
GROSS CARRYING ACCUMULATED NET CARRYING
(DOLLARS IN MILLIONS) AMOUNT AMORTIZATION AMOUNT
__________________________________________ _______________ ____________ ____________
Rights-to-expiration...................... $22.9 $ 3.1 $19.8
Core deposit intangible................... 28.2 9.5 18.7
_____ _____ _____
Total identifiable intangible assets...... $51.1 $12.6 $38.5
===== ===== =====
Amortization expense for the net carrying amount of all identifiable
intangible assets with definite lives for the years ending December 31, 2003
through 2007 is approximately $9 million, $8 million, $6 million, $4 million,
and $3 million, respectively.
NOTE 5--PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. As of December 31, 2001 and 2002, the amounts were:
DECEMBER 31,
_________________________________________________________________________________
2001 2002
_______________________________________ _____________________________________
ACCUMULATED ACCUMULATED
DEPRECIATION AND NET BOOK DEPRECIATION AND NET BOOK
(DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE
______________________ __________ ________________ _________ __________ ________________ ________
Land.................. $ 65,834 $ -- $ 65,834 $ 67,050 $ -- $ 67,050
Premises.............. 328,366 115,485 212,881 353,213 131,820 221,393
Leasehold improvements 189,438 123,241 66,197 204,980 140,992 63,988
Furniture, fixtures
and equipment....... 541,187 391,565 149,622 583,225 430,990 152,235
__________ ________ ________ __________ ________ ________
Total............. $1,124,825 $630,291 $494,534 $1,208,468 $703,802 $504,666
========== ======== ======== ========== ======== ========
Rental and depreciation and amortization expenses were as follows:
YEARS ENDED DECEMBER 31,
_______________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
____________________________________________________________ ________ _______ _______
Rental expense of premises.................................. $52,085 $48,482 $53,595
Less: rental income......................................... 15,464 19,343 18,505
_______ _______ _______
Net rental expense...................................... $36,621 $29,139 $35,090
======= ======= =======
Other net rental income, primarily for equipment............ $(1,300) $(1,570) $(1,576)
======= ======= =======
Depreciation and amortization of premises and equipment..... $66,503 $74,786 $77,426
======= ======= =======
F-66
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 5--PREMISES AND EQUIPMENT (CONTINUED)
Future minimum lease payments are as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 2002
_______________________________________________ _________________
Years ending December 31,
2003......................................... $ 53,908
2004......................................... 46,795
2005......................................... 40,648
2006......................................... 34,877
2007......................................... 25,166
Later years.................................. 88,214
________
Total minimum operating lease payments......... $289,608
========
Minimum rental income due in the future under
noncancellable subleases..................... $58,068
========
A majority of the leases provide for the payment of taxes, maintenance,
insurance, and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions, and escalation clauses.
NOTE 6--DEPOSITS
At December 31, 2002, the Company had $215 million in domestic interest
bearing time deposits with a remaining term of greater than one year, of which
$110 million exceeded $100,000. Maturity information for all domestic interest
bearing time deposits with a remaining term of greater than one year is
summarized below.
(DOLLARS IN THOUSANDS) DECEMBER 31, 2002
__________________________________________________ _________________
Due after one year through two years.............. $142,153
Due after two years through three years........... 43,680
Due after three years through four years.......... 18,791
Due after four years through five years........... 9,345
Due after five years.............................. 713
________
Total.......................................... $214,682
========
All of the foreign interest bearing time deposits exceeding $100,000 mature
in less than one year.
NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
RETIREMENT PLANS
The Company maintains the Union Bank of California, N.A. Retirement Plan
(the Plan), which is a noncontributory defined benefit plan covering
substantially all of the employees of the Company. The Plan provides retirement
benefits based on years of credited service and the final average compensation
amount, as defined in the Plan. Employees become eligible for this plan after
one year of service and become fully vested after five years of service. The
Company's funding policy is to make contributions between the minimum required
and the maximum deductible amount as allowed by the Internal Revenue Code.
Contributions are
F-67
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
intended to provide not only for benefits attributed to services to date, but
also for those expected to be earned in the future. Plan assets are invested in
U.S. government securities, corporate bonds, securities and mutual funds. The
Plan contains no Company stock.
OTHER POSTRETIREMENT BENEFITS
The Company provides certain health care benefits for its retired employees
and life insurance benefits for those employees who retired prior to January 1,
2001. The health care cost is shared between the Company and the retiree. The
life insurance plan is noncontributory. The accounting for the health care plan
anticipates future cost-sharing changes that are consistent with the Company's
intent to maintain a level of cost-sharing at approximately 25 to 50 percent,
depending on age and service with the Company. Assets set aside to cover such
obligations are primarily invested in mutual funds.
The following table sets forth the funded status of the Company's defined
benefit pension plan and its other postretirement benefit plans.
PENSION BENEFITS OTHER BENEFITS
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
________________________ ________________________
(DOLLARS IN THOUSANDS) 2001 2002 2001 2002
__________________________________________________ _________ _________ __________ _________
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year............. $509,016 $595,736 $94,108 $123,720
Service cost...................................... 21,889 25,810 3,844 5,262
Interest cost..................................... 38,931 43,316 7,267 9,546
Plan participants' contributions.................. -- -- 1,386 1,615
Amendments(1)..................................... -- -- -- (8,544)
Actuarial (gain) loss............................. 45,393 82,720 25,249 36,896
Benefits paid..................................... (19,493) (21,483) (8,134) (10,538)
________ ________ ________ ________
Benefit obligation, end of year................... 595,736 726,099 123,720 157,957
________ ________ ________ ________
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year...... 588,469 596,470 50,296 52,489
Actual return on plan assets...................... (35,273) (54,847) (2,518) (10,850)
Employer contribution............................. 62,767 140,000 11,459 48,820
Plan participants' contributions.................. -- -- 1,386 1,615
Benefits paid..................................... (19,493) (21,483) (8,134) (10,538)
________ ________ ________ ________
Fair value of plan assets, end of year............ 596,470 660,140 52,489 81,536
________ ________ ________ ________
Funded status..................................... 734 (65,959) (71,231) (76,422)
Unrecognized transition amount.................... -- -- 37,432 25,486
Unrecognized net actuarial gain................... 92,570 290,750 25,083 77,120
Unrecognized prior service cost................... 5,591 4,524 (1,441) (1,345)
________ ________ ________ ________
Prepaid (accrued) benefit cost.................... $ 98,895 $229,315 $(10,157) $ 24,839
======== ======== ======== ========
<FN>
__________
(1) In 2002, the Company changed its postretirement medical benefit plan to
increase the required contributions as a percentage of total cost paid by
some future retirees.
</FN>
F-68
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following tables summarize the assumptions used in computing the
present value of the projected benefit obligations and the net periodic cost.
PENSION BENEFITS OTHER BENEFITS
______________________ _____________________
YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
______________________ _____________________
2000 2001 2002 2000 2001 2002
______ _____ _____ _____ _____ _____
Discount rate in determining expense.................... 7.75% 7.50% 7.25% 7.75% 7.50% 7.25%
Discount rate in determining benefit obligations at
year end.............................................. 7.50 7.25 6.75 7.50 7.25 6.75
Rate of increase in future compensation levels for
determining expense................................... 5.00 5.00 5.00 -- -- --
Rate of increase in future compensation levels for
determining benefit obligations at year end........... 5.00 5.00 5.00 -- -- --
Expected return on plan assets.......................... 8.25 8.25 8.25 8.00 8.00 8.00
PENSION BENEFITS OTHER BENEFITS
________________________________ ______________________________
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
________________________________ ______________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002 2000 2001 2002
__________________________________________ _______ _______ _______ _______ _______ _______
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.............................. $20,688 $21,889 $25,810 $ 3,024 $ 3,844 $ 5,262
Interest cost............................. 34,429 38,930 43,316 6,708 7,267 9,546
Expected return on plan assets............ (45,357) (51,144) (60,613) (3,893) (4,177) (6,591)
Amortization of prior service cost........ 1,067 1,067 1,067 -- (96) (96)
Amortization of transition amount......... -- -- -- 3,455 3,216 3,403
Recognized net actuarial (gain) loss...... (1,077) -- -- (858) 12 2,299
_______ _______ _______ _______ _______ _______
Net periodic benefit cost............... 9,750 10,742 9,580 8,436 10,066 13,823
Loss (gain) due to curtailment............ -- -- -- 2,868 (1,828) --
_______ _______ _______ _______ _______ _______
Total net periodic benefit cost......... $ 9,750 $10,742 $ 9,580 $11,304 $ 8,238 $13,823
======= ======= ======= ======= ======= =======
For 2000, the Company assumed a 10 percent annual rate of increase in the
per capita cost of postretirement medical benefits for the indemnity plan and an
8 percent annual rate of increase for the HMO plan. For future periods, the rate
for the indemnity plan was expected to gradually decrease from 10 percent to 5
percent in 2007 and will remain at that level thereafter. The rate for the HMO
plan was expected to gradually decrease from 8 percent to 5 percent in 2007 and
remain at that level thereafter.
F-69
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
For 2001, the Company assumed a 9 percent annual rate of increase in the
per capita cost of postretirement medical benefits for the indemnity plan and a
7.5 percent annual rate of increase for the HMO plan. For future periods, the
rate for the indemnity plan was expected to gradually decrease from 9 percent to
5 percent in 2007 and will remain at that level thereafter. The rate for the HMO
plan was expected to gradually decrease from 7.5 percent to 5 percent in 2007
and remain at that level thereafter.
For 2002, the Company assumed an 10 percent annual rate of increase in the
per capita cost of postretirement medical benefits for the indemnity plan and a
12 percent annual rate of increase for the HMO plan. For future periods, the
rate for the indemnity plan was expected to gradually decrease from 10 percent
to 5 percent in 2008 and will remain at that level thereafter. The rate for the
HMO plan was expected to gradually decrease from 12 percent to 5 percent in 2008
and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects.
1-PERCENTAGE- 1-PERCENTAGE-
(DOLLARS IN THOUSANDS) POINT INCREASE POINT DECREASE
_______________________________________________________ ______________ ______________
Effect on total of service and interest components..... $2,150 $ (1,785)
Effect on postretirement benefit obligation............ 14,789 (12,574)
EXECUTIVE SUPPLEMENTAL BENEFIT PLANS
The Company has several Executive Supplemental Benefit Plans (ESBP), which
provide eligible employees with supplemental retirement benefits. The plans are
unfunded. The accrued liability for ESBP's included in other liabilities in the
Consolidated Balance Sheets was $28 million at December 31, 2001 and $33 million
at December 31, 2002. The Company's expense relating to the ESBP's was $2
million for the year ended December 31, 2000, and $3 million for each of the
years ended December 31, 2001 and 2002.
SECTION 401(K) SAVINGS PLANS
The Company has a defined contribution plan authorized under Section 401(k)
of the Internal Revenue Code. All benefits-eligible employees are eligible to
participate in the plan. Employees may contribute up to 25 percent of their
pre-tax covered compensation or up to 10 percent of their after-tax covered
compensation through salary deductions. The Company contributes 50 percent of
every pre-tax dollar an employee contributes up to the first 6 percent of the
employee's pre-tax covered compensation. Employees are fully vested in the
employer's contributions immediately. In addition, the Company may make a
discretionary annual profit-sharing contribution up to 2.5 percent of an
employee's pay. This profit-sharing contribution is for all eligible employees,
regardless of whether an employee is participating in the 401(k) plan, and
depends on the Company's annual financial performance. All employer
contributions are tax deductible by the Company. The Company's combined matching
contribution expense was $6 million, $13 million, and $17 million for the years
ended December 31, 2000, 2001 and 2002, respectively.
F-70
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 8--OTHER NONINTEREST EXPENSE
The detail of other noninterest expense is as follows:
YEARS ENDED DECEMBER 31,
___________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
__________________________________________ ________ ________ ________
Software.................................. $ 24,037 $ 31,766 $ 42,850
Advertising and public relations.......... 29,125 37,710 37,510
Intangible asset amortization............. 15,061 16,012 5,485
Other..................................... 154,525 157,910 171,168
________ ________ ________
Total other noninterest expenses.......... $222,748 $243,398 $257,013
======== ======== ========
NOTE 9--INCOME TAXES
The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31,
___________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
__________________________________________ ________ ________ ________
Taxes currently payable:
Federal................................. $202,427 $172,898 $173,310
State................................... 3,595 326 31,622
Foreign................................. 1,804 1,965 3,996
________ ________ ________
Total currently payable............... 207,826 175,189 208,928
________ ________ ________
Taxes deferred:
Federal................................. 9,300 49,163 58,586
State................................... 3,998 9,905 (20,807)
Foreign................................. 411 (413) 669
________ ________ ________
Total deferred........................ 13,709 58,655 38,448
________ ________ ________
Total income tax expense.............. $221,535 $233,844 $247,376
======== ======== ========
F-71
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 9--INCOME TAXES (CONTINUED)
The components of the net deferred tax balances of the Company were as
follows:
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2001 2002
_______________________________________________________ ________ ________
Deferred tax assets:
Allowance for credit losses.......................... $239,110 $231,657
Accrued income and expense........................... 45,224 62,190
Tax credit carryforwards............................. -- 13,590
Other................................................ 13,144 6,353
________ ________
Total deferred tax assets.......................... 297,478 313,790
Deferred tax liabilities:
Leasing.............................................. 425,169 462,525
Unrealized gain on securities available for sale..... 51,581 91,335
Pension liabilities.................................. 40,813 69,541
Unrealized net gains on cash flow hedges............. 38,925 64,649
________ ________
Total deferred tax liabilities..................... 556,488 688,050
________ ________
Net deferred tax liability....................... $259,010 $374,260
======== ========
It is management's opinion that no valuation allowance is necessary because
the tax benefits from the Company's deferred tax assets are expected to be
utilized in future tax returns.
The following table is an analysis of the effective tax rate:
YEARS ENDED DECEMBER 31,
________________________
2000 2001 2002
____ ____ ____
Federal income tax rate.............................. 35% 35% 35%
Net tax effects of:
State income taxes, net of federal income tax
benefit.......................................... 1 1 1
Tax credits........................................ (2) (2) (4)
Other.............................................. (1) (1) --
__ __ __
Effective tax rate............................... 33% 33% 32%
== == ==
The Company has filed its 2000 and 2001, and intends to file its 2002,
California franchise tax returns on a worldwide unitary basis, incorporating the
financial results of BTM and its worldwide affiliates.
During 2002, the Company recognized a tax credit adjustment of $9.8 million
related to the standardization of our accounting for low-income housing credit
(LIHC) investments and a $3.3 million net reduction in income tax expense
resulting from a change in California state tax law concerning loan loss
reserves.
F-72
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 10--BORROWED FUNDS
The following is a summary of the major categories of borrowed funds:
DECEMBER 31,
__________________________
(DOLLARS IN THOUSANDS) 2001 2002
________________________________________________________________ __________ __________
Federal funds purchased and securities sold under repurchase
agreements with weighted average interest rates of 1.41%
and 0.88% at December 31, 2001 and 2002, respectively......... $ 418,814 $ 334,379
Commercial paper, with weighted average interest rates of
1.89% and 1.21% at December 31, 2001 and 2002, respectively... 830,657 1,038,982
Other borrowed funds, with weighted average interest rates of
2.96% and 2.25% at December 31, 2001 and 2002, respectively... 700,403 267,047
__________ __________
Total borrowed funds.......................................... $1,949,874 $1,640,408
========== ==========
Federal funds purchased and securities sold under repurchase
agreements:
Maximum outstanding at any month end.......................... $1,575,938 $ 428,808
Average balance during the year............................... 1,243,933 427,610
Weighted average interest rate during the year................ 4.19% 1.41%
Commercial paper:
Maximum outstanding at any month end.......................... $1,572,029 $1,107,578
Average balance during the year............................... 1,287,603 997,543
Weighted average interest rate during the year................ 4.07% 1.67%
Other borrowed funds:
Maximum outstanding at any month end.......................... $ 702,511 $ 942,627
Average balance during the year............................... 464,033 469,877
Weighted average interest rate during the year................ 4.35% 2.15%
Included in other borrowed funds in 2001 and 2002 are assumed mortgage
notes related to the purchase of the Company's administrative facility at
Monterey Park, California. The notes consist of 20 zero coupon notes with
varying maturity dates through 2011. Maturities of these notes for the next five
years are as follows: $6.5 million in each of 2003 and 2004, $5.3 million in
2005, $5.0 million in each of 2006 and 2007, and $24.4 million thereafter.
NOTE 11--MEDIUM AND LONG-TERM DEBT
The following is a summary of our medium-term senior debt and long-term
subordinated debt.
DECEMBER 31,
_____________________
(DOLLARS IN THOUSANDS) 2001 2002
______________________________________________________ ________ ________
Medium-term debt, fixed rate 5.75% senior notes due
December 2006....................................... $199,931 $218,584
Long-term subordinated debt, floating rate notes due
June 2007. These notes bear interest at 0.325%
above 3-month London Interbank Offered Rate (LIBOR)
and are payable to BTM.............................. 199,726 199,776
________ ________
Total medium and long-term debt....................... $399,657 $418,360
======== ========
F-73
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 11--MEDIUM AND LONG-TERM DEBT (CONTINUED)
On November 30, 2001, the Company issued $200 million of medium-term notes.
At December 31, 2002, the weighted average interest rate of the medium-term
notes including the impact of the deferred issuance costs was 5.90 percent. The
notes do not qualify as Tier 2 risk-based capital under the Federal Reserve
guidelines for assessing regulatory capital and are not redeemable prior to the
stated maturity. The notes are senior obligations and are ranked equally with
all existing or future unsecured senior debt.
The Company has converted its 5.75 percent fixed rate to a floating rate of
interest utilizing a $200 million notional interest rate swap, which qualified
as a fair value hedge at December 31, 2002. This transaction meets the
qualifications for utilizing the shortcut method for measuring effectiveness
under SFAS No. 133. The market value adjustment to the medium-term debt was an
unrealized loss of $19 million, and the fair value of the hedge was an
unrealized gain of $19 million. The weighted average interest rate, including
the impact of the hedge and deferred issuance costs was 2.49 percent.
The long-term subordinated debt qualifies as Tier 2 risk-based capital
under the Federal Reserve guidelines for assessing regulatory capital. For the
total risk-based capital ratio, the amount of notes that qualify as capital is
reduced as the notes approach maturity. At December 31, 2001 and 2002, the $200
million of notes qualified as risk-based capital. The weighted average interest
rate of the notes as of December 31, 2002 was 2.19 percent.
Provisions of the subordinated notes restrict the use of the Company's
property as security for borrowings, and place limitations on leases,
indebtedness, distributions to shareholders, mergers, sales of certain assets,
transactions with affiliates, and changes in majority stock ownership of the
Company.
NOTE 12--UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY GRANTOR TRUST
In February 1999, UnionBanCal Finance Trust I issued $350 million preferred
securities to the public and $10,824,750 common securities to the Company. The
proceeds of such issuances were invested by UnionBanCal Finance Trust I in
$360,824,750 aggregate principal amount of the Company's 7 3/8 percent debt
securities due May 15, 2029 (the Trust Notes). The Trust Notes represent the
sole asset of UnionBanCal Finance Trust I. The Trust Notes mature on May 15,
2029, bear interest at the rate of 7 3/8 percent, payable quarterly, and are
redeemable by the Company beginning on or after February 19, 2004, at 100
percent of the principal amount thereof, plus any accrued and unpaid interest to
the redemption date.
Holders of the preferred securities and common securities are entitled to
cumulative cash distributions at an annual rate of 7 3/8 percent of the
liquidation amount of $25 per security. The preferred securities are subject to
mandatory redemption upon repayment of the Trust Notes and are callable by the
Company at 100 percent of the liquidation amount beginning on or after February
19, 2004. The Trust exists for the sole purpose of issuing the preferred
securities and investing the proceeds in the Trust Notes issued by the Company.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the preferred securities (the Guarantee). The Guarantee,
when taken together with the Company's obligations under the Trust Notes and in
the indenture pursuant to which the Trust Notes were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
subsidiary trust, provide a full and unconditional guarantee of amounts due on
the Trust Preferred securities.
The Company has converted a portion of its 7 3/8 percent fixed rate to a
floating rate of interest by utilizing a $200 million notional interest rate
swap, which qualified as a fair value hedge at December 31, 2002. The
F-74
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 12--UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY GRANTOR TRUST (CONTINUED)
market value adjustment to the preferred securities was an unrealized loss of
$15.7 million while the fair value of the hedge was an unrealized gain of $14.0
million. The weighted average interest rate, including the impact of the hedge
and deferred issuance costs, was 4.44 percent for the year ended December 31,
2002.
The grantor trust is a wholly owned subsidiary of UnionBanCal Corporation.
The Trust Notes and related trust investment in the Trust Notes have been
eliminated in consolidation and the preferred securities are reflected as a
liability in the accompanying consolidated financial statements.
NOTE 13--DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has a dividend reinvestment and stock purchase plan for
shareholders. Participating shareholders have the option of purchasing
additional shares at the full market price with cash payments of $25 to $3,000
per quarter. The Company obtains shares required for reinvestment through open
market purchases or through the issuance of new shares from its authorized but
unissued stock. During 2000, 2001, and 2002, 449,064, 383,765, and 367,713
shares, respectively, were required for dividend reinvestment purposes, of which
24,666, 20,402, and 19,881 shares were considered new issuances during 2000,
2001, and 2002, respectively. BTM did not participate in the plan in 2000, 2001
or 2002.
NOTE 14--MANAGEMENT STOCK PLAN
The Company has two management stock plans. The Year 2000 UnionBanCal
Corporation Stock Plan, effective January 1, 2000 (the 2000 Stock Plan), and the
UnionBanCal Corporation Management Stock Plan, restated effective June 1, 1997
(the 1997 Stock Plan), have 16.0 million and 6.6 million shares, respectively,
of the Company's common stock authorized to be awarded to key employees and
outside directors of the Company at the discretion of the Executive Compensation
and Benefits Committee of the Board of Directors (the Committee). Employees on
rotational assignment from BTM are not eligible for stock awards.
The Committee determines the term of each stock option grant, up to a
maximum of ten years from the date of grant. The exercise price of the options
issued under the Stock Plan shall not be less than the fair market value on the
date the option is granted. Unvested restricted stock issued under the Stock
Plan is shown as a reduction to retained earnings. The value of the restricted
shares at the date of grant is amortized to compensation expense over its
vesting period. All cancelled or forfeited options and restricted stock become
available for future grants.
In 2000, 2001 and 2002, the Company granted options to non-employee
directors and various key employees, including policy-making officers under the
1997 and 2000 Stock Plans. Under both Stock Plans, options granted to employees
vest pro-rata on each anniversary of the grant date and become fully exercisable
three years from the grant date, provided that the employee has completed the
specified continuous service requirement. The options vest earlier if the
employee dies, is permanently disabled, or retires under certain grant, age, and
service conditions. Options granted to non-employee directors are fully vested
on the grant date and exercisable 33 1/3 percent on each anniversary under the
1997 Stock Plan, and fully vested and exercisable on the grant date under the
2000 Stock Plan. The following is a summary of stock option transactions under
the Stock Plans.
F-75
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED)
YEARS ENDED DECEMBER 31,
______________________________________________________________________________________
2000 2001 2002
___________________________ ___________________________ ___________________________
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
_________ ________________ _________ ________________ _________ ________________
Options outstanding, beginning of
year............................ 3,281,273 $28.46 5,191,899 $28.47 7,939,271 $29.79
Granted......................... 2,126,506 27.99 3,448,242 30.03 2,911,652 43.49
Exercised....................... (98,004) 13.18 (557,597) 19.02 (2,187,170) 28.57
Forfeited....................... (117,876) 32.04 (143,273) 29.91 (148,284) 34.05
_________ ______ _________ ______ __________ ______
Options outstanding, end of year.. 5,191,899 $28.47 7,939,271 $29.79 8,515,469 $34.71
========= ====== ========= ====== ========== ======
Options exercisable, end of year.. 2,135,228 $25.90 3,009,555 $29.53 3,031,478 $31.08
========= ====== ========= ====== ========== ======
The weighted-average fair value of options granted was $10.21 during 2000,
$10.38 during 2001, and $16.67 during 2002.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants made in 2000, 2001 and 2002; risk-free interest
rates of 6.4 percent in 2000, 4.9 percent in 2001, and 4.9 percent in 2002;
expected volatility of 44 percent in 2000, 45 percent in 2001, and 46 percent in
2002; expected lives of 5 years for 2000, 2001, and 2002; and expected dividend
yields of 3.5 percent in 2000, 3.4 percent in 2001, and 2.3 percent in 2002.
The following table summarizes information about stock options outstanding.
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 2002 DECEMBER 31, 2002
____________________________________________________ _______________________________
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
______________________ ___________ ________________ ________________ ___________ ________________
$11.25 - 11.25........ 33,000 2.3 years $11.25 33,000 $11.25
18.29 - 25.00........ 314,392 4.5 22.23 275,285 22.07
27.56 - 38.04........ 5,290,575 7.1 30.81 2,648,693 31.84
42.69 - 48.51........ 2,877,502 9.2 43.53 74,500 45.91
_________ _________
8,515,469 3,031,478
========= =========
In 2000, 2001, and 2002, the Company also granted 13,500, 6,000 and 6,000
shares, respectively, of restricted stock to key officers, including
policy-making officers, under the Stock Plan. The awards of restricted stock
vest pro-rata on each anniversary of the grant date and become fully vested four
years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age,
and service conditions. Restricted shareholders have the right to vote their
restricted shares and receive dividends.
F-76
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED)
The following is a summary of restricted stock transactions under the Stock
Plan.
YEARS ENDED DECEMBER 31,
_____________________________________________________________________________________
2000 2001 2002
___________________________ ___________________________ __________________________
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE
_________ ________________ _________ ________________ _________ ________________
Restricted stock awards
outstanding, beginning of year.. 1,496,106 $14.05 1,506,162 $14.11 1,511,526 $14.19
Granted......................... 13,500 25.00 6,000 37.10 6,000 45.00
Cancelled....................... (3,444) 31.66 (636) 37.47 (459 32.61
_________ _________ _________
Restricted stock awards
outstanding, end of year........ 1,506,162 $14.11 1,511,526 $14.19 1,517,067 $14.31
========= ========= =========
Restricted stock awards vested,
end of year..................... 1,408,696 $13.00 1,469,354 $13.66 1,503,305 $14.09
========= ========= =========
At December 31, 2000, 2001 and 2002, 8,969,424, 5,659,091 and 2,890,182
shares, respectively, were available for future grants as either stock options
or restricted stock under the Stock Plan. The number of shares available for
future grants at December 31, 2002 does not include six million shares
authorized, but not registered, during 2002.
Effective January 1, 1997, the Company established a Performance Share
Plan. Eligible participants may earn performance share awards to be redeemed in
cash three years after the date of grant. Performance shares are linked to
shareholder value in two ways: (1) the market price of the Company's common
stock; and (2) return on equity, a performance measure closely linked to value
creation. Eligible participants generally receive grants of performance shares
annually. The total number of performance shares granted under the plan cannot
exceed 600,000. The Company granted 31,500 shares in 2000, 68,000 shares in
2001, and 61,500 shares in 2002. No performance shares were forfeited in 2000 or
2002. In 2001, 9,000 performance shares were forfeited. The value of a
performance share is equal to the market price of the Company's common stock.
All cancelled or forfeited performance shares become available for future
grants.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. All of the fair values presented
below are as of their respective period ends and have been made under this
definition of fair value unless otherwise disclosed.
It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of December 31, 2001 and 2002, as more fully described below. It should be
noted that the operations of the Company are managed on a going concern basis
and not on a liquidation basis. As a result, the ultimate value realized for the
financial instruments presented could be substantially different when actually
recognized over time through the normal course of operations.
F-77
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Additionally, a substantial portion of an institution's inherent value is
its capitalization and franchise value. Neither of these components has been
given consideration in the presentation of fair values that follow.
The table below presents the carrying value and fair value of the specified
assets, liabilities, and off-balance sheet instruments held by the Company.
DECEMBER 31,
________________________________________________________________
2001 2002
_____________________________ _____________________________
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) VALUE VALUE VALUE VALUE
____________________________________________________________ ___________ ___________ ___________ ___________
ASSETS
Cash and cash equivalents................................. $ 3,664,954 $ 3,664,954 $ 4,442,122 $ 4,442,122
Trading account assets.................................... 229,697 229,697 276,021 276,021
Securities available for sale:
Securities pledged as collateral........................ 137,922 137,922 157,823 157,823
Held in portfolio....................................... 5,661,160 5,661,160 7,180,677 7,180,677
Loans, net of allowance for credit losses (1)............. 23,392,279 23,774,330 25,044,665 25,007,245
LIABILITIES
Deposits:
Noninterest bearing..................................... 12,718,858 12,718,858 16,121,742 16,121,742
Interest bearing........................................ 15,837,341 15,869,729 16,719,073 16,800,871
___________ ___________ ___________ ___________
Total deposits............................................ 28,556,199 28,588,587 32,840,815 32,922,613
Borrowed funds............................................ 1,949,874 1,967,333 1,640,408 1,639,100
Medium and long-term debt................................. 399,657 398,051 418,360 415,333
UnionBanCal Corporation-obligated mandatorily redeemable
preferred securities of subsidiary grantor trust.......... 363,928 348,600 365,696 354,060
OFF-BALANCE SHEET INSTRUMENTS
Commitments to extend credit.............................. 50,813 50,813 55,760 55,760
Standby letters of credit................................. 8,239 8,239 10,552 10,552
<FN>
__________
(1) Excludes lease financing, net of allowance.
</FN>
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value.
CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is
considered a reasonable estimate of fair value.
TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and
valued at market based on quoted market prices or dealer quotes. If a quoted
market price is not available, the recorded amounts are estimated using quoted
market prices for similar securities. Thus, carrying value is considered a
reasonable estimate of fair value for these financial instruments.
F-78
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SECURITIES: The fair value of securities is based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. Securities
available for sale are carried at their aggregate fair value, while securities
held to maturity are carried at amortized cost.
LOANS: The fair value for performing fixed and non-reference rate loans was
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
similar remaining maturities and, where available, discount rates were based on
current market rates.
Loans that are on nonaccrual status were not included in the loan valuation
methods discussed previously. The fair value of these assets was estimated
assuming these loans were sold at their carrying value less their impairment
allowance.
The fair value of performing mortgage loans was based on quoted market
prices for loans with similar credit and interest rate risk characteristics.
The fair value of credit lines is assumed to approximate their book value.
NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing
deposits is the amount payable on demand at the reporting date. The fair value
of the demand deposit intangible has not been estimated.
INTEREST BEARING DEPOSITS: The fair value of savings accounts and certain
money market accounts is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit was estimated using rates
currently being offered on certificates with similar maturities.
BORROWED FUNDS: The book values of federal funds purchased and securities
sold under repurchase agreements and other short-term borrowed funds are assumed
to approximate their fair value due to their limited duration characteristics.
The fair value for commercial paper and term federal funds purchased was
estimated using market quotes.
MEDIUM AND LONG-TERM DEBT: The fair value of the fixed-rate senior notes
was estimated using market quotes. The book value for variable-rate subordinated
capital notes is assumed to approximate fair market value.
TRUST PREFERRED SECURITIES: The fair value of fixed-rate trust preferred
securities was based upon market quotes for those traded securities. This amount
differs from the fair value of those securities under hedge accounting since a
hypothetical value based on the present value of cash flows has been used for
that purpose. It should be noted that the trust preferred securities are not
callable until February 2004 and, therefore, cannot be settled for that price at
this time.
OFF-BALANCE SHEET INSTRUMENTS: The carrying value of 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, the
Company believes that the fair value approximates the carrying value of these
instruments.
F-79
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 16--DERIVATIVE INSTRUMENTS
The Company is a party to certain derivative and other financial
instruments that are used for trading activities of the Company, to meet the
needs of customers, and to change the impact on the Company's operating results
due to market fluctuations in currency or interest rates.
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 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. Market risk is the possibility that future changes in market conditions
may make the financial instrument less valuable.
TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS
Derivative instruments used for trading purposes are carried at fair value.
The following table reflects the Company's positions relating to trading
activities in derivative instruments. Trading activities include both activities
for the Company's own account and as an accommodation for customers. At December
31, 2001 and 2002, the majority of the Company's derivative transactions for
customers were essentially offset by contracts with other counterparties.
F-80
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED)
The following is a summary of derivative instruments held or written for
trading purposes and customer accommodations.
DECEMBER 31,
____________________________________________________________________________________________
2001 2002
_________________________________________ __________________________________________
UNREALIZED UNREALIZED ESTIMATED UNREALIZED UNREALIZED ESTIMATED
(DOLLARS IN THOUSANDS) GAINS LOSSES FAIR VALUE LOSSES LOSSES FAIR VALUE
________________________________ ________ _________ ________ ________ ________ ________
HELD OR WRITTEN FOR TRADING
PURPOSES AND CUSTOMER
ACCOMMODATIONS
Foreign exchange forward
contracts:
Commitments to purchase....... $ 2,521 $ (28,955) $(26,434) $ 36,508 $ (2,182) $ 34,326
Commitments to sell........... 33,476 (2,071) 31,405 1,655 (37,221) (35,566)
Foreign exchange OTC options:
Options purchased............. -- (224) (224) -- (863) (863)
Options written............... 224 -- 224 863 -- 863
Currency swap agreements:
Commitments to pay............ 5,311 -- 5,311 1,581 -- 1,581
Commitments to receive........ -- (5,257) (5,257) -- (1,548) (1,548)
Interest rate contracts:
Caps purchased................ 4,567 -- 4,567 5,514 -- 5,514
Floors purchased.............. 20,027 -- 20,027 4,459 -- 4,459
Caps written.................. -- (4,567) (4,567) -- (5,514) (5,514)
Floors written................ -- (20,027) (20,027) -- (4,459) (4,459)
Swap contracts:
Pay fixed/receive variable.. 4,843 (91,054) (86,211) -- (118,181) (118,181)
Pay variable/receive fixed.. 96,764 (4,084) 92,680 126,058 -- 126,058
________ ________
167,733 176,638
Effect of master netting
agreements.................... (48,762) (92,803)
________ ________
Total credit exposure........... $118,971 $83,835
======== ========
DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. All derivatives, whether designated as
a hedge, or not, are required to be recorded on the balance sheet at fair value.
SFAS No. 133 requires that derivative instruments used to hedge be identified
specifically to assets, liabilities, firm commitments or anticipated
transactions and be expected to be effective throughout the life of the hedge.
Derivative instruments that do not qualify as either a fair value or cash flow
hedge are valued at fair value and classified as trading account assets with the
resultant gain or loss recognized in current earnings. At adoption of SFAS No.
133, the Company recognized a loss of $6 million ($4 million, net of tax), which
is included in noninterest
F-81
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED)
expense. Additionally, the adoption of SFAS No. 133 resulted in a cumulative
effect of a change in accounting principle on accumulated other comprehensive
income, net of tax, of $22 million in unrealized gain.
Derivative positions are integral components of the Company's designated
asset and liability management activities. The Company uses interest rate
derivatives to manage the sensitivity of the Company's net interest income to
changes in 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, trust preferred
securities and medium-term notes.
CASH FLOW HEDGES
HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT
The Company engages in several types of cash flow hedging strategies for
which the hedged transactions are forecasted future loan interest payments, and
the hedged risk is the variability in those payments due to changes in the
designated benchmark rate, e.g., US dollar LIBOR. In these strategies, the
hedging instruments are matched with groups of variable rate loans such that the
tenor of the variable rate loans and that of the hedging instrument is
identical. Cash flow hedging strategies include the utilization of purchased
floor, cap, corridor options and interest rate swaps. The maximum length of time
over which the Company is hedging these exposures is 6.75 years.
The Company uses purchased interest rate floors to hedge the variable cash
flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments
received under the floor contract offset the decline in loan interest income
caused by the relevant LIBOR index falling below the floor's strike rate.
The Company uses interest rate floor corridors to hedge the variable cash
flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments
to be received under the floor corridor contracts offset the decline in loan
interest income caused by the relevant LIBOR index falling below the corridor's
upper strike rate, but only to the extent the index falls to 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 LIBOR or 3-month LIBOR indexed loans. Net payments to be
received under the collar contracts offset the decline in loan interest income
caused by the relevant LIBOR index falling below the collar's strike rate while
net payments to be paid will reduce the increase in loan interest income caused
by the LIBOR index rising above the collar's cap strike rate.
The Company uses interest rate swaps to hedge the variable cash flows
associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments to be
received (or paid) under the swap contracts will offset the 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 the forecasted issuance and rollover of
short-term, fixed rate negotiable certificates of deposit (CDs). In these
hedging relationships, the Company hedges the LIBOR component of the CD rates,
which is either 3-month LIBOR or 6-month LIBOR, based on the CD's original term
to maturity, which reflects their repricing frequency. Net payments to be
received under the cap contract offset the increase in interest expense caused
by the relevant LIBOR index rising above the cap's strike rate.
F-82
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED)
Hedging transactions are structured at inception so that the notional
amounts of the hedge are matched with an equal principal amount of loans or CDs,
the index and repricing frequencies of the hedge matches those of the loans or
CDs, and the period in which the designated hedged cash flows occurs is equal to
the term of the hedge. As such, most of the ineffectiveness in the hedging
relationship results from the mismatch between the timing of reset dates on the
hedge versus those of the loans or CDs. In 2002, the Company recognized a net
gain of $0.4 million due to ineffectiveness, which is recognized in noninterest
expense, compared to a net gain of $0.5 million in 2001.
For cash flow hedges, based upon amounts included in accumulated other
comprehensive income at December 31, 2002, the Company expects to recognize a
gross increase of $126.2 million in net interest income during 2003. This amount
could differ from amounts actually realized due to changes in interest rates and
the addition of other hedges subsequent to December 31, 2002.
FAIR VALUE HEDGES
HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST (TRUST PREFERRED
SECURITIES)
The Company engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specific interest bearing liability,
UnionBanCal Corporation's Trust Preferred Securities, in order to convert the
liability from a fixed rate to a floating rate instrument. This strategy
mitigates the changes in fair value of the hedged liability caused by changes in
the designated benchmark interest rate, US dollar LIBOR.
Fair value hedging transactions are structured at inception so that the
notional amounts of the swap match an associated principal amount of the Trust
Preferred Securities. The interest payment dates, the expiration date, and the
embedded call option of the swap match those of the Trust Preferred Securities.
The ineffectiveness on the fair value hedges during 2002 was a net gain of $0.6
million, compared to a net loss of $0.1 million in 2001.
HEDGING STRATEGY FOR MEDIUM-TERM NOTES
The Company engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specified interest bearing liability,
UnionBanCal Corporation's five-year, medium-term debt issuance, in order to
convert the liability from a fixed rate to a floating rate instrument. This
strategy mitigates the changes in fair value of the hedged liability caused by
changes in the designated benchmark interest rate, US dollar LIBOR.
The fair value hedging transaction for the medium-term notes was structured
at inception to mirror all of the provisions of the medium-term notes, which
allows the Company to assume that no ineffectiveness exists.
OTHER
The Company uses foreign currency forward contracts as a means of managing
foreign exchange rate risk associated with assets and/or liabilities denominated
in foreign currencies. The Company values the forward contracts, the assets
and/or the liabilities at fair value, with the resultant gain or loss recognized
in noninterest income.
F-83
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED)
The Company uses To-Be-Announced (TBA) contracts to fix the price and yield
of anticipated purchases or sales of mortgage-backed securities that will be
delivered at an agreed upon date. This strategy hedges the risk of variability
in the cash flows to be paid or received upon settlement of the TBA contract.
The following table reflects summary information on our derivative
contracts used to hedge or modify the Company's risk as of December 31, 2001 and
2002.
DECEMBER 31, 2001 DECEMBER 31, 2002
________________________________________ ________________________________________
UNREALIZED UNREALIZED ESTIMATED UNREALIZED UNREALIZED ESTIMATED
GAINS LOSSES FAIR VALUE GAINS LOSSES FAIR VALUE
__________ __________ __________ __________ __________ __________
HELD FOR ASSET AND LIABILITY
MANAGEMENT PURPOSES
Fair Value Hedges and Hedged
Items:
Interest rate swap contracts:
Pay variable/receive fixed.... $ 11,632 $ -- $ 11,632 $ 14,041 $ -- $ 14,041
Trust preferred securities.... -- (13,928) (13,928) -- (15,697) (15,697)
Medium-term debt interest rate
swap.......................... -- -- -- 18,639 -- 18,639
Medium-term note.............. -- -- -- -- (18,639) (18,639)
Currency swap agreements:
Commitments to pay.......... 2,179 -- 2,179 508 -- 508
Foreign currency loan......... -- (2,184) (2,184) -- (507) (507)
Cash Flow Hedges:
Interest rate option contracts:
Caps purchased................ 3,904 -- 3,904 89 -- 89
Floors purchased.............. 59,296 -- 59,296 -- (443) (443)
Floors written................ -- (14,987) (14,987) 36,369 -- 36,369
Interest rate swap contracts:
Pay variable/receive fixed.... 62,210 (5,350) 56,860 133,915 -- 133,915
Other Hedges:
Foreign exchange forward
contracts
Commitments to purchase....... 195 (1,728) (1,533) 2,862 (11) 2,851
Commitments to sell......... 126 (84) 42 6 (173) (167)
NOTE 17--RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND
DIVIDENDS
Federal Reserve Board regulations require the Bank to maintain reserve
balances based on the types and amounts of deposits received. Average reserve
balances were approximately $240 million and $195 million for the years ended
December 31, 2001 and 2002, respectively.
As of December 31, 2001 and 2002, securities carried at $1.5 billion and
$2.2 billion and loans of $6.5 billion and $6.4 billion, respectively, were
pledged as collateral for borrowings, to secure public and trust department
deposits, and for repurchase agreements as required by contract or law.
The Federal Reserve Act restricts the extension of credit by the Bank to
BTM and affiliates and to the Company and its non-bank subsidiaries and requires
that such loans be secured by certain types of collateral. At December 31, 2002,
$89.9 million remained outstanding on twelve Bankers Commercial Corporation
notes payable to the Bank. The respective notes were fully collateralized with
equipment leases pledged by Bankers Commercial Corporation.
F-84
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 17--RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND
DIVIDENDS (CONTINUED)
The payment of dividends by the Bank to the Company is subject to the
approval of the Office of the Comptroller of the Currency (OCC) if the total of
all dividends declared in any calendar year exceeds certain calculated amounts.
The payment of dividends is also limited by minimum capital requirements imposed
on national banks by the OCC. At December 31, 2002, the Bank could have declared
dividends aggregating $603 million without prior regulatory approval.
NOTE 18--REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and the Bank's prompt
corrective action classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. Prompt
corrective action provisions are not applicable to Bank Holding Companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to quarterly average assets (as defined). Management believes, as of
December 31, 2001 and 2002, that the Company and the Bank met all capital
adequacy requirements to which they are subject.
On February 19, 1999, the Company issued $350 million of trust preferred
securities, which qualify as Tier 1 capital. See Note 12 for a complete
description of these securities.
As of December 31, 2001 and 2002, the most recent notification from the OCC
categorized the Bank as "well-capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well-capitalized," the Bank must
maintain a minimum total risk-based capital ratio of 10 percent, a Tier 1
risk-based capital ratio of 6 percent, and a Tier 1 leverage ratio of 5 percent.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
F-85
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 18--REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Company's and the Bank's capital amounts and ratios are presented in
the following tables:
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
____________________ __________________
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
____________________________________________________________________ __________ ______ __________ _____
CAPITAL RATIOS FOR THE COMPANY:
As of December 31, 2001:
Total capital (to risk-weighted assets)............................. $4,260,043 13.35% > $2,552,515 > 8.0%
- -
Tier 1 capital (to risk-weighted assets)............................ 3,661,231 11.47 > 1,276,258 > 4.0
- -
Tier 1 capital (to quarterly average assets)(1)..................... 3,661,231 10.53 > 1,390,408 > 4.0
- -
As of December 31, 2002:
Total capital (to risk-weighted assets)............................. $4,241,095 12.93% > $2,624,915 > 8.0%
- -
Tier 1 capital (to risk-weighted assets)............................ 3,667,237 11.18 > 1,312,458 > 4.0
- -
Tier 1 capital (to quarterly average assets)(1)..................... 3,667,237 9.75 > 1,503,800 > 4.0
- -
<FN>
__________
(1) Excludes certain intangible assets.
</FN>
TO BE WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
______________________ _______________________ ______________________
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
__________________________________________ __________ _____ __________ _____ _________ ______
CAPITAL RATIOS FOR THE BANK:
As of December 31, 2001:
Total capital (to risk-weighted assets)... $3,810,736 12.19% > $2,501,701 > 8.0% > $3,127,127 > 10.0%
- - - -
Tier 1 capital (to risk-weighted assets).. 3,323,096 10.63 > 1,250,851 > 4.0 > 1,876,276 > 6.0
- - - -
Tier 1 capital (to quarterly average
assets)(1).............................. 3,323,096 9.69 > 1,371,305 > 4.0 > 1,714,131 > 5.0
- - - -
As of December 31, 2002:
Total capital (to risk-weighted assets)... $3,818,782 11.87% > $2,572,884 > 8.0% > $3,216,105 > 10.0%
- - - -
Tier 1 capital (to risk-weighted assets).. 3,334,720 10.37 > 1,286,442 > 4.0 > 1,929,663 > 6.0
- - - -
Tier 1 capital (to quarterly average
assets)(1).............................. 3,334,720 9.01 > 1,480,773 > 4.0 > 1,850,966 > 5.0
- - - -
<FN>
__________
(1) Excludes certain intangible assets.
</FN>
NOTE 19--EARNINGS PER SHARE
Basic EPS is computed by dividing net income after preferred dividends by
the weighted average number of common shares outstanding during the period. For
all periods presented, there were no dividends on preferred stock. Diluted EPS
is computed based on the weighted average number of common shares outstanding
F-86
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 19--EARNINGS PER SHARE
adjusted for common stock equivalents, which include stock options. The
following table presents a reconciliation of basic and diluted EPS for the years
ended December 31, 2000, 2001 and 2002:
DECEMBER 31,
______________________________________________________________________
2000 2001 2002
______________________ ______________________ _____________________
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED
___________________________________________________ ________ ________ ________ ________ ________ ________
Net income....................................... $439,900 $439,900 $481,428 $481,428 $527,903 $527,903
Weighted average common shares outstanding....... 161,605 161,605 157,845 157,845 154,758 154,758
Additional shares due to:
Assumed conversion of dilutive stock options..... -- 384 -- 778 -- 1,657
________ ________ ________ ________ ________ ________
Adjusted weighted average common shares outstanding 161,605 161,989 157,845 158,623 154,758 156,415
________ ________ ________ ________ ________ ________
Net income per share............................. $ 2.72 $ 2.72 $ 3.05 $ 3.04 $ 3.41 $ 3.38
======== ======== ======== ======== ======== ========
Options to purchase 4,040,244 shares of common stock with the range from
$27.56 to $44.56 per share were outstanding but not included in the computation
of diluted EPS in 2000. Options to purchase 2,234,080 shares of common stock
with the range from $32.63 to $44.56 per share were outstanding but not included
in the computation of diluted EPS in 2001. Options to purchase 2,869,052 shares
of common stock with the range from $43.25 to $48.51 per share were outstanding
but not included in the computation of diluted EPS in 2002.These options to
purchase shares were not included in the computation of diluted EPS in each of
the years 2000, 2001, and 2002 because they were anti-dilutive.
F-87
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 20--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the components of accumulated other
comprehensive income (loss):
NET UNREALIZED GAINS ON NET UNREALIZED GAINS (LOSSES) ON FOREIGN
CASH FLOW HEDGES SECURITIES AVAILABLE FOR SALE CURRENCY TRANSLATION
___________________________ ______________________________ _______________________________
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
__________________________ ______________________________ _______________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002 2000 2001 2002 2000 2001 2002
__________________________________ _____ _______ ________ _______ _______ ________ _________ _________ _________
Beginning balance................. $ -- $ -- $ 62,840 $(32,548) $41,879 $83,271 $(8,713) $(11,191) $(12,205)
Cumulative effect of accounting
change, net of tax.............. -- 22,205 -- -- -- -- -- -- --
Change during the year............ -- 40,635 41,528 74,427 41,392 64,179 (2,478) (1,014) 1,556
_____ _______ ________ ________ _______ ________ _________ _________ _________
Ending balance.................... $ -- $62,840 $104,368 $ 41,879 $83,271 $147,450 $(11,191) $(12,205) $(10,649)
===== ======= ======== ======== ======= ======== ========= ========= =========
MINIMUM PENSION LIABILITY ACCUMULATED OTHER
ADJUSTMENT COMPREHENSIVE INCOME (LOSS)
________________________________ ____________________________________
YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
________________________________ ____________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002 2000 2001 2002
_____________________________________________________ ______ ______ _______ _________ ________ ________
Beginning balance.................................... $(689) $(803) $ (973) $(41,950) $ 29,885 $132,933
Cumulative effect of accounting change, net of tax... -- -- -- -- 22,205 --
Change during the year............................... (114) (170) (102) 71,835 80,843 107,161
______ ______ ________ ________ ________ ________
Ending balance....................................... $(803) $(973) $(1,075) $ 29,885 $132,933 $240,094
====== ====== ======== ======== ======== ========
NOTE 21--COMMITMENTS, CONTINGENCIES AND GUARANTEES
The following table summarizes our significant commitments:
DECEMBER 31,
__________________________
(DOLLARS IN THOUSANDS) 2001 2002
_______________________________________________ ___________ ___________
Commitments to extend credit................... $13,038,761 $12,872,063
Standby letters of credit...................... 2,410,535 2,483,871
Commercial letters of credit................... 271,083 279,653
Commitments to fund principal investments...... 54,598 58,556
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 transaction. The majority of these types of commitments have
terms of one year or less.
F-88
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 21--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 has contingent consideration agreements that guarantee
additional payments to acquired insurance agencies' shareholders based on the
agencies future performance in excess of established revenue and/or earnings
before interest, taxes, depreciation and amortization (EBITDA) thresholds. If
the insurance agencies' future performance exceeds these thresholds during a
three-year period, the Company will be liable to make payments to former
shareholders. As of December 31, 2002, the Company has a maximum exposure of
$14.7 million for these agreements, which expire December 2005.
The Company is fund manager for limited liability corporations issuing
low-income housing investments. Low-income housing investments provide tax
benefits to investors in the form of tax deductions from operating losses and
tax credits. To facilitate the sale of these investments, the Company guarantees
the timely completion of projects and delivery of tax benefits throughout the
investment term. Guarantees may include a minimum rate of return, the
availability of tax credits, and operating deficit thresholds over a ten-year
average period. Additionally, the Company receives project completion and tax
credit guarantees from the limited liability corporations issuing the
investments that reduce the Company's ultimate exposure to loss. As of December
31, 2002, the Company's maximum exposure to loss under these guarantees is
limited to a return of investor's capital and minimum investment yield, or $77
million. The Company maintains a reserve of $2.6 million for these guarantees.
The Company has rental commitments under long-term operating lease
agreements. For detail of these commitments see Note 5.
The Company conducts securities lending transactions for institutional
customers as a fully disclosed agent, and, at times, indemnifies its customers
against counterparty default. All lending transactions are collateralized,
primarily by cash. The amount of securities lent with indemnification was $1,513
million and $1,521 million at December 31, 2001 and 2002, respectively. The
market value of the associated collateral was $1,552 million and $1,558 million
at December 31, 2001 and 2002, respectively.
The Company is subject to various pending and threatened legal actions that
arise in the normal course of business. The Company maintains reserves for
losses from legal actions that are both probable and estimable. In the opinion
of management, the disposition of claims currently pending will not have a
material adverse effect on the Company's financial position or results of
operations.
F-89
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 22--TRANSACTIONS WITH AFFILIATES
The Company had, and expects to have in the future, banking transactions
and other transactions in the ordinary course of business with BTM and with its
affiliates. During 2000, 2001 and 2002, such transactions included, but were not
limited to, origination, participation, servicing and remarketing of loans and
leases, purchase and sale of acceptances, interest rate derivatives and foreign
exchange transactions, funds transfers, custodianships, electronic data
processing, investment advice and management, deposits and credit examination,
and trust services. In the opinion of management, such transactions were made at
prevailing rates, terms, and conditions and do not involve more than the normal
risk of collectibility or present other unfavorable features. In addition, some
compensation for services rendered to the Company is paid to the expatriate
officers from BTM, and reimbursed by the Company to BTM under a service
agreement.
The Company has guarantees that obligate it to perform if its affiliates
are unable to discharge their obligations. These obligations include guarantee
of trust preferred securities (see Note 12), commercial paper obligations and
leveraged lease transactions. Guarantees issued by the Bank for an affiliate's
commercial paper program are done in order to facilitate their sale. As of
December 31, 2002, the Bank had a maximum exposure to loss under these
guarantees of $1.0 billion, which have an average term of less than one year.
The Bank's guarantee is fully collateralized by a pledged deposit. UnionBanCal
Corporation guarantees its subsidiaries leveraged lease transactions, which have
terms ranging from 15 to 30 years. Following the original funding of the
leveraged lease transactions, UnionBanCal Corporation has no material obligation
to be satisfied. As of December 31, 2002, UnionBanCal Corporation had a maximum
exposure to loss of $33.0 million for these agreements.
NOTE 23--BUSINESS SEGMENTS
The Company is organized based on the products and services that it offers
and operates in four principal areas:
o The Community Banking and Investment Services Group offers a range of
banking services, primarily to individuals and small businesses,
delivered generally through a tri-state network of branches and ATM's.
These services include commercial loans, mortgages, home equity lines
of credit, consumer loans, deposit services and cash management as
well as fiduciary, private banking, investment and asset management
services for individuals and institutions, and risk management and
insurance products for businesses and individuals.
o The Commercial Financial Services Group provides credit and cash
management services to large corporate and middle-market companies.
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 selected capital
markets products.
o The International Banking Group provides correspondent banking and
trade-finance products and services to financial institutions, and
extends primarily short-term credit to corporations engaged in
international business. The group's revenue predominately relates to
foreign customers.
o The Global Markets Group manages the Company's wholesale funding
needs, securities portfolio, and interest rate and liquidity risks.
The group also offers a broad range of risk management and trading
products to institutional and business clients of the Company through
the businesses described above.
F-90
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 23--BUSINESS SEGMENTS (CONTINUED)
The information, set forth in the table on the following page, reflects
selected income statement and balance sheet items by business unit. 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. Included in
the tables are the amounts of goodwill for each reporting unit as of December
31, 2002. Prior to January 1, 2002, most of the goodwill was reflected at the
corporate level in "Other."
The information in this table is derived from the internal management
reporting system used by management to measure the performance of the business
segments and the Company overall. The management reporting system assigns
balance sheet and income statement items to each business 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. Noninterest income and expense directly
attributable to a business segment are assigned to that business. 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 the business
segments based on a predetermined percentage of usage. Under the Company's
risk-adjusted return on capital (RAROC) methodology, credit expense is charged
to business segments 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.
"Other" is comprised of goodwill amortization for periods prior to January
1, 2002, certain parent company non-bank subsidiaries, the elimination of the
fully taxable-equivalent basis amount, the amount of the provision for credit
losses (over)/under the RAROC expected loss for the period, the earnings
associated with the unallocated equity capital and allowance for credit losses,
and the residual costs of support groups. In addition, it includes two units,
the Credit Management Group, which manages nonperforming assets, and the Pacific
Rim Corporate Group, which offers financial products to Japanese-owned
subsidiaries located in the US. On an individual basis, none of the items in
"Other" are significant to the Company's business.
The business units' results for the prior periods have been restated to
reflect changes in the transfer pricing methodology and any reorganization
changes that may have occurred.
F-91
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 23--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL
AND INVESTMENT SERVICES GROUP SERVICES GROUP BANKING GROUP
__________________________________ ____________________________ _________________________
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
__________________________________ ____________________________ _________________________
2000 2001 2002 2000 2001 2002 2000 2001 2002
__________ __________ __________ ________ ________ ________ _______ _______ ________
RESULTS OF OPERATIONS (DOLLARS IN
THOUSANDS):
Net interest income............... $ 738,709 $ 704,258 $ 797,592 $764,370 $697,533 $656,902 $34,987 $39,498 $ 38,196
Noninterest income................ 412,199 432,012 445,569 173,140 158,459 195,546 60,114 59,022 68,049
__________ __________ __________ ________ ________ ________ _______ _______ ________
Total revenue..................... 1,150,908 1,136,270 1,243,161 937,510 855,992 852,448 95,101 98,520 106,245
Noninterest expense(1)............ 722,525 750,908 790,508 303,210 316,890 347,148 54,299 57,364 63,005
Credit expense (income)........... 48,655 41,725 33,692 120,670 149,522 190,337 7,008 4,424 1,904
__________ __________ __________ ________ ________ ________ _______ _______ ________
Income (loss) before income tax
expense (benefit)............... 379,728 343,637 418,961 513,630 389,580 314,963 33,794 36,732 41,336
Income tax expense (benefit)...... 145,246 131,441 160,253 184,172 131,565 101,304 12,926 14,050 15,811
__________ __________ __________ ________ ________ ________ _______ _______ ________
Net income (loss)................. $ 234,482 $ 212,196 $ 258,708 $329,458 $258,015 $213,659 $20,868 $22,682 $ 25,525
========== ========== ========== ======== ======== ======== ======= ======= ========
Total assets (dollars in millions): $ 9,463 $ 10,376 $ 12,125 $ 18,237 $ 16,342 $ 15,761 $ 1,568 $ 1,365 $ 1,985
========== ========== ========== ======== ======== ======== ======= ======= ========
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
____________________________ ____________________________ _________________________________
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
____________________________ ____________________________ _________________________________
2000 2001 2002 2000 2001 2002 2000 2001 2002
________ _______ ________ _________ ________ ________ __________ __________ __________
RESULTS OF OPERATIONS (DOLLARS IN
THOUSANDS):
Net interest income............... $ (8,850) $16,505 $(18,478) $ 55,224 $ 66,248 $ 87,757 $1,584,440 $1,524,042 $1,561,969
Noninterest income................ (7,083) 19,633 10,104 8,810 47,278 16,708 647,180 716,404 735,976
________ _______ ________ _________ ________ ________ __________ __________ __________
Total revenue..................... (15,933) 36,138 (8,374) 64,034 113,526 104,465 2,231,620 2,240,446 2,297,945
Noninterest expense(1)............ 15,757 24,064 15,548 34,394 90,948 131,457 1,130,185 1,240,174 1,347,666
Credit expense (income)........... -- 200 200 263,667 89,129 (51,133) 440,000 285,000 175,000
________ _______ ________ _________ ________ ________ __________ __________ __________
Income (loss) before income tax
expense (benefit)............... (31,690) 11,874 (24,122) (234,027) (66,551 24,141 661,435 715,272 775,279
Income tax expense (benefit)...... (12,122) 4,542 (9,227) (108,687) (47,754 (20,765) 221,535 233,844 247,376
________ _______ ________ _________ ________ ________ __________ __________ __________
Net income (loss)................. $(19,568) $ 7,332 $(14,895) $(125,340) $(18,797 $ 44,906 $ 439,900 $ 481,428 $ 527,903
======== ======= ======== ========= ======== ======== ========== ========== ==========
Total assets (dollars in millions): $ 4,662 $ 6,983 $ 9,086 $ 1,232 $ 973 $ 1,213 $ 35,162 $ 36,039 $ 40,170
======== ======= ======== ========= ======== ======== ========== ========== ==========
<FN>
__________
(1) "Other" includes restructuring credits of $19.0 million ($11.8 million, net
of taxes) for the year ending December 31, 2000.
</FN>
F-92
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31,
__________________________
(DOLLARS IN THOUSANDS) 2001 2002
_________________________________________________________________ __________ __________
ASSETS
Cash and cash equivalents...................................... $ 435,513 $ 477,825
Investment in and advances to subsidiaries..................... 3,999,509 4,184,208
Loans.......................................................... 3,556 2,940
Other assets................................................... 25,617 40,080
__________ __________
Total assets................................................. $4,464,195 $4,705,053
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper............................................... $ 99,086 $ 98,507
Other liabilities.............................................. 44,457 53,476
Medium and long-term debt...................................... 399,657 418,360
Junior subordinated debt payable to subsidiary
grantor trust................................................ 374,753 376,521
__________ __________
Total liabilities............................................ 917,953 946,864
Shareholders' equity........................................... 3,546,242 3,758,189
__________ __________
Total liabilities and shareholders' equity................... $4,464,195 $4,705,053
========== ==========
F-93
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
___________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
_______________________________________________________________________________ ________ ________ ________
INCOME:
Dividends from bank subsidiary............................................... $283,471 $379,110 $486,300
Dividends from nonbank subsidiaries.......................................... 10,000 7,500 24,399
Interest income on advances to subsidiaries and deposits in bank............. 18,850 17,700 11,909
Other income................................................................. 458 882 188
________ ________ ________
Total income............................................................... 312,779 405,192 522,796
________ ________ ________
EXPENSE:
Interest expense............................................................. 47,172 35,890 27,443
Other expense, net........................................................... 3,313 4,683 620
________ ________ ________
Total expense................................................................ 50,485 40,573 28,063
________ ________ ________
Income before income taxes and equity in undistributed net income of
subsidiaries............................................................... 262,294 364,619 494,733
Provision for credit losses.................................................. (25) 6 (1)
Income tax benefit........................................................... (11,935) (8,409) (6,108)
________ ________ ________
Income before equity in undistributed net income of subsidiaries............. 274,204 373,034 500,840
Equity in undistributed net income of subsidiaries:
Bank subsidiary.............................................................. 138,105 100,361 61,164
Nonbank subsidiaries......................................................... 27,591 8,033 (34,101)
________ ________ ________
NET INCOME..................................................................... $439,900 $481,428 $527,903
======== ======== ========
F-94
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
____________________________________
(DOLLARS IN THOUSANDS) 2000 2001 2002
________________________________________________________________________ _________ _________ _________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 439,900 $ 481,428 $ 527,903
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries.................. (165,696) (108,394) (27,063)
Provision for credit losses......................................... 25 (6) 1
Other, net.......................................................... 7,953 11,357 86,723
_________ _________ _________
Net cash provided by operating activities........................... 282,182 384,385 587,564
_________ _________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to subsidiaries.............................................. (43,704) (23,967) (23,733)
Repayment of advances to subsidiaries................................. 11,903 16,965 29,460
_________ _________ _________
Net cash (used in) provided by investing activities................... (31,801) (7,002) 5,727
_________ _________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term borrowings...................... 1,984 (883) (579)
Proceeds from issuance of medium-term debt............................ -- 200,000 --
Payments of cash dividends............................................ (162,575) (158,406) (164,440)
Repurchase of common stock............................................ (130,642) (107,629) (385,960)
Other, net............................................................ 52 (1,323) --
_________ _________ _________
Net cash used in financing activities................................... (291,181) (68,241) (550,979)
_________ _________ _________
Net increase (decrease) in cash and due from banks...................... (40,800) 309,142 42,312
Cash and due from banks at beginning of year............................ 167,171 126,371 435,513
_________ _________ _________
Cash and due from banks at end of year.................................. $ 126,371 $ 435,513 $ 477,825
========= ========= =========
CASH PAID DURING THE YEAR FOR:
Interest.............................................................. $ 44,327 $ 33,910 $ 27,665
Income taxes.......................................................... 26,704 (271) 5,901
F-95
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED)
NOTE 25--SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly results are summarized as follows:
2001 QUARTERS ENDED
__________________________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
____________________________________________________________ ________ ________ ________ ________
Interest income............................................. $608,692 $563,121 $536,001 $487,497
Interest expense............................................ 221,431 184,398 157,910 107,530
________ ________ ________ ________
Net interest income......................................... 387,261 378,723 378,091 379,967
Provision for credit losses................................. 100,000 65,000 50,000 70,000
Noninterest income.......................................... 180,807 168,391 173,405 193,801
Noninterest expense......................................... 307,485 307,452 317,042 308,195
________ ________ ________ ________
Income before income taxes.................................. 160,583 174,662 184,454 195,573
Income tax expense.......................................... 53,296 57,512 59,325 63,711
________ ________ ________ ________
Net income.................................................. $107,287 $117,150 $125,129 $131,862
======== ======== ======== ========
Net income per common share--basic.......................... $ 0.68 $ 0.74 $ 0.79 $ 0.84
======== ======== ======== ========
Net income per common share--diluted........................ $ 0.67 $ 0.74 $ 0.79 $ 0.84
======== ======== ======== ========
Dividends per share......................................... $ 0.25 $ 0.25 $ 0.25 $ 0.25
======== ======== ======== ========
2002 QUARTERS ENDED
__________________________________________________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
____________________________________________________________ ________ ________ ________ ________
Interest income............................................. $462,380 $463,203 $463,113 $467,276
Interest expense............................................ 81,940 77,442 71,011 63,610
________ ________ ________ ________
Net interest income......................................... 380,440 385,761 392,102 403,666
Provision for credit losses................................. 55,000 50,000 40,000 30,000
Noninterest income.......................................... 171,451 188,774 182,426 193,325
Noninterest expense......................................... 323,363 329,791 331,134 363,378
________ ________ ________ ________
Income before income taxes.................................. 173,528 194,744 203,394 203,613
Income tax expense.......................................... 58,751 64,802 65,163 58,660
________ ________ ________ ________
Net income.................................................. $114,777 $129,942 $138,231 $144,953
======== ======== ======== ========
Net income per common share--basic.......................... $ 0.73 $ 0.83 $ 0.89 $ 0.96
======== ======== ======== ========
Net income per common share--diluted........................ $ 0.73 $ 0.81 $ 0.88 $ 0.95
======== ======== ======== ========
Dividends per share......................................... $ 0.25 $ 0.28 $ 0.28 $ 0.28
======== ======== ======== ========
<FN>
__________
(1) Dividends per share reflect dividends declared on the Company's common
stock outstanding as of the declaration date.
</FN>
F-96
UNIONBANCAL CORPORATION AND SUBSIDIARIES
MANAGEMENT STATEMENT
The management of UnionBanCal Corporation is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (US GAAP) and, as such,
include amounts based on informed judgments and estimates made by management.
We maintain a system of internal accounting controls to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and recorded properly to permit the
preparation of financial statements in accordance with US GAAP. Management
recognizes that even a highly effective internal control system has inherent
risks, including the possibility of human error and the circumvention or
overriding of controls, and that the effectiveness of an internal control system
can change with circumstances. However, management believes that the internal
control system provides reasonable assurance that errors or irregularities that
could be material to the financial statements would be prevented or detected on
a timely basis and corrected through the normal course of business. As of
December 31, 2002, management believes that the internal controls are in place
and operating effectively.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of our management; it includes members
with banking or related financial management expertise and who are not large
customers of Union Bank of California, N.A. The Audit Committee has access to
outside counsel. The Audit Committee is responsible for recommending to the
Board of Directors the selection of independent auditors. It meets periodically
with management, the independent auditors, and the internal auditors to provide
a reasonable basis for concluding that the Audit Committee is carrying out its
responsibilities. The Audit Committee is also responsible for performing an
oversight role by reviewing and monitoring our financial, accounting, and
auditing procedures in addition to reviewing our financial reports. The
independent auditors and internal auditors have full and free access to the
Audit Committee, with or without the presence of management, to discuss the
adequacy of internal controls for financial reporting and any other matters
which they believe should be brought to the attention of the Audit Committee.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, who were given unrestricted access to all financial
records and related data, including minutes of all meetings of shareholders, the
Board of Directors and committees of the Board. Management believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The independent auditors' report is presented on the following
page.
/s/NORIMICHI KANARI
_____________________________________
Norimichi Kanari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/TAKAHARU SAEGUSA
_____________________________________
Takaharu Saegusa
DEPUTY CHAIRMAN OF THE BOARD
/s/DAVID I. MATSON
_____________________________________
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
/s/DAVID A. ANDERSON
_____________________________________
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
F-97
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
UnionBanCal Corporation:
We have audited the accompanying consolidated balance sheets of UnionBanCal
Corporation and subsidiaries (the Company) as of December 31, 2001 and 2002, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of UnionBanCal Corporation and
subsidiaries as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002 the Company changed its method of accounting for previously
recognized goodwill and other intangible assets to conform to Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Francisco, California
January 15, 2003
F-98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, UnionBanCal Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION
(Registrant)
By: /s/NORIMICHI KANARI
_____________________________________
Norimichi Kanari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
By: /s/DAVID I. MATSON
_____________________________________
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
By: /s/DAVID A. ANDERSON
_____________________________________
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
(Principal Accounting Officer)
Date: March 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of UnionBanCal
Corporation and in the capacities and on the date indicated below.
SIGNATURE TITLE
--------- -----
_____________________________________
Director
David R. Andrews
*
_____________________________________
Director
L. Dale Crandall
*
_____________________________________
Director
Richard D. Farman
II-1
SIGNATURE TITLE
--------- -----
*
_____________________________________
Director
Stanley F. Farrar
*
_____________________________________
Director
Michael J. Gillfillan
*
_____________________________________
Director
Richard C. Hartnack
*
_____________________________________
Director
Kaoru Hayama
*
_____________________________________
Director
Norimichi Kanari
_____________________________________
Director
Satori Kishi
*
_____________________________________
Director
Monica C. Lozano
*
_____________________________________
Director
Mary S. Metz
*
_____________________________________
Director
Raymond E. Miles
*
_____________________________________
Director
J. Fernando Niebla
*
_____________________________________
Director
Charles R. Rinehart
_____________________________________
Director
Carl W. Robertson
*
_____________________________________
Director
Takaharu Saegusa
II-2
SIGNATURE TITLE
--------- -----
*
_____________________________________
Director
Robert M. Walker
_____________________________________
Director
Kenji Yoshizawa
*By: /s/JOHN H. MCGUCKIN, JR.
____________________________________
John H. McGuckin, Jr.
ATTORNEY-IN-FACT
Dated: February 26, 2003
II-3
CERTIFICATIONS
I, Norimichi Kanari, certify that:
1. I have reviewed this annual report on Form 10-K of UnionBanCal Corporation
(the Registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ NORIMICHI KANARI
_____________________________________
Norimichi Kanari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 14, 2003 (Principal Executive Officer)
II-4
I, David I. Matson, certify that:
1. I have reviewed this annual report on Form 10-K of UnionBanCal Corporation
(the Registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ DAVID I. MATSON
_____________________________________
David I. Matson
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: March 14, 2003 (Principal Financial Officer)
II-5