================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER 1-15081
UNIONBANCAL CORPORATION
(Exact name of registrant as specified in its charter)
94-1234979
DELAWARE (I.R.S. Employer
(State of Incorporation) 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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
Number of shares of Common Stock outstanding at April 30, 2004: 147,576,209
================================================================================
UNIONBANCAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I
FINANCIAL INFORMATION
Consolidated Financial Highlights........................................ 2
Item 1. Financial Statements:
Condensed Consolidated Statements of Income............................ 3
Condensed Consolidated Balance Sheets.................................. 4
Condensed Consolidated Statements of Changes in Stockholders' Equity... 5
Condensed Consolidated Statements of Cash Flows........................ 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Introduction........................................................... 21
Executive Overview..................................................... 21
Financial Performance.................................................. 23
Net Interest Income.................................................... 25
Noninterest Income..................................................... 27
Noninterest Expense.................................................... 27
Income Tax Expense..................................................... 27
Loans.................................................................. 28
Cross-Border Outstandings.............................................. 30
Provision for Credit Losses............................................ 30
Allowance for Credit Losses............................................ 31
Nonperforming Assets................................................... 35
Loans 90 Days or More Past Due and Still Accruing...................... 36
Quantitative and Qualitative Disclosures About Market Risk............. 36
Liquidity Risk......................................................... 40
Regulatory Capital..................................................... 41
Business Segments...................................................... 42
Certain Business Risk Factors.......................................... 49
Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 52
Item 4. Controls and Procedures.......................................... 53
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................ 54
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities................................................ 54
Item 4. Submission of Matters to a Vote of Security Holders.............. 55
Item 6. Exhibits and Reports on Form 8-K................................. 56
Signatures............................................................... 57
PART I. FINANCIAL INFORMATION
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
AS OF AND FOR THE
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31, PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2004 CHANGE
- ----------------------------------------------------------------- ----------- ----------- -------
RESULTS OF OPERATIONS:
Net interest income(1)......................................... $ 391,404 $ 401,223 2.51%
(Reversal of) provision for credit losses...................... 30,000 (5,000) nm
Noninterest income............................................. 185,771 211,205 13.69
Noninterest expense............................................ 342,600 373,106 8.90
----------- -----------
Income before income taxes(1).................................. 204,575 244,322 19.43
Taxable-equivalent adjustment.................................. 624 802 28.53
Income tax expense............................................. 68,434 86,033 25.72
----------- -----------
Net income..................................................... $ 135,517 $ 157,487 16.21%
=========== ===========
PER COMMON SHARE:
Net income--basic.............................................. $ 0.90 $ 1.07 18.89%
Net income--diluted............................................ 0.89 1.05 17.98
Dividends(2)................................................... 0.28 0.31 10.71
Book value (end of period)..................................... 25.35 27.12 6.98
Common shares outstanding (end of period)(3)................... 150,217,620 147,474,843 (1.83)
Weighted average common shares outstanding--basic(3)........... 150,616,367 147,400,298 (2.14)
Weighted average common shares outstanding--diluted(3)......... 152,012,570 149,952,021 (1.36)
BALANCE SHEET (END OF PERIOD):
Total assets................................................... $40,387,343 $46,102,177 14.15%
Total loans.................................................... 26,536,272 26,036,305 (1.88)
Nonaccrual loans............................................... 386,583 256,741 (33.59)
Nonperforming assets........................................... 386,972 262,894 (32.06)
Total deposits................................................. 33,252,751 39,005,555 17.30
Medium and long-term debt...................................... 418,388 836,023 99.82
Junior subordinated debt....................................... -- 16,243 nm
Trust preferred securities..................................... 363,050 -- (100.00)
Stockholders' equity........................................... 3,808,025 3,999,061 5.02
BALANCE SHEET (PERIOD AVERAGE):
Total assets................................................... $38,348,203 $43,051,127 12.26%
Total loans.................................................... 26,723,057 26,141,856 (2.17)
Earning assets................................................. 34,826,771 38,876,228 11.63
Total deposits................................................. 31,078,388 35,939,525 15.64
Stockholders' equity........................................... 3,874,293 3,949,888 1.95
FINANCIAL RATIOS:
Return on average assets(4).................................... 1.43% 1.47%
Return on average stockholders' equity(4)...................... 14.19 16.04
Efficiency ratio(5)............................................ 59.35 60.84
Net interest margin(1)......................................... 4.53 4.14
Dividend payout ratio.......................................... 31.11 28.97
Tangible equity ratio.......................................... 9.00 7.92
Tier 1 risk-based capital ratio................................ 11.33 10.29
Total risk-based capital ratio................................. 13.08 13.06
Leverage ratio................................................. 9.80 8.24
Allowance for credit losses to total loans..................... 2.21 2.00
Allowance for credit losses to nonaccrual loans................ 151.64 202.97
Net loans charged off to average total loans(4)................ 0.80 0.19
Nonperforming assets to total loans, distressed loans held
for sale, and foreclosed assets................................ 1.46 1.01
Nonperforming assets to total assets........................... 0.96 0.57
- ----------------------------
<FN>
(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) Dividends per share reflect dividends declared on UnionBanCal Corporation's
common stock outstanding as of the declaration date.
(3) Common shares outstanding reflects common shares issued less treasury
shares.
(4) Annualized.
(5) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent basis) and noninterest income. Foreclosed asset expense
was $0.1 million in the first three months of 2003 and $0.5 million for the
first three months of 2004.
nm - not meaningful
</FN>
2
ITEM 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2004
- ------------------------------------------------------------- -------- --------
INTEREST INCOME
Loans...................................................... $362,975 $335,329
Securities................................................. 79,863 105,846
Interest bearing deposits in banks......................... 962 908
Federal funds sold and securities purchased under
resale agreements........................................ 1,677 1,959
Trading account assets..................................... 927 557
-------- --------
Total interest income...................................... 446,404 444,599
-------- --------
INTEREST EXPENSE
Domestic deposits.......................................... 41,571 33,610
Foreign deposits........................................... 3,206 2,132
Federal funds purchased and securities sold under
repurchase agreements.................................... 1,327 681
Commercial paper........................................... 2,728 1,135
Medium and long-term debt.................................. 1,866 3,139
Preferred securities and trust notes....................... 3,671 2,181
Other borrowed funds....................................... 1,255 1,300
-------- --------
Total interest expense..................................... 55,624 44,178
-------- --------
NET INTEREST INCOME.......................................... 390,780 400,421
(Reversal of) provision for credit losses.................. 30,000 (5,000)
-------- --------
Net interest income after (reversal of) provision
for credit losses......................................... 360,780 405,421
-------- --------
NONINTEREST INCOME
Service charges on deposit accounts........................ 72,287 81,096
Trust and investment management fees....................... 32,675 35,822
Insurance commissions...................................... 13,218 21,735
International commissions and fees......................... 15,345 17,545
Card processing fees, net.................................. 9,682 8,792
Foreign exchange gains, net................................ 6,934 8,344
Brokerage commissions and fees............................. 8,654 8,297
Merchant banking fees...................................... 6,018 7,467
Securities gains, net...................................... -- 1,622
Other...................................................... 20,958 20,485
-------- --------
Total noninterest income................................... 185,771 211,205
-------- --------
NONINTEREST EXPENSE
Salaries and employee benefits............................. 198,107 219,423
Net occupancy.............................................. 27,636 31,582
Equipment.................................................. 16,671 17,271
Communications............................................. 13,844 13,410
Software................................................... 12,076 12,995
Professional services...................................... 12,014 11,303
Foreclosed asset expense................................... 51 519
Other...................................................... 62,201 66,603
-------- --------
Total noninterest expense.................................. 342,600 373,106
-------- --------
Income before income taxes................................. 203,951 243,520
Income tax expense......................................... 68,434 86,033
-------- --------
NET INCOME................................................... $135,517 $157,487
======== ========
NET INCOME PER COMMON SHARE--BASIC........................... $ 0.90 $ 1.07
======== ========
NET INCOME PER COMMON SHARE--DILUTED......................... $ 0.89 $ 1.05
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC............ 150,616 147,400
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED.......... 152,013 149,952
======== ========
See accompanying notes to condensed consolidated financial statements.
3
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED)
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2003 2003 2004
- -------------------------------------------------------------------------- ----------- ------------ -----------
ASSETS
Cash and due from banks................................................... $ 2,480,626 $ 2,494,127 $ 2,154,170
Interest bearing deposits in banks........................................ 226,893 235,158 243,585
Federal funds sold and securities purchased under resale agreements....... 1,736,800 769,720 3,517,500
----------- ------------ -----------
Total cash and cash equivalents......................................... 4,444,319 3,499,005 5,915,255
Trading account assets.................................................... 305,102 252,929 285,305
Securities available for sale:
Securities pledged as collateral........................................ 117,092 106,560 97,040
Held in portfolio....................................................... 6,944,188 10,660,332 11,496,366
Loans (net of allowance for credit losses: March 31, 2003, $586,197;
December 31, 2003, $532,970; March 31, 2004, $521,111).................. 25,950,075 25,411,658 25,515,194
Due from customers on acceptances......................................... 128,401 71,078 50,554
Premises and equipment, net............................................... 504,451 509,734 523,197
Intangible assets......................................................... 37,541 49,592 61,181
Goodwill.................................................................. 150,846 226,556 314,994
Other assets.............................................................. 1,805,328 1,711,023 1,843,091
----------- ------------ -----------
Total assets............................................................ $40,387,343 $ 42,498,467 $46,102,177
=========== ============ ===========
LIABILITIES
Domestic deposits:
Noninterest bearing..................................................... $15,727,203 $ 16,668,773 $18,736,656
Interest bearing........................................................ 15,944,421 17,146,858 18,238,967
Foreign deposits:
Noninterest bearing..................................................... 434,258 619,249 661,004
Interest bearing........................................................ 1,146,869 1,097,403 1,368,928
----------- ------------ -----------
Total deposits........................................................ 33,252,751 35,532,283 39,005,555
Federal funds purchased and securities sold under repurchase agreements... 282,135 280,968 325,238
Commercial paper.......................................................... 852,494 542,270 478,039
Other borrowed funds...................................................... 139,821 212,088 204,681
Acceptances outstanding................................................... 128,401 71,078 50,554
Other liabilities......................................................... 1,142,278 934,916 1,186,783
Medium and long-term debt................................................. 418,388 820,488 836,023
Junior subordinated debt payable to subsidiary grantor trust.............. -- 363,940 16,243
UnionBanCal Corporation--obligated mandatorily redeemable preferred
securities of subsidiary grantor trust.................................. 363,050 -- --
----------- ------------ -----------
Total liabilities....................................................... 36,579,318 38,758,031 42,103,116
----------- ------------ -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares, no shares issued or outstanding as of
March 31, 2003, December 31, 2003, and March 31, 2004................. -- -- --
Common stock, no stated value per share at March 31, 2003, and par value
of $1 per share at December 31, 2003 and March 31, 2004(1):
Authorized 300,000,000 shares, issued 150,217,620 shares as of March 31,
2003, 146,000,156 shares as of December 31, 2003, and 148,546,543
shares as of March 31, 2004........................................... 905,668 146,000 148,547
Additional paid-in capital................................................ -- 555,156 688,231
Treasury stock--242,000 shares as of December 31, 2003 and 1,071,700
shares as of March 31, 2004............................................. -- (12,846) (56,932)
Retained earnings......................................................... 2,685,019 2,999,884 3,111,464
Accumulated other comprehensive income.................................... 217,338 52,242 107,751
----------- ------------ -----------
Total stockholders' equity.............................................. 3,808,025 3,740,436 3,999,061
----------- ------------ -----------
Total liabilities and stockholders' equity.............................. $40,387,343 $ 42,498,467 $46,102,177
=========== ============ ===========
- -----------------------
<FN>
(1) On September 30, 2003, UnionBanCal Corporation changed its state of
incorporation from California to Delaware, establishing a par value of $1
per share common stock.
</FN>
See accompanying notes to condensed consolidated financial statements.
4
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK-
(AMOUNTS IN THOUSANDS, NUMBER COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE HOLDERS'
EXCEPT SHARES) OF SHARES STOCK(1) CAPITAL STOCK EARNINGS INCOME EQUITY
- ---------------------------------- ----------- -------- ---------- -------- ---------- ------------- ----------
BALANCE DECEMBER 31, 2002......... 150,702,363 $926,460 $ -- $ -- $2,591,635 $ 240,094 $3,758,189
-------- ---------- -------- ---------- ------------- ----------
Comprehensive income
Net income--For the three months
ended March 31, 2003.......... 135,517 135,517
Other comprehensive income, net
of tax:
Net change in unrealized gains
on cash flow hedges......... (7,379) (7,379)
Net change in unrealized gains
on securities available for
sale........................ (14,741) (14,741)
Foreign currency translation
adjustment.................. (636) (636)
----------
Total comprehensive income........ 112,761
Dividend reinvestment plan........ 4,684 10 10
Deferred compensation - restricted
stock awards.................... 56 56
Stock options exercised........... 177,309 5,691 5,691
Common stock repurchased(2)....... (666,736) (26,493) (26,493)
Dividends declared on common
stock, $0.28 per share(3)....... (42,189) (42,189)
-------- ---------- -------- ---------- ------------- ----------
Net change........................ (20,792) -- -- 93,384 (22,756) 49,836
----------- -------- ---------- -------- ---------- ------------- ----------
BALANCE MARCH 31, 2003............ 150,217,620 $905,668 $ -- $ -- $2,685,019 $ 217,338 $3,808,025
=========== ======== ========== ======== ========== ============= ==========
BALANCE DECEMBER 31, 2003......... 146,000,156 $146,000 $ 555,156 $(12,846) $2,999,884 $ 52,242 $3,740,436
-------- ---------- -------- ---------- ------------- ----------
Comprehensive income
Net income--For the three months
ended March 31, 2004.......... 157,487 157,487
Other comprehensive income, net
of tax:
Net change in unrealized gains
on cash flow hedges........... 10,237 10,237
Net change in unrealized gains
on securities available for
sale.......................... 44,658 44,658
Foreign currency translation
adjustment.................... 614 614
----------
Total comprehensive income........ 212,996
Dividend reinvestment plan........ 144 9 9
Deferred compensation - restricted
stock awards.................... 64 64
Stock options exercised........... 537,524 538 20,497 21,035
Stock issued in acquisitions...... 2,008,719 2,009 112,569 114,578
Common stock repurchased(2)....... (44,086) (44,086)
Dividends declared on common
stock, $0.31 per share(3)....... (45,971) (45,971)
-------- ---------- -------- ---------- ------------- ----------
Net change........................ 2,547 133,066 (44,086) 111,580 55,509 258,625
----------- -------- ---------- -------- ---------- ------------- ----------
BALANCE MARCH 31, 2004............ 148,546,543 $148,547 $ 688,231 $(56,932) $3,111,464 $ 107,751 $3,999,061
=========== ======== ========== ======== ========== ============= ==========
- --------------------
<FN>
(1) On September 30, 2003, UnionBanCal Corporation changed its state of
incorporation from California to Delaware, establishing a par value of $1
per share of common stock.
(2) Common stock repurchased includes commission costs. All repurchases
subsequent to September 29, 2003, are reflected in Treasury Stock.
(3) Dividends are based on UnionBanCal Corporation's shares outstanding as of
the declaration date.
</FN>
See accompanying notes to condensed consolidated financial statements.
5
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
(DOLLARS IN THOUSANDS) 2003 2004
- ---------------------------------------------------------------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 135,517 $157,487
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
(Reversal of) provision for credit losses............................... 30,000 (5,000)
Depreciation, amortization and accretion................................ 26,728 32,269
Provision for deferred income taxes..................................... 25,520 29,638
Gains on securities available for sale.................................. -- (1,622)
Net increase in prepaid expenses........................................ (90,504) (79,954)
Net increase in fees and other charges receivable....................... (60,338) (61,338)
Net increase (decrease) in accrued expenses and other liabilities....... 35,030 161,109
Net increase in trading account assets.................................. (29,081) (32,376)
Loans originated for resale............................................. (49,720) (93,286)
Net proceeds from sale of loans originated for resale................... 104,082 72,471
Other, net of acquisitions.............................................. (64,062) 206,249
---------- ----------
Total adjustments....................................................... (72,345) 228,160
---------- ----------
Net cash provided by operating activities................................. 63,172 385,647
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale...................... -- 9,751
Proceeds from matured and called securities available for sale............ 629,435 833,531
Purchases of securities available for sale................................ (450,640) (1,558,943)
Net decrease in loans, net of acquisitions................................ 89,967 340,447
Net cash used in acquisitions............................................. -- (2,287)
Other, net................................................................ (20,664) (35,540)
---------- ----------
Net cash provided by (used in) investing activities....................... 248,098 (413,041)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits, net of acquisitions............................. 411,936 2,892,915
Net increase (decrease) in federal funds purchased and securities
sold under repurchase agreements........................................ (52,244) 44,270
Net decrease in commercial paper and other borrowed funds................. (313,714) (71,638)
Repayment of junior subordinated debt..................................... -- (360,825)
Common stock repurchased.................................................. (26,493) (44,086)
Payments of cash dividends................................................ (42,438) (45,158)
Other, net................................................................ 5,065 21,658
---------- ----------
Net cash provided by (used in) financing activities....................... (17,888) 2,437,136
---------- ----------
Net increase in cash and cash equivalents................................... 293,382 2,409,742
Cash and cash equivalents at beginning of period............................ 4,152,122 3,499,005
Effect of exchange rate changes on cash and cash equivalents................ (1,185) 6,508
---------- ----------
Cash and cash equivalents at end of period.................................. $4,444,319 $5,915,255
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest.................................................................. $ 50,419 $ 26,465
Income taxes.............................................................. 9,905 17,753
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of Business Bancorp:
Fair value of assets acquired........................................... $ -- $ 803,713
Purchase price:
Cash.................................................................. -- (21,772)
Stock issued.......................................................... -- (114,578)
---------- ----------
Liabilities assumed..................................................... $ -- $ 667,363
========== ==========
See accompanying notes to condensed consolidated financial statements.
6
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The unaudited condensed consolidated financial statements of UnionBanCal
Corporation and subsidiaries (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S.
GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X of the Rules and Regulations of the Securities and
Exchange Commission. However, they do not include all of the disclosures
necessary for annual financial statements in conformity with U.S. GAAP. The
results of operations for the period ended March 31, 2004 are not necessarily
indicative of the operating results anticipated for the full year. Accordingly,
these unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Form 10-K for the year ended December 31, 2003. The preparation of
financial statements in conformity with U.S. GAAP also requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those estimates.
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). The Company provides a wide range of financial services to consumers,
small businesses, middle-market companies and major corporations, primarily in
California, Oregon, and Washington, but also nationally and internationally.
Since November 1999 through March 31, 2004, the Company has announced open
market stock repurchase plans totaling $500 million and as of March 31, 2004 has
repurchased $442 million of common stock under these repurchase plans. The
Company repurchased $58 million and $44 million of common stock in 2003 and the
first three months of 2004, respectively, as part of these repurchase plans. As
of March 31, 2004, $58 million of the Company's common stock is authorized for
repurchase. Under separate stock repurchase agreements, the Company purchased
$600 million of its common stock, $300 million in August 2002 and $300 million
in September 2003, from its majority owner, The Bank of Tokyo-Mitsubishi, Ltd.
(BTM), which is a wholly-owned subsidiary of Mitsubishi Tokyo Financial Group,
Inc. At March 31, 2004, BTM owned approximately 62 percent of the Company's
outstanding common stock.
Certain amounts for prior periods have been reclassified to conform to
current financial statement presentation.
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
7
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS (CONTINUED)
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.
At March 31, 2004, the Company has two stock-based employee compensation
plans. For further discussion concerning our stock-based employee compensation
plans see Note 14--"Management Stock Plan" of the Notes to Consolidated
Financial Statements included in the Form 10-K for the year ended December 31,
2003. The value of the restricted stock awards issued under the plans has been
reflected in compensation expense. Options granted under the plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant and, therefore, were not included in compensation expense as
allowed by current U.S. GAAP.
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.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
(DOLLARS IN THOUSANDS) 2003 2004
- ---------------------------------------------------------------- -------- --------
AS REPORTED NET INCOME.......................................... $135,517 $157,487
Stock option-based employee compensation expense (determined
under fair value based method for all awards, net of taxes)... (5,956) (6,532)
-------- --------
Pro forma net income, after stock option-based employee
compensation expense.......................................... $129,561 $150,955
======== ========
EARNINGS PER SHARE--BASIC
As reported..................................................... $ 0.90 $ 1.07
Pro forma....................................................... $ 0.86 $ 1.02
EARNINGS PER SHARE--DILUTED
As reported..................................................... $ 0.89 $ 1.05
Pro forma....................................................... $ 0.85 $ 1.01
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 first quarters
of 2003 and 2004 was not significant.
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 requires an entity to
record a liability for an obligation associated with the retirement of an asset
at the time the liability is incurred by capitalizing the cost as part of the
carrying value of the related asset and depreciating it over the remaining
useful life of the asset. This Statement was effective for the Company on
January 1, 2003 and did not have a material impact on the Company's financial
position or results of operations.
8
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 (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 was effective on January 1, 2003
and did not have a 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 Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Interpretation elaborates on
the existing disclosure requirements for most guarantees and requires that
guarantors recognize a liability for the fair value of certain guarantees at
inception. The disclosure requirements of this Interpretation were effective for
financial statements ending after December 15, 2002. The initial recognition and
measurement provisions of this Interpretation were applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
this Interpretation did not have a material impact on the Company's financial
position or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 was effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The provisions of the Statement, with certain exceptions, are
required to be applied prospectively. The adoption of this Statement did not
have a material impact on the Company's financial position or results of
operations.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
Statement establishes standards for how the Company should classify and measure
certain financial instruments with characteristics of both liabilities and
equity. This Statement was effective for financial instruments entered into or
modified after May 31, 2003, and to other instruments effective at the beginning
of the first interim period beginning after June 15, 2003. Adoption of this
Statement did 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 Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 provides guidance on how
to identify a variable interest entity (VIE), and when the
9
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
assets, liabilities, noncontrolling interests and result of operations of a VIE
need to be included in a company's consolidated financial statements. A variable
interest entity exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the
equity investors lack a controlling financial interest or they have voting
rights that are not proportionate to their economic interest. 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. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders.
In December 2003, the FASB issued FIN 46R, a revision of FIN 46. FIN 46R
clarifies that only the holder of a variable interest can ever be a VIE's
primary beneficiary. FIN 46R delays the effective date of FIN 46 for all
entities created subsequent to January 31, 2003 and non-SPE's (special-purpose
entities) created prior to February 1, 2003 to reporting periods ending after
March 15, 2004. Entities created prior to February 1, 2004 and defined as SPE's
must apply either the provisions of FIN 46 or early adopt the provisions of FIN
46R by the first reporting period ending after December 15, 2003. The adoption
of FIN 46R on January 1, 2004 did not have a material impact on the Company's
financial position or results of operations.
ACCOUNTING FOR EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS
In December 2003, the FASB issued SFAS No. 132R, a revision of SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,
an amendment of FASB Statements No. 87, 88, and 106." The Statement expands the
disclosure requirements of SFAS No. 132 to include information describing types
of plan assets, investment strategy, measurement date(s), plan obligations, cash
flows, and components of net period benefit costs of defined pension plans and
other defined benefit postretirement plans. The Statement is effective for
financial statements with fiscal years ending after December 15, 2003. The
expanded disclosures required by SFAS No. 132R are disclosed in Note 7 of the
Notes to Consolidated Financial Statements in the Form 10-K for the year ended
December 31, 2003. Periodic disclosures under SFAS No. 132R are contained in
Note 8 of this document.
ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER
In December 2003, under clearance of the FASB, the Accounting Standards
Executive Committee (AcSEC) of the AICPA issued Statement of Position (SOP)
03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer."
This SOP establishes accounting standards for discounts on purchased loans when
the discount is attributable to credit quality. The SOP requires that the loan
discount, rather than contractual amounts, establishes the investor's estimate
of undiscounted expected future principal and interest cash flows as a benchmark
for yield and impairment measurements. The SOP prohibits the carryover or
creation of a valuation allowance in the initial accounting for these loans.
This SOP is effective for loans acquired in years ending after December 15,
2004. Management believes that adoption of this Statement will not have a
material impact on the Company's financial position or results of operations at
adoption.
10
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--EARNINGS PER 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.
The following table presents a reconciliation of basic and diluted EPS for the
three months ended March 31, 2003 and 2004.
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2003 2004
------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED
- ---------------------------------------------------------- -------- -------- -------- --------
Net Income................................................ $135,517 $135,517 $157,487 $157,487
======== ======== ======== ========
Weighted average common shares outstanding................ 150,616 150,616 147,400 147,400
Additional shares due to:
Assumed conversion of dilutive stock options.............. -- 1,397 -- 2,552
-------- -------- -------- --------
Adjusted weighted average common shares outstanding....... 150,616 152,013 147,400 149,952
======== ======== ======== ========
Net income per share...................................... $ 0.90 $ 0.89 $ 1.07 $ 1.05
======== ======== ======== ========
11
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the components of the net change in
accumulated other comprehensive income and the related tax effect allocated to
each component.
BEFORE TAX
(DOLLARS IN THOUSANDS) AMOUNT TAX EFFECT NET OF TAX
- ---------------------------------------------------------------------- ---------- ---------- ----------
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Cash flow hedge activities:
Unrealized net gains on hedges...................................... $ 337 $ (129) $ 208
Less: reclassification adjustment for net gains on hedges
included in net income....................................... (12,286) 4,699 (7,587)
---------- ---------- ----------
Net change in unrealized gains on hedges.............................. (11,949) 4,570 (7,379)
---------- ---------- ----------
Securities available for sale:
Unrealized holding losses arising during the period on securities
available for sale................................................ (23,872) 9,131 (14,741)
Less: reclassification adjustment for net gains on securities
available for sale included in net income.................... -- -- --
---------- ---------- ----------
Net change in unrealized gains on securities available for sale....... (23,872) 9,131 (14,741)
---------- ---------- ----------
Foreign currency translation adjustment............................... (1,030) 394 (636)
---------- ---------- ----------
Minimum pension liability adjustment.................................. -- -- --
---------- ---------- ----------
Net change in accumulated other comprehensive income.................. $ (36,851) $ 14,095 $ (22,756)
========== ========== ==========
FOR THE THREE MONTHS ENDED MARCH 31, 2004:
Cash flow hedge activities:
Unrealized net gains on hedges...................................... $ 40,087 $ (15,333) $ 24,754
Less: reclassification adjustment for net gains on hedges
included in net income........................................ (23,509) 8,992 (14,517)
---------- ---------- ----------
Net change in unrealized gains on hedges.............................. 16,578 (6,341) 10,237
---------- ---------- ----------
Securities available for sale:
Unrealized holding gains arising during the period on securities
available for sale................................................ 73,943 (28,283) 45,660
Less: reclassification adjustment for net gains on securities
available for sale included in net income.................... (1,622) 620 (1,002)
---------- ---------- ----------
Net change in unrealized gains on securities available for sale....... 72,321 (27,663) 44,658
---------- ---------- ----------
Foreign currency translation adjustment............................... 994 (380) 614
---------- ---------- ----------
Minimum pension liability adjustment.................................. -- -- --
---------- ---------- ----------
Net change in accumulated other comprehensive income.................. $ 89,893 $ (34,384) $ 55,509
========== ========== ==========
12
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)
The following table presents accumulated other comprehensive income
balances.
NET NET
UNREALIZED UNREALIZED
GAINS (LOSSES) GAINS (LOSSES) FOREIGN MINIMUM ACCUMULATED
ON CASH ON SECURITES CURRENCY PENSION OTHER
FLOW AVAILABLE TRANSLATION LIABILITY COMPREHENSIVE
(DOLLARS IN THOUSANDS) HEDGES FOR SALE ADJUSTMENT ADJUSTMENT INCOME (LOSS)
- ------------------------------- -------------- -------------- ----------- ---------- -------------
BALANCE, DECEMBER 31, 2002..... $ 104,368 $ 147,450 $ (10,649) $ (1,075) $ 240,094
Change during the period....... (7,379) (14,741) (636) -- (22,756)
-------------- -------------- ----------- ---------- -------------
BALANCE, MARCH 31, 2003........ $ 96,989 $ 132,709 $ (11,285) $ (1,075) $ 217,338
============== ============== =========== ========== =============
BALANCE, DECEMBER 31, 2003..... $ 43,786 $ 22,535 $ (10,293) $ (3,786) $ 52,242
Change during the period....... 10,237 44,658 614 -- 55,509
-------------- -------------- ----------- ---------- -------------
BALANCE, MARCH 31, 2004........ $ 54,023 $ 67,193 $ (9,679) $ (3,786) $ 107,751
============== ============== =========== ========== =============
NOTE 5--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 primarily provides correspondent
banking and trade-finance products and services to financial
institutions. 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.
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 U.S. GAAP. Consequently, reported results
are not necessarily comparable with those presented by other companies. Included
in the total asset line of the table are the amounts of goodwill for each
reporting unit
13
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--BUSINESS SEGMENTS (CONTINUED)
as of March 31, 2003 and 2004. Substantially all of the goodwill reflected on
the Condensed Consolidated Balance Sheet is attributed to the Community Banking
and Investment Services Group.
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 certain parent company non-bank subsidiaries, the
elimination of the fully taxable-equivalent basis amount, the amount of the
(reversal of) 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 the Pacific Rim Corporate Group, which offers financial
products to Japanese-owned subsidiaries located in the U.S. On an individual
basis, none of the items in "Other" are significant to the Company's business.
14
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--BUSINESS SEGMENTS (CONTINUED)
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.
COMMUNITY BANKING COMMERCIAL
AND INVESTMENT FINANCIAL SERVICES INTERNATIONAL
SERVICES GROUP BANKING GROUP
------------------- ------------------- ---------------
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
2003 2004 2003 2004 2003 2004
- ----------------------------------------------------- -------- -------- -------- -------- ------ ------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS):
Net interest income.................................. $167,861 $182,667 $179,232 $183,506 $8,958 $ 7,808
Noninterest income................................... 101,627 116,600 57,912 69,627 15,483 18,189
-------- -------- -------- -------- ------ -------
Total revenue........................................ 269,488 299,267 237,144 253,133 24,441 25,997
Noninterest expense.................................. 199,891 218,984 98,759 104,643 14,935 15,683
Credit expense (income).............................. 7,718 7,787 42,462 31,226 505 604
-------- -------- -------- -------- ------ -------
Income (loss) before income tax expense (benefit).... 61,879 72,496 95,923 117,264 9,001 9,710
Income tax expense (benefit)......................... 23,668 27,730 30,680 38,249 3,443 3,714
-------- -------- -------- -------- ------ -------
Net income (loss).................................... $ 38,211 $ 44,766 $ 65,243 $ 79,015 $5,558 $ 5,996
======== ======== ======== ======== ====== =======
TOTAL ASSETS (dollars in millions):.................. $ 12,133 $ 13,414 $ 15,491 $ 14,330 $2,146 $ 2,134
======== ======== ======== ======== ====== =======
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
------------------- ------------------- ------------------
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------
2003 2004 2003 2004 2003 2004
- ----------------------------------------------------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS):
Net interest income.................................. $ 21,092 $ 1,151 $ 13,637 $ 25,289 $390,780 $400,421
Noninterest income................................... 1,526 1,541 9,223 5,248 185,771 211,205
-------- -------- -------- -------- -------- --------
Total revenue........................................ 22,618 2,692 22,860 30,537 576,551 611,626
Noninterest expense.................................. 4,487 6,427 24,528 27,369 342,600 373,106
Credit expense (income).............................. 50 50 (20,735) (44,667) 30,000 (5,000)
-------- -------- -------- -------- -------- --------
Income (loss) before income tax expense (benefit).... 18,081 (3,785) 19,067 47,835 203,951 243,520
Income tax expense (benefit)......................... 6,916 (1,448) 3,727 17,788 68,434 86,033
-------- -------- -------- -------- -------- --------
Net income (loss).................................... $ 11,165 $ (2,337) $ 15,340 $ 30,047 $135,517 $157,487
======== ======== ======== ======== ======== ========
TOTAL ASSETS (dollars in millions):.................. $ 9,359 $ 15,461 $ 1,258 $ 763 $ 40,387 $ 46,102
======== ======== ======== ======== ======== ========
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
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 notes, medium-term
notes and subordinated debt.
15
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
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., U.S. 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. At March 31, 2004, the
weighted average remaining life of these cash flow hedges is approximately 1.5
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 floor 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 CDs' 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.
The Company uses interest rate cap corridors to hedge the variable cash
flows associated with the forecasted issuance and roll-over of short-term, fixed
rate, negotiable CDs. In these hedging relationships, the Company hedges the
LIBOR component of the CD rates, either 1-month LIBOR, 3-month LIBOR, or 6-month
LIBOR, based on the original term to maturity of the CDs, which reflects their
repricing frequency. Net payments to be received under the cap corridor
contracts offset the increase in deposit interest expense caused by the relevant
LIBOR index rising above the corridor's lower strike rate, but only
16
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
to the extent the index rises to the upper strike rate. The corridor will not
provide protection from increases in the relevant LIBOR index to the extent it
rises above the corridor's upper strike rate.
Hedging transactions are structured at inception so that the notional
amounts of the 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 the first quarter of 2004, the
Company recorded a net loss of $1.5 million due to ineffectiveness, which is
recognized in noninterest expense, compared to a net gain of $0.1 million in the
first quarter of 2003.
FAIR VALUE HEDGES
HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--JUNIOR SUBORDINATED DEBT
PAYABLE TO SUBSIDIARY GRANTOR TRUST (TRUST NOTES)
The Company engaged in an interest rate hedging strategy in which an
interest rate swap was associated with a specific interest bearing liability,
UnionBanCal Corporation's Trust Notes, in order to convert the liability from a
fixed rate to a floating rate instrument. This strategy mitigated the changes in
fair value of the hedged liability caused by changes in the designated benchmark
interest rate, U.S. dollar LIBOR.
Fair value hedging transactions were structured at inception so that the
notional amounts of the swap matched an associated principal amount of the Trust
Notes. The interest payment dates, the expiration date, and the embedded call
option of the swap matched those of the Trust Notes. The ineffectiveness on the
fair value hedges during the first quarter of 2004 was a net gain of $1.6
million, realized upon the termination of the swap on February 19, 2004,
compared to a net gain of $0.1 million in the first quarter of 2003.
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, U.S. 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.
HEDGING STRATEGY FOR SUBORDINATED DEBT
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 ten-year, subordinated 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, U.S. dollar LIBOR.
17
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
The fair value hedging transaction for the subordinated debt was structured
at inception to mirror all of the provisions of the subordinated debt, which
allows the Company to assume that no ineffectiveness exists.
OTHER
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.
NOTE 7--GUARANTEES
Standby and commercial letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. Standby letters of
credit generally are contingent upon the failure of the customer to perform
according to the terms of the underlying contract with the third party, while
commercial letters of credit are issued specifically to facilitate foreign or
domestic trade transactions. The majority of these types of commitments have
terms of one year or less. Collateral may be obtained based on management's
credit assessment of the customer. As of March 31, 2004, the Company's maximum
exposure to loss for standby and commercial letters of credit is $2.8 billion
and $223.1 million, respectively. At March 31, 2004, the carrying value of the
Company's standby and commercial letters of credit, which is included in other
liabilities on the consolidated balance sheet, total $4.8 million.
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. At March 31, 2004,
the Company had commitments to fund principal investments of $52.8 million.
The Company has contingent consideration agreements that guarantee
additional payments to acquired insurance agencies' stockholders 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 those former
stockholders. As of March 31, 2004, the Company has a maximum exposure of $8.1
million for these agreements, the last of which expire in December 2006.
The Company is fund manager for limited liability corporations issuing
low-income housing credit (LIHC) investments. LIHC investments provide tax
benefits to investors in the form of tax deductions from operating losses and
tax credits. To facilitate the sale of these LIHC investments, the Company
guarantees 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
LIHC investments that reduce the
18
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--GUARANTEES (CONTINUED)
Company's ultimate exposure to loss. As of March 31, 2004, the Company's maximum
exposure to loss under these guarantees is limited to a return of investor
capital and minimum investment yield, or $111.0 million. The Company maintains a
reserve of $4.0 million for these guarantees.
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, 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 March 31, 2004, the
Bank had a maximum exposure to loss under these guarantees, which have an
average term of less than one year, of $478.2 million. 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 March
31, 2004, UnionBanCal Corporation had no material exposure under these
guarantees.
The Company conducts securities lending transactions for institutional
customers as a fully disclosed agent. At times, securities lending
indemnifications are issued to guarantee that a security lending customer will
be made whole in the event the borrower does not return the security subject to
the lending agreement and collateral held is insufficient to cover the market
value of the security. All lending transactions are collateralized, primarily by
cash. The amount of securities lent with indemnifications was $1.4 billion at
March 31, 2004. The market value of the associated collateral was $1.3 billion
at March 31, 2004.
NOTE 8--PENSION AND OTHER POSTRETIREMENT BENEFITS
The following table summarizes the components of net periodic benefit
costs.
PENSION BENEFITS OTHER BENEFITS
------------------- -----------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
------------------- -----------------
(DOLLARS IN THOUSANDS) 2003 2004 2003 2004
- -------------------------------------------- ------- ------- ------ ------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................ $ 8,217 $ 9,318 $1,295 $1,568
Interest cost............................... 11,875 12,602 2,641 2,772
Expected return on plan assets.............. (18,203) (20,787) (1,687) (2,097)
Amortization of prior service cost.......... 267 267 (24) (24)
Amortization of transition amount........... -- -- 637 637
Recognized net actuarial loss............... 1,042 2,822 1,599 1,586
------- ------- ------ ------
Total net periodic benefit cost............. $ 3,198 $ 4,222 $4,461 $4,442
======= ======= ====== ======
19
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SUBSEQUENT EVENTS
On April 27, 2004, the Company announced that the Bank has agreed to sell
its merchant card portfolio and to form a long-term marketing alliance with NOVA
Information Systems (NOVA). The transaction is subject to regulatory approval
and is expected to close late in the second quarter 2004. NOVA will acquire the
Bank's merchant accounts and will provide processing services, customer service
and support operations to the Bank's 10,000 merchant locations. Merchant
services will be marketed through on the Bank's branch network in California,
Oregon and Washington. The Company expects to record an after-tax gain on the
transaction of approximately $56 million, with a portion of the gain being
recorded at closing, and the remainder being recorded over the term of the
marketing agreement.
On April 28, 2004, the Board of Directors declared a quarterly cash
dividend of $0.36 per share of common stock. The dividend will be paid on July
2, 2004 to stockholders of record as of June 4, 2004.
On April 28, 2004, the Board of Directors authorized the repurchase of up
to an additional $200 million of the Company's common stock.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION, WHICH IS SUBJECT TO THE
"SAFE HARBOR" CREATED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WE MAY MAKE
FORWARD-LOOKING STATEMENTS IN OTHER UNITED STATES SECURITIES AND EXCHANGE
COMMISSION (SEC) FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH
WALL STREET ANALYSTS AND STOCKHOLDERS AND WHEN WE ARE SPEAKING ON BEHALF OF
UNIONBANCAL CORPORATION. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE
FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. OFTEN,
THEY INCLUDE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "PLAN,"
"ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL
VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," OR "MAY." THESE
FORWARD-LOOKING STATEMENTS ARE INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL
INFORMATION WITH WHICH THEY MAY ASSESS OUR FUTURE POTENTIAL. ALL OF THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON ASSUMPTIONS ABOUT AN UNCERTAIN FUTURE
AND ARE BASED ON INFORMATION AVAILABLE AT THE DATE SUCH STATEMENTS ARE ISSUED.
WE DO NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT FACTS,
CIRCUMSTANCES, ASSUMPTIONS OR EVENTS THAT OCCUR AFTER THE DATE THE
FORWARD-LOOKING STATEMENTS ARE MADE.
THERE ARE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD AND WILL CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN OUR FORWARD-LOOKING
STATEMENTS. MANY OF THESE FACTORS ARE BEYOND OUR ABILITY TO CONTROL OR PREDICT
AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE, FINANCIAL
CONDITION, AND RESULTS OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC AND
FISCAL CONDITIONS IN CALIFORNIA, GLOBAL POLITICAL AND GENERAL ECONOMIC
CONDITIONS RELATED TO THE WAR ON TERRORISM, ADVERSE ECONOMIC CONDITIONS
AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN INTEREST RATES, THE CONTROLLING
INTEREST IN US OF THE BANK OF TOKYO-MITSUBISHI, LTD. (BTM), WHICH IS A
WHOLLY-OWNED SUBSIDIARY OF MITSUBISHI TOKYO FINANCIAL GROUP, INC. (MTFG),
COMPETITION IN THE BANKING INDUSTRY, STATUTORY RESTRICTIONS ON DIVIDENDS,
ADVERSE EFFECTS OF CURRENT AND FUTURE BANKING RULES, REGULATIONS AND
LEGISLATION, AND RISKS ASSOCIATED WITH VARIOUS STRATEGIES WE MAY PURSUE,
INCLUDING POTENTIAL ACQUISITIONS, DIVESTITURES AND RESTRUCTURINGS. SEE ALSO THE
SECTION ENTITLED "CERTAIN BUSINESS RISK FACTORS" LOCATED NEAR THE END OF
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION."
ALL REPORTS THAT WE FILE ELECTRONICALLY WITH THE SEC, INCLUDING ANNUAL
REPORTS ON FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q, AND CURRENT REPORTS ON
FORM 8-K, AS WELL AS ANY AMENDMENTS TO THOSE REPORTS, ARE ACCESSIBLE AT NO COST
ON OUR INTERNET WEBSITE AT WWW.UBOC.COM AS SOON AS REASONABLY PRACTICABLE AFTER
WE ELECTRONICALLY FILE SUCH REPORTS WITH, OR FURNISH THEM, TO THE SEC. THESE
FILINGS ARE ALSO ACCESSIBLE ON THE SEC'S WEBSITE AT WWW.SEC.GOV.
INTRODUCTION
We are a California-based, commercial bank holding company with
consolidated assets of $46.1 billion at March 31, 2004. During 2003, UnionBanCal
Corporation changed its state of incorporation from California to Delaware.
UnionBanCal Corporation and its banking subsidiary, Union Bank of
California, N.A. (the Bank), were created on April 1, 1996, by the combination
of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The
Bank of California, N.A. The combination was accounted for as a reorganization
of entities under common control, similar to a pooling of interests. At March
31, 2004, BTM, our majority owner, owned approximately 62 percent of our
outstanding common stock.
EXECUTIVE OVERVIEW
We are providing you with an overview of what we believe are the most
significant events that impacted our results for the first quarter of 2004. You
should carefully read the rest of this document for more detailed information
that will assist your understanding of trends, events and uncertainties that
impact us.
Our largest subsidiary is Union Bank of California, N.A., a commercial bank
that derives most of its revenues from lending, deposit taking and trust
services to customers primarily in California. We also
21
service customers in the western United States, nationally and internationally.
Interest rates, business conditions and customer confidence all affect our
ability to generate revenues. In addition, the regulatory environment and
competition can challenge our ability to generate those revenues.
Overall credit quality in the commercial lending area continued to improve
in the first quarter of 2004. The improvements came from positive financial
results and outlooks of our borrowers, payoffs, and a slow down in net inflows
of nonaccrual loans. As a result, we recorded a reversal of provision for credit
losses of $5.0 million and reduced our allowance for credit losses. We expect to
see continued improvement in our credit quality throughout 2004, assuming that
the economy's recent positive momentum continues.
However, a full economic turnaround continues to remain uncertain in 2004,
causing our commercial lending activities to be sluggish with commercial loan
balances significantly below the first quarter of 2003 level and slightly below
the December 31, 2003 level. In the first quarter of 2004, we have seen some
improvement in the economic outlook in our markets and we anticipate that as the
economy improves, commercial lending will increase during 2004.
Record low levels of interest rates continued to pressure our net interest
income, as our variable rate loans repriced more quickly than our interest
bearing deposits. A significant contributor to the reduced asset yields was
mortgage refinancings that further reduced our net interest income on our
residential mortgage loans and our mortgage-backed securities portfolio.
Derivative contracts, used to hedge the impact of falling interest rates on our
lending activities, began to expire in late 2003, further compressing our net
interest margin in the first quarter of 2004. A discussion of the impact of our
hedges is included in our detailed analysis of net interest income. Despite
these pressures, we have benefited from a higher level of earning assets,
including a significantly higher mix of securities, strong deposit growth, and
changes in our capital structure, including replacing higher cost debt with
lower cost funding. We expect that as business activity picks up and interest
rates rise, our interest income will rise as well.
Growth in core deposits was particularly strong in the first quarter of
2004, compared to the first quarter of 2003, providing us with a low cost of
funding, which is a competitive advantage. Average demand deposits for the first
quarter of 2004 were 47 percent of average total deposits, contributing to an
average annualized all-in cost of funds (interest expense divided by total
interest bearing liabilities and noninterest bearing deposits) of 0.47 percent
for the first quarter of 2004 compared to 0.67 percent in the first quarter of
2003. We attract deposits by offering a variety of cash management products
aimed at business clients, including web cash management, check imaging,
remittance and depository services and disbursements. In addition, we made two
bank acquisitions and opened a number of de novo branches in 2003 and the first
quarter of 2004, which further expanded our business locations in California.
Noninterest income rose 14 percent in the first quarter of 2004, compared
to the first quarter of 2003, primarily as a result of increases in service
charges on deposits, insurance agency commissions, trust and investment
management fees and international commissions and fees. As part of our strategic
initiatives, we focus on identifying opportunities for growing noninterest
income.
Although noninterest expense rose 9 percent in the first quarter of 2004,
compared to the first quarter of 2003, much of that increase related to
investments that we made in bank and insurance agency acquisitions and
technology. We believe that these investments will bring opportunities for
growth in our business by increasing our customer base and expanding the
services we can provide.
22
FINANCIAL PERFORMANCE
SUMMARY OF FINANCIAL PERFORMANCE
FOR THE THREE MONTHS INCREASE (DECREASE)
ENDED 2004 VERSUS 2003
-------------------- -----------------
(DOLLARS IN THOUSANDS) 2003 2004 AMOUNT PERCENT
- ----------------------------------------------- -------- -------- ------- -------
RESULTS OF OPERATIONS
Net interest income(1)......................... $390,780 $400,421 $ 9,641 2.5%
Noninterest income
Service charges on deposit accounts.......... 72,287 81,096 8,809 12.2
Trust and investment management fees......... 32,675 35,822 3,147 9.6
Insurance commissions........................ 13,218 21,735 8,517 64.4
International commissions and fees........... 15,345 17,545 2,200 14.3
Other noninterest income..................... 52,246 55,007 2,761 5.3
-------- -------- -------
Total noninterest income....................... 185,771 211,205 25,434 13.7
Total revenue.................................. 576,551 611,626 35,075 6.1
(Reveral of) provision for credit losses....... 30,000 (5,000) (35,000) nm
Noninterest expense
Salaries and employee benefits............... 198,107 219,423 21,316 10.8
Net occupancy................................ 27,636 31,582 3,946 14.3
Intangible asset amortization................ 2,477 4,221 1,744 70.4
Other noninterest expense.................... 114,380 117,880 3,500 3.1
-------- -------- -------
Total noninterest expense...................... 342,600 373,106 30,506 8.9
Income before income tax....................... 203,951 243,520 39,569 19.4
Income tax..................................... 68,434 86,033 17,599 25.7
-------- -------- -------
Net income..................................... $135,517 $157,487 $21,970 16.2%
======== ======== =======
- -------------------------
<FN>
(1) Net interest income does not include any adjustments for fully taxable
equivalence.
nm - not meaningful
</FN>
THE PRIMARY CONTRIBUTORS TO OUR FINANCIAL PERFORMANCE FOR THE FIRST QUARTER
OF 2004 COMPARED TO THE FIRST QUARTER OF 2003 ARE PRESENTED BELOW.
o We recorded a $5.0 million reversal of provision for credit losses in
the first quarter of 2004, which reflects continued improvement in
credit quality. Reductions in criticized and classified credits in our
commercial loan portfolio resulted from pay-offs, loan grade
improvements, and loan sales, and allowed us to lower our reserve for
credit losses. (See our discussion under "Allowance for Credit
Losses.")
o Although net interest income continues to be negatively impacted by
the lower interest rate environment and a decline in the average
balances of our commercial loan portfolio, net interest income was
favorably influenced by higher other earning asset volumes, including
a significantly higher mix of securities. Strong deposit growth,
including an attractive mix of average noninterest bearing deposits to
total deposits, also contributed favorably to our net interest income.
(See our discussion under "Net Interest Income.")
o Our noninterest income was impacted by several factors:
o Service charges on deposit accounts rose primarily from a 19
percent increase in average demand deposits in the first quarter
of 2004 over the first quarter of 2003 and higher overdraft and
return fees of $4.7 million primarily associated with the
overdraft program introduced in April 2003;
23
o Insurance commissions increased mostly from the April 2003
acquisition of Tanner Insurance Brokers and the December 2003
acquisition of Knight Insurance Agency;
o Private capital investment sales resulted in net gains of $5.0
million in the first quarter of 2004 compared to net losses of
$0.1 million in the first quarter of 2003 as equity market values
rose;
o Trust and investment management fees increased from the first
quarter of 2003 primarily due to higher assets under
administration. Trust administration fees began growing in the
second half of 2003 as trust assets started to recover with the
strengthening of the equity markets and a substantial increase in
new sales. In the first quarter of 2004, managed assets increased
by 9 percent and non-managed assets increased by 19 percent from
the first quarter of 2003. Total assets under administration
increased by 18 percent, to $155.6 billion, between March 31,
2003 and March 31, 2004; and
o International commissions and fees grew, reflecting strong growth
in the foreign remittances product in almost all of our markets,
from a combination of increased pricing, product enhancements and
higher market penetration.
o Contributing to our higher noninterest expense were several factors:
o Salaries and employee benefits increased mostly from:
o Acquisitions and new branch openings, which accounted for 44
percent of the increase in our salaries and other
compensation,
o higher performance-related incentive expense from goal
achievements;
o annual merit increases; and
o increased employee benefits expense due to:
o acquisitions and new branch openings, which accounted
for 49 percent of our employee benefits increase,
o increasing healthcare costs for current employees and
retirees from rising insurance premiums and a greater
number of participants,
o the impact of the lower discount rate we are using to
calculate our future pension and other postretirement
liabilities, and
o the impact of a higher state unemployment tax rate,
which rose from 2.0 percent in the first quarter of
2003 to 3.7 percent in the first quarter of 2004;
o Net occupancy costs increased mostly from our acquisitions and
new branch openings and capitalized property improvements
recorded in December 2003;
o Intangible asset amortization increased mainly due to our recent
acquisitions; and
o Other noninterest expense rose as a result of losses attributable
to operations and litigation.
24
NET INTEREST INCOME
The following table shows the major components of net interest income and
net interest margin.
FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31, 2003 MARCH 31, 2004
-------------------------------------- ------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1)(2) BALANCE EXPENSE(1) RATE(1)(2)
- ---------------------------- ----------- --------- --------- ----------- --------- ---------
ASSETS
Loans:(3)
Domestic.................. $25,186,678 $355,073 5.70% $24,532,402 $327,933 5.38%
Foreign(4)................ 1,536,379 8,166 2.16 1,609,454 7,678 1.92
Securities--taxable......... 7,014,825 79,179 4.52 11,396,654 104,993 3.69
Securities--tax-exempt...... 41,943 1,014 9.67 65,813 1,335 8.11
Interest bearing deposits in
banks..................... 203,432 962 1.92 207,854 908 1.76
Federal funds sold and
securities purchased under
resale agreements......... 536,114 1,677 1.27 786,994 1,959 1.00
Trading account assets 307,400 957 1.26 277,057 595 0.86
----------- -------- ----------- --------
Total earning assets...... 34,826,771 447,028 5.18 38,876,228 445,401 4.60
-------- --------
Allowance for credit losses. (603,240) (534,226)
Cash and due from banks..... 2,094,976 2,276,055
Premises and equipment, net. 506,964 519,962
Other assets................ 1,522,732 1,913,108
----------- -----------
Total assets.............. $38,348,203 $43,051,127
=========== ===========
LIABILITIES
Domestic deposits:
Interest bearing.......... $ 9,365,182 18,809 0.81 $11,390,393 16,556 0.58
Savings and consumer time. 3,819,545 12,316 1.31 4,136,695 8,719 0.85
Large time................ 2,414,309 10,446 1.75 2,432,602 8,335 1.38
Foreign deposits(4)......... 1,384,177 3,206 0.94 1,227,223 2,132 0.70
----------- -------- ----------- --------
Total interest bearing
deposits................ 16,983,213 44,777 1.07 19,186,913 35,742 0.75
----------- -------- ----------- --------
Federal funds purchased and
securities sold under
repurchase agreements..... 517,511 1,327 1.04 395,466 681 0.69
Commercial paper............ 923,327 2,728 1.20 542,853 1,135 0.84
Other borrowed funds........ 172,870 1,255 2.94 187,829 1,300 2.78
Medium and long-term debt... 399,729 1,866 1.89 806,062 3,139 1.57
Preferred securities and
trust notes(5)............ 351,654 3,671 4.13 203,022 2,181 4.30
----------- -------- ----------- --------
Total borrowed funds...... 2,365,091 10,847 1.85 2,135,232 8,436 1.59
----------- -------- ----------- --------
Total interest bearing
liabilities............. 19,348,304 55,624 1.16 21,322,145 44,178 0.83
-------- --------
Noninterest bearing deposits 14,095,175 16,752,612
Other liabilities........... 1,030,431 1,026,482
----------- -----------
Total liabilities......... 34,473,910 39,101,239
STOCKHOLDERS' EQUITY
Common equity............... 3,874,293 3,949,888
----------- -----------
Total stockholders' equity 3,874,293 3,949,888
----------- -----------
Total liabilities and
stockholders' equity.... $38,348,203 $43,051,127
=========== ===========
Net interest income/margin
(taxable-equivalent basis) 391,404 4.53% 401,223 4.14%
Less: taxable-equivalent
adjustment................ 624 802
-------- --------
Net interest income....... $390,780 $400,421
======== ========
- ------------------------
<FN>
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Annualized
(3) Average balances on loans outstanding include all nonperforming loans. The
amortized portion of net loan origination fees (costs) is included in
interest income on loans, representing an adjustment to the yield.
(4) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(5) Includes interest expense for both trust preferred securities and trust
notes.
</FN>
25
Net interest income in the first quarter of 2004, on a taxable-equivalent
basis, increased 3 percent, from the first quarter of 2003. Our results were
attributable to the following factors:
o Average earning assets grew 12 percent in the first quarter of 2004,
compared to the first quarter of 2003, to $38.9 billion. This growth
was attributable to a $4.4 billion, or 62 percent, increase in average
securities, partly offset by a $581.2 million, or 2 percent, decrease
in average loans. The increase in average securities, which was
comprised primarily of fixed rate securities, reflected liquidity and
interest rate risk management actions. The decrease in average loans
was mostly due to a $1.4 billion decrease in average commercial,
financial, and industrial loans, partially offset by a $0.9 billion
increase in average residential mortgages, resulting from a strategic
portfolio shift from more volatile commercial loans, which we feel we
have now achieved;
o Deposit growth has contributed significantly to our lower cost of
funds in the first quarter of 2004, compared to the first quarter of
2003. Average noninterest bearing deposits were $2.7 billion or 19
percent higher in the first quarter of 2004, compared to the first
quarter of 2003. Average business demand deposits, including demand
deposits from our title and escrow clients, increased by $2.2 billion
in the first quarter of 2004, compared to the first quarter of 2003,
with the balance of the increase coming from consumer demand deposit
growth. We anticipate that the growth rates in average noninterest
bearing deposits will decline during 2004 as rising interest rates
will cause our customers to divert those deposits to more attractive
interest bearing investments and will slow the activity in mortgage
loan refinancings, which will impact our title and escrow deposits;
o Yields on our earning assets were negatively impacted by decreasing
interest rates in 2003 resulting in a lower average yield of 58 basis
points on average earning assets, which was negatively impacted by
lower interest rate hedge income of $9.9 million;
o Market rates on our interest bearing liabilities were favorably
impacted by the decreasing interest rate environment resulting in a
lower cost of funds on interest bearing liabilities of 33 basis
points, which included higher interest rate hedge income of $2.2
million; and
o During 2003 and continuing into 2004, our strategy was to take
advantage of our higher noninterest bearing deposit balances by
reducing our balances in higher interest rate liabilities such as
large certificate of deposits, foreign deposits, and other borrowed
funds.
As a result of these changes and a flattening yield curve environment, as
long-term interest rates declined, our net interest margin decreased by 39 basis
points.
We use derivatives to hedge expected changes in the yields on our variable
rate loans, term certificates of deposit (CDs), and long-term borrowings. During
2003, the positions provided more income than in 2002, as rates persisted lower
and longer than had been anticipated. During 2004, these positions will provide
less in net interest income as the positions mature and, to a lesser extent, as
interest rates rise. However, we expect the declines in hedge income to be
partially offset by either increased yields on the underlying variable rate
loans or continued lower than expected funding costs on our term CDs and long
term borrowings. For the quarters ended March 31, 2003 and 2004, we had gross
hedge income of $39.9 million and $32.2 million, respectively.
26
NONINTEREST INCOME
FOR THE THREE MONTHS ENDED
-------------------------------------------------
INCREASE (DECREASE)
MARCH 31, MARCH 31, -------------------
(DOLLARS IN THOUSANDS) 2003 2004 AMOUNT PERCENT
- ------------------------------------------ --------- --------- ------- -------
Service charges on deposit accounts....... $ 72,287 $ 81,096 $ 8,809 12.19%
Trust and investment management fees...... 32,675 35,822 3,147 9.63
Insurance commissions..................... 13,218 21,735 8,517 64.43
International commissions and fees........ 15,345 17,545 2,200 14.34
Card processing fees, net................. 9,682 8,792 (890) (9.19)
Foreign exchange gains, net............... 6,934 8,344 1,410 20.33
Brokerage commissions and fees............ 8,654 8,297 (357) (4.13)
Merchant banking fees..................... 6,018 7,467 1,449 24.08
Securities losses, net.................... -- 1,622 1,622 nm
Other..................................... 20,958 20,485 (473) (2.26)
--------- --------- -------
Total noninterest income................ $ 185,771 $ 211,205 $25,434 13.69%
========= ========= =======
- ---------------------------
<FN>
nm--not meaningful
</FN>
NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED
-------------------------------------------------
INCREASE (DECREASE)
MARCH 31, MARCH 31, -------------------
(DOLLARS IN THOUSANDS) 2003 2004 AMOUNT PERCENT
- ----------------------------------------- --------- --------- ------- -------
Salaries and other compensation.......... $ 153,060 $ 170,430 $17,370 11.35%
Employee benefits........................ 45,047 48,993 3,946 8.76
--------- --------- -------
Salaries and employee benefits......... 198,107 219,423 21,316 10.76
Net occupancy............................ 27,636 31,582 3,946 14.28
Equipment................................ 16,671 17,271 600 3.60
Communications........................... 13,844 13,410 (434) (3.13)
Software................................. 12,076 12,995 919 7.61
Professional services.................... 12,014 11,303 (711) (5.92)
Advertising and public relations......... 9,667 8,727 (940) (9.72)
Data processing.......................... 8,484 7,625 (859) (10.12)
Intangible asset amortization............ 2,477 4,221 1,744 70.41
Foreclosed asset expense................. 51 519 468 nm
Other.................................... 41,573 46,030 4,457 10.72
--------- --------- -------
Total noninterest expense.............. $ 342,600 $ 373,106 $30,506 8.90%
========= ========= =======
- ----------------------------
<FN>
nm--not meaningful
</FN>
INCOME TAX EXPENSE
Income tax expense in the first quarter of 2004 was $86.0 million,
resulting in a 35 percent effective income tax rate compared with an effective
tax rate of 34 percent for first quarter 2003. The increase in the effective tax
rate was due to higher California state taxes.
The State of California requires us to file our franchise tax returns as a
member of a unitary group that includes MTFG and either all worldwide affiliates
or only U.S. affiliates. Since 1996, we have elected to file our California
franchise tax returns on a worldwide unitary basis.
27
The inclusion of MTFG's financial results, which in some years were net
losses, has partially offset our net profits subject to California income tax.
The inclusion of MTFG's worldwide property, payroll and sales in the calculation
of the California apportionment factor has also reduced the percentage of our
income subject to California income tax. As a result, our effective tax rate for
California has been significantly lower than the statutory rate, net of federal
benefit, of 7.05 percent.
Changes in MTFG's taxable profits affect our California taxes. MTFG's
taxable profits are impacted most significantly by changes in the worldwide
economy, especially in Japan, and decisions that they may make about the timing
of the recognition of credit losses. When MTFG's worldwide taxable profits rise,
our effective tax rate in California will rise. We review MTFG's financial
information on a quarterly basis in order to determine the rate at which to
recognize our California income taxes. However, all of the information relevant
to determining the effective tax rate may not be available until after the end
of the period to which the tax relates. The determination of the California
effective tax rate involves management judgment and estimates, and can change
during the calendar year or between calendar years, as additional information
becomes available. Our effective tax rate in the first quarter of 2004 is higher
partially as a result of increased profits reported by MTFG for its most recent
reporting period, as well as projected profit increases for MTFG due to
improving economic conditions in Japan.
LOANS
The following table shows loans outstanding by loan type.
PERCENT CHANGE TO
MARCH 31, 2004 FROM:
--------------------------
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2003 2004 2003 2003
- ------------------------------------- ----------- ------------ ----------- --------- ------------
Domestic:
Commercial, financial and
industrial....................... $ 9,989,430 $ 8,817,679 $ 8,717,052 (12.74)% (1.14)%
Construction....................... 1,222,501 1,101,166 1,058,414 (13.42) (3.88)
Mortgage:
Residential...................... 6,658,128 7,463,538 7,502,675 12.68 0.52
Commercial....................... 4,189,565 4,195,178 4,348,537 3.79 3.66
----------- ------------ -----------
Total mortgage................. 10,847,693 11,658,716 11,851,212 9.25 1.65
Consumer:
Installment...................... 881,136 818,746 781,731 (11.28) (4.52)
Revolving lines of credit........ 1,125,186 1,222,220 1,279,651 13.73 4.70
----------- ------------ -----------
Total consumer................. 2,006,322 2,040,966 2,061,382 2.74 1.00
Lease financing.................... 756,673 663,632 637,504 (15.75) (3.94)
----------- ------------ -----------
Total loans in domestic offices 24,822,619 24,282,159 24,325,564 (2.00) 0.18
Loans originated in foreign branches. 1,705,340 1,650,204 1,707,535 0.13 3.47
----------- ------------ -----------
Total loans held to maturity... 26,527,959 25,932,363 26,033,099 (1.87) 0.39
Total loans held for sale...... 8,313 12,265 3,206 (61.43) (73.86)
----------- ------------ -----------
Total loans.................. $26,536,272 $ 25,944,628 $26,036,305 (1.88)% 0.35%
=========== ============ ===========
28
COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS
Commercial, financial and industrial loans are extended principally to
corporations, middle-market businesses, and small businesses, with no industry
concentration exceeding 10 percent of total loans. This portfolio has a high
degree of geographic diversification based upon our customers' revenue bases,
which we believe lowers our vulnerability to changes in the economic outlook of
any particular region of the U.S.
Our commercial market lending originates primarily through our commercial
banking offices. These offices, which rely extensively on relationship-oriented
banking, provide a variety of services including cash management services, lines
of credit, accounts receivable and inventory financing. Separately, we originate
or participate in a wide variety of financial services to major corporations.
These services include traditional commercial banking and specialized financing
tailored to the needs of each customer's specific industry. Presently, we are
active in, among other sectors, the oil and gas, communications, media,
entertainment, retailing and financial services industries.
The commercial, financial and industrial loan portfolio decreased $1.3
billion, or 13 percent, in the first quarter of 2004, compared to the first
quarter of 2003, primarily due to economic conditions that continued to reduce
loan demand in some segments. Loan sales and managed exits also contributed to
the decline, consistent with our strategy to reduce our exposure to certain
commercial loans while increasing our investment in more stable consumer loans
(including residential mortgages).
CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS
We engage in non-residential real estate lending that includes commercial
mortgage loans and construction loans secured by deeds of trust. Construction
loans are made primarily to commercial property developers and to residential
builders.
The construction loan portfolio decrease of $164.1 million, or 13 percent,
in the first quarter of 2004, compared to the first quarter of 2003, was
primarily attributable to slowing growth in capital assets and employment and
higher office vacancy rates in our markets. These factors impacted the level of
development and construction projects we financed.
The commercial mortgage loan portfolio consists of loans on commercial and
industrial projects primarily in California. The increase in commercial
mortgages of $159.0 million, or 4 percent, in the first quarter of 2004,
compared to the first quarter of 2003, was primarily due to our acquisitions of
Monterey Bay Bank in the third quarter of 2003 and Business Bank of California
in the first quarter of 2004.
RESIDENTIAL MORTGAGE LOANS
We originate residential mortgage loans, secured by one-to-four family
residential properties, through our multiple channel network (including
branches, mortgage brokers, and loan-by-phone) throughout California, Oregon and
Washington, and we periodically purchase loans in our market area.
The residential mortgages increase of $844.5 million, or 13 percent, in the
first quarter of 2004, compared to the first quarter of 2003, was influenced by
a high refinance market driven by low interest rates during 2003. While we hold
most of the loans we originate, we sell most of our 30-year, fixed rate,
non-Community Reinvestment Act (CRA) residential mortgage loans.
CONSUMER LOANS
We originate consumer loans, such as auto loans and home equity loans and
lines, through our branch network. Consumer loans increased $55.1 million, or 3
percent, primarily as a result of an increase in home equity loans and partially
offset by pay-offs related to the run-off of the automobile dealer lending
business that we exited in the third quarter of 2000. The indirect automobile
dealer lending portfolio at March 31, 2004 was $49.5 million.
29
LEASE FINANCING
We offer primarily two types of leases to our customers: direct financing
leases, where the assets leased are acquired without additional financing from
other sources; and leveraged leases, where a substantial portion of the
financing is provided by debt with no recourse to us. The lease financing
decrease of $119.2 million, or 16 percent, in the first quarter of 2004,
compared to the first quarter of 2003, was attributable to our announced
discontinuance of our auto leasing activity, effective April 20, 2001. At March
31, 2004, our auto lease portfolio had declined to $71.2 million and is
projected to decline 60 percent by December 2004, and fully mature by mid-year
2006. Included in our lease portfolio are leveraged leases of $536.3 million,
which are net of non-recourse debt of approximately $1.2 billion. We utilize a
number of special purpose entities for our leveraged leases. These entities
serve legal and tax purposes and do not function as vehicles to shift
liabilities to other parties or to deconsolidate affiliates for financial
reporting purposes. As allowed by U.S. GAAP and by law, the gross lease
receivable is offset by the qualifying non-recourse debt. In leveraged lease
transactions, the third-party lender may only look to the collateral value of
the leased assets for repayment.
LOANS ORIGINATED IN FOREIGN BRANCHES
Our loans originated in foreign branches consist primarily of short-term
extensions of credit to financial institutions located primarily in Asia. The
loans originated in foreign branches in the first quarter of 2004 were
relatively flat compared to the first quarter of 2003.
CROSS-BORDER OUTSTANDINGS
Our cross-border outstandings reflect certain additional economic and
political risks that are not reflected in domestic outstandings. These risks
include those arising from exchange rate fluctuations and restrictions on the
transfer of funds. The following table sets forth our cross-border outstandings
as of March 31, 2003, December 31, 2003 and March 31, 2004, for any country
where such outstandings exceeded 1 percent of total assets. The cross-border
outstandings were compiled based upon category and domicile of ultimate risk and
are comprised of balances with banks, trading account assets, securities
available for sale, securities purchased under resale agreements, loans, accrued
interest receivable, acceptances outstanding and investments with foreign
entities. The amounts outstanding exclude local currency outstandings. For any
country shown in the table below, we do not have significant local currency
outstandings that are not hedged or are not funded by local currency borrowings.
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
(DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
- --------------------------- ------------ -------- ------------ ------------
March 31, 2003
Korea...................... $651 $-- $90 $741
December 31, 2003
Korea...................... $630 $-- $28 $658
March 31, 2004
Korea...................... $640 $-- $12 $652
PROVISION FOR CREDIT LOSSES
We recorded a reversal of provision for credit losses of $5 million in the
first quarter of 2004, compared with a $30 million provision for credit losses
in the first quarter of 2003. Provisions for credit losses are charged to income
to bring our allowance for credit losses to a level deemed appropriate by
management based on the factors discussed under "Allowance for Credit Losses"
below. Reversals of provisions for credit losses increase our income and reduce
the allowance.
30
ALLOWANCE FOR CREDIT LOSSES
ALLOWANCE POLICY AND METHODOLOGY
We maintain an allowance for credit losses to absorb losses inherent in the
loan portfolio. The allowance is based on our regular, quarterly assessments of
the probable estimated losses inherent in the loan portfolio, and, to a lesser
extent, unused commitments to provide financing. Our methodology for measuring
the appropriate level of the allowance relies on several key elements, which
include the formula allowance, specific allowances for identified problem loans
and portfolio segments, and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans, leases and commitments. Changes in risk grades affect the
amount of the formula allowance. Loss factors are based on our historical loss
experience and may be adjusted for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are developed in the following ways:
o pass graded loss factors for commercial, financial, and industrial
loans, as well as all problem graded loan loss factors, are derived
from a migration model that tracks historical losses over a period,
which we believe captures the inherent losses in our loan portfolio;
o pass graded loss factors for commercial real estate loans and
construction loans are based on the average annual net charge-off rate
over a period reflective of a full economic cycle; and
o pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs for one year. Pooled loans are loans that are
homogeneous in nature, such as consumer installment, home equity,
residential mortgage loans and automobile leases.
We believe that an economic cycle is a period in which both upturns and
downturns in the economy have been reflected. We calculate loss factors over a
time interval that spans what we believe constitutes a complete and
representative economic cycle.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit or a
portfolio segment that management believes indicate the probability that a loss
has been incurred. This amount may be determined either by a method prescribed
by SFAS No. 114, or methods that include a range of probable outcomes based upon
certain qualitative factors.
The unallocated allowance is based on management's evaluation of conditions
that are not directly reflected in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to these conditions
is subject to a higher degree of uncertainty because they may not be identified
with specific problem credits or portfolio segments. The conditions evaluated in
connection with the unallocated allowance include the following, which existed
at the balance sheet date:
o general economic and business conditions affecting our key lending
areas;
o credit quality trends (including trends in nonperforming loans
expected to result from existing conditions);
o collateral values;
o loan volumes and concentrations;
o seasoning of the loan portfolio;
o specific industry conditions within portfolio segments;
o recent loss experience in particular segments of the portfolio;
o duration of the current economic cycle;
31
o bank regulatory examination results; and
o findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion with
our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of such conditions
may be reflected as a specific allowance, applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan portfolio. The actual losses can vary from the estimated
amounts. Our methodology includes several features that are intended to reduce
the differences between estimated and actual losses. The loss migration model
that is used to establish the loan loss factors for problem graded loans and
pass graded commercial, financial, and industrial loans is designed to be
self-correcting by taking into account our loss experience over prescribed
periods. Similarly, by basing the pass graded loan loss factors over a period
reflective of an economic cycle, the methodology is designed to take into
account our recent loss experience for commercial real estate mortgages and
construction loans. Pooled loan loss factors are adjusted quarterly primarily
based upon the level of net charge-offs expected by management in the next
twelve months. Furthermore, based on management's judgement, our methodology
permits adjustments to any loss factor used in the computation of the formula
allowance for significant factors, which affect the collectibility of the
portfolio as of the evaluation date, but are not reflected in the loss factors.
By assessing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, we are able to adjust specific and inherent loss estimates
based upon the most recent information that has become available. This includes
changing the number of periods that are included in the calculation of the loss
factors and adjusting qualitative factors to be representative of the economic
cycle that will impact the portfolio.
COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES
FROM DECEMBER 31, 2003
At December 31, 2003, our total allowance for credit losses was $533
million, or 2.05 percent of the total loan portfolio and 190 percent of total
nonaccrual loans. At March 31, 2004, our total allowance for credit losses was
$521 million (consisting of $324 million and $197 million of allocated and
unallocated allowance, respectively), or 2.00 percent of the total loan
portfolio and 203 percent of total nonaccrual loans. In addition, the allowance
incorporates the results of measuring impaired loans as provided in SFAS No. 114
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." These accounting standards prescribe
the measurement methods, income recognition and disclosures related to impaired
loans. At December 31, 2003, total impaired loans were $230 million, and the
associated impairment allowance was $55 million, compared with $206 million and
$52 million, respectively, at March 31, 2004. On March 31, 2004 and December 31,
2003, the total allowance for credit losses for off-balance sheet commitments
was $67 million and $86 million, respectively.
During the first quarter of 2004, there were no material changes in
estimation methods or assumptions that affected our methodology for assessing
the appropriateness of the formula and specific allowances for credit losses,
except that the period used to calculate the cumulative loss rates on criticized
loans was expanded from 12 to 24 quarters to better estimate losses over the
life of the loans. The incremental increase in loss factors from this longer
view resulted in an increase of approximately $9 million in the formula
allowance. Changes in estimates and assumptions regarding the effects of
economic and business conditions on borrowers and other factors, which are
described below, affected the assessment of the unallocated allowance.
32
As a result of management's assessment of factors, including the continued
slow, but improving, U.S. economy; the adverse impact of soaring fuel costs
across the whole economy, and fears of terrorism on the airline industry; the
fiscal and budgetary difficulties of the State of California; the generally weak
economy; uncertain, although improving, conditions in the communications/media,
power, and other sectors in domestic markets in which we operate; and growth and
changes in the composition of the loan portfolio, we recorded a reversal of
provision for credit losses of $5 million in the first quarter of 2004.
CHANGES IN THE ALLOCATED (FORMULA AND SPECIFIC) ALLOWANCE
At March 31, 2004, the formula allowance was $249 million, compared to $280
million at December 31, 2003, a decrease of $31 million, due primarily to
substantial decreases in classified credit balances. The specific allowance was
$75 million at March 31, 2004, compared to $80 million at December 31, 2003, a
decrease of $5 million. This decrease is proportional to decreases in impaired
loans.
CHANGES IN THE UNALLOCATED ALLOWANCE
At March 31, 2004, the unallocated allowance rose to $197 million from $173
million at December 31, 2003. The reasons for the increase are detailed below.
In our assessment as of March 31, 2004, management focused, in particular,
on the factors and conditions set out below. There can be no assurance that the
adverse impact of any of these conditions on us will not be in excess of the
ranges set forth.
o With respect to fuel prices, management established a new factor as a
result of the sustained high prices of oil and petroleum products, and
the impact across virtually all sectors of the economy, which could be
in the range of $10 million to $35 million.
o With respect to the real estate sector, management considered
nationally high vacancy rates and stagnant rent growth, with specific
weakness in Northern California, which could be in the range of $16
million to $32 million.
o With respect to the communications/media industry, management
considered improving advertising revenues contrasted against
subscriber erosion for cable companies, resulting from municipalities
allowing competitors to enter previously monopolistic markets, and
some consolidation in the wireless segment of the telecommunications
industry, which could be in the range of $9 million to $27 million.
o With respect to power companies/utilities, management considered the
excess capacity and flat demand in the power generation market,
exacerbated by higher natural gas prices in the U.S., which could be
in the range of $11 million to $23 million.
o With respect to cross-border loans and acceptances to certain
Asia/Pacific Rim countries, management considered improving
performances in many countries, offset by high unemployment and
household debt, as well as political disruption in the Philippines,
which could be in the range of $12 million to $21 million.
o With respect to leasing, management considered the worsening situation
for airlines in the wake of increased fears of terrorism and surging
fuel prices, which could be in the range of $7 million to $13 million.
o With respect to the State of California, management considered
underlying uncertainties confronting the new administration in
Sacramento, including the major shortfall in the state's budgetary
position for fiscal year 2005, despite the passage of State
Propositions 57 and 58, which could be in the range of $6 million to
$12 million.
33
o With respect to the retail sector, management considered improving
sales growth, compared to that experienced in 2003, against a backdrop
of ever higher household debt at a time of considerable employment and
income uncertainty, which could be in the range of $4 million to $10
million.
Although in certain instances the downgrading of a loan resulting from
these effects was reflected in the allocated allowance, management believes that
in most instances the impact of these events on the collectibility of the
applicable loans may not have been reflected in the level of nonperforming loans
or in the internal risk grading process with respect to such loans. Accordingly,
our evaluation of the probable losses related to these factors was reflected in
the unallocated allowance. The evaluations of the inherent losses with respect
to these factors were subject to higher degrees of uncertainty because they were
not identified with specific problem credits.
CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES
The following table sets forth a reconciliation of changes in our allowance
for credit losses.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
(DOLLARS IN THOUSANDS) 2003 2004
- -------------------------------------------------------- -------- --------
Balance, beginning of period............................ $609,190 $532,970
Loans charged off:
Commercial, financial and industrial.................. 37,826 19,788
Mortgage.............................................. -- --
Consumer.............................................. 2,656 1,815
Lease financing....................................... 19,018 358
-------- --------
Total loans charged off............................... 59,500 21,961
Recoveries of loans previously charged off:
Commercial, financial and industrial.................. 5,579 8,819
Mortgage.............................................. 106 --
Consumer.............................................. 723 435
Lease financing....................................... 118 73
-------- --------
Total recoveries of loans previously
charged off......................................... 6,526 9,327
-------- --------
Net loans charged off................................. 52,974 12,634
(Reversal of) provision for credit losses............... 30,000 (5,000)
Foreign translation adjustment and other net
additions (deductions)(1)............................. (19) 5,775
-------- --------
Balance, end of period.................................. $586,197 $521,111
======== ========
Allowance for credit losses to total loans.............. 2.21% 2.00%
(Reversal of) provision for credit losses to net loans
charged off........................................... 56.63 nm
Net loans charged off to average loans
outstanding for the period(2)......................... 0.80 0.19
- -----------------------------
<FN>
(1) Includes a transfer of $5.7 million related to the Business Bancorp
acquisition in the first quarter of 2004.
(2) Annualized.
nm--not meaningful
</FN>
Total loans charged off in the first quarter of 2004 decreased by $37.5
million from the first quarter of 2003, primarily due to an $18.0 million
decrease in commercial, financial and industrial loans charged off and an $18.7
million decrease in lease financing charge-offs reflecting the charge-offs
related to several airline leases in the first quarter of 2003. Charge-offs
reflect the realization of losses in the portfolio that were recognized
previously through provisions for credit losses.
34
First quarter 2004 recoveries of loans previously charged off increased by
$2.8 million from the first quarter of 2003. The percentage of net loans charged
off to average loans outstanding for the first quarter of 2004 decreased by 61
basis points from the same period in 2003. At March 31, 2004, the allowance for
credit losses exceeded the annualized net loans charged off during the first
quarter of 2004, reflecting management's belief, based on the foregoing
analysis, that there are additional losses inherent in the portfolio.
Historical net charge-offs are not necessarily indicative of the amount of
net charge-offs that we will realize in the future.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, distressed loans held for
sale, and foreclosed assets. Nonaccrual loans are those for which management has
discontinued accrual of interest because there exists significant uncertainty as
to the full and timely collection of either principal or interest or such loans
have become contractually past due 90 days with respect to principal or
interest. For a more detailed discussion of the accounting for nonaccrual loans,
see Note 1 to our Consolidated Financial Statements included in the Form 10-K
for the year ended December 31, 2003.
Distressed loans held for sale are loans, which would otherwise be included
in nonaccrual loans, but that have been identified for accelerated disposition.
Disposition of these assets is contemplated within a short period of time, not
to exceed one year. There were no distressed loans held for sale at March 31,
2003, December 31, 2003 and March 31, 2004.
Foreclosed assets include property where we acquired title through
foreclosure or "deed in lieu" of foreclosure.
The following table sets forth an analysis of nonperforming assets.
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2003 2003 2004
- ------------------------------------------------------- --------- ------------ ---------
Commercial, financial and industrial................... $ 273,196 $ 190,404 $ 177,636
Commercial mortgage.................................... 25,675 38,354 27,354
Lease financing........................................ 84,712 51,603 51,121
Loan originated in foreign branches.................... 3,000 840 630
--------- ------------ ---------
Total nonaccrual loans............................... 386,583 281,201 256,741
Foreclosed assets...................................... 389 5,689 6,153
--------- ------------ ---------
Total nonperforming assets........................... $ 386,972 $ 286,890 $ 262,894
========= ============ =========
Allowance for credit losses............................ $ 586,197 $ 532,970 $ 521,111
========= ============ =========
Nonaccrual loans to total loans........................ 1.46% 1.08% 0.99%
Allowance for credit losses to nonaccrual
loans................................................ 151.64 189.53 202.97
Nonperforming assets to total loans, distressed
loans held for sale and foreclosed assets............ 1.46 1.11 1.01
Nonperforming assets to total assets................... 0.96 0.68 0.57
At March 31, 2004, nonaccrual loans totaled $257 million, a decrease of
$130 million, or 34 percent, from March 31, 2003. Our nonperforming assets are
concentrated in our non-agented syndicated loan portfolio and approximately 46
percent of our total nonaccrual loans are syndicated loans. In addition,
nonaccrual loans include $52 million in aircraft leases, of which $14 million
are in the process of being renegotiated into operating leases. The decrease in
nonaccrual loans was primarily due to pay-downs, charge-offs, and loan sales,
coupled with significantly reduced inflows. During the first quarters of 2004
and 2003, respectively, we sold approximately $11 million and $98 million of
loan commitments to reduce our credit exposures. Losses from these sales are
reflected in our charge-offs.
35
Nonaccrual loans as a percentage of total loans were 0.99 percent at March
31, 2004, compared with 1.46 percent at March 31, 2003. Nonperforming assets as
a percentage of total loans and foreclosed assets decreased to 1.01 percent at
March 31, 2004, from 1.46 percent at March 31, 2003. At March 31, 2004,
approximately 69 percent of nonaccrual loans were related to commercial,
financial and industrial credits, compared to 71 percent at March 31, 2003.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2003 2003 2004
- ----------------------------------------------- --------- ------------ ---------
Commercial, financial and industrial........... $ 10,413 $ 893 $ 401
Construction................................... -- -- 1,318
Mortgage:
Residential.................................. 5,818 1,878 5,421
Commercial................................... 803 -- 118
--------- ------------ ---------
Total mortgage............................... 6,621 1,878 5,539
Consumer and other............................. 2,123 1,123 1,665
--------- ------------ ---------
Total loans 90 days or more past due
and still accruing......................... $ 19,157 $ 3,894 $ 8,923
========= ============ =========
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices, and other market changes that affect market risk sensitive
instruments. Market risk is attributable to all market risk sensitive financial
instruments, including securities, loans, deposits, and borrowings, as well as
derivative instruments. Our exposure to market risk is a function of our asset
and liability management activities, our trading activities for our own account,
and our role as a financial intermediary in customer-related transactions. The
objective of market risk management is to mitigate an undue adverse impact on
earnings and capital arising from changes in interest rates and prices of
financial instruments. This risk management objective supports our broad
objective of preserving shareholder value, which encompasses earnings growth
over time and capital stability.
The management of market risk is governed by policies reviewed and approved
annually by our Board. In the administration of the Board policies, under the
guidance and oversight of the Chief Executive Officer Forum (CEO Forum), the
Asset & Liability Management Committee (ALCO) is responsible for managing
liquidity risk, interest rate risk and price risk. ALCO is a committee comprised
of UnionBanCal Corporation senior executives, with the chairman designated by
the Chief Executive Officer. ALCO meets monthly and reports regularly to the
Chief Executive Officer Forum and the Finance and Capital Committee of the Board
on activities related to the management of market risk. As part of the
management of our market risk, ALCO may direct changes in the mix of assets and
liabilities and the extent to which we utilize securities and derivative
instruments such as interest rate swaps, caps and floors to hedge our interest
rate exposures. ALCO reviews and approves specific market risk management
programs involving investment and hedging activities and certain market risk
limits. The ALCO Chairman is responsible for the company-wide management of
market risk. The Treasurer is responsible for implementing funding, investing,
and hedging strategies designed to manage this risk. On a day-to-day basis, the
monitoring of market risk takes place at a centralized level within the Market
Risk Monitoring unit (MRM). MRM is responsible for measuring risks to ensure
compliance with all market risk limits and guidelines incorporated within the
policies and procedures established by the Board and ALCO. MRM reports monthly
to ALCO on trading risk exposures and on compliance with interest rate risk,
securities
36
portfolio and derivatives policy limits. MRM also reports quarterly to ALCO on
the effectiveness of our hedging activities. In addition, periodic reviews by
our internal audit department and regulators provide further evaluation of
controls over the risk management process.
We have separate and distinct methods for managing the market risk
associated with our trading activities and our asset and liability management
activities, as described below.
INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING)
We engage in asset and liability management activities with the primary
purposes of managing the sensitivity of net interest income (NII) to changes in
interest rates within limits established by the Board and maintaining a risk
profile that is consistent with management's strategic objectives.
The ALM Policy approved by our Board's Finance & Capital Committee requires
monthly monitoring of interest rate risk by ALCO through a variety of modeling
techniques that are used to quantify the sensitivity of NII to changes in
interest rates. As directed by ALCO, and in consideration of the importance of
our demand deposit accounts as a funding source, NII is adjusted in the official
policy risk measure to incorporate the effect of certain noninterest expense
items related to these deposits that are nevertheless sensitive to changes in
interest rates. In managing interest rate risk, ALCO monitors NII sensitivity on
both an adjusted and unadjusted basis over various time horizons.
Our unhedged NII remains inherently asset sensitive, meaning that our
assets generally reprice more quickly than our liabilities, particularly our
core deposits. Since the NII associated with an asset sensitive balance sheet
tends to decrease when interest rates decline and increase when interest rates
rise, derivative hedges and the investment portfolio are used to manage this
risk. In the first quarter of 2004, we continued to increase the size of our
securities portfolio, principally through purchases of intermediate term
mortgage-backed and agency issued securities. In addition, we entered into $900
million of interest rate caps and cap corridors to offset the potential adverse
impact that rising short-term interest rates could have on our cost of deposit
funding. We also entered into $800 million of interest rate swaps to hedge some
of our variable rate loans. For a further discussion of derivative instruments
and our hedging strategies, see Note 6 to our Notes to Condensed Consolidated
Financial Statements included in this Form 10-Q.
Together, our hedging and investment activities resulted in an essentially
neutral interest rate risk profile for the hedged balance sheet with respect to
parallel yield curve shifts in terms of simulated NII versus the no rate change
base case scenario. However, our NII is also sensitive to non-parallel shifts in
the yield curve. In general, our adjusted NII increases when the yield curve
steepens (specifically when short rates, under one year, drop and long rates,
beyond one year, rise), while a flattening curve tends to depress our adjusted
NII. In this respect, our adjusted NII is asset sensitive when measured against
changes in long rates and slightly liability sensitive when measured against
changes in short rates.
In the current low rate environment, run off of fixed rate assets,
including prepayments, depresses NII even if interest rates do not change
because the cash flows from the repaid and prepaid assets that were booked at
higher rates must be reinvested at lower prevailing rates.
Our official NII policy measure involves a simulation of "Earnings-at-Risk"
(EaR) in which we estimate the impact that gradual, ramped-on parallel shifts in
the yield curve would have on NII over a 12-month horizon. Under the Board's
policy limits, the negative change in simulated NII in either the up or down 200
basis point shock scenarios may not exceed 4 percent of NII as measured in the
base case, or
37
no change, scenario. The following table sets forth the simulation results in
both the up and down 200 basis point ramp scenarios as of December 31, 2003 and
March 31, 2004(1):
DECEMBER 31, MARCH 31,
(DOLLARS IN MILLIONS) 2003 2004
- -------------------------------------- ------------ ---------
+200 basis points..................... $17.2 $31.1
as a percentage of base case NII...... 1.20% 2.18%
- -200 basis points..................... $(19.8) $(36.7)
as a percentage of base case NII...... 1.38% 2.57%
- -----------------------
<FN>
(1) For these policy simulations, NII is adjusted to incorporate the effect of
certain noninterest expense items related to demand deposits that are
nevertheless sensitive to changes in interest rates.
</FN>
EaR in the down 200 basis point scenario was a negative $36.7 million, or
2.57 percent of adjusted NII in the base case scenario, well within the Board's
guidelines. The increase in asset sensitivity measured at quarter-end, as shown
in the above table, was accentuated by the significant deposit growth
experienced late in the quarter and a corresponding increase in short-term money
market assets. Asset sensitivity measured on a quarterly average basis was
materially lower than the March 31, 2004 figures shown in the table above.
However, with federal funds and LIBOR rates already below two percent, a
downward ramp scenario of 200 basis points would result in short-term rate
levels below zero. As a result, we believe that a downward ramp scenario of 100
basis points provides a more reasonable measure of asset sensitivity in a
falling interest rate environment. As of March 31, 2004, the difference between
adjusted NII in the base case and adjusted NII after a gradual 100 basis point
downward ramp was a negative $18.9 million, or 1.32 percent of the base case.
Management's goal in the NII simulations is to capture the risk embedded in
the balance sheet. As a result, asset and liability balances are kept constant
throughout the analysis horizon. Two exceptions are non-maturity deposits, which
vary with levels of interest rates according to statistically derived balance
equations, and discretionary derivative hedges and fixed income portfolios,
which are allowed to mature without replacement.
Additional assumptions are made to model the future behavior of deposit
rates and loan spreads based on statistical analysis, management's outlook, and
historical experience. The prepayment risks related to residential loans and
mortgage-backed securities are measured using industry estimates of prepayment
speeds. The sensitivity of the simulation results to the underlying assumptions
is tested as a regular part of the risk measurement process by running
simulations with different assumptions. In addition, management supplements the
official risk measures based on the constant balance sheet assumption with
volume-based simulations of NII based on forecasted balances and with
value-based simulations that measure the sensitivity of economic-value-of-equity
(EVE) to changes in interest rates. We believe that, together, these simulations
provide management with a reasonably comprehensive view of the sensitivity of
our operating results to changes in interest rates, at least over the
measurement horizon. However, as with any financial model, the underlying
assumptions are inherently uncertain and subject to refinement as modeling
techniques and theory improve and historical data becomes more readily
accessible. Consequently, our simulation models cannot predict with certainty
how rising or falling interest rates might impact net interest income. Actual
and simulated NII results will differ to the extent there are differences
between actual and assumed interest rate changes, balance sheet volumes, and
management strategies, among other factors.
At December 31, 2003 and March 31, 2004, our securities available for sale
portfolio included $10.4 billion and $11.1 billion, respectively, of securities
for ALM purposes with an expected weighted average maturity of 2.9 years and 2.5
years, respectively. In addition, this portfolio had an overall estimated
effective duration of 2.1 compared to 2.5 at December 31, 2003. Duration is a
measure of price sensitivity of a bond portfolio to immediate changes in
interest rates. An effective duration of 2.1 suggests an expected price change
of approximately 2.1 percent
38
for an immediate one percent change in interest rates. This portfolio included
$5.3 billion in mortgage-backed securities with an estimated duration of 2.4.
This securities portfolio duration, in the context of our total balance sheet,
after giving consideration to the composition of our core deposits, contributes
to the maintenance of our current, essentially neutral, interest rate risk
profile.
TRADING ACTIVITIES
We enter into trading account activities primarily as a financial
intermediary for customers, and, to a minor extent, for our own account. By
acting as a financial intermediary, we are able to provide our customers with
access to a wide range of products from the securities, foreign exchange, and
derivatives markets. In acting for our own account, we may take positions in
some of these instruments with the objective of generating trading profits.
These activities expose us to two primary types of market risk: interest rate
and foreign currency exchange risk.
In order to manage interest rate and foreign currency exchange risk
associated with the securities and foreign exchange trading activities for our
own account, we utilize a variety of non-statistical methods including: position
limits for each trading activity, daily marking of all positions to market,
daily profit and loss statements, position reports, and independent verification
of all inventory pricing. Additionally, MRM reports positions and profits and
losses daily to the Treasurer and trading managers and weekly to the ALCO
Chairman. ALCO is provided reports on a monthly basis. We believe that these
procedures, which stress timely communication between MRM and senior management,
are the most important elements of the risk management process.
We use a form of Value at Risk (VaR) methodology to measure the overall
market risk inherent in our trading account activities. Under this methodology,
management statistically calculates, with 97.5 percent confidence, the potential
loss in fair value that we might experience if an adverse shift in market prices
were to occur within a period of 5 business days. The amount of VaR is managed
within limits well below the maximum limit established by Board policy at 0.5
percent of stockholders' equity. The VaR model incorporates a number of key
assumptions, including assumed holding period and historical volatility based on
3 years of historical market data updated quarterly.
The following table sets forth the average, high and low VaR for our
trading activities for the year ended December 31, 2003 and the quarter ended
March 31, 2004.
DECEMBER 31, 2003 MARCH 31, 2004
---------------------- ----------------------
AVERAGE HIGH LOW AVERAGE HIGH LOW
(DOLLARS IN THOUSANDS) VAR VAR VAR VAR VAR VAR
- -------------------------------- ------- ---- --- ------- ---- ---
Foreign exchange................ $143 $428 $57 $146 $239 $75
Securities...................... 206 463 97 211 483 86
Consistent with our business strategy of focusing on the sale of capital
markets products to customers, we manage our trading risk exposures at
conservative levels, well below the trading risk policy limits established by
the Finance and Capital Committee of the Board. As a result, our foreign
exchange business continues to derive the bulk of its revenue from
customer-related transactions. We take inter-bank trading positions only on a
limited basis and we do not take any large or long-term strategic positions in
the market for our own portfolio. We continue to grow our customer-related
foreign exchange business while maintaining an essentially unchanged inter-bank
trading risk profile as measured under our VaR methodology.
The Securities Trading & Institutional Sales department serves the fixed
income needs of our institutional clients and acts as the fixed income
wholesaler for our broker/dealer subsidiary, UBOC Investment Services, Inc. As
with our foreign exchange business, we continue to generate the vast majority of
our securities trading income from customer-related transactions.
39
Our interest rate derivative contracts included, as of March 31, 2004, $4.0
billion notional amount of derivative contracts entered into as an accommodation
for customers. We act as an intermediary and match these contracts, at a credit
spread, to contracts with major dealers, thus neutralizing the related market
risk.
LIQUIDITY RISK
Liquidity risk represents the potential for loss as a result of limitations
on our ability to adjust our future cash flows to meet the needs of depositors
and borrowers and to fund operations on a timely and cost-effective basis. The
ALM Policy approved by the Finance and Capital Committee of the Board requires
quarterly reviews of our liquidity by ALCO. Additionally, ALCO conducts monthly
ongoing reviews of our liquidity situation. Liquidity is managed through this
ALCO coordination process on a company-wide basis, encompassing all major
business units. The operating management of liquidity is implemented through the
funding and investment functions of the Global Markets Group. Our liquidity
management draws upon the strengths of our extensive retail and commercial core
deposit franchise, coupled with the ability to obtain funds for various terms in
a variety of domestic and international money markets. Our securities portfolio
represents a significant source of additional liquidity.
Core deposits provide us with a sizable source of relatively stable and
low-cost funds. Our average core deposits, which include demand deposits, money
market demand accounts, and savings and consumer time deposits, combined with
average common stockholders' equity, funded 84 percent of average total assets
of $43.1 billion in the first quarter of 2004. Most of the remaining funding was
provided by short-term borrowings in the form of negotiable certificates of
deposit, large time deposits, foreign deposits, federal funds purchased,
securities sold under repurchase agreements, commercial paper, and other
borrowings. In the fourth quarter of 2003, we issued $400 million in long-term
subordinated debt. In February 2004, we used a portion of the net proceeds
(approximately $350 million) from the sale of these securities to redeem our
outstanding Trust Notes. The remainder of the net proceeds from this offering is
for general corporate purposes, which may include extending credit to or funding
investments in our subsidiaries, repurchasing shares of our common stock,
reducing our existing indebtedness or financing possible acquisitions.
The securities portfolio provides additional enhancement to our liquidity
position, which may be created through either securities sales or repurchase
agreements. At March 31, 2004, we could have sold or transferred under
repurchase agreements approximately $8.7 billion of our available for sale
securities, with no portion of this balance being encumbered at March 31, 2004.
Liquidity may also be provided by the sale or maturity of other assets such as
interest-bearing deposits in banks, federal funds sold, and trading account
securities. The aggregate balance of these assets averaged approximately $1.3
billion in the first quarter of 2004. Additional liquidity may be provided
through loan maturities and sales. In the third quarter of 2003, we terminated
the issuance of commercial paper under UnionBanCal Corporation's commercial
paper program. UnionBanCal Commercial Funding Corporation (a UnionBanCal
Corporation subsidiary) continues to issue commercial paper under another
commercial paper program. The proceeds of this commercial paper program are
deposited in Union Bank of California, N.A. and used to fund our Bank
operations.
40
REGULATORY CAPITAL
The following table summarizes our risk-based capital, risk-weighted
assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION
MINIMUM
MARCH 31, DECEMBER 31, MARCH 31, REGULATORY
(DOLLARS IN THOUSANDS) 2003 2003 2004 REQUIREMENT
- --------------------------- ----------------- ----------------- ----------------- -----------------
CAPITAL COMPONENTS
Tier 1 capital............. $ 3,739,690 $ 3,747,884 $ 3,510,616
Tier 2 capital............. 576,214 936,189 946,422
----------------- ----------------- -----------------
Total risk-based capital... $ 4,315,904 $ 4,684,073 $ 4,457,038
================= ================= =================
Risk-weighted assets....... $33,001,706 $33,133,407 $34,132,921
================= ================= =================
Quarterly average assets... $38,169,532 $41,506,828 $42,597,143
================= ================= =================
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total capital (to risk-
weighted assets)........ $4,315,904 13.08% $4,684,073 14.14% $4,457,038 13.06% >$2,730,634 8.0%
-
Tier 1 capital (to risk-
weighted assets)........ 3,739,690 11.33 3,747,884 11.31 3,510,616 10.29 > 1,365,317 4.0
-
Leverage(1)............... 3,739,690 9.80 3,747,884 9.03 3,510,616 8.24 > 1,703,886 4.0
-
- -----------------------
<FN>
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
</FN>
UNION BANK OF CALIFORNIA, N.A.
MINIMUM "WELL-CAPITALIZED"
MARCH 31, DECEMBER 31, MARCH 31, REGULATORY REGULATORY
(DOLLARS IN THOUSANDS) 2003 2003 2004 REQUIREMENT REQUIREMENT
- --------------------------- ----------------- ----------------- ----------------- ----------------- ------------------
CAPITAL COMPONENTS
Tier 1 capital............. $ 3,448,720 $ 3,395,519 $ 3,513,066
Tier 2 capital............. 486,329 467,619 479,639
----------------- ----------------- -----------------
Total risk-based capital... $ 3,935,049 $ 3,863,138 $ 3,992,705
================= ================= =================
Risk-weighted assets....... $32,389,193 $32,526,017 $33,506,773
================= ================= =================
Quarterly average assets... $37,368,882 $40,921,517 $42,045,737
================= ================= =================
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------- ---------- ----- ---------- ----- --------- ----- ---------- ----- ---------- -----
Total capital (to risk-
weighted assets)......... $3,935,049 12.15% $3,863,138 11.88% $3,992,705 11.92% >$2,680,542 8.0% >$3,350,677 10.0%
- -
Tier 1 capital (to risk-
weighted assets)......... 3,448,720 10.65 3,395,519 10.44 3,513,066 10.48 > 1,340,271 4.0 > 2,010,406 6.0
- -
Leverage(1)................ 3,448,720 9.23 3,395,519 8.30 3,513,066 8.36 > 1,681,829 4.0 > 2,102,287 5.0
- -
- ---------------------
<FN>
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
</FN>
We and Union Bank of California, N.A. are subject to various regulations of
the federal banking agencies, including minimum capital requirements. We both
are required to maintain minimum ratios of Total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to quarterly average assets (the
leverage ratio).
Included in Tier 1 capital at year-end 2003 was $350 million in preferred
securities, which we redeemed on February 19, 2004 resulting in a decrease in
our capital ratios compared with March 31, 2003 and December 31, 2003. In
December of 2003, we issued $400 million of long-term subordinated debt, which
is included in Tier 2 capital as of December 31, 2003 (further discussion of our
subordinated debt can be found in Note 11 of the Notes to Consolidated Financial
Statements included in the Form 10-K for the year ended December 31, 2003).
Compared with March 31, 2003, in addition to the changes to our capital
structure mentioned in the above paragraph, the decrease in our capital ratios
was also attributable to higher risk-weighted assets, partly offset by higher
equity. Our leverage ratio decrease was primarily attributable to a $4 billion,
or 12 percent, increase in quarterly average assets, which was substantially the
result of an increase in our securities portfolio.
41
As of March 31, 2004, management believes the capital ratios of Union Bank
of California, N.A. met all regulatory requirements of "well-capitalized"
institutions, which are 10 percent for the Total risk-based capital ratio, 6
percent for the Tier 1 risk-based capital ratio and 5 percent for the leverage
ratio.
BUSINESS SEGMENTS
We segregate our operations into four primary business units for the
purpose of management reporting, as shown in the table that follows. The results
show the financial performance of our major business units.
The risk-adjusted return on capital (RAROC) methodology used seeks to
attribute economic capital to business units consistent with the level of risk
they assume. These risks are primarily credit risk, market risk and operational
risk. Credit risk is the potential loss in economic value due to the likelihood
that the obligor will not perform as agreed. Market risk is the potential loss
in fair value due to changes in interest rates, currency rates and equity
prices. Operational risk is the potential loss due to failures in internal
control, system failures, or external events.
The table on the following page reflects the condensed income statements,
selected average balance sheet items and selected financial ratios for each of
our primary business units. The information presented does not necessarily
represent the business units' financial condition and results of operations as
if they were independent entities. In addition, the tables include performance
center earnings. A performance center is a special unit whose income generating
activities, unlike typical profit centers, are based on other business segment
units' customer base. The revenues generated and expenses incurred for those
transactions entered into to accommodate our customers are allocated to other
business segments where the customer relationships reside. A performance
center's purpose is to foster cross-selling with a total profitability view of
the products and services it manages. For example, the Global Markets Trading
and Sales unit, within the Global Markets Group, is a performance center that
manages the foreign exchange, derivatives, and fixed income securities
activities within the Global Markets organization. Unlike financial accounting,
there is no authoritative body of guidance for management accounting equivalent
to U.S. GAAP. Consequently, reported results are not necessarily comparable with
those presented by other companies.
The RAROC measurement methodology recognizes credit expense for expected
losses arising from credit risk and attributes economic capital related to
unexpected losses arising from credit, market and operational risks. As a result
of the methodology used by the RAROC model to calculate expected losses,
differences between the provision for credit losses and credit expense in any
one period could be significant. However, over an economic cycle, the cumulative
provision for credit losses and credit expense for expected losses should be
substantially the same. Business unit results are based on an internal
management reporting system used by management to measure the performance of the
units and UnionBanCal Corporation as a whole. Our management reporting system
identifies balance sheet and income statement items to each business unit based
on internal management accounting policies. Net interest income is determined
using our internal funds transfer pricing system, which assigns a cost of funds
to assets or a credit for funds to liabilities and capital, based on their type,
maturity or repricing characteristics. Noninterest income and expense directly
or indirectly attributable to a business unit are assigned to that business. The
business units are assigned the costs of products and services directly
attributable to their business activity through standard unit cost accounting
based on volume of usage. All other corporate expenses (overhead) are assigned
to the business units based on a predetermined percentage of usage.
42
We have restated certain business units' results for the prior periods to
reflect certain transfer pricing changes and any reorganization changes that may
have occurred.
COMMUNITY BANKING
AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL
SERVICES SERVICES GROUP BANKING GROUP
-------------------- -------------------- -------------------
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
2003 2004 2003 2004 2003 2004
-------- -------- -------- -------- ------- -------
RESULTS OF OPERATIONS AFTER PERFORMANCE
CENTER EARNINGS (DOLLARS IN THOUSANDS):
Net interest income........................ $167,861 $182,667 $179,232 $183,506 $ 8,958 $ 7,808
Noninterest income......................... 101,627 116,600 57,912 69,627 15,483 18,189
-------- -------- -------- -------- ------- -------
Total revenue.............................. 269,488 299,267 237,144 253,133 24,441 25,997
Noninterest expense........................ 199,891 218,984 98,759 104,643 14,935 15,683
Credit expense (income).................... 7,718 7,787 42,462 31,226 505 604
-------- -------- -------- -------- ------- -------
Income (loss) before income tax
expense (benefit)........................ 61,879 72,496 95,923 117,264 9,001 9,710
Income tax expense (benefit)............... 23,668 27,730 30,680 38,249 3,443 3,714
-------- -------- -------- -------- ------- -------
Net income (loss).......................... $ 38,211 $ 44,766 $ 65,243 $ 79,015 $ 5,558 $ 5,996
======== ======== ======== ======== ======= =======
PERFORMANCE CENTER EARNINGS (DOLLARS
IN THOUSANDS):
Net interest income........................ $ 202 $ 172 $ (206) $ (117) $ 4 $ 9
Noninterest income......................... (10,364) (10,552) 14,849 16,618 332 273
Noninterest expense........................ (8,201) (9,195) 8,307 9,576 252 43
Net income (loss).......................... (1,231) (749) 3,956 4,312 52 147
Total loans (dollars in millions).......... 27 27 (47) (44) -- --
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1)............................. $ 11,113 $ 12,092 $ 13,534 $ 12,085 $ 1,525 $ 1,565
Total assets............................... 12,027 13,310 15,590 14,193 1,923 2,004
Total deposits(1).......................... 15,790 18,666 11,353 13,338 1,518 1,663
FINANCIAL RATIOS:
Risk adjusted return on capital(2)......... 25% 26% 15% 22% 38% 42%
Return on average assets(2)................ 1.29 1.35 1.70 2.24 1.17 1.20
Efficiency ratio(3)........................ 74.2 73.2 41.6 41.3 61.1 60.3
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
-------------------- -------------------- --------------------
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
2003 2004 2003 2004 2003 2004
-------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS AFTER PERFORMANCE
CENTER EARNINGS (DOLLARS IN THOUSANDS):
Net interest income........................ $ 21,092 $ 1,151 $ 13,637 $ 25,289 $390,780 $400,421
Noninterest income......................... 1,526 1,541 9,223 5,248 185,771 211,205
-------- -------- -------- -------- -------- --------
Total revenue.............................. 22,618 2,692 22,860 30,537 576,551 611,626
Noninterest expense........................ 4,487 6,427 24,528 27,369 342,600 373,106
Credit expense (income).................... 50 50 (20,735) (44,667) 30,000 (5,000)
-------- -------- -------- -------- -------- --------
Income (loss) before income tax
expense (benefit)........................ 18,081 (3,785) 19,067 47,835 203,951 243,520
Income tax expense (benefit)............... 6,916 (1,448) 3,727 17,788 68,434 86,033
-------- -------- -------- -------- -------- --------
Net income (loss).......................... $ 11,165 $ (2,337) $ 15,340 $ 30,047 $135,517 $157,487
======== ======== ======== ======== ======== ========
PERFORMANCE CENTER EARNINGS (DOLLARS
IN THOUSANDS):
Net interest income........................ $ (102) $ (164) $ 102 $ 100 $ -- $ --
Noninterest income......................... (8,072) (10,196) 3,255 3,857 -- --
Noninterest expense........................ (1,628) (1,906) 1,270 1,482 -- --
Net income (loss).......................... (4,042) (5,221) 1,265 1,511 -- --
Total loans (dollars in millions).......... -- -- 20 17 -- --
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1)............................. $ 214 $ 126 $ 337 $ 274 $ 26,723 $ 26,142
Total assets............................... 7,967 12,382 841 1,162 38,348 43,051
Total deposits(1).......................... 1,207 1,099 1,210 1,174 31,078 35,940
FINANCIAL RATIOS:
Risk adjusted return on capital(2)......... 4% (1)% na na na na
Return on average assets(2)................ 0.57 (0.08) na na 1.43% 1.47%
Efficiency ratio(3)........................ 19.8 238.7 na na 59.4 60.8
- --------------------------------
<FN>
(1) Represents loans and deposits for each business segment after allocation
between the segments of loans and deposits originated in one segment but
managed by another segment.
(2) Annualized.
(3) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income and noninterest
income. Foreclosed asset expense was $0.1 million and $0.5 million in the
first quarters of 2003 and 2004, respectively.
na = not applicable
</FN>
43
COMMUNITY BANKING AND INVESTMENT SERVICES GROUP
The Community Banking and Investment Services Group provides financial
products including a set of credit, deposit, trust, risk management, and
insurance products delivered through branches, relationship managers, private
bankers, trust administrators, and insurance agents to individuals and small
businesses.
In the first quarter of 2004, net income increased $6.6 million, or 17
percent, compared to the first quarter of 2003. In the first quarter of 2004,
total revenue increased $29.8 million, or 11 percent, compared to the first
quarter of 2003. Increased asset and deposit volumes offset the effect of a
lower interest rate environment leading to an increase of $14.8 million, or 9
percent, in net interest income over the first quarter of 2003. In the first
quarter of 2004, noninterest income was $15.0 million, or 15 percent, higher
than the first quarter of 2003 primarily due to our acquisitions and new de novo
branches in 2003 and the first quarter of 2004, higher deposit-related service
fees and higher trust and investment management fees. Noninterest expense
increased $19.1 million, or 10 percent, in the first quarter of 2004 compared to
the first quarter of 2003, with the majority of that increase being attributable
to higher salaries and employee benefits mainly related to our acquisitions and
new de novo branches, deposit gathering, small business growth and residential
loan growth over the first quarter of 2003.
In 2004, the Community Banking and Investment Services Group continues to
emphasize growing the consumer asset portfolio, expanding wealth management
services, extending the small business franchise, expanding the branch network,
and expanding cross selling activities throughout the Bank. The strategy for
growing the consumer asset portfolio primarily focused on mortgage and home
equity products that may be originated through the branch network, as well as
through channels such as wholesalers, correspondents, and whole loan purchases.
As of March 31, 2004, residential mortgages grew by $844.5 million, or 13
percent, from the first quarter of 2003. The Wealth Management division is
focused on becoming a growing provider of banking and investment products for
affluent individuals in geographic areas already served by us. We seek to
provide quality service superior to that of our competitors and offer our
customers an attractive product suite. Core elements of the initiative to extend
our small business franchise include improving our sales force, increasing
marketing activities, adding new locations, and developing online capabilities
to complement physical distribution. It is anticipated that expansion of the
distribution network will be achieved through acquisitions and new branch
openings. On July 1, 2003, we completed the acquisition of Monterey Bay Bank, a
$632 million asset savings and loan association headquartered in Watsonville,
California, with eight full-service branches in the Greater Monterey Bay area.
On January 16, 2004, we completed our acquisition of Business Bank of
California, a commercial bank headquartered in San Bernardino, California, with
$704 million in assets and fifteen full-service branches in the Southern
California Inland Empire and the San Francisco Bay Area.
The Community Banking and Investment Services Group is comprised of five
major divisions: Community Banking, Wealth Management, Institutional Services
and Asset Management, Consumer Asset Management, and Insurance Services.
COMMUNITY BANKING serves its customers through 298 full-service branches in
California, 4 full-service branches in Oregon and Washington, and a network of
565 proprietary ATMs. Customers may also access our services 24 hours a day by
telephone or through our WEBSITE at www.uboc.com. In addition, the division
offers automated teller and point-of-sale merchant services.
This division is organized by service delivery method, by markets and by
geography. We serve our customers in the following ways:
o through community banking branches, which serve consumers and
businesses with checking and deposit services, as well as various
types of consumer and business financing, brokerage products and
services, and insurance services;
o through on-line access to our internet banking services, which augment
our physical delivery channels by providing an array of customer
transaction, bill payment and loan payment services;
44
o through branches and business banking centers, which serve businesses
with annual sales up to $5 million; and
o through in-store branches in supermarkets, which also serve consumers
and businesses.
WEALTH MANAGEMENT provides private banking services to our affluent
clientele as well as brokerage products and services.
o The Private Bank focuses primarily on delivering financial services to
high net worth individuals with sophisticated financial needs as well
as to professional service firms. Specific products and services
include trust and estate services, investment account management
services, and deposit and credit products. A key strategy of The
Private Bank is to expand its business by leveraging existing Bank
client relationships. Through 14 existing locations, The Private Bank
relationship managers offer all of our available products and
services.
o Our brokerage products and services are provided through UBOC
Investment Services, Inc., a registered broker/dealer offering
investment products to individuals and institutional clients, whose
primary strategy is to further penetrate our existing client base.
INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment management
and administration services for a broad range of individuals and institutions.
o HighMark Capital Management, Inc., a registered investment advisor,
provides investment advisory services to institutional clients and its
proprietary mutual funds, the affiliated HighMark Funds. It also
provides advisory services to Union Bank of California, N.A. trust and
agency clients, including corporations, pension funds and individuals.
HighMark Capital Management, Inc. also provides mutual fund support
services. HighMark Capital Management, Inc.'s strategy is to increase
assets under management by broadening its client base and helping to
expand the distribution of shares of its mutual fund clients.
o Institutional Services provides custody, corporate trust, and
retirement plan services. Custody Services provides both domestic and
international safekeeping/settlement services in addition to
securities lending. Corporate Trust acts as trustee for corporate and
municipal debt issues. Retirement Services provides a full range of
defined benefit and defined contribution administrative services,
including trustee services, administration, investment management, and
401(k) valuation services. The client base of Institutional Services
includes financial institutions, corporations, government agencies,
unions, insurance companies, mutual funds, investment managers, and
non-profit organizations. Institutional Services' strategy is to
continue to leverage and expand its position in our target markets.
CONSUMER ASSET MANAGEMENT provides the centralized underwriting,
processing, servicing, collection and administration for consumer assets
including residential loans and merchant bank cards.
o Consumer Asset Management is centralized in two California sites, one
in San Diego and one in Brea, and
o provides customer and credit management services for consumer loan
products.
INSURANCE SERVICES provides a range of risk management services and
insurance products to business and retail customers. The group, which includes
our 2001 acquisition of Armstrong/Robitaille, Inc., our 2002 acquisition of John
Burnham & Company, and our 2003 acquisitions of Tanner Insurance Brokers, Inc.
and Knight Insurance Agency, offers its risk management and insurance products
through offices in California and Oregon.
Through alliances with other financial institutions, the Community Banking
and Investment Services Group offers additional products and services, such as
credit cards, leasing, and asset-based and leveraged financing.
45
The group competes with larger banks by attempting to provide service
quality superior to that of its major competitors. The group's primary means of
competing with community banks include its branch network and its technology to
deliver banking services. The group also offers convenient banking hours to
consumers through our drive-through banking locations and selected branches that
are open seven days a week.
The group competes with a number of commercial banks, internet banks,
savings associations and credit unions, as well as more specialized financial
service providers such as investment brokerage companies, consumer finance
companies, and residential real estate lenders. The group's primary competitors
are other major depository institutions such as Bank of America, Citibank,
Washington Mutual and Wells Fargo, as well as smaller community banks in the
markets in which we operate.
COMMERCIAL FINANCIAL SERVICES GROUP
The Commercial Financial Services Group offers financing and cash
management services to middle-market and large corporate businesses primarily
headquartered in the western United States. The Commercial Financial Services
Group has continued to focus specialized financing expertise to specific
geographic markets and industry segments such as energy, entertainment, and real
estate. Relationship managers in the Commercial Financial Services Group provide
credit services, including commercial loans, accounts receivable and inventory
financing, project financing, lease financing, trade financing and real estate
financing. In addition to credit services, the group offers its customers access
to cash management services delivered through deposit managers with experience
in cash management solutions for businesses and government entities.
In the first quarter of 2004, net income increased $13.8 million, or 21
percent, compared to the first quarter of 2003. In the first quarter of 2004,
net interest income increased $4.3 million, or 2 percent, compared to the first
quarter of 2003, partially attributable to the impact of increasing deposit
balances and a lower cost of funds resulting from the lower interest rate
environment. Excluding higher income in the private equity portfolio of $5.1
million, mainly related to higher net gains on private capital investments in
the first quarter of 2004 compared to the first quarter of 2003, noninterest
income increased $6.6 million, or 11 percent. This 11 percent increase was
mainly attributable to higher deposit-related service fees. In the first quarter
of 2004, noninterest expense increased $5.9 million, or 6 percent, compared to
the first quarter of 2003 due to higher expenses to support increased product
sales and deposit volume. Credit expense decreased $11.2 million mainly
attributable to a refinement in the RAROC allocation of capital and expected
losses and lower loan balances year-over-year.
The group's initiatives during 2004 continue to include expanding wholesale
deposit activities and increasing domestic trade financing. Loan strategies
include originating, underwriting and syndicating loans in core competency
markets, such as the California middle-market, commercial real estate, energy,
entertainment, equipment leasing and commercial finance. The Commercial
Financial Services Group provides strong processing services, including services
such as check processing, front-end item processing, cash vault services and
digital imaging.
The Commercial Financial Services Group is comprised of the following
business units:
o the Commercial Banking Division, which serves California middle-market
and large corporate companies with commercial lending, trade
financing, and asset-based loans;
o the Corporate Deposit and Treasury Management Division, which provides
deposit and cash management expertise to clients in the middle-market,
large corporate market, government agencies and specialized
industries;
o the Real Estate Industries Division, which provides real estate
lending products such as construction loans, commercial mortgages and
bridge financing;
46
o the Energy Capital Services Division, which provides custom financing
and project financing to oil and gas companies, as well as power and
utility companies, nationwide and internationally; and
o the Corporate Capital Markets Division, which provides custom
financing to middle-market and large corporate clients in their
defined industries and geographic markets, together with limited
merchant and investment banking related products and services.
The Check Clearing for the 21st Century Act (Check 21) was signed into law
on October 28, 2003, and will become effective on October 28, 2004. Check 21 is
designed to foster innovation in the payments system and to enhance its
efficiency by reducing some of the legal impediments to check truncation (that
is, the banking process by which cancelled original checks are not returned to
the customer with the customer's regular bank statement). The law facilitates
check truncation by creating a new negotiable instrument called a substitute
check, which would permit banks to truncate original checks, to process check
information electronically, and to deliver substitute checks to banks that want
to continue receiving paper checks. A substitute check will be the legal
equivalent of the original check and will include all the information contained
on the original check. The law does not require banks to accept checks in
electronic form nor does it require banks to use the new authority granted by
Check 21 to create substitute checks. The detailed regulations regarding Check
21 are still pending. In order to manage and control the changes which may be
necessitated by Check 21, we have established a "Check 21 Initiative Project
Management Structure," composed of representatives from many of our operating
and support units. The objective of this initiative is to allow us to prioritize
and allocate our resources and mitigate risk to our ongoing operations. It is
not possible at this time to predict the long-term financial impact of Check 21
on our business.
The group's main strategy is to target industries and companies for which
the group can reasonably expect to be one of a customer's primary banks.
Consistent with its strategy, the group attempts to serve a large part of its
targeted customers' credit and depository needs. The group competes with other
banks primarily on the basis of the quality of its relationship managers, the
delivery of quality customer service, and its reputation as a "business bank."
The group also competes with a variety of other financial services companies.
Competitors include other major California banks, as well as regional, national
and international banks. In addition, the group competes with investment banks,
commercial finance companies, leasing companies, and insurance companies.
INTERNATIONAL BANKING GROUP
The International Banking Group primarily focuses on providing
correspondent banking and trade finance related products and services to
international financial institutions worldwide. This focus includes products and
services such as letters of credit, international payments, collections and
providing short-term financing. The majority of the revenue generated by the
International Banking Group is from financial institutions domiciled outside of
the U.S.
In the first quarter of 2004, net income increased $0.4 million, or 8
percent, compared to the first quarter of 2003. Total revenue increased $1.6
million, or 6 percent, compared to the first quarter of 2003. Net interest
income decreased $1.2 million, or 13 percent, compared to the first quarter of
2003 mainly attributable to the lower value of demand deposits and lower yields
on foreign loans, partly offset by increasing deposit balances. Noninterest
income was $2.7 million, or 18 percent, higher compared to the first quarter of
2003, primarily attributable to higher payment and trade activities. Noninterest
expense increased $0.7 million, or 5 percent, compared to the first quarter of
2003. In the first quarter of 2004, credit expense of $0.6 million was slightly
higher compared to the first quarter of 2003. The International Banking Group's
business revolves around short-term trade financing, mostly to banks, which
provides service-related income, as well as significantly lower credit risk when
compared to other lending activities.
The group has a long history of providing correspondent banking and
trade-related products and services to international financial institutions. We
believe the group continues to achieve strong customer
47
loyalty in the correspondent banking market. The International Banking Group,
headquartered in San Francisco, also maintains offices in Asia, Latin America
and Europe; and an international banking subsidiary in New York.
GLOBAL MARKETS GROUP
The Global Markets Group conducts business activities primarily to support
the previously described business groups and their customers. This group offers
a broad range of risk management products, such as foreign exchange contracts
and interest rate swaps and options. It trades money market, government, agency,
and other securities to meet investment needs of our institutional and business
clients. Income attributable to business with Bank clients is allocated, through
performance centers, to the business units. Another primary area of the group is
treasury management for the Company, which encompasses wholesale funding,
liquidity management, interest rate risk management, including securities
portfolio management, and hedging activities. The Global Markets Group results
include the transfer pricing activity for the Bank, which allocates to the other
business segments their cost of funds on all asset categories or credit for
funds in the case of all liability categories.
In the first quarter of 2004, net loss was $2.3 million compared to net
income of $11.2 million in the first quarter of 2003. Total revenue in the first
quarter of 2004 decreased by $19.9 million, compared to the first quarter of
2003, resulting from a $19.9 million decrease in net interest income. The
decrease in net interest income was primarily attributable to a higher transfer
pricing residual in the first quarter of 2004 resulting from significantly
higher year-over-year growth in deposits, which are priced on longer-term
liability rates, compared to credits on earning assets, which are priced on
shorter-term lending rates. Noninterest income of $1.5 million was relatively
flat compared to the first quarter of 2003. Noninterest expense in the first
quarter of 2004 increased $1.9 million, or 43 percent, compared to the first
quarter of 2003, mainly attributable to the ineffectiveness on our cash flow
hedges, which is recognized in noninterest expense.
OTHER
"Other" includes the following items:
o corporate activities that are not directly attributable to one of the
four major business units. Included in this category are certain other
nonrecurring items such as the results of operations of certain parent
company non-bank subsidiaries and the elimination of the fully
taxable-equivalent basis amount;
o the adjustment between the credit expense under RAROC and the
provision for credit losses under U.S. GAAP and earnings associated
with unallocated equity capital;
o the adjustment between the tax expense reported under RAROC using a
tax rate of 38.25 percent and the Company's effective tax rates;
o the Pacific Rim Corporate Group, with assets of $283 million at March
31, 2004, which offers a range of credit, deposit, and investment
management products and services to companies in the U.S., which are
affiliated with companies headquartered in Japan; and
o the residual costs of support groups.
Net income for "Other" in 2004 was $30.0 million. The results were impacted
by the following factors:
o Credit expense (income) of ($44.7) million was due to the difference
between the $5.0 million reversal of provision for credit losses
calculated under our U.S. GAAP methodology and the $39.7 million in
expected losses for the reportable business segments, which utilizes
the RAROC methodology;
48
o Net interest income of $25.3 million, which resulted from the
differences between the credit for equity for the reportable segments
under RAROC and the net interest income earned by UnionBanCal
Corporation, and a credit for deposits in the Pacific Rim Corporate
Group;
o Noninterest income of $5.2 million; and
o Noninterest expense of $27.4 million.
Net income for "Other" in 2003 was $15.3 million. The results were impacted
by the following factors:
o Credit expense (income) of ($20.7) million was due to the difference
between the $30.0 million in provision for credit losses calculated
under our U.S. GAAP methodology and the $50.7 million in expected
losses for the reportable business segments, which utilizes the RAROC
methodology; offset by
o Net interest income of $13.6 million, which resulted from the
differences between the credit for equity for the reportable segments
under RAROC and the net interest income earned by UnionBanCal
Corporation, and a credit for deposits in the Pacific Rim Corporate
Group;
o Noninterest income of $9.2 million; and
o Noninterest expense of $24.5 million.
CERTAIN BUSINESS RISK FACTORS
ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS
A substantial majority of our assets, deposits and fee income are generated
in California. As a result, poor economic conditions in California may cause us
to incur losses associated with higher default rates and decreased collateral
values in our loan portfolio. Economic conditions in California are subject to
various uncertainties at this time, including the decline in the technology
sector, the California state government's budgetary difficulties and continuing
fiscal difficulties. We have various banking relationships with the California
State government, including credit and deposit relationships and funds transfer
arrangements. If economic conditions in California decline, we expect that our
level of problem assets could increase and our prospects for growth could be
impaired. On March 2, 2004, the California electorate approved certain ballot
measures, including a one-time economic recovery bond issue of up to $15 billion
to pay off the State's accumulated general fund deficit. While these measures
are expected to provide near-term relief for the State government's fiscal
situation, the State of California continues to face fiscal challenges, the
long-term impact of which, on the State's economy, cannot be predicted with any
certainty.
THE CONTINUING WAR ON TERRORISM COULD ADVERSELY AFFECT U.S. ECONOMIC
CONDITIONS
Acts or threats of terrorism and actions taken by the U.S. or other
governments as a result of such acts or threats may result in a downturn in U.S.
economic conditions and could adversely affect business and economic conditions
in the U.S. generally and in our principal markets.
ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD ADVERSELY
AFFECT OUR BUSINESS
We are subject to certain industry-specific economic factors. For example,
a significant and increasing portion of our total loan portfolio is related to
residential real estate. Accordingly, a downturn in the real estate and housing
industries in California could have an adverse effect on our operations. We
provide financing to businesses in a number of other industries that may be
particularly vulnerable to industry-specific economic factors, including the
communications / media industry, the retail industry, the airline industry, the
power industry and the technology industry. Recent increases in fuel prices
could adversely affect businesses in several of these industries.
Industry-specific risks are beyond our control and could
49
adversely affect our portfolio of loans, potentially resulting in an increase in
nonperforming loans or charge-offs.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS
Significant increases in market interest rates, or the perception that an
increase may occur, could adversely affect both our ability to originate new
loans and our ability to grow. Conversely, further decreases in interest rates
could result in an acceleration in the prepayment of loans. An increase in
market interest rates could also adversely affect the ability of our
floating-rate borrowers to meet their higher payment obligations. If this
occurred, it could cause an increase in nonperforming assets and charge-offs,
which could adversely affect our business.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD
Changes in market interest rates, including changes in the relationship
between short-term and long-term market interest rates or between different
interest rate indices, can impact our margin spread, that is, the difference
between the interest rates we charge on interest earning assets, such as loans,
and the interest rates we pay on interest bearing liabilities, such as deposits
or other borrowings. The impact, particularly in a falling interest rate
environment, could result in a decrease in our interest income relative to
interest expense.
STOCKHOLDER VOTES ARE CONTROLLED BY BTM; OUR INTERESTS MAY NOT BE THE SAME
AS BTM'S INTERESTS
BTM, a wholly owned subsidiary of Mitsubishi Tokyo Financial Group, Inc.,
owns a majority (approximately 62 percent as of March 31, 2004) of the
outstanding shares of our common stock. As a result, BTM can elect all of our
directors and can control the vote on all matters, including determinations such
as: approval of mergers or other business combinations; sales of all or
substantially all of our assets; any matters submitted to a vote of our
stockholders; issuance of any additional common stock or other equity
securities; incurrence of debt other than in the ordinary course of business;
the selection and tenure of our Chief Executive Officer; payment of dividends
with respect to common stock or other equity securities; and other matters that
might be favorable to BTM.
A majority of our directors are independent of BTM and are not officers or
employees of UnionBanCal Corporation or any of our affiliates, including BTM.
However, because of BTM's control over the election of our directors, BTM could
designate us as a "controlled company" under the New York Stock Exchange Rules
and could change the composition of our Board of Directors so that the Board
would not have a majority of independent directors. BTM's ability to prevent an
unsolicited bid for us or any other change in control could have an adverse
effect on the market price for our common stock.
POSSIBLE FUTURE SALES OF SHARES BY BTM COULD ADVERSELY AFFECT THE MARKET
FOR OUR STOCK
BTM may sell shares of our common stock in compliance with the federal
securities laws. By virtue of BTM's current control of us, BTM could sell large
amounts of shares of our common stock by causing us to file a registration
statement that would allow them to sell shares more easily. In addition, BTM
could sell shares of our common stock without registration. Although we can make
no prediction as to the effect, if any, that such sales would have on the market
price of our common stock, sales of substantial amounts of our common stock, or
the perception that such sales could occur, could adversely affect the market
price of our common stock. If BTM sells or transfers shares of our common stock
as a block, another person or entity could become our controlling stockholder.
BTM'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS
Although we fund our operations independently of BTM and believe our
business is not necessarily closely related to BTM's business or outlook, BTM's
credit ratings may affect our credit ratings. BTM is
50
also subject to regulatory oversight and review by Japanese and US regulatory
authorities. Our business operations and expansion plans could be negatively
affected by regulatory concerns related to the Japanese financial system and
BTM.
POTENTIAL CONFLICTS OF INTEREST WITH BTM COULD ADVERSELY AFFECT US
BTM's view of possible new businesses, strategies, acquisitions,
divestitures or other initiatives may differ from ours. This may delay or hinder
us from pursuing such initiatives.
Also, as part of BTM's normal risk management processes, BTM manages global
credit exposures and concentrations on an aggregate basis, including UnionBanCal
Corporation. Therefore, at certain levels or in certain circumstances, our
ability to approve certain credits or other banking transactions and categories
of customers is subject to the concurrence of BTM. We may wish to extend credit
or furnish other banking services to the same customers as BTM. Our ability to
do so may be limited for various reasons, including BTM's aggregate credit
exposure and marketing policies.
Certain directors' and officers' ownership interests in BTM's common stock
or service as a director or officer or other employee of both us and BTM could
create or appear to create potential conflicts of interest, especially since
both of us compete in the U.S. banking industry.
SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY
AFFECT US
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, as well as
nationally and internationally. Our competitors include a large number of state
and national banks, thrift institutions and major foreign-affiliated or foreign
banks, as well as many financial and nonfinancial firms that offer services
similar to those offered by us. Some of our competitors are community banks that
have strong local market positions. Other competitors include large financial
institutions that have substantial capital, technology and marketing resources.
Such large financial institutions may have greater access to capital at a lower
cost than us, which may adversely affect our ability to compete effectively.
Banks, securities firms, and insurance companies can now combine as a
"financial holding company." Financial holding companies can offer virtually any
type of financial service, including banking, securities underwriting, insurance
(both agency and underwriting), and merchant banking. Recently, a number of
foreign banks have acquired financial services companies in the U.S., further
increasing competition in the U.S. market.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS
PAYABLE TO US
As a holding company, a substantial portion of our cash flow typically
comes from dividends our bank and nonbank subsidiaries pay to us. Various
statutory provisions restrict the amount of dividends our subsidiaries can pay
to us without regulatory approval. In addition, if any of our subsidiaries
liquidate, that subsidiary's creditors will be entitled to receive distributions
from the assets of that subsidiary to satisfy their claims against it before we,
as a holder of an equity interest in the subsidiary, will be entitled to receive
any of the assets of the subsidiary.
ADVERSE EFFECTS OF, OR CHANGES IN, BANKING OR OTHER LAWS AND REGULATIONS OR
GOVERNMENTAL FISCAL OR MONETARY POLICIES COULD ADVERSELY AFFECT US
We are subject to significant federal and state regulation and supervision,
which is primarily for the benefit and protection of our customers and not for
the benefit of investors. In the past, our business has been materially affected
by these regulations. This trend is likely to continue in the future. Laws,
regulations or policies, including accounting standards and interpretations
currently affecting us and our subsidiaries may change at any time. Regulatory
authorities may also change their interpretation of these
51
statutes and regulations. Therefore, our business may be adversely affected by
any future changes in laws, regulations, policies or interpretations, including
legislative and regulatory reactions to the terrorist attack on September 11,
2001, and future acts of terrorism, and the Enron Corporation, WorldCom, Inc.
and other major U.S. corporate bankruptcies and reports of accounting
irregularities at U.S. public companies, including various large and publicly
traded companies. Additionally, our international activities may be subject to
the laws and regulations of the jurisdiction where business is being conducted.
International laws, regulations and policies affecting us and our subsidiaries
may change at any time and affect our business opportunities and competitiveness
in these jurisdictions. Due to BTM's controlling ownership of us, laws,
regulations and policies adopted or enforced by the Government of Japan may
adversely affect our activities and investments and those of our subsidiaries in
the future.
Additionally, our business is affected significantly by the fiscal and
monetary policies of the federal government and its agencies. We are
particularly affected by the policies of the Federal Reserve Board (FRB), which
regulates the supply of money and credit in the U.S. Under long-standing policy
of the FRB, a bank holding company is expected to act as a source of financial
strength for its subsidiary banks. As a result of that policy, we may be
required to commit financial and other resources to our subsidiary bank in
circumstances where we might not otherwise do so. Among the instruments of
monetary policy available to the FRB are (a) conducting open market operations
in U.S. government securities, (b) changing the discount rates of borrowings by
depository institutions, and (c) imposing or changing reserve requirements
against certain borrowings by banks and their affiliates. These methods are used
in varying degrees and combinations to directly affect the availability of bank
loans and deposits, as well as the interest rates charged on loans and paid on
deposits. The policies of the FRB may have a material effect on our business,
results of operations and financial condition.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR
RESTRUCTURING MAY ADVERSELY AFFECT US
We may seek to acquire or invest in companies, technologies, services or
products that complement our business. There can be no assurance that we will be
successful in completing any such acquisition or investment as this will depend
on the availability of prospective target companies at valuation levels we find
attractive and the competition for such opportunities from other bidders. In
addition, we continue to evaluate the performance of all of our businesses and
business lines and may sell a business or business line. Any acquisitions,
divestitures or restructuring may result in the issuance of potentially dilutive
equity securities, significant write-offs, including those related to goodwill
and other intangible assets, and/or the incurrence of debt, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Acquisitions, divestitures or restructuring could involve
numerous additional risks including difficulties in obtaining any required
regulatory approvals and in the assimilation or separation of operations,
services, products and personnel, the diversion of management's attention from
other business concerns, higher than expected deposit attrition (run-off),
divestitures required by regulatory authorities, the disruption of our business,
and the potential loss of key employees. There can be no assurance that we will
be successful in overcoming these or any other significant risks encountered.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A complete explanation concerning our market risk exposure is incorporated
herein by reference to Part I, Item 2 of this document under the captions
"Quantitative and Qualitative Disclosure About Market Risk," "Liquidity Risk,"
and "Certain Business Risk Factors."
52
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer (principal executive officer) and Chief
Financial Officer (principal financial officer) have concluded that the design
and operation of our disclosure controls and procedures are effective as of
March 31, 2004. This conclusion is based on an evaluation conducted under the
supervision and with the participation of management. Disclosure controls and
procedures are those controls and procedures which ensure that information
required to be disclosed in this filing is accumulated and communicated to
management and is recorded, processed, summarized and reported in a timely
manner and in accordance with Securities and Exchange Commission rules and
regulations.
During the quarter ended March 31, 2004, there were no changes in our
internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
53
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various pending and threatened legal actions that arise
in the normal course of business. We maintain reserves for losses from legal
actions that are both probable and estimable.
Union Bank of California, N.A., our major subsidiary (the Bank), was named
in two suits pending in the United States District Court for the Central
District of California, Christensen v. Union Bank of California (formerly
captioned as Rockoff v. Union Bank of California et al.) (filed December 21,
2001) and Neilson v. Union Bank of California et al (filed September 4, 2002),
and one suit in Los Angeles County Superior Court, Kilpatrick v. Orrick
Herrington & Sutcliffe, et al. (filed April 22, 2003 as to the Bank). The
plaintiffs in these suits collectively sought in excess of $250 million, which
is alleged to have been lost by those who invested money in various investment
arrangements conducted by an individual named Reed Slatkin. Mr. Slatkin is
alleged to have been operating a fraudulent investment scheme commonly referred
to as a "Ponzi" scheme. The plaintiffs in the Christensen case were various
investors in the arrangements conducted by Mr. Slatkin, and the plaintiffs in
the Neilson case included both investors and the trustee of Mr. Slatkin's
bankruptcy estate. A substantial majority of those who invested with Mr. Slatkin
had no relationship with the Bank. A small minority, comprising less than five
percent of the investors, had custodial accounts with the Bank. The Neilson case
seeks to impose liability upon the Bank and two other financial institutions for
both the losses suffered by those custodial customers as well as investors who
had no relationship with the Bank. The Plaintiff in the Kilpatrick case was an
individual investor who sought recovery of funds placed in an account for a
limited liability company that he formed with Mr. Slatkin. The Christensen case
has been dismissed and the Kilpatrick case has been settled for $2.1 million.
Another suit, Grafton Partners LP v. Union Bank of California, is pending
in Alameda County Superior Court (filed March 12, 2003). That suit concerns an
unrelated "Ponzi" scheme perpetrated by PinnFund, USA, located in San Diego,
California. The victims of this scheme seek $235 million from the Bank. They
assert that the Bank improperly opened and administered a deposit account, which
was used by PinnFund in furtherance of the fraud.
The Bank has numerous legal defenses to the Grafton and Neilson cases.
Based on our evaluation to date of these claims, management believes that they
will not result in a material adverse effect on our financial position or
results of operations. In addition, we believe that the disposition of all other
claims currently pending will also not have a material adverse effect on our
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Repurchases of equity securities are presented in the table below.
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES (OR UNITS) (OR APPROXIMATE DOLLAR VALUE)
TOTAL NUMBER OF AVERAGE PRICE PURCHASED AS PART OF OF SHARES (OR UNITS)
SHARES (OR UNITS) PAID PER SHARE PUBLICLY ANNOUNCED THAT MAY YET BE PURCHASED
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS UNDER THE PLANS OR PROGRAMS
- ----------------------------- ----------------- ------------------- -------------------- -----------------------------
JANUARY 2004
(January 26 - 30, 2004)...... 150,000 $53.31747 150,000 $93,812,190.59
FEBRUARY 2004
(February 2 - 26, 2004)...... 449,700 52.97409 449,700 $69,989,741.10
MARCH 2004
(March 1 - 17, 2004)......... 230,000 53.15495 230,000 $57,764,103.60
----------------- --------------------
TOTAL........................ 829,700 $53.08631 829,700
================= ====================
54
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Set forth below is information concerning each matter submitted to a vote
at the Annual Meeting of Stockholders on April 28, 2004 ("Annual Meeting"):
ELECTION OF DIRECTORS: Each of the following persons was elected as a
director to hold office until the 2005 Annual Meeting of Stockholders or until
earlier retirement, resignation or removal.
NOMINEE FOR WITHHELD
- ------------------------------- ----------- ----------
David R. Andrews............... 142,309,449 422,108
L. Dale Crandall............... 141,421,540 1,310,016
Richard D. Farman.............. 140,775,746 1,955,811
Stanley F. Farrar.............. 142,280,987 450,570
Philip B. Flynn................ 141,409,821 1,321,735
Michael J. Gillfillan.......... 141,352,945 1,378,612
Richard C. Hartnack............ 141,342,459 1,389,097
Norimichi Kanari............... 141,412,567 1,318,990
Satoru Kishi................... 115,141,713 27,589,844
Monica C. Lozano............... 142,280,182 451,375
Mary S. Metz................... 140,643,478 2,088,079
Takahiro Moriguchi............. 122,427,574 20,303,983
J. Fernando Niebla............. 141,373,521 1,358,035
Takaharu Saegusa............... 141,404,716 1,326,840
Tetsuo Shimura................. 141,389,675 1,341,882
PROPOSAL TO AMEND THE 1997 UNIONBANCAL CORPORATION PERFORMANCE SHARE PLAN:
Proposal No. 2 to amend the Performance Share Plan (a) to increase by 2,000,000
the aggregate number of performance shares subject to the Plan, and (b) to
permit the Executive Compensation & Benefits Committee, in its discretion, to
provide for the payment of earned awards in cash and/or shares of UnionBanCal
Corporation common stock issued under the Year 2000 UnionBanCal Corporation
Management Stock Plan received the following votes:
For: 125,665,337
Against: 16,714,752
Abstain: 351,467
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS: Proposal No. 3 to ratify
the selection by the Audit Committee of Deloitte & Touche LLP as independent
auditors of UnionBanCal Corporation in 2004 received the following votes:
For: 141,382,287
Against: 1,280,443
Abstain: 68,826
STOCKHOLDER PROPOSAL REGARDING CUMULATIVE VOTING: Proposal No. 4 to request
the Board of Directors to take steps necessary to provide for cumulative voting
in the election of directors in future annual meetings received the following
votes:
For: 13,865,894
Against: 127,651,975
Abstain: 1,213,687
55
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
NO. DESCRIPTION
- ---- ----------------------------------------------------------------------
10.1 Philip B. Flynn Employment Agreement (Effective April 1, 2004)(1)
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14a/15d-14(a) of the Exchange Act, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002(1)
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14a/15d-14(a) of the Exchange Act, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002(1)
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002(1)
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002(1)
- ------------------------
(1) Filed herewith
(B) REPORTS ON FORM 8-K
We furnished a report on Form 8-K on January 22, 2004 reporting under Item
12 thereof that UnionBanCal Corporation issued a press release concerning
earnings for the fourth quarter of 2003.
We furnished a report on Form 8-K/A on January 23, 2004 reporting under
Item 12 thereof an amendment to our report furnished on Form 8-K on January 22,
2004, which reported that UnionBanCal Corporation issued a press release
concerning earnings for the fourth quarter of 2003. This amendment was solely
filed to reflect the conformed signature of David I. Matson, Chief Financial
Officer, which was inadvertently omitted.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, UnionBanCal Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION
(Registrant)
By: /S/ NORIMICHI KANARI
-------------------------------------
Norimichi Kanari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
By: /S/ DAVID I. MATSON
-------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
By: /S/ DAVID A. ANDERSON
-------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
(Principal Accounting Officer)
Date: May 10, 2004
57