================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
|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
================================================================================
EXPLANATORY NOTE
After filing our Annual Report on Form 10-K for the year ended December 31,
2002, we discovered a tabulation error in the Consolidated Statements of Cash
Flows. This error caused the "other, net of acquisitions" line within "cash
flows from operating activities" to be overstated by $542 million, with a
corresponding offset in "net decrease (increase) in loans" within "cash flows
from investing activities."
Accordingly, we are filing this 10-K/A for the purpose of correcting this
error and we have amended Items 8 and 15 (pages F-46 through F-98) of our Annual
Report on Form 10-K for the year ended December 31, 2002 by restating the
Consolidated Statements of Cash Flows. Such correction has no impact on the
Company's financial position or results of operations.
INDEX
PAGE
----
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 1, F-46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................... 1
SIGNATURES............................................................. II-1
CERTIFICATIONS......................................................... II-4
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-46 through F-98 of this Form 10-K/A.
PART IV
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.
2
(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(11)
24.1 Power of Attorney(2)
24.2 Resolution of Board of Directors(2)
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(11)
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(11)
__________
(1) Incorporated by reference to the UnionBanCal Corporation Annual Report on
Form 10-K for the year ended December 31, 1998.
(2) Incorporated by reference to the UnionBanCal Corporation Annual Report on
Form 10-K for the year ended December 31, 2002.
(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.
(11) Filed herewith.
* 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.
3
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).
4
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) (254,319)
___________ ___________ ___________
Total adjustments................................................. 160,216 608,171 (19,218)
___________ ___________ ___________
Net cash provided by operating activities............................... 600,116 1,089,599 508,685
___________ ___________ ___________
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 (1,374,958)
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) (2,819,336)
___________ ___________ ___________
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/DAVID I. MATSON
_____________________________________
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
Date: July 10, 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: July 10, 2003
II-3
CERTIFICATIONS
I, Norimichi Kanari, certify that:
1. I have reviewed this amended annual report on Form 10-K/A (the "annual
report") 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 amended 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: July 10, 2003 (Principal Executive Officer)
II-4
I, David I. Matson, certify that:
1. I have reviewed this amended annual report on Form 10-K/A (the "annual
report") 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: July 10, 2003 (Principal Financial Officer)
II-5