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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 SEPTEMBER 30, 2001
Commission file number 0-28118
UnionBanCal Corporation
CALIFORNIA 94-1234979
(State of Incorporation) (I.R.S. Employer Identification No.)
400 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104-1302
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
Number of shares of Common Stock outstanding at October 31, 2001: 156,871,624
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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................................................ 4
Condensed Consolidated Balance Sheets...................................................... 5
Condensed Consolidated Statements of Changes in Shareholders' Equity....................... 6
Condensed Consolidated Statements of Cash Flows............................................ 7
Notes to Condensed Consolidated Financial Statements....................................... 8
Item 2. Management's Discussion and Analysis:
Introduction............................................................................... 15
Summary.................................................................................... 16
Business Segments.......................................................................... 19
Net Interest Income........................................................................ 28
Noninterest Income......................................................................... 31
Noninterest Expense........................................................................ 33
Income Tax Expense......................................................................... 34
Loans...................................................................................... 35
Cross-border Outstandings.................................................................. 36
Provision for Credit Losses................................................................ 36
Allowance for Credit Losses................................................................ 37
Nonperforming Assets....................................................................... 41
Loans 90 Days or More Past Due and Still Accruing.......................................... 42
Liquidity.................................................................................. 42
Regulatory Capital......................................................................... 43
Certain Business Risk Factors.............................................................. 44
Item 3. Market Risk........................................................................... 48
PART II
OTHER INFORMATION
Item 4. Other Information..................................................................... 49
Item 6. Exhibits and Reports on Form 8-K...................................................... 49
Signatures....................................................................................... 50
PART I. FINANCIAL INFORMATION
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
PERCENT CHANGE TO
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 FROM:
------------------------------------------------- -----------------------------
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2001 2000 2001
- -------------------------------------------- ----------- ------------ ----------- --------- ------------
RESULTS OF OPERATIONS:
Net interest income(1)............ $ 404,626 $ 379,313 $ 378,517 (6.45)% (0.21)%
Provision for credit losses....... 80,000 65,000 50,000 (37.50) (23.28)
Noninterest income................ 168,928 168,391 173,405 2.65 2.98
Noninterest expense............... 291,378 307,452 317,042 8.81 3.12
----------- ----------- -----------
Income before income taxes(1)..... 202,176 175,252 184,880 (8.55) 5.49
Taxable-equivalent adjustment..... 641 590 426 (33.54) (27.80)
Income tax expense................ 69,959 57,512 59,325 (15.20) 3.15
----------- ----------- -----------
Net income........................ $ 131,576 $ 117,150 $ 125,129 (4.90)% 6.81%
=========== =========== ===========
PER COMMON SHARE:
Net income--basic.................. $ 0.82 $ 0.74 $ 0.79 (3.66)% 6.76%
Net income--diluted................ 0.82 0.74 0.79 (3.66) 6.76
Dividends(2)....................... 0.25 0.25 0.25 -- --
Book value (end of period)........ 20.13 21.37 22.49 11.72 5.24
Common shares outstanding (end of
period)........................ 160,112,869 157,839,218 157,181,483 (1.83) (0.42)
Weighted average common shares
outstanding--basic.............. 160,759,916 158,180,799 157,584,675 (1.98) (0.38)
Weighted average common shares
outstanding--diluted............ 161,014,901 158,881,633 159,028,898 (1.23) 0.09
BALANCE SHEET (END OF PERIOD):
Total assets...................... $33,745,489 $35,758,632 $35,239,224 4.43% (1.45)%
Total loans....................... 26,157,939 25,656,247 25,594,289 (2.15) (0.24)
Nonaccrual loans.................. 282,999 453,422 444,519 57.07 (1.96)
Nonperforming assets.............. 299,795 460,116 450,246 50.18 (2.15)
Total deposits.................... 25,894,059 27,700,624 27,065,423 4.52 (2.29)
Subordinated capital notes........ 200,000 200,000 200,000 -- --
Trust preferred securities........ 350,000 364,269 369,441 5.55 1.42
Common equity..................... 3,222,770 3,373,564 3,534,533 9.67 4.77
BALANCE SHEET (PERIOD AVERAGE):
Total assets...................... $33,690,070 $34,589,322 $34,616,940 2.75% 0.08%
Total loans....................... 26,454,975 26,114,389 25,917,100 (2.03) (0.76)
Earning assets.................... 30,399,146 31,272,909 31,343,059 3.11 0.22
Total deposits.................... 25,402,036 26,641,335 26,391,293 3.89 (0.94)
Common equity..................... 3,185,167 3,406,324 3,497,664 9.81 2.68
FINANCIAL RATIOS:
Return on average assets(3)....... 1.55% 1.36% 1.43%
Return on average common equity(3) 16.43 13.79 14.19
Efficiency ratio(4)............... 50.80 56.13 57.45
Net interest margin(1)............ 5.30 4.86 4.81
Dividend payout ratio............. 30.49 33.78 31.65
Tangible equity ratio............. 9.41 9.30 9.91
Tier 1 risk-based capital ratio... 10.52 10.85 11.18
Total risk-based capital ratio.... 12.35 12.70 13.05
Leverage ratio.................... 10.47 10.33 10.50
Allowance for credit losses to
total loans.................... 2.01 2.44 2.46
Allowance for credit losses to
nonaccrual loans............... 185.83 138.18 141.65
Net loans charged off to average
total loans(3)................. 0.82 1.24 0.72
Nonperforming assets to total
loans, distressed loans held
for sale, and foreclosed assets 1.15 1.79 1.76
Nonperforming assets to total
assets......................... 0.89 1.29 1.28
- -----------
<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) Annualized.
(4) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income.
</FN>
2
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED)
(UNAUDITED)
AS OF AND FOR THE
NINE MONTHS ENDED
------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 CHANGE
- ---------------------------------------------------------------------------- ------------- ------------- ----------
RESULTS OF OPERATIONS:
Net interest income(1)................................................... $ 1,187,732 $ 1,145,713 (3.54)%
Provision for credit losses.............................................. 190,000 215,000 13.16
Noninterest income....................................................... 494,008 522,603 5.79
Noninterest expense, excluding restructuring credit...................... 848,735 931,979 9.81
Restructuring credit..................................................... (19,000) -- (100.00)
------------ ------------
Income before income taxes(1)............................................ 662,005 521,337 (21.25)
Taxable-equivalent adjustment............................................ 1,933 1,638 (15.26)
Income tax expense....................................................... 228,610 170,133 (25.58)
------------ ------------
Net income............................................................... $ 431,462 $ 349,566 (18.98)%
============ ============
PER COMMON SHARE:
Net income--basic......................................................... $ 2.66 $ 2.21 (16.92)%
Net income--diluted....................................................... 2.65 2.20 (16.98)
Dividends(2)............................................................. 0.75 0.75 --
Book value (end of period)............................................... 20.13 22.49 11.72
Common shares outstanding (end of period)................................ 160,112,869 157,181,483 (1.83)
Weighted average common shares outstanding--basic......................... 162,259,396 158,214,813 (2.49)
Weighted average common shares outstanding--diluted....................... 162,674,610 158,916,432 (2.31)
BALANCE SHEET (END OF PERIOD):
Total assets............................................................. $ 33,745,489 $ 35,239,224 4.43%
Total loans.............................................................. 26,157,939 25,594,289 (2.15)
Nonaccrual loans......................................................... 282,999 444,519 57.07
Nonperforming assets..................................................... 299,795 450,246 50.18
Total deposits........................................................... 25,894,059 27,065,423 4.52
Subordinated capital notes............................................... 200,000 200,000 --
Trust preferred securities............................................... 350,000 369,441 5.55
Common equity............................................................ 3,222,770 3,534,533 9.67
BALANCE SHEET (PERIOD AVERAGE):
Total assets............................................................. $ 33,520,179 $ 34,545,443 3.06%
Total loans.............................................................. 26,303,921 26,147,872 (0.59)
Earning assets........................................................... 30,267,580 31,229,078 3.18
Total deposits........................................................... 25,320,107 26,269,050 3.75
Common equity............................................................ 3,095,375 3,414,561 10.31
FINANCIAL RATIOS:
Return on average assets(3).............................................. 1.72% 1.35%
Return on average common equity(3)....................................... 18.62 13.69
Efficiency ratio(4)...................................................... 49.34 55.86
Net interest margin(1)................................................... 5.23 4.90
Dividend payout ratio.................................................... 28.20 33.94
Tangible equity ratio.................................................... 9.41 9.91
Tier 1 risk-based capital ratio.......................................... 10.52 11.18
Total risk-based capital ratio........................................... 12.35 13.05
Leverage ratio........................................................... 10.47 10.50
Allowance for credit losses to total loans............................... 2.01 2.46
Allowance for credit losses to nonaccrual loans.......................... 185.83 141.65
Net loans charged off to average total loans(3).......................... 0.68 1.02
Nonperforming assets to total loans, distressed loans held for sale, and
foreclosed assets..................................................... 1.15 1.76
Nonperforming assets to total assets..................................... 0.89 1.28
- -----------
<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) Annualized.
(4) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income.
</FN>
3
ITEM 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2000 2001
- ----------------------------------------------------------------- -------- -------- ---------- ----------
INTEREST INCOME
Loans......................................................... $576,567 $455,477 $1,675,900 $1,478,894
Securities.................................................... 55,706 76,852 162,689 215,370
Interest bearing deposits in banks............................ 2,775 622 7,522 2,249
Federal funds sold and securities purchased under resale
agreements................................................. 1,263 1,398 6,364 4,585
Trading account assets........................................ 4,170 1,652 12,205 6,716
-------- -------- ---------- ----------
Total interest income...................................... 640,481 536,001 1,864,680 1,707,814
-------- -------- ---------- ----------
INTEREST EXPENSE
Domestic deposits............................................. 144,406 105,851 410,625 366,394
Foreign deposits.............................................. 25,506 15,954 76,872 60,944
Federal funds purchased and securities sold under repurchase
agreements................................................. 26,994 12,265 72,383 48,687
Commercial paper.............................................. 26,072 11,844 71,004 46,882
Subordinated capital notes.................................... 4,060 2,142 13,997 7,873
UnionBanCal Corporation--obligated mandatorily redeemable
preferred securities of subsidiary grantor trust........... 6,414 4,940 19,788 16,329
Other borrowed funds.......................................... 3,044 4,914 14,212 16,630
-------- -------- ---------- ----------
Total interest expense..................................... 236,496 157,910 678,881 563,739
-------- -------- ---------- ----------
NET INTEREST INCOME.............................................. 403,985 378,091 1,185,799 1,144,075
Provision for credit losses................................... 80,000 50,000 190,000 215,000
-------- -------- ---------- ----------
Net interest income after provision for credit losses...... 323,985 328,091 995,799 929,075
-------- -------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts........................... 53,779 62,742 153,987 181,614
Trust and investment management fees.......................... 39,975 37,965 116,163 116,880
Merchant transaction processing fees.......................... 19,354 21,315 54,887 60,814
International commissions and fees............................ 18,012 18,053 53,463 53,288
Brokerage commissions and fees................................ 8,616 8,786 27,309 26,764
Merchant banking fees......................................... 15,353 7,742 40,681 26,671
Securities gains (losses), net................................ 3,104 (1,699) 8,804 4,318
Other......................................................... 10,735 18,501 38,714 52,254
-------- -------- ---------- ----------
Total noninterest income................................... 168,928 173,405 494,008 522,603
-------- -------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits................................ 152,227 171,172 444,483 500,243
Net occupancy................................................. 24,664 23,779 69,358 70,375
Equipment..................................................... 15,702 16,985 47,706 48,252
Merchant transaction processing............................... 12,784 13,324 37,144 39,687
Communications................................................ 11,736 13,074 33,048 36,582
Professional services......................................... 10,760 9,982 29,278 29,155
Data processing............................................... 8,577 8,885 26,199 26,935
Foreclosed asset expense (income)............................. (14) (60) 7 1
Restructuring credit.......................................... -- -- (19,000) --
Other......................................................... 54,942 59,901 161,512 180,749
-------- -------- ---------- ----------
Total noninterest expense.................................. 291,378 317,042 829,735 931,979
-------- -------- ---------- ----------
Income before income taxes.................................... 201,535 184,454 660,072 519,699
Income tax expense............................................ 69,959 59,325 228,610 170,133
-------- -------- ---------- ----------
NET INCOME....................................................... $131,576 $125,129 $ 431,462 $ 349,566
======== ======== ========== ==========
NET INCOME PER COMMON SHARE--BASIC................................ $ 0.82 $ 0.79 $ 2.66 $ 2.21
======== ======== ========== ==========
NET INCOME PER COMMON SHARE--DILUTED.............................. $ 0.82 $ 0.79 $ 2.65 $ 2.20
======== ======== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC................. 160,760 157,585 162,259 158,215
======== ======== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED............... 161,015 159,029 162,675 158,916
======== ======== ========== ==========
See accompanying notes to condensed consolidated financial statements.
4
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2000 2000 2001
- ----------------------------------------------------------------------- ------------ ------------ -------------
ASSETS
Cash and due from banks................................................ $ 2,133,958 $ 2,957,103 $ 2,577,510
Interest bearing deposits in banks..................................... 142,106 73,936 73,394
Federal funds sold and securities purchased under resale agreements.... 236,600 291,940 514,600
----------- ----------- -----------
Total cash and cash equivalents..................................... 2,512,664 3,322,979 3,165,504
Trading account assets................................................. 224,063 339,695 335,617
Securities available for sale:
Securities pledged as collateral.................................... -- 593,686 135,355
Held in portfolio................................................... 3,588,360 3,533,984 4,719,724
Securities held to maturity (market value: September 30, 2000, $23,469;
December 31, 2000, $23,302)......................................... 24,173 23,529 --
Loans (net of allowance for credit losses: September 30, 2000,
$525,896; December 31, 2000, $613,902; September 30, 2001, $629,683) 25,632,043 25,396,496 24,964,606
Due from customers on acceptances...................................... 255,325 268,116 188,020
Premises and equipment, net............................................ 426,166 474,279 489,176
Other assets........................................................... 1,082,695 1,209,711 1,241,222
----------- ----------- -----------
Total assets........................................................ $33,745,489 $35,162,475 $35,239,224
=========== =========== ===========
LIABILITIES
Domestic deposits:
Noninterest bearing................................................. $ 9,971,158 $10,916,710 $11,256,740
Interest bearing.................................................... 13,723,799 13,986,774 13,536,139
Foreign deposits:
Noninterest bearing................................................. 288,612 323,783 342,189
Interest bearing.................................................... 1,910,490 2,055,916 1,930,355
----------- ----------- -----------
Total deposits...................................................... 25,894,059 27,283,183 27,065,423
Federal funds purchased and securities sold under repurchase agreements 1,234,541 1,387,667 1,286,730
Commercial paper....................................................... 1,471,815 1,385,771 1,114,527
Other borrowed funds................................................... 274,348 249,469 535,976
Acceptances outstanding................................................ 255,325 268,116 188,020
Other liabilities...................................................... 842,631 826,704 944,574
Subordinated capital notes............................................. 200,000 200,000 200,000
UnionBanCal Corporation--obligated mandatorily redeemable preferred
securities of subsidiary grantor trust.............................. 350,000 350,000 369,441
----------- ----------- -----------
Total liabilities................................................... 30,522,719 31,950,910 31,704,691
----------- ----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares, no shares issued or outstanding as of
September 30, 2000, December 31, 2000, and September 30, 2001.... -- -- --
Common stock--no stated value:
Authorized 300,000,000 shares, issued 160,112,869 shares as of September
30, 2000, 159,234,454 shares as of December 31, 2000,
and 157,181,483 shares as of September 30, 2001.................. 1,294,893 1,275,587 1,207,312
Retained earnings...................................................... 1,936,827 1,906,093 2,137,956
Accumulated other comprehensive income (loss).......................... (8,950) 29,885 189,265
----------- ----------- -----------
Total shareholders' equity.......................................... 3,222,770 3,211,565 3,534,533
----------- ----------- -----------
Total liabilities and shareholders' equity.......................... $33,745,489 $35,162,475 $35,239,224
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001
- ----------------------------------------------------------------------- ----------------------- -----------------------
COMMON STOCK
Balance, beginning of period........................................ $1,404,155 $1,275,587
Dividend reinvestment plan.......................................... 39 32
Deferred compensation--restricted stock awards...................... 247 196
Stock options exercised............................................. 1,652 9,363
Common stock repurchased............................................ (111,200) (77,866)
---------- ----------
Balance, end of period........................................... $1,294,893 $1,207,312
---------- ----------
RETAINED EARNINGS
Balance, beginning of period........................................ $1,625,263 $1,906,093
Net income.......................................................... 431,462 $431,462 349,566 $349,566
Dividends on common stock(1)........................................ (121,402) (118,593)
Deferred compensation--restricted stock awards...................... 1,504 890
---------- ----------
Balance, end of period........................................... $1,936,827 $2,137,956
---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of period........................................ $ (41,950) $ 29,885
Cumulative effect of accounting change (SFAS No.133)(2), net of tax
expense of $13,754............................................... -- 22,205
Unrealized net gains on cash flow hedges, net of tax expense of
$45,793 in the first nine months of 2001......................... -- 73,928
Less: reclassification adjustment for net gains on cash flow hedges
included in net income, net of tax expense of $10,751 in the
first nine months of 2001........................................ -- (17,356)
-------- --------
Net unrealized gains on cash flow hedges............................ -- 56,572
Unrealized holding gains arising during the period on securities
available for sale, net of tax expense of $23,587 and $51,996 in
the first nine months of 2000 and 2001, respectively............. 38,078 83,941
Less: reclassification adjustment for gains on securities available
for sale included in net income, net of tax expense of $3,368 and
$1,652 in the first nine months of 2000 and 2001, respectively... (5,436) (2,666)
-------- --------
Net unrealized gains on securities available for sale............... 32,642 81,275
Foreign currency translation adjustment, net of tax expense
(benefit) of $222 and $(416) in the first nine months of 2000 and
2001, respectively............................................... 358 (672)
-------- --------
Other comprehensive income.......................................... 33,000 33,000 159,380 159,380
---------- -------- ---------- --------
Total comprehensive income.......................................... $464,462 $508,946
======== ========
Balance, end of period........................................... $ (8,950) $ 189,265
---------- ----------
TOTAL SHAREHOLDERS' EQUITY..................................... $3,222,770 $3,534,533
========== ==========
- -----------
<FN>
(1) Dividends per share were $0.75 for the first nine months of 2000 and
2001. Dividends are based on UnionBanCal Corporation's shares
outstanding as of the declaration date.
(2) Statement of Financial Accounting Standards No. 133, "Accounting For
Derivative Instruments and Hedging Activities"
</FN>
See accompanying notes to condensed consolidated financial statements.
6
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
(DOLLARS IN THOUSANDS) 2000 2001
- -------------------------------------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................... $ 431,462 $ 349,566
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses........................................................... 190,000 215,000
Depreciation, amortization and accretion.............................................. 53,862 60,471
Provision for deferred income taxes................................................... (28,431) 34,479
Gain on sales of securities available for sale........................................ (8,804) (4,318)
Utilization in excess of restructuring charge......................................... (46,772) (9,536)
Net decrease (increase) in trading account assets..................................... (44,128) 4,078
Other, net............................................................................ 56,786 91,095
------------ ------------
Total adjustments..................................................................... 172,513 391,269
------------ ------------
Net cash provided by operating activities................................................ 603,975 740,835
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale..................................... 393,869 657,703
Proceeds from matured and called securities available for sale........................... 725,459 636,208
Purchases of securities available for sale............................................... (1,434,439) (1,858,667)
Proceeds from matured and called securities held to maturity............................. 22,359 --
Net decrease (increase) in loans......................................................... (390,627) 224,002
Purchases of premises and equipment...................................................... (50,172) (70,353)
Other, net............................................................................... 3,686 2,606
------------ ------------
Net cash used in investing activities................................................. (729,865) (408,501)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits................................................................. (362,548) (217,760)
Net increase (decrease) in federal funds purchased and securities sold under repurchase
agreements............................................................................ 77,742 (100,937)
Net increase in commercial paper and other borrowed funds................................ 97,409 15,263
Common stock repurchased................................................................. (111,200) (77,866)
Repayment of subordinated debt........................................................... (98,000) --
Payments of cash dividends............................................................... (122,556) (119,005)
Other, net............................................................................... 2,049 28,164
------------ ------------
Net cash used in financing activities................................................. (517,104) (472,141)
------------ ------------
Net decrease in cash and cash equivalents................................................... (642,994) (139,807)
Cash and cash equivalents at beginning of period............................................ 3,158,133 3,322,979
Effect of exchange rate changes on cash and cash equivalents................................ (2,475) (17,668)
------------ ------------
Cash and cash equivalents at end of period.................................................. $ 2,512,664 $ 3,165,504
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest................................................................................. $ 667,649 $ 618,076
Income taxes............................................................................. 179,581 96,274
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans transferred to foreclosed assets (OREO) and/or distressed loans held for sale...... $ 21,875 $ 6,611
Securities transferred from held to maturity to available for sale....................... -- 23,529
Dividends declared but unpaid............................................................ 40,018 39,363
See accompanying notes to condensed consolidated financial statements.
7
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
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 (US GAAP) for interim financial reporting and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the
Securities and Exchange Commission. However, they do not include all of the
disclosures necessary for annual financial statements in conformity with US
GAAP. The results of operations for the period ended September 30, 2001 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, 2000. The
preparation of financial statements in conformity with US GAAP also requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
In July 2000 and April 2001, the Company announced stock repurchase
plans of $100 million each. The Company repurchased $69 million in common stock
between July 2000 and March 2001, $25 million between April 2001 and June 2001,
and $31 million between July 2001 and September 2001. As of September 30, 2001,
$75 million of common stock repurchases authorized is available for repurchase.
At September 30, 2001, The Bank of Tokyo-Mitsubishi, Ltd. (BTM) owned 67 percent
of UnionBanCal Corporation.
On January 1, 2000, the Company changed the method it uses to calculate
the market-related value of its pension plan assets. This change increased the
value of plan assets on which the expected returns are based and, therefore,
results in lower net periodic pension cost. This change in methodology resulted
in a one-time credit to salaries and employee benefits of $16.0 million. The
impact on future years is not considered significant.
Certain amounts for prior periods have been reclassified to conform to
current financial statement presentation.
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which replaces SFAS No. 125. The Statement revises the standards
for accounting for the securitization and other transfers of financial assets
and collateral, and requires certain disclosures, but carries over most of SFAS
No. 125's provisions without reconsideration. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Management believes that adopting these
components of SFAS No. 140 will not have a material impact on the Company's
financial position or results of operations. SFAS No. 140 must be applied
prospectively. For recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral, this
Statement was adopted as of December 31, 2000 and did not have a material impact
on the Company's financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that all business combinations be
8
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
accounted for by a single method--the purchase method. This Statement eliminates
the pooling-of-interests method but carries forward without reconsideration the
guidance in Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises" related to the application of the purchase method of
accounting. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
SFAS No. 142 significantly changes the accounting for goodwill and other
intangible assets subsequent to their initial recognition. SFAS No. 142 requires
that goodwill and some intangible assets no longer be amortized, but tested for
impairment at least annually by comparing the fair value of those assets with
their recorded amounts. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001 and must be adopted at the beginning of the fiscal year.
However, goodwill and intangible assets acquired in a transaction completed
after June 30, 2001, but before SFAS No. 142 is adopted, would be accounted for
in accordance with the amortization and nonamortization provisions of this
Statement. Upon adoption on January 1, 2002, the amortization of existing
goodwill will cease and a transitional impairment test will be performed.
Impairment loss at adoption, if any, will be recognized as a change in
accounting principle. Management believes that at adoption, SFAS No. 141 and
SFAS No. 142 will not have a material impact on the Company's financial position
or results of operations. Upon adoption, goodwill amortization for the year
ending December 31, 2002 will be reduced by approximately $12.5 million and no
previously acquired goodwill is expected to be impaired.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to the legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and, or, the normal operation of a
long-lived asset. A legal obligation is an obligation that a party is required
to settle as a result of an existing or enacted law, statute, ordinance, or
written or oral contract or by legal construction under the doctrine of
promissory estoppel. This Statement is effective for fiscal years beginning
after June 15, 2002. Management believes that adopting this Statement will not
have a material impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. This Statement carries over the framework
established in SFAS No. 121, and is effective for fiscal years beginning after
December 15, 2001. Management believes that adopting this Statement will not
have a material impact on the Company's financial position or results of
operations.
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
9
NOTE 3--EARNINGS PER SHARE (CONTINUED)
equivalent. The following table presents a reconciliation of basic and diluted
EPS for the three months and nine months ended September 30, 2000 and 2001:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------- -------------------------------------------------
2000 2001 2000 2001
---------------------- ---------------------- ---------------------- ---------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income.................. $131,576 $131,576 $125,129 $125,129 $431,462 $431,462 $349,566 $349,566
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding........ 160,760 160,760 157,585 157,585 162,259 162,259 158,215 158,215
Additional shares due to:
Assumed conversion of
dilutive stock options.. -- 255 -- 1,444 -- 416 -- 701
-------- -------- -------- -------- -------- -------- -------- --------
Adjusted weighted average
common shares outstanding. 160,760 161,015 157,585 159,029 162,259 162,675 158,215 158,916
======== ======== ======== ======== ======== ======== ======== ========
Net income per share........ $0.82 $0.82 $0.79 $0.79 $2.66 $2.65 $2.21 $2.20
======== ======== ======== ======== ======== ======== ======== ========
NOTE 4--COMPREHENSIVE INCOME
The following table presents a summary of the components of accumulated
other comprehensive income (loss):
NET UNREALIZED GAINS
(LOSSES) ON SECURITIES FOREIGN CURRENCY NET UNREALIZED GAINS
AVAILABLE FOR SALE TRANSLATION ADJUSTMENT ON CASH FLOW HEDGES
----------------------- ---------------------- -----------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001 2000 2001 2000 2001
- -------------------------------------------------- --------- -------- -------- -------- ------ -------
Beginning balance................................ $(32,548) $ 41,879 $ (8,713) $(11,191) $ -- $ --
Cumulative effect of accounting change, net of tax -- -- -- -- -- 22,205
Change during the period......................... 32,642 81,275 358 (672) -- 56,572
--------- -------- -------- -------- ------ -------
Ending balance................................... $ 94 $123,154 $ (8,355) $(11,863) $ -- $78,777
========= ======== ======== ======== ====== =======
MINIMUM PENSION ACCUMULATED OTHER
LIABILITY ADJUSTMENT COMPREHENSIVE INCOME (LOSS)
-------------------- -------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001 2000 2001
- -------------------------------------------------------------------- ------ ------ -------- --------
Beginning balance................................................... $ (689) $ (803) $(41,950) $ 29,885
Cumulative effect of accounting change, net of tax.................. -- -- -- 22,205
Change during the period............................................ -- -- 33,000 137,175
------- ------- -------- --------
Ending balance...................................................... $ (689) $ (803) $ (8,950) $189,265
======= ======= ======== ========
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 full
range of banking services, primarily to individuals and small
businesses, delivered through a tri-state network of branches and
ATM's. These services include commercial loans, mortgages and 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.
10
NOTE 5--BUSINESS SEGMENTS (CONTINUED)
o The Commercial Financial Services Group primarily provides
tailored credit and cash management services to large corporate
and middle market companies. Services include commercial loans,
asset based lending, commercial real estate lending, leasing and a
comprehensive product array of deposit and cash management
services.
o The International Banking Group provides correspondent banking and
trade-finance products and services to financial institutions, and
extends primarily short-term credit to corporations engaged in
international business. The group's revenue predominately relates
to foreign customers.
o The Global Markets Group manages the Company's securities
portfolio, trading operations, wholesale funding needs, and
interest rate and liquidity risk.
The information, set forth in the tables on the following pages,
reflects selected income statement items and a selected balance sheet item by
business unit. The information presented does not necessarily represent the
business units' financial condition and results of operations as if they were
independent entities. Unlike financial accounting, there is no authoritative
body of guidance for management accounting equivalent to US GAAP. Consequently,
reported results are not necessarily comparable with those presented by other
companies.
The information in this table is derived from the internal management
reporting system used by management to measure the performance of the segments
and the Company overall. The management reporting system assigns balance sheet
and income statement items to each 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
segment are assigned to that business, other than restructuring charges
(credits). Indirect costs, such as overhead, operations, and technology expense,
are allocated to the segments based on studies of billable unit costs for
product or data processing. Under the Company's risk-adjusted return on capital
(RAROC) methodology, credit expense is charged to business segments based upon
expected losses arising from credit risk. In addition, the attribution of
economic capital is related to unexpected losses arising from credit, market and
operational risks.
"Other" is comprised of goodwill amorization, certain parent company
non-bank subsidiaries, the elimination of the fully taxable-equivalent amounts,
the amount of the provision for credit losses (over)/under the RAROC expected
loss for the period, the earnings associated with the unallocated equity capital
and allowance for credit losses, and the residual costs of support groups, as
well as certain nonrecurring items such as restructuring charges (credits). In
addition, it includes two units, the Credit Management Group, which manages
nonperforming assets, and the Pacific Rim Corporate Group, which offers
financial products to Asian-owned subsidiaries located in the U.S.
11
NOTE 5--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING
AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL
SERVICES GROUP SERVICES GROUP BANKING GROUP
---------------------- ---------------------- ---------------------
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2000 2001 2000 2001 2000 2001
- ------------------------------------------------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Total revenue(1)................................. $294,762 $282,788 $233,429 $201,457 $ 22,571 $ 22,751
Net income (loss)................................ $ 62,734 $ 50,295 $ 80,776 $ 57,772 $ 4,349 $ 4,681
Total assets at period end (dollars in millions). $ 9,118 $ 10,106 $ 18,440 $ 16,968 $ 1,367 $ 1,406
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
---------------------- ---------------------- ---------------------
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2000 2001 2000 2001 2000 2001
- ------------------------------------------------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Total revenue(1)................................. $ 9,081 $ 25,548 $ 13,070 $ 18,952 $572,913 $551,496
Net income (loss)................................ $ 3,202 $ 13,164 $(19,485) $ (783) $131,576 $125,129
Total assets at period end (dollars in millions). $ 3,960 $ 5,767 $ 860 $ 992 $ 33,745 $ 35,239
- -----------
<FN>
(1) Total revenue is comprised of net interest income and noninterest income
</FN>
COMMUNITY BANKING
AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL
SERVICES GROUP SERVICES GROUP BANKING GROUP
--------------------- ---------------------- --------------------------
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
2000 2001 2000 2001 2000 2001
- ------------------------------------------- -------- -------- -------- -------- ---------- ----------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Total revenue(1)........................... $861,778 $830,975 $690,219 $630,795 $ 70,599 $ 70,555
Net income (loss).......................... $179,090 $149,241 $242,734 $195,360 $ 14,962 $ 15,616
Total assets at period end (dollars in
millions)............................... $ 9,118 $ 10,106 $ 18,440 $ 16,968 $ 1,367 $ 1,406
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
--------------------- ---------------------- --------------------------
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
2000 2001 2000 2001 2000 2001
- ------------------------------------------- -------- -------- -------- -------- ---------- ----------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Total revenue(1)........................... $10,040 $49,894 $47,171 $84,459 $1,679,807 $1,666,678
Net income (loss).......................... $(1,060) $19,269 $(4,264) $(29,920) $431,462 $349,566
Total assets at period end (dollars in
millions)............................... $3,960 $5,767 $860 $992 $33,745 $35,239
- -----------
<FN>
(1) Total revenue is comprised of net interest income and noninterest income
</FN>
12
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. All derivatives, whether designated as
a hedge, or not, are required to be recorded on the balance sheet at fair value.
SFAS No. 133 requires that derivative instruments used to hedge be identified
specifically to assets, liabilities, firm commitments or anticipated
transactions and be expected to be effective throughout the life of the hedge.
Derivative instruments that do not qualify as either a fair value or cash flow
hedge are valued at fair value and classified as trading account assets with the
resultant gain or loss recognized in current earnings. The adoption of SFAS No.
133 resulted in the recognition of a loss of $6 million ($4 million, net of
tax), which is included in noninterest expense. Additionally, the adoption of
SFAS No. 133 resulted in a cumulative effect of a change in accounting principle
on accumulated other comprehensive income, net of tax, of $22 million in
unrealized gain.
Derivative positions are integral components of the Company's
designated asset and liability management activities. The Company uses interest
rate derivative instruments as part of its management of asset and liability
positions. Derivatives are used to manage interest rate risk relating to
specified groups of assets and liabilities, primarily LIBOR-based commercial
loans and trust preferred securities.
CASH FLOW HEDGES
HEDGING STRATEGIES FOR VARIABLE RATE LOANS
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 and corridor options and interest rate swaps.
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 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 LIBOR to the
extent it falls below the corridor's lower strike rate.
The Company uses interest rate swaps to hedge the variable cash flows
associated with 1-month LIBOR or 3-month LIBOR indexed loan portfolio. 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 LIBOR.
The Company uses purchased interest rate caps to hedge the variable
cash flows associated with 3-month LIBOR or 6-month LIBOR indexed negotiable
certificates of deposits (CDs). 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.
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
13
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
matches those of the loans or CDs, and the period in which the designated hedged
cash flows occur 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. During
the third quarter of 2001, the Company recognized a net loss of $0.1 million due
to ineffectiveness, which is recognized in noninterest expense.
FAIR VALUE HEDGES
HEDGING STRATEGIES FOR UNIONBANCAL CORPORATION- OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUSTS (TRUST
PREFERRED SECURITIES)
The Company engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specific interest bearing liability,
UnionBanCal Corporation's Trust Preferred Securities, in order to convert the
liability from a fixed rate to a floating rate instrument. This strategy
mitigates the changes in fair value of the hedged liability caused by changes in
the designated benchmark interest rate, US dollar LIBOR.
Fair value hedging transactions are structured at inception so that the
notional amounts of the swap match an associated principal amount of the Trust
Preferred Securities. The interest payment dates, the expiration date, and the
embedded call option of the swap match those of the Trust Preferred Securities.
The ineffectiveness on the fair value hedges during the third quarter of 2001
was $0.4 million.
OTHER
The Company uses foreign currency forward contracts as a means of
managing foreign exchange rate risk associated with assets and/or liabilities
denominated in foreign currencies. The Company values the forward contracts, the
assets and/or the liabilities at fair value, with the resultant gain or loss
recognized in noninterest income.
NOTE 7--SUBSEQUENT EVENT
On October 24, 2001, the Board of Directors declared a quarterly cash
dividend of $0.25 per share of common stock. The dividend will be paid on
January 4, 2002 to shareholders of record as of December 7, 2001.
As previously announced, effective November 9, 2001, the Union Bank of
California branch offices in Guam and Saipan have been sold to First Hawaiian
Bank. This transaction will not result in a material impact to the Company's
financial position or results of operations.
14
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. OUR
MANAGEMENT MAY MAKE FORWARD-LOOKING STATEMENTS IN OTHER SECURITIES AND EXCHANGE
COMMISSION FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH WALL
STREET ANALYSTS AND SHAREHOLDERS AND WHEN WE ARE SPEAKING ON BEHALF OF
UNIONBANCAL CORPORATION. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE
FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. OFTEN,
THEY INCLUDE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "PLAN,"
"ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL
VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," OR "MAY." THESE
FORWARD-LOOKING STATEMENTS ARE INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL
INFORMATION WITH WHICH THEY MAY ASSESS OUR FUTURE POTENTIAL. ALL OF THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON ASSUMPTIONS ABOUT AN UNCERTAIN FUTURE
AND ARE BASED ON INFORMATION AVAILABLE AT THE DATE SUCH STATEMENTS ARE ISSUED.
THERE ARE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD AND WILL CAUSE
ACTUAL RESULTS TO DIFFER 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, RESULTS
OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA
(INCLUDING PROBLEMS ARISING FROM THE CALIFORNIA ENERGY CRISIS), GLOBAL POLITICAL
AND GENERAL ECONOMIC CONDITIONS RELATED TO THE TERRORIST ATTACKS ON SEPTEMBER
11, 2001 AND THEIR AFTERMATH, ADVERSE ECONOMIC CONDITIONS AFFECTING CERTAIN
INDUSTRIES, FLUCTUATIONS IN INTEREST RATES, THE CONTROLLING INTEREST IN US BY
THE BANK OF TOKYO-MITSUBISHI, LTD., COMPETITION IN THE BANKING INDUSTRY,
RESTRICTIONS ON DIVIDENDS, ADVERSE EFFECTS OF CURRENT AND FUTURE BANKING RULES,
REGULATIONS AND LEGISLATION, AND RISKS ASSOCIATED WITH VARIOUS STRATEGIES WE MAY
PURSUE, INCLUDING POTENTIAL ACQUISITIONS, DIVESTITURES AND RESTRUCTURINGS. SEE
ALSO THE SECTION ENTITLED "CERTAIN BUSINESS RISK FACTORS" ON PAGE 44.
INTRODUCTION
We are a California-based, commercial bank holding company with
consolidated assets of $35.2 billion at September 30, 2001. At September 30,
2001, Union Bank of California, N.A. was the third largest commercial bank in
California, based on total assets and total deposits in California.
UnionBanCal Corporation and its banking subsidiary, Union Bank of
California, N.A. (the Bank), was 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.
In July 2000 and April 2001, we announced stock repurchase plans of
$100 million each. We repurchased $69 million in common stock between July 2000
and March 2001, $25 million between April 2001 and June 2001, and $31 million
between July 2001 and September 2001. As of September 30, 2001, $75 million of
common stock repurchases authorized is available for repurchase. At September
30, 2001, The Bank of Tokyo-Mitsubishi, Ltd. (BTM) owned 67 percent of the
UnionBanCal Corporation.
Our interim financial information should be read in conjunction with
our Form 10-K for the year ended December 31, 2000. Certain amounts for prior
periods have been reclassified to conform to current financial statement
presentation.
TERRORIST ATTACKS ON SEPTEMBER 11, 2001
The terrorist attacks on the World Trade Center on September 11, 2001
have impacted everyone both in the United States and globally. The direct impact
on us was felt with the presence of our Edge Act subsidiary, Union Bank of
California International, Inc., which was located in one of the two World Trade
Center towers. Fortunately, all 106 employees were safely evacuated. The
operations of this subsidiary
15
were immediately transferred to our operations department located in California
until the New York group could once again handle their operations. No material
losses related to customers or us were experienced as a result of the
international operations.
During the week that followed the attacks, our retail broker/dealer and
our trust department were negatively impacted by the close of our stock
exchanges. However, the amount of revenue loss during this period was not
material.
We do not have material exposure to either the airline industry or the
insurance industry. We have attributed a portion of our allowance for credit
losses for the impact the terrorist attacks will have on certain of our
customers. It is not known yet to what extent our customers will be impacted. As
information develops, further adjustments to our allowance may be necessary.
It is management's belief that the negative impact on our third quarter
earnings of the September 11, 2001 attacks was immaterial.
SUMMARY
To facilitate the discussion of the results of operations, the
following table includes certain pro forma earnings disclosures and ratios.
These presentations supplement the Consolidated Statements of Income on page 4,
which are prepared in accordance with accounting principles generally accepted
in the United States of America (US GAAP), by excluding the effects of the
restructuring credit recorded in the first and second quarters of 2000.
Management believes that it is meaningful to understand the operating results
and trends excluding this item and, therefore, has included information in this
table and in the management's discussion and analysis which follows, that
presents income excluding this item and related pro forma ratio and per share
calculations.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2000 2001
- ----------------------------------------------------------------------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES............................................. $202,176 $184,880 $662,005 $521,337
Restructuring credit................................................ -- -- (19,000) --
Taxable equivalent adjustment....................................... (641) (426) (1,933) (1,638)
Income tax expense(1)............................................... (69,959) (59,325) (221,451) (170,133)
-------- -------- -------- --------
PRO FORMA EARNINGS..................................................... $131,576 $125,129 $419,621 $349,566
======== ======== ======== ========
PER COMMON SHARE, EXCLUDING RESTRUCTURING CREDIT
Pro forma earnings (basic).......................................... $ 0.82 $ 0.79 $ 2.59 $ 2.21
Pro forma earnings (diluted)........................................ 0.82 0.79 2.58 2.20
SELECTED FINANCIAL RATIOS, EXCLUDING RESTRUCTURING CREDIT
Pro forma return on average assets(2)............................... 1.55% 1.43% 1.67% 1.35%
Pro forma return on average common equity(2)........................ 16.43 14.19 18.11 13.69
Pro forma efficiency ratio(3)....................................... 50.80 57.45 50.47 55.86
Pro forma dividend payout ratio..................................... 30.49 31.65 28.96 33.94
- -----------
<FN>
(1) Excludes the income tax expense effect of $7.159 million in the nine
months ending September 30, 2000 related to restructuring credits.
(2) Annualized
(3) The pro forma efficiency ratio is noninterest expense, excluding
foreclosed asset expense (income), as a percentage of net interest
income (tax-equivalent) and noninterest income.
</FN>
16
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
2001
Reported net income was $125.1 million, or $0.79 per diluted common
share, in the third quarter of 2001, compared with $131.6 million, or $0.82 per
diluted common share, in the third quarter of 2000. There were no proforma
earnings adjustments for the third quarters of 2000 and 2001. This decrease in
reported diluted earnings per share of 4 percent below the third quarter of 2000
was due to a $26.1 million, or 6 percent, decrease in net interest income (on a
taxable-equivalent basis) and a $25.7 million, or 9 percent, increase in
noninterest expense, partially offset by a $30.0 million, or 38 percent,
decrease in provision for credit losses, a $4.5 million, or 3 percent, increase
in noninterest income, and a three percentage point decrease in the effective
income tax rate. Other highlights of the third quarter of 2001 include:
o Net interest income, on a taxable-equivalent basis, was $378.5
million in the third quarter of 2001, a decrease of $26.1 million,
or 6 percent, from the third quarter of 2000. Net interest margin
in the third quarter of 2001 was 4.81 percent, a decrease of 49
basis points from the third quarter of 2000 reflecting the
compression caused by lower interest rates.
o Noninterest income was $173.4 million in the third quarter of
2001, an increase of $4.5 million, or 3 percent, from the third
quarter of 2000. Service charges on deposit accounts grew $9.0
million, or 17 percent, trust and investment management fees
declined by $2.0 million, or 5 percent, merchant transaction
processing fees increased $2.0 million, or 10 percent, and all
other noninterest income, including auto lease residual writedowns
of $5.0 million in the third quarter of 2000, decreased $4.4
million, or 8 percent. There were no auto lease residual
writedowns in the third quarter of 2001.
o A provision for credit losses of $50.0 million was recorded in the
third quarter of 2001, compared with $80.0 million in the third
quarter of 2000. This resulted from management's regular
assessment of overall credit quality, loan portfolio composition,
business and economic conditions in relation to the level of the
allowance for credit losses. The allowance for credit losses was
$629.7 million, or 142 percent of total nonaccrual loans, at
September 30, 2001, compared with $525.9 million, or 186 percent
of total nonaccrual loans, at September 30, 2000.
o Noninterest expense was $317.0 million in the third quarter of
2001, an increase of $25.7 million, or 9 percent, over the third
quarter of 2000. Most of this increase is attributed to higher
salaries and employee benefits of $18.9 million, or 12 percent,
higher software expenses of $2.4 million, or 41 percent, and
higher advertising and public relations expense of $2.0 million,
or 25 percent. The increase in salaries and employee benefits
expense was primarily caused by a 6 percent increase in average
staff levels, annual merit increases, and higher other benefits
expense.
o Income tax expense in the third quarter of 2001 was $59.3 million,
a 32 percent effective income tax rate. For the third quarter of
2000, the effective income tax rate was 35 percent. The decrease
in the year-over-year effective income tax rate was primarily
attributed to an increase in low income housing tax credits in the
third quarter of 2001.
o Reported return on average assets decreased to 1.43 percent in the
third quarter of 2001 from 1.55 percent a year earlier, and our
return on average common equity decreased to 14.19 percent from
16.43 percent a year earlier.
o Total loans at September 30, 2001 were $25.6 billion, a decrease
of $563.7 million, or 2 percent, from September 30, 2000.
o Nonperforming assets increased $150.5 million, or 50 percent, from
September 30, 2000 to $450.2 million at September 30, 2001.
Nonperforming assets as a percentage of total assets increased to
1.28 percent at September 30, 2001, compared with 0.89 percent a
year earlier. Total nonaccrual loans were $444.5 million at
September 30, 2001, compared with $283.0 million at
17
September 30, 2000, resulting in an increase in the ratio of
nonaccrual loans to total loans from 1.08 percent at September 30,
2000 to 1.74 percent at September 30, 2001.
o Our Tier 1 and total risk-based capital ratios were 11.18 percent
and 13.05 percent, respectively, at September 30, 2001, compared
with 10.52 percent and 12.35 percent, respectively, at September
30, 2000. Our leverage ratio was 10.50 percent at September 30,
2001 compared with 10.47 percent at September 30, 2000.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
2001
Reported net income was $349.6 million, or $2.20 per diluted common
share, in the first nine months of 2001, compared with $431.5 million, or $2.65
per diluted common share, in the first nine months of 2000. There were no pro
forma net earnings adjustments for the first nine months of 2001. Pro forma
income was $419.6 million, or $2.58 per diluted common share, in the first nine
months of 2000, which excluded the effects of the $19.0 million of restructuring
credits ($11.8 million net of tax) recorded in the first and second quarters of
2000. This decrease in pro forma diluted earnings per share of 15 percent below
the first nine months of 2000 was due to a $83.2 million, or 10 percent,
increase in noninterest expense, a $42.0 million, or 4 percent, decrease in net
interest income (on a taxable-equivalent basis), and a $25.0 million, or 13
percent, increase in the provision for credit losses, partially offset by a
$28.6 million, or 6 percent, increase in noninterest income, and a two
percentage point decrease in the effective income tax rate. Other highlights of
the first nine months of 2001 include:
o Net interest income, on a taxable-equivalent basis, was $1,145.7
million in the first nine months of 2001, a decrease of $42.0
million, or 4 percent, from the first nine months of 2000. Net
interest margin in the first nine months of 2001 was 4.90 percent,
a decrease of 33 basis points from the first nine months of 2000
reflecting the compression caused by lower interest rates.
o Noninterest income was $522.6 million in the first nine months of
2001, an increase of $28.6 million, or 6 percent, over the first
nine months of 2000. Service charges on deposit accounts grew
$27.6 million, or 18 percent, merchant transaction processing fees
increased $5.9 million, or 11 percent, merchant banking fees
decreased $14.0 million, or 34 percent, and all other noninterest
income increased $9.1 million, or 4 percent. All other noninterest
income included a $20.7 million one-time gain recognized on the
exchange of our STAR System stock and auto lease residual
writedowns of $28.3 million in the current year, compared with
auto lease residual writedowns in the first nine months of 2000 of
$17.5 million.
o A provision for credit losses of $215.0 million was recorded in
the first nine months of 2001, compared with $190.0 million in the
first nine months of 2000. This resulted from management's regular
assessment of overall credit quality, loan portfolio composition
and business and economic conditions in relation to the level of
the allowance for credit losses.
o Noninterest expense was $932.0 million in the first nine months of
2001, an increase of $83.2 million, or 10 percent, over the first
nine months of 2000, excluding the restructuring credits in the
first and second quarters of 2000. Salaries and employee benefits
increased $55.8 million, or 13 percent, primarily caused by a 4
percent increase in average staff levels, annual merit increases
and to a $16.0 million one-time credit for an accounting
methodology change in recognizing pension expense in 2000.
Advertising and public relations expense increased $7.6 million,
or 37 percent, mainly due to marketing efforts aimed at growing
deposits, small business relationships, and the residential loan
business. Software expense increased $5.8 million, or 34 percent,
mainly related to the implementation of ebusiness initiatives. All
other noninterest expense increased $14.1 million, or 4 percent
over the same period of 2000, including the recognition of a loss
of $6.2 million at adoption of Statement of Financial Accounting
Standards (SFAS) No. 133 in the current year.
18
o Income tax expense in the first nine months of 2001 was $170.1
million, a 33 percent effective income tax rate. For the first
nine months of 2000, the effective income tax rate was 35 percent.
The decrease in the year-over-year effective income tax rate was
primarily attributable to an increase in low income housing tax
credits in the first nine months of 2001.
o Reported return on average assets decreased to 1.35 percent from a
pro forma 1.67 percent a year earlier, and reported return on
average common equity decreased to 13.69 percent from a pro forma
18.11 percent a year earlier.
BUSINESS SEGMENTS
We segregate our operations into four primary business units for the
purpose of management reporting, as shown in the tables on the following pages.
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 volatilities.
Operational risk is the potential loss due to failures in internal control,
system failures, or external events.
The following tables reflect 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. Unlike financial accounting, there is no
authoritative body of guidance for management accounting equivalent to US GAAP.
Consequently, reported results are not necessarily comparable with those
presented by other companies.
The RAROC measurement methodology recognizes credit loss 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. The management reporting system
identifies balance sheet and income statement items to each business unit based
on internal management accounting policies. Net interest income is determined
using 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.
19
COMMUNITY BANKING
AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL
SERVICES GROUP SERVICES GROUP BANKING GROUP
---------------------- ---------------------- --------------------
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001 2000 2001 2000 2001
- ------------------------------------------------- -------- -------- -------- -------- ------- --------
RESULTS OF OPERATIONS:
Net interest income........................... $184,289 $172,501 $192,235 $166,350 $ 9,102 $ 8,732
Noninterest income............................ 110,473 110,287 41,194 35,107 13,469 14,019
-------- -------- -------- -------- -------- --------
Total revenue................................. 294,762 282,788 233,429 201,457 22,571 22,751
Noninterest expense........................... 181,101 191,871 75,104 81,974 14,040 14,006
Credit expense................................ 12,068 9,468 31,829 32,924 1,488 1,164
-------- -------- -------- -------- -------- --------
Income before income tax expense (benefit).... 101,593 81,449 126,496 86,559 7,043 7,581
Income tax expense (benefit).................. 38,859 31,154 45,720 28,787 2,694 2,900
-------- -------- -------- -------- -------- --------
Net income (loss)............................. $ 62,734 $ 50,295 $ 80,776 $ 57,772 $ 4,349 $ 4,681
======== ======== ======== ======== ======== ========
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1)................................ $ 8,057 $ 9,114 $ 17,051 $ 15,416 $ 928 $ 1,004
Total assets.................................. 8,952 10,046 18,907 17,267 1,424 1,317
Total deposits(1)............................. 13,957 14,240 6,485 7,095 1,068 1,448
FINANCIAL RATIOS:
Return on risk adjusted capital(2)............ 42% 34% 19% 13% 20% 23%
Return on average assets(2)................... 2.79 1.99 1.70 1.33 1.21 1.41
Efficiency ratio(3)........................... 61.44 67.85 32.17 40.69 62.20 61.56
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
---------------------- ---------------------- --------------------
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001 2000 2001 2000 2001
- ------------------------------------------------- -------- -------- -------- -------- ------- -------
RESULTS OF OPERATIONS:
Net interest income........................... $ 6,216 $ 13,646 $ 12,143 $ 16,862 $403,985 $378,091
Noninterest income............................ 2,865 11,902 927 2,090 168,928 173,405
-------- -------- -------- -------- -------- --------
Total revenue................................. 9,081 25,548 13,070 18,952 572,913 551,496
Noninterest expense........................... 3,895 4,079 17,238 25,112 291,378 317,042
Credit expense................................ -- 150 34,615 6,294 80,000 50,000
-------- -------- -------- -------- -------- --------
Income before income tax expense (benefit).... 5,186 21,319 (38,783) (12,454) 201,535 184,454
Income tax expense (benefit).................. 1,984 8,155 (19,298) (11,671) 69,959 59,325
-------- -------- -------- -------- -------- --------
Net income (loss)............................. $ 3,202 $ 13,164 $(19,485) $ (783) $131,576 $125,129
======== ======== ======== ======== ======== ========
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1)................................ $ -- $ 80 $ 419 $ 303 $ 26,455 $ 25,917
Total assets.................................. 3,593 5,295 814 692 33,690 34,617
Total deposits(1)............................. 3,099 2,900 793 708 25,402 26,391
FINANCIAL RATIOS:
Return on risk adjusted capital(2)............ 8% 13% na na na na
Return on average assets(2)................... 0.35 0.99 na na 1.55% 1.43%
Efficiency ratio(3)........................... 42.89 15.97 na na 50.80 57.45
- -----------
<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
(taxable-equivalent) and noninterest income.
na=not applicable
</FN>
20
COMMUNITY BANKING AND COMMERCIAL FINANCIAL INTERNATIONAL
INVESTMENT SERVICES GROUP SERVICES GROUP BANKING GROUP
---------------------- ---------------------- ---------------------
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001 2000 2001 2000 2001
- ------------------------------------------------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS:
Net interest income........................... $543,308 $519,801 $556,508 $518,390 $ 25,775 $ 27,357
Noninterest income............................ 318,470 311,174 133,711 112,405 44,824 43,198
-------- -------- -------- -------- -------- --------
Total revenue................................. 861,778 830,975 690,219 630,795 70,599 70,555
Noninterest expense(1)........................ 535,256 556,510 220,460 234,659 40,421 41,737
Credit expense................................ 36,497 32,780 89,763 99,370 5,949 3,530
-------- -------- -------- -------- -------- --------
Income before income tax
expense (benefit)........................... 290,025 241,685 379,996 296,766 24,229 25,288
Income tax expense (benefit).................. 110,935 92,444 137,262 101,406 9,267 9,672
-------- -------- -------- -------- -------- --------
Net income (loss)............................. $179,090 $149,241 $242,734 $195,360 $ 14,962 $ 15,616
======== ======== ======== ======== ======== ========
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(2)................................ $ 8,013 $ 8,776 $ 16,853 $ 15,968 $ 953 $ 980
Total assets.................................. 8,935 9,731 18,643 17,802 1,508 1,346
Total deposits(2)............................. 14,163 14,134 6,238 6,979 944 1,403
FINANCIAL RATIOS:
Return on risk adjusted capital(3)............ 42% 35% 21% 14% 20% 24%
Return on average assets(3)................... 2.68 2.05 1.74 1.47 1.33 1.55
Efficiency ratio(4)........................... 62.11 66.97 31.94 37.20 57.25 59.16
UNIONBANCAL
GLOBAL MARKETS GROUP OTHER CORPORATION
---------------------- ---------------------- -----------------------
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001 2000 2001 2000 2001
- ------------------------------------------------- -------- -------- -------- -------- ---------- ----------
RESULTS OF OPERATIONS:
Net interest income..................... $ 19,829 $ 31,696 $ 40,379 $ 46,831 $1,185,799 $1,144,075
Noninterest income...................... (9,789) 18,198 6,792 37,628 494,008 522,603
-------- -------- -------- -------- ---------- ----------
Total revenue........................... 10,040 49,894 47,171 84,459 1,679,807 1,666,678
Noninterest expense(1).................. 11,756 18,540 21,842 80,533 829,735 931,979
Credit expense.......................... -- 150 57,791 79,170 190,000 215,000
-------- -------- -------- -------- ---------- ----------
Income before income tax
expense (benefit)..................... (1,716) 31,204 (32,462) (75,244) 660,072 519,699
Income tax expense (benefit)............ (656) 11,935 (28,198) (45,324) 228,610 170,133
-------- -------- -------- -------- ---------- ----------
Net income (loss)....................... $ (1,060) $ 19,269 $ (4,264) $(29,920) $ 431,462 $ 349,566
======== ======== ======== ======== ========== ==========
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(2).......................... $ -- $ 64 $ 485 $ 360 $ 26,304 $ 26,148
Total assets............................ 3,604 4,932 830 734 33,520 34,545
Total deposits(2)....................... 3,306 3,023 669 730 25,320 26,269
FINANCIAL RATIOS:
Return on risk adjusted capital(3)...... (1)% 9% na na na na
Return on average assets(3)............. (0.04) 0.52 na na 1.72% 1.35%
Efficiency ratio(4)..................... 117.09 37.16 na na 49.34 55.86
- -----------
<FN>
(1) "Other" includes first and second quarter 2000 restructuring credits of $19.0 million ($11.8 million, net of tax).
(2) Represents loans and deposits for each business segment after
allocation between the segments of loans and deposits originated in one
segment but managed by another segment.
(3) Annualized.
(4) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income.
na=not applicable
</FN>
21
COMMUNITY BANKING AND INVESTMENT SERVICES GROUP
The Community Banking and Investment Services Group strives to provide
the best possible financial products to individuals and small businesses
including a broad set of credit, deposit and trust products delivered through
branches, relationship managers, private bankers and trust administrators. The
Community Banking and Investment Services Group provides its customers with high
quality customer service executed through a number of responsive and efficient
delivery channels.
In the third quarter of 2001, net income decreased $12.4 million, or 20
percent, compared to the prior year quarter. Total revenue decreased $12.0
million, or 4 percent, compared to a year earlier. Despite increased asset and
deposit volumes, net interest income decreased $11.8 million over the prior year
primarily due to the declining interest rate environment. Noninterest income was
relatively flat from the prior year quarter. However, excluding auto lease
residual writedowns in the prior year quarter of $5.0 million, noninterest
income decreased 5 percent compared to a year earlier. Noninterest expense
increased $10.8 million, or 6 percent, compared to a year earlier with the
majority of that increase being attributable to higher salaries and employee
benefits and an increase in advertising expense.
In 2001, the Community Banking and Investment Services Group has been
emphasizing growth in the consumer asset portfolio, expanding wealth management
services, extending the small business franchise and expanding the branch
network. The strategy for growing the consumer asset portfolio primarily focuses
on mortgage and home equity products, originated through the branch network, as
well as through wholesale, correspondent, and wholesale loan purchases.
Residential loans have grown by $1.6 billion, or 52 percent, since the same
period last year. The Wealth Management division is focused on becoming the
preferred provider of banking and investment products for affluent individuals
in geographic areas already served by us. This will be achieved through a
combination of superior service, a broad product suite, an increased number of
banking locations convenient to the targeted clientele and improved
cross-selling programs. Our completed acquisition of Copper Mountain Trust
Company is expected to enhance our growing custody and 401(k) administration
businesses. Core elements of the initiative to extend our small business
franchise include enhancing the sales force, increasing marketing activities,
introducing new insurance and trade finance products, adding new locations, and
developing online capabilities to complement physical distribution. Expansion of
the distribution network will be achieved through acquisitions and de novo
branching. Expansion opportunities exist in both Southern California, where we
have a particularly strong presence, and Northern California.
In addition to our traditional network channels, the Community Banking
and Investment Services Group has an established alliance with Navicert
Financial Corporation, doing business as NIX Check Cashing and Operation Hope.
This alliance has allowed our small business and consumer clients access to a
unique blend of financial services combining the NIX Check Cashing services,
Union Bank of California Banking Services and Operation Hope small business
education services. Checking and savings account services are available today
through selected NIX Check Cashing locations with future services planned to
include applications for consumer loans, credit cards, new and used car loans,
home equity loans and residential mortgages. The NIX Check Cashing alliance
complements our current network of 15 Cash and Save(R) outlets located
throughout Southern and Central California.
The Community Banking and Investment Services Group is comprised of
four major divisions: Community Banking, Wealth Management, Institutional
Services and Asset Management, and Government and Not-For-Profit Markets.
COMMUNITY BANKING serves over one million consumer households and
businesses through its 244 full-service branches in California, 6 full-service
branches in Oregon and Washington, and its network of 458 proprietary ATMs.
Customers may also access our services 24 hours a day by telephone or through
our Bank@Home product at www.UBOC.com. In addition, the division offers
automated teller and point-of-sale debit services through our membership in the
STAR System, the largest shared ATM network in the Western United States.
22
This division is organized by service delivery method, by markets and
by geography. We serve our customers in the following ways:
o through community banking branches, which serve consumers and
businesses with checking and deposit services, as well as various
types of consumer financing;
o through on-line access to our internet banking services, which
augment our physical delivery channels by providing a wide array of
customer transaction, bill payment and loan payment services;
o through business banking centers, which serve businesses with sales
up to $5 million; and
o through in-store branches, 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 integrated and
customized 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 customized
deposit and credit products. The Private Bank's strategy is to
expand its business by leveraging existing Bank client
relationships, increasing its geographic market coverage and the
breadth of its products and services. Through 12 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 a
full line of investment products to individuals and institutional
clients. Its primary strategy is to further penetrate our existing
client base.
INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment
management and administration services for a broad range of individuals and
institutions.
o HighMark Capital Management, Inc., a registered investment advisor,
provides investment advisory services to affiliated domestic and
offshore mutual funds, including the HighMark Funds. It also
provides advisory services to Union Bank of California trust
clients, including corporations, pension funds and individuals.
HighMark Capital Management also provides mutual fund support
services. HighMark Capital Management'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 Business Trust provides retirement services, which includes trustee
services, investment management, and 401(k) administration and
record keeping, to businesses, professional corporations,
government agencies, unions and non-profit organizations. Business
Trust's strategy is to leverage the Bank's existing commercial
relationships and third-party distribution network which includes
attorneys, certified public accountants and third party
administration firms.
o Securities Services is engaged in domestic and multi-currency
custody, safekeeping, mutual fund accounting, securities lending,
and corporate trust services. Its client base includes financial
institutions, businesses, government agencies, unions, insurance
companies, mutual funds, investment managers and non-profit
organizations. Securities Services is the only West Coast based,
in-house provider of a full range of institutional trust services.
GOVERNMENT AND NOT-FOR-PROFIT MARKETS provides a full range of treasury
management, investment, and trust services to government entities and
not-for-profit organizations.
o The group, which primarily focuses on local, state, and federal
agencies, includes an expanding product offering to the Native
American government market. Niche markets have been developed that
service colleges, universities, trade associations, cultural
institutions, and religious non-profit organizations. The group's
strategy is to expand its market presence by continuing delivery of
23
innovative cash management products, broadening internet based
technology solutions, and expanding lending capabilities to tax-
exempt clients.
Through alliances with other financial institutions, the Community
Banking and Investment Services Group offers additional products and services,
such as credit cards, leasing, and asset-based and leveraged financing.
The group competes with larger banks by providing service quality
superior to that of its major competitors. We have been recognized as among the
highest rated banks in California for customer service quality and satisfaction.
The group's primary means of competing with community banks include its
large and convenient branch network and its reputation for innovative use of
technology to deliver banking services. We have the fifth largest branch network
among depository institutions in California. We also offer convenient banking
hours to consumers through our drive-through banking locations and selected
branches that are open seven days a week.
The group competes with a number of commercial banks, internet banks,
savings associations and credit unions, as well as more specialized financial
service providers such as investment brokerage companies, consumer finance
companies, and residential real estate lenders. The group's primary competitors
are other major depository institutions such as Bank of America, California
Federal, 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 customized financing and
cash management services to middle market and large corporate businesses
primarily headquartered in the western United States. The Commercial Financial
Services Group focuses on customer segmentation, allowing the group to provide
specialized financing expertise to specific geographic markets and industry
segments such as Energy, Entertainment, Real Estate and Retail. Relationship
managers and credit executives 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 high quality cash management services delivered through
specialized deposit managers with extensive experience in cash management
solutions for businesses.
In the third quarter of 2001, net income decreased $23.0 million, or 28
percent, compared to the prior year quarter. Net interest income decreased $25.9
million primarily due to lower asset volume and the declining rate environment.
Noninterest income decreased $6.1 million partly due to the gains from venture
capital investments in the prior year coupled with losses sustained in 2001 in
the Private Capital Portfolio. Excluding gains and losses from both periods, the
Commercial Financial Services Group showed a 10 percent growth in noninterest
income. Noninterest expense increased $6.9 million, or 9 percent, compared to a
year earlier due to higher expenses to support increased product sales and
deposit volume. Credit expense increased $1.1 million as a result of higher risk
assets in the portfolio.
The group's initiatives during 2001 include expanding wholesale deposit
activities, increasing domestic trade financing and expanding the item
processing business. Loan growth 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 operates a strong
processing business, including services such as check processing, front-end item
processing, cash vault services and digital imaging. Opportunities for
outsourcing these capabilities for correspondent banks, and credit unions are
significant. In the processing business, Commercial Financial Services Group
intends to build new capabilities, in addition to leveraging
24
existing capabilities. Some new initiatives underway include cash management
products with internet delivery, check truncation at point-of-sale, digital
certificates and e-bill payment and presentment. The combination of expanded
products and an emphasis on core competencies are expected to contribute to
strong earnings growth.
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 traditional
commercial lending, trade financing, and asset based loans;
o the Corporate Deposit Services Division, which provides deposit and
cash management expertise to clients in the middle market, large
corporate market and specialized industries;
o the Institutional and Deposit Services Division, which provides
deposit and cash management expertise to clients in specific
deposit-intensive industries;
o the Corporate Capital Markets Division, which provides merchant and
investment banking related products and services.
o the National Banking Division, which provides credit services to a
variety of specialized industries including retailers, finance
companies and insurance companies, as well as large corporate
clients headquartered outside the United States;
o the Real Estate Industries Division, which provides real estate
lending products such as construction loans, commercial mortgages
and bridge financing;
o the Energy Capital Services Division, which provides custom
financing and project financing to oil and gas companies, as well
as power and utility companies, in California and Texas; and
o the Communications, Media and Entertainment Division, which
provides custom financing to middle market and large corporate
clients in their defined industries.
The group competes with other banks primarily on the basis of its
reputation as a "business bank," the quality of its relationship managers, and
the delivery of superior customer service. We are recognized in California as
having a superior "business banking" reputation relative to other large banks.
We are also highly rated among financial institutions for our cash management
services and systems.
The group's main strategy is to target industries and companies for
which the group can reasonably expect to be one of a customer's primary banks.
Consistent with its strategy, the group attempts to serve a large part of its
targeted customers' credit and depository needs.
The group competes with a variety of other financial services
companies. Competitors include other major California banks, as well as
regional, national and international banks. In addition, we compete with
investment banks, commercial finance companies, leasing companies, and insurance
companies.
INTERNATIONAL BANKING GROUP
The International Banking Group focuses on providing correspondent
banking and trade finance related products and services to international
financial institutions worldwide, primarily in Asia. This focus includes
products and services such as letters of credit, international payments,
collections and financing of mostly short-term transactions. The group also
serves certain foreign firms and U.S. corporate clients in selected countries
where we have branches, including Taipei, Taiwan, Seoul, Korea and Tokyo, Japan.
In the U.S., the group serves subsidiaries and affiliates of non-Japanese Asian
companies and U.S. branches/agencies of foreign banks. The majority of revenue
generated by the International Banking Group is from customers domiciled outside
of the U.S.
In the third quarter of 2001, net income increased $0.3 million, or 8
percent, compared to the prior year quarter. Total revenue was slightly higher
compared to third quarter 2000. However, lower portfolio
25
exposure and a $0.3 million reduction in credit expense compared to the prior
year contributed to the group's overall increase in net income. The nature of
the International Banking Group business revolves around short-term, trade
financing and service-related income, which tends to result in significantly
lower credit risk when compared to other long-term lending activities.
The group has a long and stable history of providing correspondent
banking and trade-related products and services to international financial
institutions. The group continues to be a market leader, achieving strong
customer loyalty in the Asia Pacific correspondent banking market by providing
high quality products and services at competitive prices. The International
Banking Group head office is located in San Francisco with branches in Tokyo,
Taipei, Seoul, Manila and Hong Kong. In addition, the group maintains
representative offices in other parts of Asia and Latin America and an
international banking subsidiary in New York.
GLOBAL MARKETS GROUP
The Global Markets Group conducts business activities primarily to
support the previously described business groups and their customers. This group
offers a broad range of risk management products, such as foreign exchange and
interest rate swaps and caps. It trades money market, government, agency and
other securities to meet investment needs of institutional and business clients
of the Company. Another primary area of the group is treasury risk management
for the Company that encompasses wholesale funding, liquidity management,
interest rate risk management including securities portfolio management and
hedging activities.
In the third quarter of 2001, net income increased $10.0 million, or
311 percent, compared to the prior year quarter. Total revenue increased $16.5
million, or 181 percent, compared to a year earlier primarily resulting from a
120 percent increase in net interest income and a 315 percent increase in
noninterest income. Net interest income increased $7.4 million compared to the
prior year mainly due to an increase in hedge income that offsets our asset
sensitivity in a declining rate environment and growth in earning assets as part
of our asset/liability management strategy. Noninterest income increased $9.0
million compared to the prior year mainly due to current year gains on the sale
of securities in our securities available for sale portfolio as part of our
asset/liability management strategy and current year mark-to-market gains on our
trading securities portfolio. Noninterest expense was relatively flat from the
prior year.
OTHER
"Other" includes the following items:
o corporate activities that are not directly attributable to one of
the four major business units. Included in this category are
goodwill amortization and certain other nonrecurring items such as
restructuring charges and credits, merger and integration expense,
certain parent company non-bank subsidiaries, and the elimination
of the fully taxable-equivalent amounts;
o the adjustment between the credit expense under RAROC and the
provision for credit losses under US GAAP and earnings associated
with unallocated equity capital;
o the Credit Management Group, containing the Special Assets
Division, which includes most of the $299.8 million and $450.2
million of nonperforming assets for 2000 and 2001, respectively;
o the Pacific Rim Corporate Group, 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 outside the U.S., mostly in Japan; and
o the residual costs of support groups.
26
Net loss for "other" in the third quarter of 2001 was $0.8 million. The
results were impacted by the following factors:
o Credit expense of $6.3 million due to the difference between the
$50.0 million in provision for credit losses calculated under our
US GAAP methodology and the $43.7 million in expected losses for
the reportable business segments, which utilizes the RAROC
methodology,
o Net interest income of $16.9 million, which resulted from the
differences between the credit for equity for the reportable
segments under RAROC and the net interest income earned by the
consolidated Company, and a credit for demand deposits in the
Pacific Rim Corporate Group,
o Noninterest income of $2.1 million, and
o Noninterest expense of $25.1 million.
Net loss for "other" in the third quarter of 2000 was $19.5 million.
The results were impacted by the following factors:
o Net interest income of $12.1 million, which resulted from the
differences between the credit for equity for the reportable
segments under RAROC and the net interest income earned by the
consolidated Company,
o Credit expense of $34.6 million due to the difference between the
$80.0 million in provision for credit losses calculated under our
US GAAP methodology and the $45.4 million in expected losses for
the reportable business segments, which utilizes the RAROC
methodology, and
o Noninterest expense of $17.2 million.
27
NET INTEREST INCOME
The following tables show the major components of net interest income
and net interest margin.
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 2001
-------------------------------------- ------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) RATE(1) BALANCE EXPENSE (1) RATE (1)
- ---------------------- ----------- ----------- -------- ----------- ------------ --------
ASSETS
Loans:
Domestic.......................... $25,440,873 $559,071 8.74% $24,825,234 $442,062 7.08%
Foreign........................... 1,014,102 17,568 6.89 1,091,866 13,451 4.89
Securities--taxable.................. 3,349,476 54,602 6.52 4,853,629 75,728 6.24
Securities--tax-exempt............... 67,962 1,643 9.68 42,501 1,475 13.88
Interest bearing deposits in banks... 174,526 2,775 6.32 61,074 622 4.04
Federal funds sold and securities
purchased under resale agreements. 74,158 1,263 6.77 164,876 1,398 3.36
Trading account assets............... 278,049 4,200 6.01 303,879 1,691 2.21
----------- -------- ----------- --------
Total earning assets......... 30,399,146 641,122 8.40 31,343,059 536,427 6.81
-------- --------
Allowance for credit losses.......... (521,989) (639,736)
Cash and due from banks.............. 2,109,093 2,191,527
Premises and equipment, net.......... 428,854 489,181
Other assets......................... 1,274,966 1,232,909
----------- -----------
Total assets................. $33,690,070 $34,616,940
=========== ===========
LIABILITIES
Domestic deposits:
Interest bearing.................. $ 5,977,345 $ 41,506 2.76 $5,941,131 $ 33,509 2.24
Savings and consumer time......... 3,381,638 30,969 3.64 3,481,091 26,605 3.03
Large time........................ 4,602,394 71,931 6.22 4,346,272 45,737 4.18
Foreign deposits..................... 1,764,375 25,506 5.75 1,986,119 15,954 3.19
----------- -------- ----------- --------
Total interest bearing
deposits.................. 15,725,752 169,912 4.30 15,754,613 121,805 3.07
----------- -------- ----------- --------
Federal funds purchased and
securities sold under repurchase
agreements........................ 1,644,888 26,994 6.53 1,413,866 12,265 3.44
Commercial paper..................... 1,595,462 26,072 6.50 1,330,949 11,844 3.53
Other borrowed funds................. 243,854 3,044 4.97 404,629 4,914 4.82
Subordinated capital notes........... 226,630 4,060 7.13 200,000 2,142 4.25
UnionBanCal Corporation--obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust............................. 350,000 6,414 7.32 352,363 4,940 5.62
----------- -------- ----------- --------
Total borrowed funds......... 4,060,834 66,584 6.53 3,701,807 36,105 3.87
----------- -------- ----------- --------
Total interest bearing
liabilities............... 19,786,586 236,496 4.76 19,456,420 157,910 3.22
-------- --------
Noninterest bearing deposits......... 9,676,284 10,636,680
Other liabilities.................... 1,042,033 1,026,176
----------- -----------
Total liabilities............ 30,504,903 31,119,276
SHAREHOLDERS' EQUITY
Common equity........................ 3,185,167 3,497,664
----------- -----------
Total shareholders' equity... 3,185,167 3,497,664
----------- -----------
Total liabilities and
shareholders' equity...... $33,690,070 $34,616,940
=========== ===========
Net interest income/margin
(taxable-equivalent basis)........ 404,626 5.30% 378,517 4.81%
Less: taxable-equivalent adjustment.. 641 426
-------- --------
Net interest income.......... $403,985 $378,091
======== ========
<FN>
__________________
(1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming loans.
The amortized portion of net loan origination fees (costs) is included
in interest income on loans, representing an adjustment to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
</FN>
28
FOR THE NINE MONTHS ENDED
-------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 2001
-------------------------------------- ------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE (1) RATE(1) BALANCE EXPENSE (1) RATE (1)
- ---------------------- ----------- ----------- -------- ----------- ------------ --------
ASSETS
Loans:
Domestic................... $25,248,387 $1,622,722 8.59% $25,093,475 $1,433,167 7.63%
Foreign.................... 1,055,534 53,386 6.76 1,054,397 45,873 5.82
Securities--taxable............ 3,290,918 159,204 6.45 4,477,761 212,030 6.31
Securities--tax-exempt......... 69,078 5,134 9.91 57,943 4,731 10.89
Interest bearing deposits in
banks...................... 193,050 7,522 5.20 68,631 2,249 4.38
Federal funds sold and
securities purchased under
resale agreements.......... 137,987 6,364 6.16 142,965 4,585 4.29
Trading account assets........ 272,626 12,281 6.02 333,906 6,817 2.73
----------- ---------- ----------- ----------
Total earning assets.. 30,267,580 1,866,613 8.23 31,229,078 1,709,452 7.31
---------- ----------
Allowance for credit losses... (500,137) (635,230)
Cash and due from banks....... 2,111,443 2,204,603
Premises and equipment, net... 425,880 484,682
Other assets.................. 1,215,413 1,262,310
----------- -----------
Total assets.......... $33,520,179 $34,545,443
=========== ===========
LIABILITIES
Domestic deposits:
Interest bearing........... $ 5,942,695 $ 117,648 2.64 $ 5,999,738 $ 110,321 2.46
Savings and consumer time.. 3,395,513 89,318 3.51 3,394,569 84,878 3.34
Large time................. 4,581,849 203,659 5.94 4,600,627 171,195 4.98
Foreign deposits.............. 1,869,177 76,872 5.49 1,985,523 60,944 4.10
----------- ---------- ----------- ----------
Total interest bearing
deposits........... 15,789,234 487,497 4.12 15,980,457 427,338 3.58
----------- ---------- ----------- ----------
Federal funds purchased and
securities sold under
repurchase agreements...... 1,573,315 72,383 6.15 1,419,912 48,687 4.58
Commercial paper.............. 1,539,749 71,004 6.16 1,383,999 46,882 4.53
Other borrowed funds.......... 366,568 14,212 5.18 456,195 16,630 4.87
Subordinated capital notes.... 274,036 13,997 6.82 200,000 7,873 5.26
UnionBanCal
Corporation--obligated
mandatorily redeemable
preferred securities of
subsidiary grantor trust... 350,000 19,788 7.53 352,215 16,329 6.18
----------- ---------- ----------- ----------
Total borrowed funds.. 4,103,668 191,384 6.23 3,812,321 136,401 4.78
----------- ---------- ----------- ----------
Total interest bearing
liabilities........ 19,892,902 678,881 4.56 19,792,778 563,739 3.81
---------- ----------
Noninterest bearing deposits.. 9,530,873 10,288,593
Other liabilities............. 1,001,029 1,049,511
----------- -----------
Total liabilities..... 30,424,804 31,130,882
SHAREHOLDERS' EQUITY
Common equity................. 3,095,375 3,414,561
----------- -----------
Total shareholders'
equity............. 3,095,375 3,414,561
----------- -----------
Total liabilities and
shareholders' equity $33,520,179 $34,545,443
=========== ===========
Net interest income/margin
(taxable-equivalent basis). 1,187,732 5.23% 1,145,713 4.90%
Less: taxable-equivalent
adjustment................. 1,933 1,638
---------- ----------
Net interest income... $1,185,799 $1,144,075
========== ==========
<FN>
__________________
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming loans.
The amortized portion of net loan origination fees (costs) is included
in interest income on loans, representing an adjustment to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
</FN>
Net interest income is interest earned on loans and securities less
interest expense on deposit accounts and borrowings. Primary factors affecting
the level of net interest income include the margin between the yield earned on
interest earning assets and the rate paid on interest bearing liabilities, as
well as the volume and composition of average interest earning assets and
average interest bearing liabilities.
29
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
Net interest income, on a taxable-equivalent basis, was $378.5 million
in the third quarter of 2001, compared with $404.6 million in the third quarter
of 2000. This decrease of $26.1 million, or 6 percent, was attributable
primarily to a lower net interest margin which was unfavorably impacted by the
declining interest rate environment and a strategic shift in our loan portfolio
to increase the mix of less volatile residential real estate loans. The
declining interest environment contributed to lower yields on loans and other
interest earning assets, which was only partially offset by lower rates on
deposits, which have not repriced as rapidly as our interest-sensitive assets.
The lower interest rate environment resulted in lower yields on average earning
assets of 159 basis points, coupled with lower rates paid on average interest
bearing liabilities of 154 basis points. The net interest margin decreased 49
basis points to 4.81 percent.
Average earning assets were $31.3 billion in the third quarter of 2001,
compared with $30.4 billion in the third quarter of 2000. This growth was
attributable to a $1.5 billion, or 43 percent, increase in average securities.
The increase in average securities, which was comprised primarily of fixed rate
available for sale securities, reflected liquidity and interest rate risk
management actions. Although average loans were slightly lower by $537.9
million, or 2 percent, over the third quarter of 2000, the loan mix has
substantially changed. The decrease in average loans was mostly due to a $1.9
billion decrease in average commercial loans, mostly offset by an increase in
average residential mortgages of $1.6 billion, both of which resulted from a
strategic portfolio shift from more volatile commercial loans. In addition,
average real estate construction loans increased $220.3 million, average
consumer loans decreased $340.4 million, average lease financing decreased
$139.2 million, and average commercial mortgages decreased $14.7 million.
Average noninterest bearing deposits of $10.6 billion were $960.4
million, or 10 percent, higher over the third quarter of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
Net interest income, on a taxable-equivalent basis, was $1,145.7
million in the first nine months of 2001, compared with $1,187.7 million in the
first nine months of 2000. This decrease of $42.0 million, or 4 percent, was
attributable primarily to a lower net interest margin, which was unfavorably
impacted by the declining interest rate environment and a strategic shift in our
loan portfolio to increase the mix of less volatile, yet lower yielding
residential real estate loans. The declining interest environment contributed to
lower yields on loans and other interest bearing assets and lower rates on most
interest bearing liabilities; however, we continued to experience slightly
higher rates on interest bearing core deposits, which have not repriced as
rapidly as our interest-sensitive assets mainly due to increased competitive
pricing on these products. The overall lower interest rate environment resulted
in lower yields on average earning assets of 92 basis points, coupled with lower
rates paid on average interest bearing liabilities of 75 basis points. The net
interest margin decreased 33 basis points to 4.90 percent.
Average earning assets were $31.2 billion in the first nine months of
2001, compared with $30.3 billion in the first nine months of 2000. This growth
was attributable to a $1.2 billion, or 35 percent, increase in average
securities. The increase in average securities, which was comprised primarily of
fixed rate available for sale securities, reflected liquidity and interest rate
risk management actions. Although average loans were relatively flat over the
first nine months of 2000, the loan mix has substantially changed. Average
residential mortgages were higher by $1.2 billion and commercial loans were
lower by $1.1 billion, both of which resulted from a strategic portfolio shift
from more volatile commercial loans. In addition, average real estate
construction loans increased $241.2 million, average consumer loans decreased
$293.7 million, average commercial mortgages decreased $115.8 million, and
average lease financing decreased $83.6 million.
Average noninterest bearing deposits were $757.7 million, or 8 percent,
higher over the first nine months of 2000.
30
NONINTEREST INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------------- -------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, PERCENT SEPTEMBER 30, SEPTEMBER 30, PERCENT
(DOLLARS IN THOUSANDS) 2000 2001 CHANGE 2000 2001 CHANGE
- ------------------------ ------------- ------------- ------- ------------- ------------- -------
Service charges on
deposit accounts.... $53,779 $ 62,742 16.67% $153,987 $181,614 17.94%
Trust and investment
management fees..... 39,975 37,965 (5.03) 116,163 116,880 0.62
Merchant transaction
processing fees..... 19,354 21,315 10.13 54,887 60,814 10.80
International
commissions and fees 18,012 18,053 0.23 53,463 53,288 (0.33)
Brokerage commissions
and fees............ 8,616 8,786 1.97 27,309 26,764 (2.00)
Merchant banking fees.. 15,353 7,742 (49.57) 40,681 26,671 (34.44)
Gain on exchange of STAR
System stock........ -- -- -- -- 20,700 nm
Securities gains
(losses), net....... 3,104 (1,699) (154.74) 8,804 4,318 (50.95)
Other.................. 10,735 18,501 72.34 38,714 31,554 (18.49)
-------- -------- -------- --------
Total noninterest income $168,928 $173,405 2.65% $494,008 $522,603 5.79%
======== ======== ======== ========
<FN>
__________________
nm = not meaningful
</FN>
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
In the third quarter of 2001, noninterest income was $173.4 million, an
increase of $4.5 million, or 3 percent, over the same period in 2000. This
increase was primarily attributed to a $9.0 million increase in service charges
on deposit accounts, no auto lease residual writedowns in the third quarter of
2001 compared to $5.0 million in the third quarter of 2000, and a $2.0 million
increase in merchant transaction processing fees, partially offset by a $7.6
million decrease in merchant banking fees and a $2.0 million decrease in trust
and investment management fees. Securities gains, net decreased $4.8 million.
Revenue from service charges on deposit accounts was $62.7 million, an
increase of 17 percent over the third quarter of 2000. The increase was
primarily attributable to a 4 percent increase in average deposits and lower
earnings credits on customer deposit balances.
Trust and investment management fees were $38.0 million for third
quarter 2001, a decrease of 5 percent over the same prior year period. The
decrease was primarily attributed to current market conditions and their impact
on transaction and asset-based fees. In addition, the current quarter includes
incremental revenue of $1.8 million resulting from the acquisition of Copper
Mountain Trust Company, which occurred on January 31, 2001.
Merchant transaction processing fees were $21.3 million, an increase of
10 percent over the third quarter of 2000. The increase was primarily due to an
increase in the volume of merchant credit card drafts.
Merchant banking fees were $7.7 million, a decrease of 50 percent from
third quarter 2000. The decrease was primarily due to lower demand for
syndication and investment banking activities as a result of current market
conditions.
Securities losses, net, were $1.7 million, compared with securities
gains, net, of $3.1 million in the third quarter of 2000. In the prior year
quarter, we had realized gains of $3.1 million, which were primarily related to
various venture capital and equities investments. In the current year, we had
permanent writedowns of $9.5 million on venture capital and equities
investments, partially offset by realized gains of $7.5 million on the sale of
securities in our securities available for sale portfolio as part of our
asset/liability management strategy and realized gains of $0.3 million on
venture capital and equity investments.
31
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
In the first nine months of 2001, noninterest income was $522.6
million, an increase of $28.6 million, or 6 percent, over the same period in
2000. This increase was primarily due to a $27.6 million increase in service
charges on deposit accounts, a $20.7 million gain recognized when our stock
holding in STAR System was exchanged for Concord EFS stock, and a $5.9 million
increase in merchant transaction processing fees, partially offset by a $14.0
million decrease in merchant banking fees, higher auto lease residual writedowns
of $10.8 million in the current year, and a $4.1 million gain on the sale of a
building in the prior year. In addition, securities gains, net were 51 percent,
or $4.5 million, lower than the first nine months of 2000.
Revenue from service charges on deposit accounts was $181.6 million, an
increase of 18 percent over the first nine months of 2000. The increase was
primarily attributable to a 4 percent increase in average deposits, lower
earnings credits on customer deposit balances, and higher overdraft fees due to
a change in fee structures in 2000.
Trust and investment management fees were $116.9 million for the first
nine months of 2001, an increase of 1 percent over the same prior year period.
This growth is attributable to $4.4 million in incremental revenue resulting
from the acquisition of Copper Mountain Trust Company, which occurred on January
31, 2001. Excluding Copper Mountain Trust Company, fees from pre-existing
businesses were lower year-over-year primarily due to current market conditions
and their impact on transaction and asset-based fees.
Merchant transaction processing fees were $60.8 million, an increase of
11 percent over the first nine months of 2000. The increase was primarily due to
an increase in the volume of merchant credit card drafts.
Merchant banking fees were $26.7 million, a decrease of 34 percent from
the first nine months of 2000. The decrease was primarily due to lower demand
for syndication and investment banking activities as a result of current market
conditions.
Securities gains, net, were $4.3 million, a decrease of 51 percent over
the first nine months of 2000. In the current year, we had realized gains of
$23.9 million including gains of $9.7 million on the securities in our
securities available for sale portfolio as part of our asset/liability
management strategy, a $9.5 million gain on the sale of our Concord EFS stock,
and $4.6 million in realized gains, net, on venture capital and equity
investments, which were partially offset by permanent writedowns on venture
capital and equity investments of $19.6 million.
32
NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------------------------- -----------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, PERCENT SEPTEMBER 30, SEPTEMBER 30, PERCENT
(DOLLARS IN THOUSANDS) 2000 2001 CHANGE 2000 2001 CHANGE
- ------------------------ ------------- ------------- ------- ------------- ------------- -------
Salaries and other
compensation......... $130,085 $140,147 7.73% $387,411 $408,413 5.42%
Employee benefits....... 22,142 31,025 40.12 57,072 91,830 60.90
-------- -------- -------- --------
Salaries and employee
benefits.......... 152,227 171,172 12.45 444,483 500,243 12.54
Net occupancy........... 24,664 23,779 (3.59) 69,358 70,375 1.47
Equipment............... 15,702 16,985 8.17 47,706 48,252 1.14
Merchant transaction
processing........... 12,784 13,324 4.22 37,144 39,687 6.85
Communications.......... 11,736 13,074 11.40 33,048 36,582 10.69
Professional services... 10,760 9,982 (7.23) 29,278 29,155 (0.42)
Advertising and public
relations............ 8,042 10,084 25.39 20,546 28,134 36.93
Data processing......... 8,577 8,885 3.59 26,199 26,935 2.81
Software................ 5,850 8,250 41.03 16,831 22,614 34.36
Intangible asset
amortization......... 3,338 3,635 8.90 10,014 10,806 7.91
Foreclosed asset expense
(income)............. (14) (60) 328.57 7 1 (85.71)
Restructuring credit.... -- -- -- (19,000) -- (100.00)
Other................... 37,712 37,932 0.58 114,121 119,195 4.45
-------- -------- -------- --------
Total noninterest
expense......... $291,378 $317,042 8.81% $829,735 $931,979 12.32%
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
In the third quarter of 2001, noninterest expense was $317.0 million,
an increase of $25.7 million, or 9 percent, over the same period in 2000. This
increase was mostly due to an $18.9 million increase in salaries and employee
benefits, a $2.4 million increase in software expense, and a $2.0 million
increase in advertising and public relations expense.
Salaries and employee benefits were $171.2 million, an increase of 12
percent over the third quarter of 2000. This increase was primarily due to an
increase in salaries and employee benefits necessary to achieve our strategic
goals to expand key businesses, annual merit increases, and an increase in
health insurance expense partially due to lower company owned life insurance
(COLI) income of $2.9 million in the current quarter.
Advertising and public relations expense was $10.1 million, an increase
of 25 percent, over the third quarter of 2000 primarily attributable to higher
marketing expenditures on programs targeted toward increasing growth in
deposits, small business relationships, and residential mortgages.
Software expense was $8.3 million, an increase of 41 percent, over the
third quarter of 2000 primarily from higher software amortization and software
maintenance contract expenses related to the implementation of ebusiness
initiatives.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001
In the first nine months of 2001, excluding the first and second
quarter 2000 restructuring credits, noninterest expense was $932.0 million, an
increase of $83.2 million, or 10 percent, over the same period in 2000. This
increase was mostly due to a $55.8 million increase in salaries and employee
benefits, a $7.6 million increase in advertising and public relations expense, a
$5.8 million increase in software expense, and a $14.1 million increase in all
other noninterest expenses.
Salaries and employee benefits were $500.2 million, an increase of 13
percent over the first nine months of 2000. This increase was primarily due to a
one-time credit for an accounting methodology change in recognizing pension
expense of $16.0 million in the first quarter of 2000, an increase in salaries
33
and employee benefits necessary to achieve our strategic goals to expand key
businesses, annual merit increases, and higher health insurance expenses
partially due to lower COLI income in the current year.
Advertising and public relations expense was $28.1 million, an increase
of 37 percent over the first nine months of 2000 primarily attributable to
higher marketing expenditures on programs targeted toward increasing growth in
deposits, small business relationships, and residential mortgages.
Software expense was $22.6 million, an increase of 34 percent, over the
third quarter of 2000 primarily from higher software amortization and software
maintenance contract expenses related to the implementation of ebusiness
initiatives.
All other noninterest expense was $381.0 million, an increase of 4
percent over the first nine months of 2000 due to the recognition of a loss of
$6.2 million at adoption of Statement of Financial Accounting Standards (SFAS)
No. 133, higher operating losses of $4.4 million including higher legal
settlements and forgery losses in the first nine months of 2001, and higher
derivative-related expenses of $3.6 million due to changes in the value of a
portion of the interest rate options that are excluded from hedge accounting
under SFAS No. 133.
INCOME TAX EXPENSE
Income tax expense in the third quarter of 2001 was $59.3 million, a 32
percent effective income tax rate. For the third quarter of 2000, the effective
income tax rate was 35 percent.
Income tax expense in the first nine months of 2001 was $170.1 million,
a 33 percent effective income tax rate. For the first nine months of 2000, the
effective income tax rate was 35 percent.
The decrease in the year-over-year effective income tax rates for the
third quarter and first nine months of the year was primarily attributed to an
increase in low income housing tax credits in the first nine months of 2001.
34
LOANS
The following table shows loans outstanding by loan type.
PERCENT CHANGE TO
SEPTEMBER 30, 2001 FROM:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 2000 2001 2000 2000
- ---------------------------- ------------- ------------ ------------- ------------- ------------
Domestic:
Commercial, financial and
industrial............ $14,207,319 $13,748,838 $12,227,368 (13.94)% (11.07)%
Construction............. 944,263 939,302 1,119,854 18.60 19.22
Mortgage:
Residential........... 2,984,627 3,294,485 4,537,854 52.04 37.74
Commercial............ 3,373,801 3,348,252 3,434,037 1.79 2.56
----------- ----------- -----------
Total mortgage...... 6,358,428 6,642,737 7,971,891 25.38 20.01
Consumer:
Installment........... 1,752,292 1,655,676 1,326,056 (24.32) (19.91)
Home equity........... 736,835 755,053 810,188 9.96 7.30
----------- ----------- -----------
Total consumer...... 2,489,127 2,410,729 2,136,244 (14.18) (11.39)
Lease financing.......... 1,148,314 1,134,440 981,290 (14.55) (13.50)
----------- ----------- -----------
Total loans in domestic
offices........... 25,147,451 24,876,046 24,436,647 (2.83) (1.77)
Loans originated in foreign
branches................. 1,010,488 1,134,352 1,157,642 14.56 2.05
----------- ----------- -----------
Total loans......... $26,157,939 $26,010,398 $25,594,289 (2.15)% (1.60)%
=========== =========== ===========
Our lending activities are predominantly domestic, with such loans
comprising 95 percent of the total loan portfolio at September 30, 2001. Total
loans at September 30, 2001 were $25.6 billion, a decrease of 2 percent, over
the prior year. The decrease was mainly attributable to a decline in the
commercial, financial and industrial loan portfolio, which decreased $2.0
billion, partially offset by the residential mortgage portfolio, which increased
$1.6 billion. In addition, the construction loan portfolio increased $175.6
million, the commercial mortgage portfolio increased $60.2 million, the consumer
loan portfolio decreased $352.9 million, and the lease financing portfolio
decreased $167.0 million.
Commercial, financial and industrial loans represent the largest
category in the loan portfolio. These loans are extended principally to
corporations, middle market businesses, and small businesses, with no industry
concentration exceeding 10 percent of total commercial, financial and industrial
loans. At September 30, 2001 and 2000, the commercial, financial and industrial
loan portfolio was $12.2 billion, or 48 percent of total loans, and $14.2
billion, or 54 percent of total loans, respectively. The decrease of $2.0
billion, or 14 percent, from the prior year was primarily attributable to loan
sales and reductions in our exposures in nonrelationship syndicated loans. The
nonrelationship syndicated loan portfolio, which comprises an estimated $1.1
billion of our total commercial, financial, and industrial loans, has caused a
disproportionate share of our credit problems. The reduction in commercial,
financial, and industrial loans is consistent with our strategy to reduce our
exposure in more volatile commercial loans and increase the percentage of more
stable residential mortgages.
The construction loan portfolio totaled $1.1 billion, or 4 percent of
total loans, at September 30, 2001, compared with $944.3 million, or 4 percent
of total loans, at September 30, 2000. This growth of $175.6 million, or 19
percent, from the prior year was primarily attributable to a reasonably stable,
but slowing, California real estate market and West Coast economy during 2001.
35
Commercial mortgages were $3.4 billion, or 13 percent of total loans,
at September 30, 2001 and September 30, 2000. The commercial mortgage loan
portfolio consists of loans on commercial and industrial projects primarily in
California. The increase in commercial mortgages of $60.2 million, or 2 percent,
from September 30, 2000, was also primarily due to a reasonably stable, but
slowing, California real estate market and West Coast economy during 2001.
Residential mortgages were $4.5 billion, or 18 percent of total loans,
at September 30, 2001, compared with $3.0 billion, or 11 percent of total loans,
at September 30, 2000. The residential mortgage portfolio consists of
residential loans secured by one-to-four family residential properties primarily
in California. The increase in residential mortgages of $1.6 billion, or 52
percent, from September 30, 2000, was influenced by our strategic decision to
increase our residential mortgage portfolio through additional channels such as
wholesale and correspondent, and to a lesser extent, the bulk whole loan
purchase channel.
Consumer loans totaled $2.1 billion, or 8 percent of total loans, at
September 30, 2001, compared with $2.5 billion, or 10 percent of total loans, at
September 30, 2000. The decrease of $352.9 million, or 14 percent, was primarily
attributable to exiting the automobile dealer lending business in the third
quarter of 2000, partially offset by an increase in home equity loans.
Lease financing totaled $1.0 billion, or 4 percent of total loans, at
September 30, 2001, compared with $1.1 billion, or 4 percent of total loans, at
September 30, 2000. As we previously announced, effective April 20, 2001, we
discontinued our auto leasing activity.
Loans originated in foreign branches totaled $1.2 billion, or 5 percent
of total loans, at September 30, 2001 and $1.0 billion, or 4 percent of total
loans, at September 30, 2000.
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 September 30, 2000, December 31, 2000 and September 30, 2001 for each
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 for each country exclude local
currency outstandings. For those individual countries 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
- ------------------------------------------------------------ ------------ -------- ------------ ------------
September 30, 2000
Korea....................................................... $332 $-- $34 $366
December 31, 2000
Korea....................................................... 507 -- 46 553
September 30, 2001
Korea....................................................... 470 -- 5 475
PROVISION FOR CREDIT LOSSES
We recorded a $50.0 million provision for credit losses in the third
quarter of 2001, compared with a $80.0 million provision for credit losses in
the third quarter of 2000. The provision for credit losses in the
36
first nine months ended September 30, 2001 was $215.0 million, compared with a
$190.0 million provision for credit losses in the nine months ended September
30, 2000. 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.
Our provision for credit losses in the third quarter and first nine
months of 2001 considered the following:
o The continuing application of stricter standards to the definitions
of potential and well-defined weaknesses in our loan portfolio,
o The current quarter improvement in asset quality in our domestic
commercial loan portfolio, and
o An overall improvement in the risk profile of our loan portfolio.
ALLOWANCE FOR CREDIT LOSSES
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, pools of loans, leases and commitments.
Changes in risk grades of both performing and nonperforming loans 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.
During the third quarter of 2001, we refined our methodology to more accurately
calculate loss factors for commercial pass graded credits. Loss factors are
developed in the following ways:
o Pass graded, for commercial, industrial and financial loans, as
well as all problem graded loan loss factors are derived from a
migration model that tracks historical loss over a period, which we
believe captures the inherent default losses on our loan portfolio,
o Pass graded loan loss factors for commercial real estate and
construction loans are based on the average annual net charge off
rate over a period reflective of a full economic cycle,
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 and
residential mortgage loans and automobile leases.
We believe that a business cycle is a period in which both upturns and
downturns in the economy have been reflected. The long-term nature of the most
recent economic cycle has required us to extend our historical perspective to
capture the highs and lows of a more typical economic cycle.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to an individually
impaired credit that management believes indicate the probability that a loss
has been incurred. This amount may be determined either by a method prescribed
by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", or by a
method which identifies certain qualitative factors.
37
The unallocated allowance contains amounts that are based on
management's evaluation of conditions that are not directly measured 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 are not 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 business cycle,
o Bank regulatory examination results, and
o Findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion
with our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of such condition
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 pass graded
non-real estate and construction commercial loans, as well as all problem graded
loans is designed to be self-correcting by taking into account our loss
experience over prescribed periods. Pooled loan loss factors are adjusted
quarterly 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.
COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT
LOSSES FROM DECEMBER 31, 2000
During the third quarter of 2001, there were no changes in estimation
methods or assumptions that affected our methodology for assessing the
appropriateness of the formula and specific allowances for credit losses.
Changes in estimates and assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
also affected the assessment of the unallocated allowance. However, we refined
our methodology for pass graded, commercial, financial and
38
industrial lending by utilizing the same migration model used for problem graded
credits. This change did not have a material effect on our allowance for credit
losses.
At December 31, 2000, our total allowance for credit losses was $614
million or 2.36 percent of the total loan portfolio and 153 percent of total
nonaccrual loans. At September 30, 2001, our total allowance for credit losses
was $630 million, or 2.46 percent of the total loan portfolio and 142 percent of
total nonaccrual loans. In addition, the allowance incorporates the results of
measuring impaired loans as provided in SFAS No. 114 and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures". These accounting standards prescribe the measurement methods,
income recognition and disclosures related to impaired loans. At December 31,
2000, total impaired loans were $400 million, and the associated impairment
allowance was $118 million compared with $445 million and $54 million,
respectively, at September 30, 2001. In addition, the formula allowance includes
amounts for those loans evaluated for impairment on a collective basis.
We recorded a $50 million provision in the third quarter of 2001 as a
result of management's assessment of factors, including the weakening US
economy, affecting elements of the communication/media, insurance, agriculture,
real estate, and other companies in domestic markets in which we operate and the
growth in, and changes in the composition of, the loan portfolio. Losses
inherent in these types of credits are more difficult to assess because
historically these have been more volatile than losses from other credits.
CHANGES IN THE FORMULA, SPECIFIC ALLOWANCES, AND UNALLOCATED ALLOWANCES
FROM DECEMBER 31, 2000
At September 30, 2001, the formula allowance was $374 million, compared
to $380 million at December 31, 2000, representing a decrease of $6 million.
At September 30, 2001, the specific allowance was $95 million compared
to $133 million at December 31, 2000, a decrease of $38 million. This was
primarily due to charge-offs.
Our problem credits continue to be centered in the commercial loan
portfolio and mostly within syndicated loan purchases. At this time, we see no
significant deterioration in the real estate or consumer loan portfolios.
At September 30, 2001, the unallocated allowance was $161 million
compared to $101 million at December 31, 2000, an increase of $60 million. In
evaluating the appropriateness of the unallocated allowance, we considered the
following factors, as well as more general factors, such as the interest rate
environment and the impact of the economic downturn on those borrowers who have
a more leveraged financial profile:
o the need to provide for the adverse effects of the California
energy crisis, which was eliminated, due to the absence of rolling
blackouts during the summer of 2001,
o the continued adverse effects of changes in the economic,
regulatory, and technology environments on borrowers in the
communications/media industry, which could be in the range of $19
million to $40 million,
o the adverse effects of the weakening economy and slowing trends in
consumer spending on borrowers in the retailing industry, which
could be in the range of $18 million to $37 million,
o the adverse effects of the well-publicized problems of the large
public utilities and the independent power producers in California,
which have been partially recognized through downgrades, which
could be in the range of $4 million to $17 million,
o the adverse effects of the weakening California economy on the real
estate industry in the San Francisco Bay Area and Northern
California, which could be in the range of $6 million to $13
million,
39
o the adverse effects of the September 11, 2001 terrorist attacks and
resulting insurance claims on the insurance industry, which could
be in the range of $5 million to $12 million,
o the adverse effects of overproduction and foreign supply, which
have lowered commodity prices on certain crops in the agriculture
industry, which could be in the range of $5 million to $11 million,
and
o the adverse effects of declining product life cycles and a slowing
demand for personal computers on borrowers in the technology
industry, which could be in the range of $5 million to $11 million.
There can be no assurance that the adverse impact of any of these
conditions on us will not be in excess of the ranges set forth above. See
"Certain Business Risks Factors" on page 44.
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 FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
(DOLLARS IN THOUSANDS) 2000 2001 2000 2001
- ---------------------------------------------------------------------------- -------- -------- -------- --------
Balance, beginning of period................................................ $500,731 $626,537 $470,378 $613,902
Loans charged off:
Commercial, financial and industrial..................................... 55,855 65,974 140,629 230,680
Construction............................................................. -- 567 -- 567
Mortgage................................................................. 18 37 133 95
Consumer................................................................. 2,867 3,299 8,861 9,534
Lease financing.......................................................... 827 807 2,158 2,595
-------- -------- -------- --------
Total loans charged off............................................... 59,567 70,684 151,781 243,471
Recoveries of loans previously charged off:
Commercial, financial and industrial..................................... 3,123 22,467 11,766 40,477
Mortgage................................................................. 30 -- 156 24
Consumer................................................................. 1,534 1,027 5,047 3,279
Lease financing.......................................................... 128 282 455 601
Foreign(1)............................................................... -- -- -- 14
-------- -------- -------- --------
Total recoveries of loans previously charged off...................... 4,815 23,776 17,424 44,395
-------- -------- -------- --------
Net loans charged off............................................... 54,752 46,908 134,357 199,076
Provision for credit losses................................................. 80,000 50,000 190,000 215,000
Foreign translation adjustment and other net additions (deductions)......... (83) 54 (125) (143)
-------- -------- -------- --------
Balance, end of period...................................................... $525,896 $629,683 $525,896 $629,683
======== ======== ======== ========
Allowance for credit losses to total loans.................................. 2.01% 2.46% 2.01% 2.46%
Provision for credit losses to net loans charged off........................ 146.11 106.59 141.41 108.00
Net loans charged off to average loans outstanding for the period(2)........ 0.82 0.72 0.68 1.02
<FN>
__________________
(1) Foreign loans are those loans originated in foreign branches.
(2) Annualized.
</FN>
Total loans charged off in the third quarter of 2001 increased by $11.1
million from the third quarter of 2000, due primarily to a $10.1 million
increase in commercial, financial and industrial loans charged off.
40
Charge-offs reflect the realization of losses in the portfolio that were
recognized previously through provisions for credit losses.
The third quarter's recoveries of loans previously charged off
increased by $19.0 million from the same period in 2000 primarily a result of
one significant recovery of $14 million. The percentage of net loans charged
off to average loans outstanding for the period decreased by 10 basis points
from the same period in 2000. At September 30, 2001, the allowance for credit
losses exceeded the annualized net loans charged off during the year, 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
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2000 2000 2001
- ----------------------------------------------------------------------- ------------- ------------ -------------
Commercial, financial and industrial................................... $262,169 $385,263 $419,544
Construction........................................................... 3,967 3,967 --
Commercial mortgage.................................................... 11,509 10,769 24,975
Foreign................................................................ 5,354 -- --
------------- ------------ -------------
Total nonaccrual loans.............................................. 282,999 399,999 444,519
Distressed loans held for sale......................................... 14,782 7,124 5,349
Foreclosed assets...................................................... 2,014 1,181 378
------------- ------------ -------------
Total nonperforming assets.......................................... $299,795 $408,304 $450,246
============= ============ =============
Allowance for credit losses............................................ $525,896 $613,902 $629,683
============= ============ =============
Nonaccrual loans to total loans........................................ 1.08% 1.54% 1.74%
Allowance for credit losses to nonaccrual loans........................ 185.83 153.48 141.65
Nonperforming assets to total loans, distressed loans held for sale and
foreclosed assets................................................... 1.15 1.57 1.76
Nonperforming assets to total assets................................... 0.89 1.16 1.28
At September 30, 2001, nonperforming assets totaled $450.2 million, an
increase of $150.5 million, or 50 percent, from a year earlier. The increase was
due to general deterioration in our loan portfolio.
Nonaccrual loans as a percentage of total loans were 1.74 percent at
September 30, 2001, compared with 1.08 percent at September 30, 2000.
Nonperforming assets as a percentage of total loans, distressed loans held for
sale, and foreclosed assets increased to 1.76 percent at September 30, 2001 from
1.15 percent at September 30, 2000.
41
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2000 2000 2001
- ----------------------------------------------------------------------- ------------- ------------ -------------
Commercial, financial and industrial................................... $ 5,758 $1,713 $ 5,993
Construction........................................................... 638 -- --
Mortgage:
Residential......................................................... 2,835 2,699 5,063
Commercial.......................................................... -- -- 710
------- ------ -------
Total mortgage................................................... 2,835 2,699 5,773
Consumer and other..................................................... 3,405 2,921 2,459
------- ------ -------
Total loans 90 days or more past due and still accruing............. $12,636 $7,333 $14,225
======= ====== =======
LIQUIDITY
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 Asset and Liability Management Policy approved by the Board of
Directors requires quarterly reviews of our liquidity by the Asset and Liability
Management Committee, which is composed of bank senior executives. Our liquidity
management draws upon the strengths of our extensive retail and commercial
market business franchise, coupled with the ability to obtain funds for various
terms in a variety of domestic and international money markets. Liquidity is
managed through the funding and investment functions of the Global Markets
Group.
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 shareholders' equity, funded 68 percent of average total assets
of $34.6 billion for the third quarter ended September 30, 2001. Most of the
remaining funding was provided by short-term borrowings in the form of
negotiable certificates of deposit, foreign deposits, federal funds purchased
and securities sold under repurchase agreements, commercial paper and other
borrowings.
Liquidity may also be provided by the sale or maturity of assets. Such
assets include interest bearing deposits in banks, federal funds sold and
securities purchased under resale agreements, and trading account securities.
The aggregate of these assets averaged $0.5 billion during the third quarter of
2001. Additional liquidity may be provided by securities available for sale that
amounted to $4.9 billion at September 30, 2001 and by loan maturities.
42
REGULATORY CAPITAL
The following table summarizes our risk-based capital, risk-weighted
assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION
MINIMUM "WELL-CAPITALIZED"
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY REGULATORY
(DOLLARS IN THOUSANDS) 2000 2000 2001 REQUIREMENT REQUIREMENT
- --------------------------------- --------------- -------------- -------------- ------------- -----------------
CAPITAL COMPONENTS
Tier 1 capital................... $ 3,520,717 $ 3,471,289 $ 3,631,340
Tier 2 capital................... 613,777 620,102 605,605
----------- ----------- -----------
Total risk-based capital......... $ 4,134,494 $ 4,091,391 $ 4,236,945
=========== =========== ===========
Risk-weighted assets............. $33,476,055 $33,900,404 $32,473,206
=========== =========== ===========
Quarterly average assets......... $33,637,908 $34,075,813 $34,572,908
=========== =========== ===========
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ ----- ------ -----
CAPITAL RATIOS
Total capital (to
risk-weighted assets)... $4,134,494 12.35% $4,091,391 12.07% $4,236,945 13.05% > $2,597,856 8.0% na
-
Tier 1 capital (to
risk-weighted assets)... 3,520,717 10.52 3,471,289 10.24 3,631,340 11.18 > 1,298,928 4.0 na
-
Leverage(1)................ 3,520,717 10.47 3,471,289 10.19 3,631,340 10.50 > 1,382,916 4.0 na
-
__________________
<FN>
(1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
na = not applicable
</FN>
UNION BANK OF CALIFORNIA, N.A.
MINIMUM "WELL-CAPITALIZED"
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY REGULATORY
(DOLLARS IN THOUSANDS) 2000 2000 2001 REQUIREMENT REQUIREMENT
- ---------------------------------- ------------- ------------ ------------- ----------- -----------------
CAPITAL COMPONENTS
Tier 1 capital.................... $ 3,295,828 $ 3,157,516 $ 3,275,643
Tier 2 capital.................... 506,616 513,144 495,165
Total risk-based capital.......... $ 3,802,444 $ 3,670,660 $ 3,770,808
Risk-weighted assets.............. $32,900,514 $33,341,752 $31,887,207
Quarterly average assets.......... $33,942,940 $34,173,719 $34,132,248
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
CAPITAL RATIOS
Total capital (to
risk-weighted assets).. $3,802,444 11.56% $3,670,660 11.01% $3,770,808 11.83% > $2,550,977 8.0% > $3,188,721 10.0%
- -
Tier 1 capital (to
risk-weighted assets).. 3,295,828 10.02 3,157,516 9.47 3,275,643 10.27 > 1,275,488 4.0 > 1,913,232 6.0
- -
Leverage(1)............... 3,295,828 9.71 3,157,516 9.24 3,275,643 9.60 > 1,365,290 4.0 > 1,706,612 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 issued by federal banking agencies, including minimum capital
requirements. We and Union Bank of California, N.A. are required to maintain
minimum ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1
capital to quarterly average assets (the leverage ratio).
Compared with December 31, 2000, our Tier 1 risk-based capital ratio at
September 30, 2001 increased 94 basis points to 11.18 percent, our total
risk-based capital ratio increased 98 basis points to
43
13.05 percent, and our leverage ratio increased 31 basis points to 10.50
percent. The increases in the capital ratios were primarily attributable to
higher common equity mainly related to higher net income and a lower risk-based
asset balance mainly due to lower commercial loan balances outstanding and
unused commitments in the third quarter of 2001.
As of September 30, 2001, management believes the capital ratios of
Union Bank of California, N.A. met all regulatory requirements of a
"well-capitalized" institution.
CERTAIN BUSINESS RISKS FACTORS
ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS
A substantial majority of our assets and deposits 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. In the early 1990's, the California economy
experienced an economic recession that resulted in increases in the level of
delinquencies and losses for us and many of the state's other financial
institutions. Economic conditions in California are currently in a downturn and
the outlook for recovery is subject to various uncertainties at this time,
including the long-term impact of the California energy crisis and the decline
in the technology sector. If economic conditions in California continue to
decline, we expect that our level of problem assets could increase accordingly.
ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD ADVERSELY AFFECT OUR
BUSINESS
We are subject to certain industry-specific economic factors. For
example, a portion of our total loan portfolio is related to real estate.
Accordingly, a downturn in the real estate industry in California could have an
adverse effect on our operations. Similarly, a portion of our total loan
portfolio is to borrowers in the agricultural industry. Adverse weather
conditions, combined with low commodity prices, may adversely affect the
agricultural industry and, consequently, may impact our business negatively. In
addition, auto leases comprise a portion of our total loan portfolio. We ceased
originating auto leases in April 2001; however, continued deterioration in the
used car market may result in additional losses on the valuation of auto lease
residuals on our existing auto leases. We provide loans to businesses in a
number of other industries that may be particularly vulnerable to
industry-specific economic factors, including the communications/media industry,
the retailing industry, and the technology industry. Industry-specific risks are
beyond our control and could adversely affect our portfolio of loans,
potentially resulting in an increase in nonperforming loans or charge-offs.
THE TRAGIC EVENTS OF SEPTEMBER 11 HAVE RESULTED IN INCREASED
UNCERTAINTY REGARDING THE OUTLOOK FOR ECONOMIC CONDITIONS.
The terrorist attacks on the World Trade Center and the Pentagon on
September 11, 2001 have resulted in increased uncertainty regarding the economic
outlook. Past experience suggests that shocks to American society of far lesser
severity have resulted in a temporary loss in consumer and business confidence
and a reduction in the rate of economic growth. With the U.S. economy already on
the edge of recession before the attacks, a downturn in California's economy is
now a distinct possibility. It is not possible at this time to project the
economic impact of these events. However, any further deterioration in either
the U.S. or the California economy would adversely affect our financial
condition and results of operations.
RISKS ASSOCIATED WITH THE CALIFORNIA ENERGY CRISIS COULD ADVERSELY AFFECT OUR
BUSINESS
Due to problems associated with the deregulation of the electrical
power industry in California, California utilities and other energy industry
participants have experienced difficulties with the supply and price of
electricity and natural gas. For example, earlier this year, two California
utilities publicly announced that their financial situation was grave and that
they had defaulted on certain payment obligations. The California energy
situation continues to be fluid and subject to many uncertainties and a number
of lawsuits and regulatory proceedings have been commenced concerning various
aspects of the
44
current energy situation. As a lender to segments of the utility industry, we
face the risk that energy-industry participants could sustain continuing
defaults on payments or seek bankruptcy protection.
In addition, although the situation has stabilized recently, customers
of the utilities have been faced this year with increased gas and electric
prices, power shortages and, in some cases, rolling blackouts. The long-term
impact of the energy crisis in California on our markets and our business cannot
be predicted but could result in an economic slow-down. This could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and, as a result, on our financial condition and results of operations.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS
Significant increases in market interest rates, or the perception that
an increase may occur, could adversely affect both our ability to originate new
loans and our ability to grow. Conversely, a decrease in interest rates could
result in an acceleration in the prepayment of loans. An increase in market
interest rates could also adversely affect the ability of our floating-rate
borrowers to meet their higher payment obligations. If this occurred, it could
cause an increase in nonperforming assets and charge-offs, which could adversely
affect our business.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD
Changes in market interest rates, including changes in the relationship
between short-term and long-term market interest rates or between different
interest rate indices, can impact our margin spread, that is, the difference
between the interest rates we charge on interest earning assets, such as loans,
and the interest rates we pay on interest bearing liabilities, such as deposits.
The impact, particularly in a falling interest rate environment, which is
currently the case, could result in an increase in our interest expense relative
to interest income.
SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD.; YOUR
INTERESTS MAY NOT BE THE SAME AS THE BANK OF TOKYO-MITSUBISHI'S INTERESTS
The Bank of Tokyo-Mitsubishi, Ltd., a wholly owned subsidiary of
Mitsubishi Tokyo Financial Group, Inc., owns a majority (67 percent as of
September 30, 2001) of the outstanding shares of our common stock. As a result,
The Bank of Tokyo-Mitsubishi, Ltd. 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 shareholders; issuance of any
additional common stock or other equity securities; incurrence of debt other
than in the ordinary course of business; the selection and tenure of our Chief
Executive Officer; payment of dividends with respect to common stock or other
equity securities; and matters that might be favorable to The Bank of
Tokyo-Mitsubishi, Ltd.
A majority of our directors are not officers or employees of
UnionBanCal Corporation or any of our affiliates, including The Bank of
Tokyo-Mitsubishi, Ltd. However, because of The Bank of Tokyo-Mitsubishi, Ltd.'s
control over the election of our directors, The Bank of Tokyo-Mitsubishi, Ltd.
could change the composition of our Board of Directors so that the Board would
not have a majority of outside directors. The Bank of Tokyo-Mitsubishi, Ltd.'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.
THE BANK OF TOKYO-MITSUBISHI, LTD.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT
OUR OPERATIONS
Although we fund our operations independently of The Bank of
Tokyo-Mitsubishi, Ltd. and believe our business is not necessarily closely
related to The Bank of Tokyo-Mitsubishi, Ltd.'s business or outlook, The Bank of
Tokyo-Mitsubishi, Ltd.'s credit ratings may affect our credit ratings.
Deterioration in The Bank of Tokyo-Mitsubishi, Ltd.'s credit ratings or
financial condition could result in an increase in our
45
borrowing costs and could impair our access to the public and private capital
markets. The Bank of Tokyo-Mitsubishi, Ltd. is also subject to regulatory
oversight and review. Our business operations and expansion plans could be
negatively affected by regulatory concerns related to the Japanese financial
system and The Bank of Tokyo-Mitsubishi, Ltd.
POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD
ADVERSELY AFFECT US
As part of The Bank of Tokyo-Mitsubishi, Ltd.'s normal risk management
processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit exposures
and concentrations on an aggregate basis, including UnionBanCal Corporation.
Therefore, at certain levels, our ability to approve certain credits and
categories of customers is subject to concurrence by The Bank of
Tokyo-Mitsubishi, Ltd. We may wish to extend credit to the same customer as The
Bank of Tokyo-Mitsubishi, Ltd. Our ability to do so may be limited for various
reasons, including The Bank of Tokyo-Mitsubishi, Ltd.'s aggregate credit
exposure and marketing policies. Certain directors' and officers' ownership
interests in The Bank of Tokyo-Mitsubishi, Ltd.'s common stock or service as a
director or officer or other employee of both us and The Bank of
Tokyo-Mitsubishi, Ltd. could create or appear to create potential conflicts of
interest, especially since both of us compete in the United States banking
industry.
SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY AFFECT
US
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, as well as
nationally and internationally. Our competitors include a large number of state
and national banks, thrift institutions and major foreign-affiliated or foreign
banks, as well as many financial and non-financial firms that offer services
similar to those offered by us. Some of our competitors are community banks that
have strong local market positions. Other competitors include large financial
institutions (such as Bank of America, California Federal, Washington Mutual,
and Wells Fargo) that have substantial capital, technology and marketing
resources. Such large financial institutions may have greater access to capital
at a lower cost than us, which may adversely affect our ability to compete
effectively.
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
liquidates, 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 BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS 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 currently affecting us and our
subsidiaries may change at any time. Regulatory authorities may also change
their interpretation of these statutes and regulations. Therefore, our business
may be adversely affected by any future changes in laws, regulations, policies
or interpretations. 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 The Bank of Tokyo-Mitsubishi, Ltd.'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. Under long-standing policy of the Board
of
46
Governors of the Federal Reserve System, 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.
POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD
ADVERSELY AFFECT THE MARKET FOR OUR STOCK
Although The Bank of Tokyo-Mitsubishi, Ltd. has announced its intention
to maintain its majority ownership in us, The Bank of Tokyo-Mitsubishi, Ltd. may
sell shares of our common stock in compliance with the federal securities laws.
By virtue of The Bank of Tokyo-Mitsubishi, Ltd.'s current control of us, The
Bank of Tokyo-Mitsubishi, Ltd. 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, The Bank of Tokyo-Mitsubishi, Ltd. could
sell shares of our common stock without registration pursuant to Rule 144 under
the Securities Act. 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 The Bank
of Tokyo-Mitsubishi, Ltd. sells or transfers shares of our common stock as a
block, another person or entity could become our controlling shareholder.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR OPERATING STRATEGIES
In connection with our strategic plan established in 2000, we have
developed long-term financial performance goals, which we expect to result from
successful implementation of our operating strategies. We cannot assure you that
we will be successful in achieving these long-term goals or that our operating
strategies will be successful. Achieving success in these areas is dependent on
a number of factors, many of which are beyond our direct control. Factors that
may adversely affect our ability to attain our long-term financial performance
goals include:
o deterioration of our asset quality,
o our inability to control noninterest expenses,
o our inability to increase noninterest income,
o our inability to decrease reliance on asset revenues,
o our ability to sustain loan growth,
o regulatory and other impediments associated with making
acquisitions,
o deterioration in general economic conditions, especially in our
core markets,
o decreases in net interest margins,
o increases in competition,
o adverse regulatory or legislative developments, and
o unexpected increases in costs related to potential acquisitions.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR RESTRUCTURING
MAY ADVERSELY AFFECT US
We may acquire or invest in companies, technologies, services or
products that complement our business. In addition, we continue to evaluate the
performance of all of our businesses and business lines and may sell a business
or business lines. Any acquisitions, divestitures or restructuring may result in
the potentially dilutive issuance of 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
47
could involve numerous additional risks including difficulties in the
assimilation or separation of operations, services, products and personnel, the
diversion of management's attention from other business concerns, the disruption
of our business, and the potential loss of key employees. There can be no
assurance that we would be successful in overcoming these or any other
significant risks encountered.
ITEM 3. MARKET RISK.
Our exposure to market risk was mitigated in the volatile interest rate
environment in the first nine months of 2001 due to the effectiveness of our
asset/liability management. A complete explanation concerning our market risk
exposure is incorporated by reference from the text under the caption
"Quantitative and Qualitative Disclosures About Market Risk" in the Form 10-K
for the year ended December 31, 2000.
48
PART II. OTHER INFORMATION
ITEM 4. OTHER INFORMATION
ANNUAL MEETING OF SHAREHOLDERS: The Annual Meeting of Shareholders will
be held on Wednesday, April 24, 2002, at 9:30 a.m upon the approval of the Board
of Directors at the December 2001 meeting. Shareholders who expect to present a
proposal at the 2002 Annual Meeting of Shareholders for publication in the
Company's proxy statement and action on the proxy form or otherwise for such
meeting must submit their proposal by December 2, 2001. The proposal must be
mailed to the Corporate Secretary of the Company at 400 California Street, Mail
Code 1-001-16, San Francisco, CA 94104. Without such notice, proxy holders
appointed by the Board of Directors of the Company will be entitled to exercise
their discretionary voting authority when the proposal is raised at the annual
meeting, without any discussion of the proposal in the proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
NO. DESCRIPTION
- ----- -----------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Registrant, as amended(1)">
3.2 By-laws of the Registrant, as amended January 27, 1999(2)">
10.1 Management Stock Plan. (As restated effective June 1, 1997)*(3)
10.2 Union Bank of California Deferred Compensation Plan. (January 1, 1997,
Restatement, as amended November 21, 1996)*(4)">
10.3 Union Bank of California Senior Management Bonus Plan. (Effective
January 1, 2001)*(5)
10.4 Richard C. Hartnack Employment Agreement. (Effective January 1, 1998)*
(6)
10.5 Robert M. Walker Employment Agreement. (Effective January 1, 1998)*(6)
10.6 Union Bank of California Supplemental Executive Retirement Plan.
(Effective January 1, 1988) (Amended and restated as of January 1,
1997)*(3)
10.7 Union Bank Financial Services Reimbursement Program. (Effective
January 1, 1996)*(7)
10.9 1997 Performance Share Plan, as amended.(Effective January 1, 1997)*(5)
10.10 Service Agreement Between Union Bank of California and The Bank of
Tokyo-Mitsubishi Ltd. (Effective October 1, 1997)*(3)
10.11 Management Stock Plan. (As restated effective January 1, 2000)*(8)
10.12 Union Bank of Califorinia, N.A. Supplemental Retirement Plan for Policy
Making Officers. (Effective November 1, 1999)(9)
__________________
(1) Incorporated by reference to Form 10-K for the year ended December 31,
1998.
(2) Incorporated by reference to Form 10-Q for the quarter ended March 31,
1999.
(3) Incorporated by reference to Form 10-K for the year ended December 31,
1997.
(4) Incorporated by reference to Form 10-K for the year ended December 31,
1996.
(5) Incorporated by reference to Form DEF-14A dated March 28, 2001.
(6) Incorporated by reference to Form 10-Q for the quarter ended September
30, 1998.
(7) Incorporated by reference to Form 8-K dated April 1, 1996.
(8) Incorporated by reference to form 10-Q for the quarter ended June 30,
1999.
(9) Incorporated by reference to Form 10-Q for the quarter ended June 30,
2000.
* Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K:
None
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION
(Registrant)
By: /s/ DAVID I. MATSON
-----------------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
By: /s/ DAVID A. ANDERSON
-----------------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
Dated: November 13, 2001
50