________________________________________________________________________________
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, 2002
Commission file number 1-15081
UnionBanCal Corporation
State of Incorporation: I.R.S. Employer Identification No.
CALIFORNIA 94-1234979
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, 2002: 150,285,197
________________________________________________________________________________
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 18
Summary 19
Business Segments 20
Net Interest Income 30
Noninterest Income 33
Noninterest Expense 35
Income Tax Expense 37
Loans 37
Cross-Border Outstandings 38
Provision for Credit Losses 39
Allowance for Credit Losses 39
Nonperforming Assets 43
Loans 90 Days or More Past Due and Still Accruing 43
Quantitative and Qualitative Disclosure about Interest
Rate Risk Management 44
Liquidity 46
Regulatory Capital 46
Certain Business Risk Factors 47
Written Statements Under Section 906 of the Sarbanes-
Oxley Act of 2002 52
Item 3. Market Risk 52
Item 4. Controls and Procedures 52
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 53
Item 5. Other Information 53
Item 6. Exhibits and Reports on Form 8-K 53
Signatures 55
Certifications 56
PART I. FINANCIAL INFORMATION
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
AS OF AND FOR THE THREE MONTHS ENDED
____________________________________________
SEPTEMBER 30, SEPTEMBER 30, PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 CHANGE
___________________________________________________________ ______________ _____________ ________
RESULTS OF OPERATIONS:
Net interest income(1) $ 378,517 $ 392,636 3.73%
Provision for credit losses 50,000 40,000 (20.00)
Noninterest income 173,405 182,426 5.20
Noninterest expense 317,042 331,134 4.44
_____________ _____________
Income before income taxes(1) 184,880 203,928 10.30
Taxable-equivalent adjustment 426 534 25.35
Income tax expense 59,325 65,163 9.84
_____________ _____________
Net income $ 125,129 $ 138,231 10.47%
============= =============
PER COMMON SHARE:
Net income--basic $ 0.79 $ 0.89 12.66%
Net income--diluted 0.79 0.88 11.39
Dividends(2) 0.25 0.28 12.00
Book value (end of period) 22.49 24.22 7.69
Common shares outstanding (end of period) 157,181,483 150,220,119 (4.43)
Weighted average common shares outstanding--basic 157,584,675 154,889,552 (1.71)
Weighted average common shares outstanding--diluted 159,028,898 156,709,715 (1.46)
BALANCE SHEET (END OF PERIOD):
Total assets $ 35,238,937 $ 37,608,001 6.72%
Total loans 25,594,289 25,962,159 1.44
Nonaccrual loans 444,519 395,212 (11.09)
Nonperforming assets 450,246 395,521 (12.15)
Total deposits 27,065,423 30,588,080 13.02
Medium and long-term debt 199,713 418,369 109.49
Trust preferred securities 369,441 370,286 0.23
Common equity 3,534,533 3,637,945 2.93
BALANCE SHEET (PERIOD AVERAGE):
Total assets $ 34,616,940 $ 35,803,475 3.43%
Total loans 25,917,100 25,971,483 0.21
Earning assets 31,343,059 32,757,523 4.51
Total deposits 26,391,293 28,455,452 7.82
Common equity 3,497,664 3,814,927 9.07
FINANCIAL RATIOS:
Return on average assets(3) 1.43% 1.53%
Return on average common equity(3) 14.19 14.38
Efficiency ratio(4) 57.45 57.58
Net interest margin(1) 4.81 4.77
Dividend payout ratio 31.65 31.46
Tangible equity ratio 9.91 9.38
Tier 1 risk-based capital ratio 11.18 11.14
Total risk-based capital ratio 13.05 12.89
Leverage ratio 10.50 10.13
Allowance for credit losses to total loans 2.46 2.40
Allowance for credit losses to nonaccrual loans 141.65 157.66
Net loans charged off to average total loans(3) 0.72 0.64
Nonperforming assets to total loans, distressed
loans held for sale, and foreclosed assets 1.76 1.52
Nonperforming assets to total assets 1.28 1.05
<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 basis) and noninterest income. Foreclosed asset
expense (income) was $(0.1) million in the third quarter of 2001, and
immaterial in the third quarter of 2002.
</FN>
2
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED)
(UNAUDITED)
AS OF AND FOR THE THREE MONTHS ENDED
____________________________________________
SEPTEMBER 30, SEPTEMBER 30, PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 CHANGE
___________________________________________________________ _______________ _____________ _______
RESULTS OF OPERATIONS:
Net interest income(1) $ 1,145,713 $ 1,159,907 1.24%
Provision for credit losses 215,000 145,000 (32.56)
Noninterest income 522,603 542,651 3.84
Noninterest expense 931,979 984,288 5.61
_____________ _____________
Income before income taxes(1) 521,337 573,270 9.96
Taxable-equivalent adjustment 1,638 1,604 (2.08)
Income tax expense 170,133 188,716 10.92
_____________ _____________
Net income $ 349,566 $ 382,950 9.55%
============= =============
PER COMMON SHARE:
Net income--basic $ 2.21 $ 2.45 10.86%
Net income--diluted 2.20 2.43 10.45
Dividends(2) 0.75 0.81 8.00
Book value (end of period) 22.49 24.22 7.69
Common shares outstanding (end of period) 157,181,483 150,220,119 (4.43)
Weighted average common shares outstanding--basic 158,214,813 156,139,173 (1.31)
Weighted average common shares outstanding--diluted 158,916,432 157,892,168 (0.64)
BALANCE SHEET (END OF PERIOD):
Total assets $ 35,238,937 $ 37,608,001 6.72%
Total loans 25,594,289 25,962,159 1.44
Nonaccrual loans 444,519 395,212 (11.09)
Nonperforming assets 450,246 395,521 (12.15)
Total deposits 27,065,423 30,588,080 13.02
Medium and long-term debt 199,713 418,369 109.49
Trust preferred securities 369,441 370,286 0.23
Common equity 3,534,533 3,637,945 2.93
BALANCE SHEET (PERIOD AVERAGE):
Total assets $ 34,545,443 $ 35,541,802 2.88%
Total loans 26,147,872 25,562,452 (2.24)
Earning assets 31,229,078 32,472,409 3.98
Total deposits 26,269,050 28,085,461 6.91
Common equity 3,414,561 3,730,273 9.25
FINANCIAL RATIOS:
Return on average assets(3) 1.35% 1.44%
Return on average common equity(3) 13.69 13.73
Efficiency ratio(4) 55.86 57.80
Net interest margin(1) 4.90 4.77
Dividend payout ratio 33.94 33.06
Tangible equity ratio 9.91 9.38
Tier 1 risk-based capital ratio 11.18 11.14
Total risk-based capital ratio 13.05 12.89
Leverage ratio 10.50 10.13
Allowance for credit losses to total loans 2.46 2.40
Allowance for credit losses to nonaccrual loans 141.65 157.66
Net loans charged off to average total loans(3) 1.02 0.83
Nonperforming assets to total loans, distressed
loans held for sale, and foreclosed assets 1.76 1.52
Nonperforming assets to total assets 1.28 1.05
<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 basis) and noninterest income. Foreclosed asset expense
(income) was immaterial for the first nine months of 2001, and $0.1
million for the first nine months of 2002.
</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 SEPTEMBER 30, ENDED SEPTEMBER 30,
______________________ __________________________
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2001 2002
______________________________________________________ ___________ ________ __________ __________
INTEREST INCOME
Loans $455,477 $381,989 $1,478,894 $1,136,359
Securities 76,852 77,518 215,370 237,098
Interest bearing deposits in banks 622 773 2,249 1,898
Federal funds sold and securities purchased under
resale agreements 1,398 1,467 4,585 10,354
Trading account assets 1,652 1,366 6,716 2,987
________ ________ __________ __________
Total interest income 536,001 463,113 1,707,814 1,388,696
________ ________ __________ __________
INTEREST EXPENSE
Domestic deposits 105,851 52,049 366,394 167,395
Foreign deposits 15,954 4,727 60,944 17,096
Federal funds purchased and securities sold under
repurchase agreements 12,265 1,789 48,687 5,134
Commercial paper 11,844 4,488 46,882 12,998
Medium and long-term debt 2,142 2,375 7,873 7,198
UnionBanCal Corporation--obligated mandatorily
redeemable preferred securities of subsidiary
grantor trust 4,940 3,921 16,329 11,832
Other borrowed funds 4,914 1,662 16,630 8,740
________ ________ __________ __________
Total interest expense 157,910 71,011 563,739 230,393
________ ________ __________ __________
NET INTEREST INCOME 378,091 392,102 1,144,075 1,158,303
Provision for credit losses 50,000 40,000 215,000 145,000
________ ________ __________ __________
Net interest income after provision for
credit losses 328,091 352,102 929,075 1,013,303
________ ________ __________ __________
NONINTEREST INCOME
Service charges on deposit accounts 62,742 68,629 181,614 204,641
Trust and investment management fees 37,965 35,368 116,880 109,680
Merchant transaction processing fees 21,315 22,860 60,814 65,982
International commissions and fees 18,053 20,131 53,288 57,593
Brokerage commissions and fees 8,786 9,183 26,764 28,090
Merchant banking fees 7,742 6,819 26,671 22,845
Securities gains (losses), net (1,699) 550 4,318 (3,313)
Other 18,501 18,886 52,254 57,133
________ ________ __________ __________
Total noninterest income 173,405 182,426 522,603 542,651
________ ________ __________ __________
NONINTEREST EXPENSE
Salaries and employee benefits 171,172 182,275 500,243 547,251
Net occupancy 23,779 27,340 70,375 75,750
Equipment 16,985 16,343 48,252 48,650
Merchant transaction processing 13,324 14,644 39,687 41,993
Communications 13,074 13,186 36,582 39,695
Professional services 9,982 10,350 29,155 30,789
Data processing 8,885 7,944 26,935 24,475
Foreclosed asset expense (income) (60) 18 1 130
Other 59,901 59,034 180,749 175,555
________ ________ __________ __________
Total noninterest expense 317,042 331,134 931,979 984,288
________ ________ __________ __________
Income before income taxes 184,454 203,394 519,699 571,666
Income tax expense 59,325 65,163 170,133 188,716
________ ________ __________ __________
NET INCOME $125,129 $138,231 $ 349,566 $ 382,950
======== ======== ========== ==========
NET INCOME PER COMMON SHARE--BASIC $ 0.79 $ 0.89 $ 2.21 $ 2.45
======== ======== ========== ==========
NET INCOME PER COMMON SHARE--DILUTED $ 0.79 $ 0.88 $ 2.20 $ 2.43
======== ======== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC 157,585 154,890 158,215 156,139
======== ======== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED 159,029 156,710 158,916 157,892
======== ======== ========== ==========
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) 2001 2001 2002
_____________________________________________________________________ ____________ ____________ _____________
ASSETS
Cash and due from banks $ 2,577,510 $ 2,682,392 $ 2,184,714
Interest bearing deposits in banks 73,394 64,162 139,323
Federal funds sold and securities purchased under resale agreements 514,600 918,400 1,137,550
___________ ___________ ___________
Total cash and cash equivalents 3,165,504 3,664,954 3,461,587
Trading account assets 335,617 229,697 383,749
Securities available for sale:
Securities pledged as collateral 135,355 137,922 132,974
Held in portfolio 4,719,724 5,661,160 6,137,325
Loans (net of allowance for credit losses: September 30, 2001, 24,964,606 24,359,521 25,339,081
$629,683; December 31, 2001, $634,509; September 30, 2002,
$623,078)
Due from customers on acceptances 188,020 182,440 68,605
Premises and equipment, net 489,176 494,534 492,687
Intangible assets 2,447 16,176 23,119
Goodwill 52,772 68,623 93,279
Other assets 1,185,716 1,223,719 1,475,595
___________ ___________ ___________
Total assets $35,238,937 $36,038,746 $37,608,001
=========== =========== ===========
LIABILITIES
Domestic deposits:
Noninterest bearing $11,256,740 $12,314,150 $14,125,497
Interest bearing 13,536,139 14,160,113 14,701,824
Foreign deposits:
Noninterest bearing 342,189 404,708 401,202
Interest bearing 1,930,355 1,677,228 1,359,557
___________ ___________ ___________
Total deposits 27,065,423 28,556,199 30,588,080
Federal funds purchased and securities sold under repurchase
agreements 1,286,730 418,814 303,307
Commercial paper 1,114,527 830,657 880,170
Other borrowed funds 535,976 700,403 218,282
Acceptances outstanding 188,020 182,440 68,605
Other liabilities 944,574 1,040,406 1,122,957
Medium and long-term debt 199,713 399,657 418,369
UnionBanCal Corporation--obligated mandatorily redeemable
preferred securities of subsidiary grantor trust 369,441 363,928 370,286
___________ ___________ ___________
Total liabilities 31,704,404 32,492,504 33,970,056
___________ ___________ ___________
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares, no shares issued or
outstanding as of September 30, 2001, December 31, 2001, and
September 30, 2002 -- -- --
Common stock--no stated value:
Authorized 300,000,000 shares, issued 157,181,483
shares as of September 30, 2001, 156,483,511 shares as of
December 31, 2001, and 150,220,119 shares as of September 30, 2002 1,207,312 1,181,925 907,088
Retained earnings 2,137,956 2,231,384 2,488,873
Accumulated other comprehensive income 189,265 132,933 241,984
___________ ___________ ___________
Total shareholders' equity 3,534,533 3,546,242 3,637,945
___________ ___________ ___________
Total liabilities and shareholders' equity $35,238,937 $36,038,746 $37,608,001
=========== =========== ===========
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) 2001 2002
___________________________________________________________ ________________________ _______________________
COMMON STOCK
Balance, beginning of period $1,275,587 $1,181,925
Dividend reinvestment plan 32 85
Deferred compensation--restricted stock awards 196 255
Stock options exercised 9,363 72,953
Stock issued in acquisition of First Western Bank -- 23,852
Common stock repurchased(1) (77,866) (371,982)
__________ __________
Balance, end of period $1,207,312 $907,088
__________ __________
RETAINED EARNINGS
Balance, beginning of period $1,906,093 $2,231,384
Net income 349,566 $349,566 382,950 $382,950
Dividends on common stock(2) (118,593) (125,345)
Deferred compensation--restricted stock awards 890 (116)
__________ __________
Balance, end of period $2,137,956 $2,488,873
__________ __________
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period $ 29,885 $ 132,933
Cumulative effect of accounting change (SFAS
No.133),(3) net of tax expense of $13,754 in 2001 22,205 --
Unrealized net gains on cash flow hedges, net of tax
expense of $45,793 and $61,525 in the first nine months
of 2001 and 2002, respectively 73,928 99,325
Less: reclassification adjustment for net gains on
cash flow hedges included in net income, net of tax expense
of $10,751 and $31,920 in the first nine months of 2001 and
2002, respectively (17,356) (51,532)
________ ________
Net unrealized gains on cash flow hedges 56,572 47,793
Unrealized holding gains arising during the period on
securities available for sale, net of tax expense of $51,996
and $35,950 in the first nine months of 2001 and 2002,
respectively 83,941 58,037
Less: reclassification adjustment for losses (gains)
on securities available for sale included in net income, net
of tax expense (benefit) of $1,652 and $(1,267) in the first
nine months of 2001 and 2002, respectively (2,666) 2,046
________ ________
Net unrealized gains on securities available for sale 81,275 60,083
Foreign currency translation adjustment, net of tax
expense (benefit) of $(416) and $728 in the first nine months
of 2001 and 2002, respectively (672) 1,175
________ ________
Other comprehensive income 159,380 159,380 109,051 109,051
__________ ________ __________ ________
Total comprehensive income $508,946 $492,001
======== ========
Balance, end of period $ 189,265 $ 241,984
__________ __________
TOTAL SHAREHOLDERS' EQUITY $3,534,533 $3,637,945
========== ==========
<FN>
___________
(1) Common stock repurchased includes commission costs.
(2) Dividends per share were $0.75 and $0.81 for the first nine months of 2001
and 2002, respectively. Dividends are based on UnionBanCal Corporation's
shares outstanding as of the declaration date.
(3) Statement of Financial Accounting Standards (SFAS) 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) 2001 2002
________________________________________________________________________________ ___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 349,566 $ 382,950
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 215,000 145,000
Depreciation, amortization and accretion 60,471 62,563
Provision for deferred income taxes 34,479 42,941
Loss (gain) on securities available for sale (4,318) 3,313
Net (increase) decrease in trading account assets 4,078 (154,052)
Other, net of acquisition 81,559 60,776
___________ ___________
Total adjustments 391,269 160,541
___________ ___________
Net cash provided by operating activities 740,835 543,491
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 657,703 183,063
Proceeds from matured and called securities available for sale 636,208 856,160
Purchases of securities available for sale (1,858,667) (1,425,404)
Net decrease (increase) in loans, net of acquisition 224,002 (1,243,849)
Net cash received in acquisition -- 64,689
Purchases of premises and equipment (70,353) (55,256)
Other, net 2,606 7,153
___________ ___________
Net cash used in investing activities (408,501) (1,613,444)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits, net of acquisition (217,760) 1,827,256
Net decrease in federal funds purchased and securities sold under repurchase
agreements (100,937) (115,507)
Net increase (decrease) in commercial paper and other borrowed funds 15,263 (432,608)
Common stock repurchased (77,866) (371,982)
Payments of cash dividends (119,005) (122,228)
Stock options exercised 9,363 72,953
Other, net 18,801 1,260
___________ ___________
Net cash provided by (used in) financing activities (472,141) 859,144
___________ ___________
Net decrease in cash and cash equivalents (139,807) (210,809)
Cash and cash equivalents at beginning of period 3,322,979 3,664,954
Effect of exchange rate changes on cash and cash equivalents (17,668) 7,442
___________ ___________
Cash and cash equivalents at end of period $ 3,165,504 $ 3,461,587
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 618,076 $ 237,723
Income taxes 96,274 110,253
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of First Western Bank:
Fair value of assets acquired -- $ 256,276
Purchase price:
Cash -- (20,940)
Stock issued -- (23,852)
___________ ___________
Liabilities assumed $ -- $ 211,484
=========== ===========
Loans transferred to foreclosed assets (OREO) and/or distressed loans held for
sale $ 6,611 $ 376
Securities transferred from held to maturity to available for sale at the
adoption of SFAS No. 133 23,529 --
See accompanying notes to condensed consolidated financial statements.
7
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(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, 2002 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, 2001. 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.
Since November 1999, the Company has announced stock repurchase plans
totaling $400 million. The Company repurchased $35 million, $19 million and $18
million of common stock in the first, second, and third quarters of 2002,
respectively, and $22 million, $25 million, and $31 million of common stock in
the first, second, and third quarters of 2001, respectively, as part of these
repurchase plans. As of September 30, 2002, $73 million of common stock is
authorized for repurchase. In addition, on August 27, 2002, the Company
announced that it purchased $300 million of its common stock from its majority
owner, The Bank of Tokyo-Mitsubishi (BTM), which is a wholly-owned subsidiary of
Mitsubishi Tokyo Financial Group. At September 30, 2002, BTM owned approximately
65 percent of the outstanding common stock of UnionBanCal Corporation.
Certain amounts for prior periods have been reclassified to conform to
current financial statement presentation.
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations be accounted for by a single
method--the purchase method. This Statement eliminates the pooling-of-interests
method but carries forward without reconsideration of the guidance in Accounting
Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises," related
to the application of the purchase method of accounting. The provisions of SFAS
No. 141 apply to all business combinations initiated after June 30, 2001, and
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001, or later. Goodwill and intangible assets
acquired in transactions completed after June 30, 2001 are accounted for in
accordance with the amortization and nonamortization provisions of SFAS No. 142.
SFAS No. 142 significantly changes the accounting for goodwill and other
intangible assets subsequent to their initial recognition. This Statement
requires that goodwill and some intangible assets no longer be amortized, but
tested for impairment at least annually by comparing the fair value of those
assets with their recorded
8
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
amounts. Upon adoption of SFAS No. 142 on January 1, 2002, the amortization of
existing goodwill ceased and the carrying amount of goodwill was allocated to
the applicable reporting units. The allocation was based on the sources of
previously recognized goodwill as well as the reporting units to which the
related acquired net assets were assigned. Management's expectations of which
reporting units had benefited from the synergies of acquired businesses were
considered in the allocation process. The Company performed a transitional
impairment test during May 2002, measured as of the date of adoption. The fair
market value of the goodwill tested for impairment exceeded its carrying value;
therefore, no impairment loss was recognized. As of September 30, 2002, goodwill
was $93 million.
Net income and earnings per share for the three and nine months ended
September 30, 2001 were adjusted, on a pro forma basis, to exclude $3.7 million
in goodwill amortization expense (net of taxes of $0.1 million) for the third
quarter of 2001 and $11.1 million in goodwill amortization expense (net of taxes
of $0.4 million) for the nine months ended September 30, 2001 as follows:
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
______________________ ______________________
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2001 2002
_____________________________________________________________________ ________ ________ ________ ________
NET INCOME:
As reported $125,129 $138,231 $349,566 $382,950
Goodwill amortization, net of income tax 3,721 -- 11,066 --
As adjusted $128,850 $138,231 $360,627 $382,950
BASIC EARNINGS PER SHARE:
As reported $ 0.79 $ 0.89 $ 2.21 $ 2.45
Goodwill amortization 0.02 -- 0.07 --
As adjusted $ 0.81 $ 0.89 $ 2.28 $ 2.45
DILUTED EARNINGS PER SHARE:
As reported $ 0.79 $ 0.88 $ 2.20 $ 2.43
Goodwill amortization 0.02 -- 0.07 --
As adjusted $ 0.81 $ 0.88 $ 2.27 $ 2.43
On May 13, 2002, the Company completed its acquisition of First Western
Bank and recorded approximately $23.9 million of goodwill and $10.6 million of
core deposit intangible. The core deposit intangible is being amortized on an
accelerated basis over an estimated life of 12 years.
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to the legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the normal operation of a
long-lived asset. A legal obligation is an obligation that a party is required
to settle as a result of an existing or enacted law, statute, ordinance, or
written or oral contract, or by legal construction of a contract under the
doctrine of promissory estoppel. This Statement
9
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
is effective for fiscal years beginning after June 15, 2002. Management believes
adoption of this Statement will not have a material impact on the Company's
financial position or results of operations.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. This
Statement carries over the framework established in SFAS No. 121, and was
adopted by the Company on January 1, 2002. The adoption of this Statement had no
material impact on the Company's financial position or results of operations.
RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.13
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment of SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement requires that capital leases that
are modified so that the resulting lease agreement is classified as an operating
lease be accounted for under the sale-leaseback provisions of SFAS No. 98,
"Accounting for Leases." This Statement also amends other existing authoritative
pronouncements to make technical corrections, clarify meanings, or describe
their applicability under changed conditions. The provisions of this Statement
related to the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. The provisions of this Statement related to SFAS
No. 13 are effective for transactions occurring after May 15, 2002. All other
provisions of this Statement are effective for financial statements issued on or
after May 15, 2002, with early application encouraged. Management believes
adoption of this Statement will not have a material impact on the Company's
financial position or results of operations.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement replaces the
accounting and reporting provisions of Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." It requires that costs associated with an exit or disposal
activity be recognized when a liability is incurred rather than at the date an
entity commits to an exit plan. This Statement is effective after December 31,
2002. Management
10
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
believes that adopting this Statement will not have a material impact on the
Company's financial position or results of operations.
ACCOUNTING FOR ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." This Statement amended SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and
Interpretation No. 9, "Applying APB Opinion No. 16 and 17, "When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method." The requirement in paragraph 5 of
Statement 72 to recognize any excess of the fair value of liabilities assumed
over the fair value of tangible and identifiable intangible assets acquired as
an unidentifiable intangible asset no longer applies to acquisitions within the
scope of this Statement. The acquisition of all or part of a financial
institution that meets the definition of a business combination shall be
accounted for by the purchase method in accordance with SFAS No. 141, "Business
Combinations." In addition, this Statement amends SFAS No. 144, to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor and borrower-relationship intangible assets and
credit cardholder intangible assets. As a result, those intangible assets are
now subject to the impairment test in accordance with the provisions in SFAS No.
144. The provisions of this Statement that relate to the application of the
purchase method of accounting apply to all acquisitions of financial
institutions, except transactions between two or more mutual enterprises. This
Statement was effective October 1, 2002 and had no material impact on the
Company's financial position or results of operations.
NOTE 3--EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted EPS incorporates the dilutive effect of common stock equivalents
outstanding on an average basis during the period. Stock options are a common
stock equivalent. The following table presents a reconciliation of basic and
diluted EPS for the three months and nine months ended September 30, 2001 and
2002.
11
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
_________________________________________________ _________________________________________________
2001 2002 2001 2002
______________________ ______________________ ______________________ _____________________
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
__________________________ ________ ________ ________ ________ ________ ________ ________ ________
Net Income $125,129 $125,129 $138,231 $138,231 $349,566 $349,566 $382,950 $382,950
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common
shares outstanding 157,585 157,585 154,890 154,890 158,215 158,215 156,139 156,139
Additional shares due to:
Assumed conversion of
dilutive stock options -- 1,444 -- 1,820 -- 701 -- 1,753
________ _______ _______ _______ _______ _______ _______ _______
Adjusted weighted average
common shares outstanding 157,585 159,029 154,890 156,710 158,215 158,916 156,139 157,892
======== ======== ======== ======== ======== ======== ======== ========
Net income per share $0.79 $0.79 $0.89 $0.88 $2.21 $2.20 $2.45 $2.43
======== ======== ======== ======== ======== ======== ======== ========
NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents a summary of the components of accumulated
other comprehensive income.
NET UNREALIZED GAINS ON NET UNREALIZED GAINS FOREIGN CURRENCY
CASH FLOW HEDGES ON SECURITIES TRANSLATION ADJUSTMENT
AVAILABLE FOR SALE
_________________________ _____________________ ________________________
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
__________________________________________________________________________________
(DOLLARS IN THOUSANDS) 2001 2002 2001 2002 2001 2002
______________________________________________ ________ _______ ________ ________ _________ _________
Beginning balance $ -- $ 62,840 $ 41,879 $ 83,271 $(11,191) $(12,205)
Cumulative effect of accounting change, net of 22,205 -- -- -- -- --
tax
Change during the period 56,572 47,793 81,275 60,083 (672) 1,175
_______ ________ ________ ________ _________ _________
Ending balance $78,777 $110,633 $123,154 $143,354 $(11,863) $(11,030)
======= ======== ======== ======== ========= =========
MINIMUM PENSION ACCUMULATED OTHER
LIABILITY ADJUSTMENT COMPREHENSIVE INCOME
__________________ _______________________
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
_____________________________________________
(DOLLARS IN THOUSANDS) 2001 2002 2001 2002
__________________________________________________ _______ ______ ________ ________
Beginning balance $(803) $(973) $29,885 $132,933
Cumulative effect of accounting change, net of tax -- -- 22,205 --
Change during the period -- -- 137,175 109,051
_______ ______ ________ ________
Ending balance $(803) $(973) $189,265 $241,984
======= ====== ======== ========
12
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 5--BUSINESS SEGMENTS
The Company is organized based on the products and services that it
offers and operates in four principal areas:
o The Community Banking and Investment Services Group offers a
range of banking services, primarily to individuals and small
businesses, delivered generally through a tri-state network of
branches and ATM's. These services include commercial loans,
mortgages, home equity lines of credit, consumer loans, deposit
services and cash management as well as fiduciary, private
banking, investment and asset management services for individuals
and institutions, and risk management and insurance products for
businesses and individuals.
o The Commercial Financial Services Group provides credit and cash
management services to large corporate and middle market
companies. Services include commercial and project loans, real
estate financing, asset-based financing, trade finance and
letters of credit, lease financing, cash management services and
selected capital markets products.
o The International Banking Group provides correspondent banking
and trade-finance products and services to financial
institutions, and extends primarily short-term credit to
corporations engaged in international business. The group's
revenue predominately relates to foreign customers.
o The Global Markets Group manages the Company's wholesale funding
needs, securities portfolio, and interest rate and liquidity
risks. The group also offers a broad range of risk management and
trading products to institutional and business clients of the
Company through the businesses described above.
The information, set forth in the tables on the following page,
reflects selected income statement and balance sheet items by business unit. The
information presented does not necessarily represent the business units'
financial condition and results of operations were they independent entities.
Unlike financial accounting, there is no authoritative body of guidance for
management accounting equivalent to US GAAP. Consequently, reported results are
not necessarily comparable with those presented by other companies. Included in
the tables are the amounts of goodwill for each reporting unit as of September
30, 2002. Prior to January 1, 2002, most of the goodwill was reflected at the
corporate level in "Other."
The information in these tables is derived from the internal management
reporting system used by management to measure the performance of the business
segments and the Company overall. The management reporting system assigns
balance sheet and income statement items to each business segment based on
internal management accounting policies. Net interest income is determined by
the Company's internal funds transfer pricing system, which assigns a cost of
funds or a credit for funds to assets or liabilities based on their type,
maturity or repricing characteristics. Noninterest income and expense directly
attributable to a business segment are assigned to that business. Certain
indirect costs, such as operations and technology expense, are allocated to the
segments based on studies of billable unit costs for product or data processing.
Other indirect costs, such as corporate overhead, are allocated to the business
segments based on a predetermined percentage of usage. Under the Company's
risk-adjusted return on capital (RAROC) methodology, credit expense is charged
to business segments based upon expected losses arising from credit risk. In
addition, the attribution of economic capital is related to unexpected losses
arising from credit, market and operational risks.
13
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 5--BUSINESS SEGMENTS (CONTINUED)
"Other" is comprised of goodwill amortization for periods prior to
January 1, 2002, certain parent company non-bank subsidiaries, the elimination
of the fully taxable-equivalent basis amount, the amount of the provision for
credit losses (over)/under the RAROC expected loss for the period, the earnings
associated with the unallocated equity capital and allowance for credit losses,
and the residual costs of support groups. In addition, it includes two units,
the Credit Management Group, which manages nonperforming assets, and the Pacific
Rim Corporate Group, which offers financial products to Asian-owned subsidiaries
located in the US. On an individual basis, none of the items in "Other" are
significant to the Company's business.
The business units' results for the prior periods have been restated to
reflect changes in the transfer pricing methodology and any reorganization
changes that may have occurred.
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL
AND INVESTMENT SERVICES GROUP BANKING GROUP
SERVICES GROUP
_____________________ ______________________ ____________________
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
_________________________________________________________________________
2001 2002 2001 2002 2001 2002
_________________________________________________ ________ ________ ________ ________ ________ ________
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND
ASSETS (DOLLARS IN MILLIONS):
Total revenue $285,117 $317,892 $206,898 $212,021 $ 22,755 $ 26,421
Net income $ 51,467 $ 72,211 $ 60,743 $ 52,054 $ 4,684 $ 6,299
Goodwill at period end $ -- $ 79 $ -- $ 14 $ -- $ --
Total assets at period end $ 10,136 $ 11,158 $ 16,937 $ 15,965 $ 1,406 $ 1,680
GLOBAL OTHER UNIONBANCAL
MARKETS GROUP CORPORATION
_____________________ ______________________ ____________________
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
_________________________________________________________________________
2001 2002 2001 2002 2001 2002
_________________________________________________ ________ ________ ________ ________ ________ ________
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND
ASSETS (DOLLARS IN MILLIONS):
Total revenue $ 17,757 $(7,574) $ 18,969 $ 25,768 $551,496 $574,528
Net income (loss) $ 8,354 $(7,027) $ (119) $ 14,694 $125,129 $138,231
Goodwill at period end $ -- $ -- $ 53 $ -- $ 53 $ 93
Total assets at period end $ 5,767 $ 7,863 $ 993 $ 942 $ 35,239 $ 37,608
<FN>
___________
(1) Total revenue is comprised of net interest income and noninterest income
</FN>
14
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 5--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL
AND INVESTMENT SERVICES GROUP BANKING GROUP
SERVICES GROUP
_____________________ ______________________ _____________________
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
__________________________________________________________________________
2001 2002 2001 2002 2001 2002
_________________________________________________ ________ ________ ________ ________ _________ __________
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND
ASSETS (DOLLARS IN MILLIONS):
Total revenue $838,124 $915,063 $646,729 $625,050 $ 70,569 $ 78,012
Net income $153,127 $193,195 $205,071 $152,627 $ 15,624 $ 18,790
Goodwill at period end $ -- $ 79 $ -- $ 14 $ -- $ --
Total assets at period end $ 10,136 $ 11,158 $ 16,937 $ 15,965 $ 1,406 $ 1,680
GLOBAL OTHER UNIONBANCAL
MARKETS GROUP CORPORATION
_____________________ ______________________ _____________________
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
__________________________________________________________________________
2001 2002 2001 2002 2001 2002
_________________________________________________ ________ ________ ________ ________ _________ __________
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
AND ASSETS (DOLLARS IN MILLIONS):
Total revenue $ 26,722 $ 5,903 $ 84,534 $ 76,926 $1,666,678 $1,700,954
Net income (loss) $ 4,960 $ (3,658) $(29,216) $ 21,996 $ 349,566 $ 382,950
Goodwill at period end $ -- $ -- $ 53 $ -- $ 53 $ 93
Total assets at period end $ 5,767 $ 7,863 $ 993 $ 942 $ 35,239 $ 37,608
<FN>
___________
(1) Total revenue is comprised of net interest income and noninterest income
</FN>
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
Derivative positions are integral components of the Company's
designated asset and liability management activities. The Company uses interest
rate derivatives to manage the sensitivity of the Company's net interest income
to changes in interest rates. These instruments are used to manage interest rate
risk relating to specified groups of assets and liabilities, primarily
LIBOR-based commercial loans, certificates of deposit, trust preferred
securities and medium-term notes.
CASH FLOW HEDGES
HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT
The Company engages in several types of cash flow hedging strategies
for which the hedged transactions are forecasted future loan interest payments,
and the hedged risk is the variability in those payments due to changes in the
designated benchmark rate, e.g., US dollar LIBOR. In these strategies, the
hedging instruments are matched with groups of variable rate loans such that the
tenor of the variable rate loans and that of the hedging instrument is
identical. Cash flow hedging strategies include the utilization of purchased
floor, cap, corridor options and interest rate swaps.
The 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.
15
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
The Company uses interest rate floor corridors to hedge the variable
cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net
payments to be received under the floor corridor contracts offset the decline in
loan interest income caused by the relevant LIBOR index falling below the
corridor's upper strike rate, but only to the extent the index falls to the
lower strike rate. The corridor will not provide protection from declines in the
relevant LIBOR index to the extent it falls below the corridor's lower strike
rate.
The Company uses interest rate collars to hedge the variable cash flows
associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be
received (or paid) under the collar contracts offset the decline in loan
interest income caused by the relevant LIBOR index falling below the collar's
strike rate and the increase in interest income caused by the LIBOR index rising
above the collar's cap strike rate.
The Company uses interest rate swaps to hedge the variable cash flows
associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments to be
received (or paid) under the swap contracts will offset the fluctuations in loan
interest income caused by changes in the relevant LIBOR index. As such, these
instruments hedge all fluctuations in the loans' interest income caused by
changes in the relevant LIBOR index.
The Company uses purchased interest rate caps to hedge the variable
interest cash flows associated with the forecasted issuance and rollover of
short-term, fixed rate negotiable certificates of deposit (CDs). In these
hedging relationships, the Company hedges the LIBOR component of the CD rates,
which is either 3-month LIBOR or 6-month LIBOR, based on the CD's original term
to maturity, which reflects their repricing frequency. Net payments to be
received under the cap contract offset the increase in interest expense caused
by the relevant LIBOR index rising above the cap's strike rate.
Hedging transactions are structured at inception so that the notional
amounts of the hedge are matched with an equal principal amount of loans or CDs,
the index and repricing frequencies of the hedge matches those of the loans or
CDs, and the period in which the designated hedged cash flows occurs is equal to
the term of the hedge. As such, most of the ineffectiveness in the hedging
relationship results from the mismatch between the timing of reset dates on the
hedge versus those of the loans or CDs. During the third quarter of 2002, the
Company recognized a net gain of $0.2 million due to ineffectiveness, which is
recognized in noninterest expense, compared to a net loss of less than $0.1
million in the third quarter of 2001.
FAIR VALUE HEDGES
HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST (TRUST
PREFERRED SECURITIES)
The Company engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specific interest bearing liability,
UnionBanCal Corporation's Trust Preferred Securities, in order to convert the
liability from a fixed rate to a floating rate instrument. This strategy
mitigates the changes in fair value of the hedged liability caused by changes in
the designated benchmark interest rate, US dollar LIBOR.
16
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
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 2002
was a net loss of less than $0.1 million, compared to a net loss of $0.4 million
in the third quarter of 2001.
HEDGING STRATEGY FOR MEDIUM-TERM NOTES
The Company engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specified interest bearing liability,
UnionBanCal Corporation's five-year, medium-term debt issuance, in order to
convert the liability from a fixed rate to a floating rate instrument. This
strategy mitigates the changes in fair value of the hedged liability caused by
changes in the designated benchmark interest rate, US dollar LIBOR.
The fair value hedging transaction for the medium-term notes was
structured at inception to mirror all of the provisions of the medium-term
notes, which allows the Company to assume that no ineffectiveness exists.
OTHER
The Company uses foreign currency forward contracts as a means of
managing foreign exchange rate risk associated with assets and/or liabilities
denominated in foreign currencies. The Company values the forward contracts, the
assets and/or the liabilities at fair value, with the resultant gain or loss
recognized in noninterest income.
The Company uses To-Be-Announced (TBA) contracts to fix the price and
yield of anticipated purchases or sales of mortgage-backed securities that will
be delivered at an agreed upon date. This strategy hedges the risk of
variability in the cash flows to be paid or received upon settlement of the TBA
contract.
NOTE 7--SUBSEQUENT EVENTS
On October 23, 2002, the Board of Directors declared a quarterly cash
dividend of $0.28 per share of common stock. The dividend will be paid on
January 3, 2003 to shareholders of record as of December 6, 2002.
On October 31, 2002, the Company completed its acquisition of Valencia
Bank and Trust, a commercial bank with $266 million in assets and five branches.
The Company will pay approximately $31.5 million in cash and will issue
approximately $31.0 million in its common stock to Valencia Bank and Trust
shareholders.
17
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
SECURITIES 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 AND
THROUGHOUT THE COUNTRY, GLOBAL POLITICAL AND GENERAL ECONOMIC CONDITIONS RELATED
TO THE TERRORIST ATTACKS ON SEPTEMBER 11, 2001 AND THEIR AFTERMATH, FUTURE ACTS
OR THREATS OF TERRORISM AND POSSIBLE MILITARY ACTION, ADVERSE ECONOMIC
CONDITIONS AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN INTEREST RATES, THE
CONTROLLING INTEREST IN US BY THE BANK OF TOKYO-MITSUBISHI, LTD., WHICH IS A
WHOLLY-OWNED SUBSIDIARY OF MITSUBISHI TOKYO FINANCIAL GROUP, INC., COMPETITION
IN THE BANKING INDUSTRY, RESTRICTIONS ON DIVIDENDS, ADVERSE EFFECTS OF CURRENT
AND FUTURE BANKING AND OTHER RULES, REGULATIONS AND LEGISLATION, AND RISKS
ASSOCIATED WITH VARIOUS STRATEGIES WE MAY PURSUE, INCLUDING POTENTIAL
ACQUISITIONS, DIVESTITURES AND RESTRUCTURINGS. SEE ALSO THE SECTION ENTITLED
"CERTAIN BUSINESS RISK FACTORS" LOCATED NEAR THE END OF THIS SECTION,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
INTRODUCTION
We are a California-based, commercial bank holding company with
consolidated assets of $37.6 billion at September 30, 2002. At September 30,
2002, 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., were created on April 1, 1996 by the combination of Union Bank
with BanCal Tri-State Corporation and its banking subsidiary, The Bank of
California, N.A. The combination was accounted for as a reorganization of
entities under common control, similar to a pooling of interests.
Since November 1999, we announced stock repurchase plans totaling $400
million. We repurchased $35 million, $19 million, and $18 million of common
stock in the first, second, and third quarters of 2002, respectively, and $22
million, $25 million, and $31 million of common stock in the first, second, and
quarters of 2001, respectively, as part of these repurchase plans. As of
September 30, 2002, $73 million of common stock is authorized for repurchase. On
August 27, 2002, we announced that we purchased $300 million of our common stock
from our majority owner, The Bank of Tokyo-Mitsubishi (BTM), which is a
wholly-owned subsidiary of Mitsubishi Tokyo Financial Group. At September 30,
2002, BTM owned approximately 65 percent of our outstanding common stock.
18
SUMMARY
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30,
2002
Net income was $138.2 million, or $0.88 per diluted common share, in
the third quarter of 2002, compared with $125.1 million, or $0.79 per diluted
common share, in the third quarter of 2001. This increase in diluted earnings
per share of $0.09, or 11 percent, above the third quarter of 2001 was due to a
$14.1 million, or 4 percent, increase in net interest income (on a
taxable-equivalent basis), a $10.0 million, or 20 percent, decrease in provision
for credit losses, and a $9.0 million, or 5 percent, increase in noninterest
income, partly offset by a $14.1 million, or 4 percent, increase in noninterest
expense. Other highlights of the third quarter of 2002 include:
o Net interest income, on a taxable-equivalent basis, was $392.6
million in the third quarter of 2002, an increase of $14.1
million, or 4 percent, over the third quarter of 2001. Net
interest margin in the third quarter of 2002 was 4.77 percent, a
decrease of 4 basis points from the third quarter of 2001.
o A provision for credit losses of $40.0 million was recorded in
the third quarter of 2002 compared with $50.0 million in the
third quarter of 2001. 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. The allowance for credit losses
was $623.1 million, or 158 percent of total nonaccrual loans, at
September 30, 2002, compared with $629.7 million, or 142 percent
of total nonaccrual loans, at September 30, 2001.
o Noninterest income was $182.4 million in the third quarter of
2002, an increase of $9.0 million, or 5 percent, from the third
quarter of 2001. This growth included a $5.9 million increase in
service charges on deposit accounts and $6.1 million in revenues
associated with our November 30, 2001 acquisition of
Armstrong/Robitaille Business and Insurance Services
("Armstrong/Robitaille"), partly offset by a $2.6 million
decrease in trust and investment management fees.
o Noninterest expense was $331.1 million in the third quarter of
2002, an increase of $14.1 million, or 4 percent, over the third
quarter of 2001. Salaries and employee benefits increased $11.1
million, or 7 percent, primarily attributable to higher
incentives of $3.2 million and higher salaries of $8.7 million.
o Income tax expense in the third quarter of 2002 was $65.2
million, a 32 percent effective income tax rate, which included a
$3.3 million net reduction in income tax expense resulting from a
change in a tax law in the State of California concerning the tax
treatment of loan loss reserves. For the third quarter of 2001,
the effective income tax rate was also 32 percent.
o Return on average assets increased to 1.53 percent in the third
quarter of 2002 compared to 1.43 percent in the third quarter of
2001. Our return on average common equity increased to 14.38
percent in the third quarter of 2002 compared to 14.19 percent in
the third quarter of 2001.
o Total loans at September 30, 2002 were $26.0 billion, an increase
of $367.9 million, or 1.4 percent, from September 30, 2001.
o Nonperforming assets were $395.5 million at September 30, 2002, a
decrease of $54.7 million, or 12 percent, from September 30,
2001. Nonperforming assets, as a percentage of total assets,
decreased to 1.05 percent at September 30, 2002, compared with
1.28 percent at September 30, 2001. Total nonaccrual loans were
$395.2 million at September 30, 2002, compared with $444.5
million at September 30, 2001, resulting in a decrease in the
ratio of nonaccrual loans to total loans of 1.52 percent at
September 30, 2002 from 1.74 percent at September 30, 2001.
o Our Tier 1 and total risk-based capital ratios were 11.14 percent
and 12.89 percent, respectively, at September 30, 2002, compared
with 11.18 percent and 13.05 percent, respectively, at September
30,
19
2001. Our leverage ratio was 10.13 percent at September 30,
2002 compared with 10.50 percent at September 30, 2001.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30,
2002
Net income was $383.0 million, or $2.43 per diluted common share, in
the first nine months of 2002 compared with $349.6 million, or $2.20 per diluted
common share, in the first nine months of 2001. This increase in diluted
earnings per share of $0.23, or 11 percent above the first nine months of 2001
was due to a $70.0 million, or 33 percent, decrease in provision for credit
losses, a $20.0 million, or 4 percent, increase in noninterest income, and a
$14.2 million, or 1 percent, increase in net interest income (on a
taxable-equivalent basis), partly offset by a $52.3 million, or 6 percent,
increase in noninterest expense. Other highlights of the first nine months of
2002 include:
o Net interest income, on a taxable-equivalent basis, was $1,159.9
million in the first nine months of 2002, an increase of $14.2
million over the first nine months of 2001. Net interest margin
in the first nine months of 2002 was 4.77 percent, a decrease of
13 basis points from the first nine months of 2001.
o A provision for credit losses of $145.0 million was recorded in
the first nine months of 2002, compared with $215.0 million in
the first nine months of 2001.
o Noninterest income was $542.7 million in the first nine months of
2002, an increase of $20.0 million, or 4 percent, from the first
nine months of 2001. Noninterest income, excluding a $20.7
million gain recognized on the exchange of our STAR System stock
in the prior year, increased $40.7 million, or 8 percent. This
growth was mainly attributable to a $23.0 million increase in
service charges on deposit accounts and $19.5 million in revenues
associated with our acquisition of Armstrong/Robitaille, partly
offset by a $7.2 million decrease in trust and investment
management fees. In addition, we had residual value writedowns in
our auto lease portfolio of $9.0 million in the first nine months
of 2002 compared with $28.3 million in the first nine months of
2001.
o Noninterest expense was $984.3 million in the first nine months
of 2002, an increase of $52.3 million, or 6 percent, over the
first nine months of 2001. Salaries and employee benefits
increased $47.0 million, or 9 percent, primarily attributable to
higher incentives of $17.6 million, higher salaries of $22.6
million, and higher employee benefits of $6.7 million.
o Income tax expense in the first nine months of 2002 was $188.7
million, a 33 percent effective income tax rate, which included a
$3.3 million net reduction in income tax expense resulting from a
change in a tax law in the State of California concerning the tax
treatment of loan loss reserves. For the first nine months of
2001, the effective income tax rate was also 33 percent.
o Return on average assets increased to 1.44 percent in the first
nine months of 2002 compared to 1.35 percent in the first nine
months of 2001. Our return on average common equity increased to
13.73 percent in the first nine months of 2002 compared to 13.69
percent in the first nine months of 2001.
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
20
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. Also, the tables have been expanded to include
performance center earnings. A performance center is a special unit of the bank
whose income generating activities, unlike typical profit centers, are based on
other business segment units' customer base. A performance center has direct
interactions with customers, and its purpose is to foster cross selling with a
total profitability view of the product and services it manages. For example,
the Global Trading and Sales unit, within the Global Markets Group, is a
performance center that manages the foreign exchange, derivatives, and fixed
income securities activities within the Global Markets organization. However the
revenues generated and expenses incurred for those transactions entered into to
accommodate our customers are allocated to other business segments where the
customer relationships reside. Unlike financial accounting, there is no
authoritative body of guidance for management accounting equivalent to US GAAP.
Consequently, reported results are not necessarily comparable with those
presented by other companies.
The RAROC measurement methodology recognizes credit expense for
expected losses arising from credit risk and attributes economic capital related
to unexpected losses arising from credit, market and operational risks. As a
result of the methodology used by the RAROC model to calculate expected losses,
differences between the provision for credit losses and credit expense in any
one period could be significant. However, over an economic cycle, the cumulative
provision for credit losses and credit expense for expected losses should be
substantially the same. Business unit results are based on an internal
management reporting system used by management to measure the performance of the
units and UnionBanCal Corporation as a whole. Our management reporting system
identifies balance sheet and income statement items to each business unit based
on internal management accounting policies. Net interest income is determined
using our internal funds transfer pricing system, which assigns a cost of funds
to assets or a credit for funds to liabilities and capital, based on their type,
maturity or repricing characteristics. Noninterest income and expense directly
or indirectly attributable to a business unit are assigned to that business. The
business units are assigned the costs of products and services directly
attributable to their business activity through standard unit cost accounting
based on volume of usage. All other corporate expenses (overhead) are assigned
to the business units based on a predetermined percentage of usage.
21
We have restated the business units' results for the prior periods to
reflect changes in the transfer pricing methodology and any reorganization
changes that may have occurred.
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL
AND INVESTMENT SERVICES GROUP BANKING GROUP
SERVICES GROUP
______________________ ______________________ _____________________
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
____________________________________________________________________________
2001 2002 2001 2002 2001 2002
________ ________ ________ ________ ________ ________
RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER
EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $174,830 $203,687 $171,791 $167,919 $ 8,736 $ 9,153
Noninterest income 110,287 114,205 35,107 44,102 14,019 17,268
________ ________ ________ ________ ________ ________
Total revenue 285,117 317,892 206,898 212,021 22,755 26,421
Noninterest expense 192,291 193,588 82,677 88,532 14,006 15,746
Credit expense (income) 9,479 7,363 32,851 47,380 1,164 474
________ ________ ________ ________ ________ ________
Income before income tax expense
(benefit) 83,347 116,941 91,370 76,109 7,585 10,201
Income tax expense (benefit) 31,880 44,730 30,627 24,055 2,901 3,902
________ ________ ________ ________ ________ ________
Net income $ 51,467 $ 72,211 $ 60,743 $ 52,054 $ 4,684 $ 6,299
======== ======== ======== ======== ======== ========
PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $ 517 $ 808 $ 6,330 $ 11,075 $ -- $ --
Noninterest income (3,056) (10,494) 9,052 15,009 121 1,098
Noninterest expense (1,051) (8,030) 5,603 11,118 48 860
Total loans (dollars in millions) 100 97 846 1,055 -- --
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1) $ 9,145 $ 10,170 $ 15,386 $ 14,191 $ 1,004 $ 1,219
Total assets 10,076 11,034 17,237 15,898 1,317 1,547
Total deposits(1) 14,240 15,947 7,095 8,662 1,448 1,358
FINANCIAL RATIOS:
Return on risk adjusted capital(2) 35% 49% 13% 13% 23% 37%
Return on average assets(2) 2.03 2.60 1.40 1.30 1.41 1.62
Efficiency ratio(3) 67.45 60.90 39.97 41.76 61.55 59.60
GLOBAL OTHER UNIONBANCAL
MARKETS GROUP CORPORATION
______________________ ______________________ _____________________
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30,
____________________________________________________________________________
2001 2002 2001 2002 2001 2002
________ ________ ________ ________ ________ ________
RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER
EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $ 5,855 $(10,135) $ 16,879 $21,478 $378,091 $392,102
Noninterest income 11,902 2,561 2,090 4,290 173,405 182,426
________ ________ ________ ________ ________ ________
Total revenue 17,757 (7,574) 18,969 25,768 551,496 574,528
Noninterest expense 4,079 3,756 23,989 29,512 317,042 331,134
Credit expense (income) 150 50 6,356 (15,267) 50,000 40,000
________ ________ ________ ________ ________ ________
Income before income tax expense 13,528 (11,380) (11,376) 11,523 184,454 203,394
(benefit)
Income tax expense (benefit) 5,174 (4,353) (11,257) (3,171) 59,325 65,163
________ ________ ________ ________ ________ ________
Net income (loss) $ 8,354 $ (7,027) $ (119) $ 14,694 $125,129 $138,231
======== ======== ======== ======== ======== ========
PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $ -- $ -- $ (6,847) $(11,883) $ -- $ --
Noninterest income (7,131) (8,578) 1,014 2,965 -- --
Noninterest expense (1,280) (1,534) (3,320) (2,414) -- --
Total loans (dollars in millions) -- -- (946) (1,152) -- --
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1) $ 80 $ 103 $ 302 $ 288 $ 25,917 $ 25,971
Total assets 5,295 6,562 692 762 34,617 35,803
Total deposits(1) 2,900 1,496 708 992 26,391 28,455
FINANCIAL RATIOS:
Return on risk adjusted capital(2) 8% (4)% na na na na
Return on average assets(2) 0.63 (0.42) na na 1.43% 1.53%
Efficiency ratio(3) 22.97 (49.59) na na 57.45 57.58
<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
basis) and noninterest income. Foreclosed asset expense was immaterial in
the first nine months of 2001 and $0.1 million in the first nine months of
2002.
na = not applicable
</FN>
22
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL
AND INVESTMENT SERVICES GROUP BANKING GROUP
SERVICES GROUP
______________________ ______________________ _____________________
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
____________________________________________________________________________
2001 2002 2001 2002 2001 2002
________ ________ ________ ________ ________ ________
RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER
EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $526,948 $584,910 $534,326 $483,592 $ 27,371 $ 28,024
Noninterest income 311,176 330,153 112,403 141,458 43,198 49,988
________ ________ ________ ________ __________ __________
Total revenue 838,124 915,063 646,729 625,050 70,569 78,012
Noninterest expense 557,204 576,735 235,034 259,583 41,737 46,155
Credit expense (income) 32,942 25,462 99,203 141,693 3,530 1,428
________ ________ ________ ________ __________ __________
Income before income tax expense
(benefit) 247,978 312,866 312,492 223,774 25,302 30,429
Income tax expense (benefit) 94,851 119,671 107,421 71,147 9,678 11,639
________ ________ ________ ________ __________ __________
Net income $153,127 $193,195 $205,071 $152,627 $ 15,624 $ 18,790
======== ======== ======== ======== ========== ==========
PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $ 2,623 $ 1,900 $ 14,555 $ 29,141 $ -- $ --
Noninterest income (5,351) (32,329) 20,154 42,330 270 3,139
Noninterest expense (3,208) (24,048) 14,968 32,104 377 2,487
Total loans (dollars in millions) 92 111 767 1,048 -- --
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1) $ 8,803 $ 9,904 $ 15,941 $ 14,152 $ 980 $ 1,095
Total assets 9,758 10,776 17,775 15,808 1,346 1,421
Total deposits(1) 14,134 15,433 6,979 8,232 1,403 1,493
FINANCIAL RATIOS:
Return on risk adjusted capital(2) 35% 45% 15% 13% 24% 38%
Return on average assets(2) 2.10 2.40 1.54 1.29 1.55 1.77
Efficiency ratio(3) 66.48 63.03 36.34 41.53 59.14 59.16
GLOBAL OTHER UNIONBANCAL
MARKETS GROUP CORPORATION
______________________ ______________________ _____________________
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
____________________________________________________________________________
2001 2002 2001 2002 2001 2002
________ ________ ________ ________ ________ ________
RESULTS OF OPERATIONS AFTER PERFORMANCE
CENTER EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $ 8,524 $ (2,885) $ 46,906 $ 64,662 $1,144,075 $1,158,303
Noninterest income 18,198 8,788 37,628 12,264 522,603 542,651
________ ________ ________ ________ __________ __________
Total revenue 26,722 5,903 84,534 76,926 1,666,678 1,700,954
Noninterest expense 18,540 11,677 79,464 90,138 931,979 984,288
Credit expense (income) 150 150 79,175 (23,733) 215,000 145,000
________ ________ ________ ________ __________ __________
Income before income tax expense
(benefit) 8,032 (5,924) (74,105) 10,521 519,699 571,666
Income tax expense (benefit) 3,072 (2,266) (44,889) (11,475) 170,133 188,716
________ ________ ________ ________ __________ __________
Net income (loss) $ 4,960 $ (3,658) $(29,216) $ 21,996 $ 349,566 $ 382,950
======== ======== ======== ======== ========== ==========
PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS):
Net interest income $ -- $ -- $(17,178) $(31,041) $ -- $ --
Noninterest income (18,117) (22,146) 3,044 9,006 -- --
Noninterest expense (3,275) (3,766) (8,862) (6,777) -- --
Total loans (dollars in millions) -- -- (859) (1,159) -- --
AVERAGE BALANCES (DOLLARS IN MILLIONS):
Total loans(1) $ 64 $ 91 $ 360 $ 320 $ 26,148 $ 25,562
Total assets 4,932 6,729 734 808 34,545 35,542
Total deposits(1) 3,023 1,991 730 936 26,269 28,085
FINANCIAL RATIOS:
Return on risk adjusted capital(2) 2% (1)% na na na na
Return on average assets(2) 0.13 (0.07) na na 1.35% 1.44%
Efficiency ratio(3) 69.38 197.80 na na 55.86 57.80
<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 basis) and noninterest income. Foreclosed asset expense was
immaterial in the first nine months of 2001 and $0.1 million in the first
nine months of 2002.
na = not applicable
</FN>
23
COMMUNITY BANKING AND INVESTMENT SERVICES GROUP
The Community Banking and Investment Services Group provides financial
products to individuals and small businesses including a set of credit, deposit,
trust, risk management, and insurance products delivered through branches,
relationship managers, private bankers, trust administrators, and insurance
agents.
In the third quarter of 2002, net income increased $20.7 million, or 40
percent, compared to the third quarter of 2001. Total revenue increased $32.8
million, or 12 percent, compared to a year earlier. Increased asset and deposit
volumes offset the effect of a significantly lower interest rate environment
leading to an increase of $28.9 million, or 17 percent, in net interest income
over the prior year quarter. Noninterest income was $3.9 million, or 4 percent,
higher than the prior year quarter primarily due to our acquisition of
Armstrong/Robitaille. Noninterest expense increased $1.4 million, or 1 percent,
compared to a year earlier with the majority of that increase being attributable
to higher salaries and employee benefits mainly related to deposit gathering,
small business growth, acquisitions and residential loan growth over the third
quarter of 2001.
In 2002, 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, expanding the branch network,
and expanding cross selling activities throughout the bank. The strategy for
growing the consumer asset portfolio primarily focuses on mortgage and home
equity products that may be originated through the branch network, as well as
through channels such as wholesalers, correspondents, and whole loan purchases.
As of September 30, 2002, residential loans have grown by $1.3 billion, or 29
percent, from the same period last year. The Wealth Management division is
focused on becoming a growing provider of banking and investment products for
affluent individuals in geographic areas already served by us. We seek to
provide quality service superior to that of our competitors, offering an
attractive product suite. Core elements of the initiative to extend our small
business franchise include improving our sales force, increasing marketing
activities, adding new locations, and developing online capabilities to
complement physical distribution. Expansion of the distribution network will be
achieved through acquisitions and de novo branching. On October 31, 2002, the
Company completed its acquisition of Valencia Bank and Trust, a commercial bank
with $266 million in assets and five branches.
The Community Banking and Investment Services Group is comprised of six
major divisions: Community Banking, Wealth Management, Institutional Services
and Asset Management, Consumer Asset Management, Government and Not-For-Profit
Markets, and Insurance Services.
COMMUNITY BANKING serves its customers through 254 full-service
branches in California, 6 full-service branches in Oregon and Washington, and a
network of 512 proprietary ATMs. Customers may also access our services 24 hours
a day by telephone or through our BANK@HOME product at www.UBOC.com. In
addition, the division offers automated teller and point-of-sale merchant
services.
This division is organized by service delivery method, by markets and
by geography. We serve our customers in the following ways:
o through community banking branches, which serve consumers and
businesses with checking and deposit services, as well as various
types of consumer financing;
o through on-line access to our internet banking services, which
augment our physical delivery channels by providing an array of
customer transaction, bill payment and loan payment services;
o through branches and business banking centers, which serve
businesses with annual sales up to $5 million; and
o through in-store branches, which also serve consumers and
businesses.
24
WEALTH MANAGEMENT provides private banking services to our affluent
clientele as well as brokerage products and services.
o The Private Bank focuses primarily on delivering financial
services to high net worth individuals with sophisticated
financial needs as well as to professional service firms.
Specific products and services include trust and estate services,
investment account management services, and deposit and credit
products. A key strategy of the Private Bank is to expand its
business by leveraging existing Bank client relationships.
Through 13 existing locations, the Private Bank relationship
managers offer all of our available products and services.
o Our brokerage products and services are provided through UBOC
Investment Services, Inc., a registered broker/dealer offering
investment products to individuals and institutional clients. Its
primary strategy is to further penetrate our existing client
base.
INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment
management and administration services for a broad range of individuals and
institutions.
o HighMark Capital Management, Inc., a registered investment
advisor, provides investment advisory services to 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, Inc. also provides
mutual fund support services. HighMark Capital Management Inc.'s
strategy is to increase assets under management by broadening its
client base and helping to expand the distribution of shares of
its mutual fund clients.
o Institutional Services provides custody, corporate trust, and
retirement plan services. Custody Services provides both domestic
and international safekeeping/settlement services in addition to
securities lending. Corporate Trust acts as trustee for corporate
and municipal debt issues. Retirement Services provides a full
range of defined benefit and defined contribution administrative
services, including trustee services, administration, investment
management, and 401(k) valuation services. The client base of
Institutional Services includes financial institutions,
corporations, government agencies, unions, insurance companies,
mutual funds, investment managers, and non-profit organizations.
Institutional Services' strategy is to continue to leverage and
expand our position in our target markets. As we announced on
April 30, 2002, we acquired a substantial portion of the trust
and institutional custody business of a bank located in Southern
California.
CONSUMER ASSET MANAGEMENT is the centralized underwriting, processing,
servicing, collection and administration for consumer assets including
residential loans and merchant bank cards.
o Consumer Asset Management is centralized in two sites, one in San
Diego and one in Brea, and
o provides customer and credit management services for consumer
loan products.
GOVERNMENT AND NOT-FOR-PROFIT MARKETS provides a full range of treasury
management, investment, and trust services to government entities and
not-for-profit organizations.
o The division, which primarily focuses on local, state, and
federal agencies, includes an expanding product offering to the
Native American government market. Niche markets have been
developed that service colleges, universities, trade
associations, cultural institutions, and religious non-profit
organizations. The division's strategy is to expand its market
presence by continued delivery of cash management products,
internet based technology solutions, and expanding its tax-exempt
lending capabilities to meet existing clients' needs.
25
INSURANCE SERVICES provides a range of risk management services and
insurance products to business and retail customers.
o The group, which includes our fourth quarter 2001 acquisition of
Armstrong/Robitaille, a regional insurance broker, offers its
risk management and insurance products through offices in
California and Oregon.
Through alliances with other financial institutions, the Community
Banking and Investment Services Group offers additional products and services,
such as credit cards, leasing, and asset-based and leveraged financing.
The group competes with larger banks by attempting to provide service
quality superior to that of its major competitors. The group's primary means of
competing with community banks include its branch network and its technology to
deliver banking services. We also offer convenient banking hours to consumers
through our drive-through banking locations and selected branches that are open
seven days a week.
The group competes with a number of commercial banks, internet banks,
savings associations and credit unions, as well as more specialized financial
service providers such as investment brokerage companies, consumer finance
companies, and residential real estate lenders. The group's primary competitors
are other major depository institutions such as Bank of America, 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 financing and cash
management services to middle market and large corporate businesses primarily
headquartered in the western United States. The Commercial Financial Services
Group has continued to focus specialized financing expertise to specific
geographic markets and industry segments such as Energy, Entertainment, and Real
Estate. Relationship managers in the Commercial Financial Services Group provide
credit services including commercial loans, accounts receivable and inventory
financing, project financing, lease financing, trade financing and real estate
financing. In addition to credit services, the group offers its customers access
to cash management services delivered through deposit managers with experience
in cash management solutions for businesses.
In the third quarter of 2002, net income decreased $8.7 million, or 14
percent, compared to the third quarter of 2001. Net interest income decreased
$3.9 million, or 2 percent, primarily attributable to the lower interest rate
environment, wherein our wholesale liabilities are closely tied to the effects
of the lower treasury bill rates. The impact on earnings of decreasing earning
asset balances was mitigated by a significantly lower cost of funds resulting
from this lower interest rate environment. Noninterest income increased $9.0
million, or 26 percent, mainly due to net losses of only $2.8 million in the
private equity portfolio in the third quarter of 2002 compared with net losses
of $9.9 million in the third quarter of 2001. Excluding these private equity
portfolio losses, noninterest income increased by 4 percent over the third
quarter of 2001, which was primarily due to higher deposit-related service fees.
Noninterest expense increased $5.9 million, or 7 percent, compared to a year
earlier due to higher expenses to support increased product sales and deposit
volume. Credit expense increased $14.5 million due to a refinement in the RAROC
credit metrics that were implemented in late 2001 and not reflected in our third
quarter 2001 results.
The group's initiatives during 2002 included expanding wholesale
deposit activities and increasing domestic trade financing. Loan growth
strategies included originating, underwriting and syndicating loans in core
competency markets, such as the California middle market, commercial real
estate, energy, entertainment, equipment leasing and commercial finance. The
Commercial Financial Services Group
26
provides strong processing services, including services such as check
processing, front-end item processing, cash vault services and digital imaging.
The Commercial Financial Services Group is comprised of the following
business units:
o the Commercial Banking Division, which serves California
middle-market and large corporate companies with commercial
lending, trade financing, and asset-based loans;
o the Corporate Deposit Services Division, which provides deposit
and cash management expertise to clients in the middle market,
large corporate market and specialized industries;
o the Institutional and Deposit Services Division, which provides
deposit and cash management expertise to clients in specific
deposit-intensive industries;
o the Corporate Capital Markets Division, which provides limited
merchant and investment banking related products and services;
o the Real Estate Industries Division, which provides real estate
lending products such as construction loans, commercial mortgages
and bridge financing;
o the Energy Capital Services Division, which provides custom
financing and project financing to oil and gas companies, as well
as power and utility companies, nationwide; and
o the National Banking Division, which provides custom financing to
middle market and large corporate clients in their defined
industries and geographic markets.
The group competes with other banks primarily on the basis of the
quality of its relationship managers, the delivery of quality customer service,
and its reputation as a "business bank."
The group's main strategy is to target industries and companies for
which the group can reasonably expect to be one of a customer's primary banks.
Consistent with its strategy, the group attempts to serve a large part of its
targeted customers' credit and depository needs.
The group competes with a variety of other financial services
companies. Competitors include other major California banks, as well as
regional, national and international banks. In addition, we compete with
investment banks, commercial finance companies, leasing companies, and insurance
companies.
INTERNATIONAL BANKING GROUP
The International Banking Group focuses on providing correspondent
banking and trade finance related products and services to international
financial institutions worldwide, primarily in Asia. This focus includes
products and services such as letters of credit, international payments,
collections and financing of mostly short-term transactions. The group also
serves certain foreign firms and US corporate clients in selected countries
where we have branches, including Hong Kong, Japan, Korea, the Philippines and
Taiwan. In the US, the group serves subsidiaries and affiliates of non-Japanese
Asian companies and US branches/agencies of foreign banks. The majority of the
revenue generated by the International Banking Group is from customers domiciled
outside of the US.
In the third quarter of 2002, net income increased $1.6 million, or 35
percent, compared to the third quarter of 2001. Total revenue in the third
quarter of 2002 increased $3.7 million, or 16 percent, compared to the third
quarter of 2001. Net interest income increased $0.4 million, or 5 percent, over
the third quarter of 2001, mainly due to higher loan volumes. Noninterest income
was $3.2 million, or 23 percent, higher than the third quarter of 2001, mainly
attributable to higher foreign remittance and collection commissions, reflecting
a strategic focus on this business, and merchant card activity in the current
quarter. Noninterest expense increased $1.7 million, or 12 percent, compared to
the third quarter of 2001, with the majority of that increase attributable to
merchant card activity. Also contributing to the group's overall increase in net
income was a reduction in credit expense of $0.7 million, or 59 percent,
compared to the
27
third quarter of 2001. International Banking Group's business revolves around
short-term, trade financing, mostly to banks, which we believe tends to result
in significantly lower credit risk when compared to other lending activities and
service-related income.
The group has a long and stable history of providing correspondent
banking and trade-related products and services to international financial
institutions. We believe the group continues to be a market leader, achieving
strong customer loyalty in the correspondent banking market. The International
Banking Group, headquartered in San Francisco, also maintains representative
offices in Asia and Latin America and an international banking subsidiary in New
York.
GLOBAL MARKETS GROUP
The Global Markets Group conducts business activities primarily to
support the previously described business groups and their customers. This group
offers a broad range of risk management products, such as foreign exchange
contracts and interest rate swaps and options. It trades money market,
government, agency, and other securities to meet investment needs of
institutional and business clients of UnionBanCal Corporation. Another primary
area of the group is treasury management for UnionBanCal Corporation, which
encompasses wholesale funding, liquidity management, interest rate risk
management, including securities portfolio management, and hedging activities.
In the third quarter of 2002, net loss was $7.0 million compared to net
income of $8.4 million in the third quarter of 2001. Total revenue in the third
quarter of 2002 decreased $25.3 million, or 143 percent, compared to the third
quarter of 2001, resulting from a $16.0 million decrease in net interest income
and a $9.3 million decrease in noninterest income. The decrease in net interest
income from the third quarter of 2001 was mainly attributed to a declining
interest rate environment, offset in part by reduced volume and costs of
wholesale funding and increased income from hedged positions. The noninterest
income decrease, compared to the third quarter of 2001, was mainly attributable
to higher net gains on the sale of securities in our investment securities
portfolio in the third quarter of 2001 and to higher distribution of performance
center earnings to other business segments of the bank in the current quarter.
Noninterest expense increased $0.3 million, or 8 percent, compared to the third
quarter of 2001.
OTHER
"Other" includes the following items:
o corporate activities that are not directly attributable to one of
the four major business units. Included in this category are
goodwill amortization for periods prior to January 1, 2002 and
certain other nonrecurring items such as merger and integration
expense, certain parent company non-bank subsidiaries, and the
elimination of the fully taxable-equivalent basis amount;
o the adjustment between the credit expense under RAROC and the
provision for credit losses under US GAAP and earnings associated
with unallocated equity capital;
o the Credit Management Group, containing the Special Assets
Division, which includes $450 million and $396 million of
nonperforming assets as of September 30, 2001 and 2002,
respectively;
o the Pacific Rim Corporate Group, which offers a range of credit,
deposit, and investment management products and services to
companies in the US, which are affiliated with companies
headquartered outside the US, mostly in Japan; and
o the residual costs of support groups.
28
Net income for "Other" in the third quarter of 2002 was $14.7 million.
The results were impacted by the following factors:
o credit expense (income) of ($15.3) million was due to the
difference between the $40.0 million in provision for credit
losses calculated under our US GAAP methodology and the $55.3
million in expected losses for the reportable business segments,
which utilizes the RAROC methodology;
o net interest income of $21.5 million, which resulted from the
differences between the credit for equity for the reportable
segments under RAROC and the net interest income earned by
UnionBanCal Corporation, and a credit for demand deposits in the
Pacific Rim Corporate Group;
o noninterest income of $4.3 million; and
o noninterest expense of $29.5 million.
Net loss for "Other" in the third quarter of 2001 was $0.1 million. The
results were impacted by the following factors:
o credit expense of $6.4 million due to the difference between the
$50.0 million in provision for credit losses calculated under our
US GAAP methodology and the $43.6 million in expected losses for
the reportable business segments, which utilizes the RAROC
methodology; offset by
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
UnionBanCal Corporation, and a credit for demand deposits in the
Pacific Rim Corporate Group;
o noninterest income of $2.1 million, and
o noninterest expense of $24.0 million.
29
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, 2001 SEPTEMBER 30, 2002
_________________________________________ _________________________________________
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE INCOME/ YIELD/ BALANCE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) EXPENSE(1) RATE(1) EXPENSE(1) RATE(1)
_____________________________________ ___________ ________ _______ ___________ ________ _______
ASSETS
Loans:(2)
Domestic $24,825,234 $442,062 7.08% $24,770,565 $374,043 6.00%
Foreign(3) 1,091,866 13,451 4.89 1,200,918 8,134 2.69
Securities--taxable 4,853,629 75,728 6.24 5,907,792 76,825 5.20
Securities--tax-exempt 42,501 1,475 13.88 35,761 990 11.08
Interest bearing deposits in banks 61,074 622 4.04 135,952 773 2.26
Federal funds sold and securities 164,876 1,398 3.36 327,820 1,467 1.78
purchased under resale agreements
Trading account assets 303,879 1,691 2.21 378,715 1,415 1.48
___________ ________ ___________ ________
Total earning assets 31,343,059 536,427 6.81 32,757,523 463,647 5.63
________ ________
Allowance for credit losses (639,736) (631,581)
Cash and due from banks 2,191,527 1,860,183
Premises and equipment, net 489,181 497,542
Other assets 1,232,909 1,319,808
___________ ___________
Total assets $34,616,940 $35,803,475
=========== ===========
LIABILITIES
Domestic deposits:
Interest bearing $ 5,941,131 33,509 2.24 $ 8,292,080 22,855 1.09
Savings and consumer time 3,481,091 26,605 3.03 3,614,192 14,593 1.60
Large time 4,346,272 45,737 4.18 2,679,594 14,601 2.16
Foreign deposits(3) 1,986,119 15,954 3.19 1,369,123 4,727 1.37
___________ ________ ___________ ________
Total interest bearing deposits 15,754,613 121,805 3.07 15,954,989 56,776 1.41
___________ ________ ___________ ________
Federal funds purchased and
securities sold under repurchase
agreements 1,413,866 12,265 3.44 487,201 1,789 1.46
Commercial paper 1,330,949 11,844 3.53 1,043,111 4,488 1.71
Other borrowed funds 404,629 4,914 4.82 270,795 1,662 2.44
Medium and long-term debt 200,000 2,142 4.25 399,697 2,375 2.36
UnionBanCal Corporation--obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust 352,363 4,940 5.62 351,879 3,921 4.48
___________ ________ ___________ ________
Total borrowed funds 3,701,807 36,105 3.87 2,552,683 14,235 2.22
___________ ________ ___________ ________
Total interest bearing liabilities 19,456,420 157,910 3.22 18,507,672 71,011 1.52
________ ________
Noninterest bearing deposits 10,636,680 12,500,463
Other liabilities 1,026,176 980,413
___________ ___________
Total liabilities 31,119,276 31,988,548
SHAREHOLDERS' EQUITY
Common equity 3,497,664 3,814,927
___________ ___________
Total shareholders' equity 3,497,664 3,814,927
___________ ___________
Total liabilities and shareholders'
equity $34,616,940 $35,803,475
=========== ===========
Net interest income/margin
(taxable-equivalent basis) 378,517 4.81% 392,636 4.77%
Less: taxable-equivalent adjustment 426 534
________ ________
Net interest income $378,091 $392,102
======== ========
<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>
30
FOR THE NINE MONTHS ENDED
______________________________________________________________________________________
SEPTEMBER 30, 2001 SEPTEMBER 30, 2002
_________________________________________ _________________________________________
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE INCOME/ YIELD/ BALANCE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) EXPENSE(1) RATE(1) EXPENSE(1) RATE(1)
_____________________________________ ___________ ________ _______ ___________ ________ _______
ASSETS
Loans:(2)
Domestic $25,093,475 $1,433,167 7.63% $24,468,284 $1,113,279 6.08%
Foreign(3) 1,054,397 45,873 5.82 1,094,168 23,642 2.89
Securities--taxable 4,477,761 212,030 6.31 5,678,095 235,041 5.52
Securities--tax-exempt 57,943 4,731 10.89 36,971 2,979 10.75
Interest bearing deposits in banks 68,631 2,249 4.38 113,779 1,898 2.23
Federal funds sold and securities
purchased under resale agreements 142,965 4,585 4.29 782,607 10,354 1.77
Trading account assets 333,906 6,817 2.73 298,505 3,107 1.39
___________ __________ ___________ __________
Total earning assets 31,229,078 1,709,452 7.31 32,472,409 1,390,300 5.72
__________ __________
Allowance for credit losses (635,230) (635,313)
Cash and due from banks 2,204,603 1,878,616
Premises and equipment, net 484,682 497,503
Other assets 1,262,310 1,328,587
___________ ___________
Total assets $34,545,443 $35,541,802
=========== ===========
LIABILITIES
Domestic deposits:
Interest bearing $ 5,999,738 110,321 2.46 $ 7,881,352 68,564 1.16
Savings and consumer time 3,394,569 84,878 3.34 3,587,824 46,830 1.75
Large time 4,600,627 171,195 4.98 3,125,003 52,001 2.22
Foreign deposits(3) 1,985,523 60,944 4.10 1,576,176 17,096 1.45
___________ __________ ___________ __________
Total interest bearing deposits 15,980,457 427,338 3.58 16,170,355 184,491 1.53
___________ __________ ___________ __________
Federal funds purchased and
securities sold under repurchase
agreements 1,419,912 48,687 4.58 463,067 5,134 1.48
Commercial paper 1,383,999 46,882 4.53 999,030 12,998 1.74
Other borrowed funds 456,195 16,630 4.87 543,796 8,740 2.15
Medium and long-term debt 200,000 7,873 5.26 399,788 7,198 2.41
UnionBanCal Corporation--obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust 352,215 16,329 6.18 352,183 11,832 4.47
___________ __________ ___________ __________
Total borrowed funds 3,812,321 136,401 4.78 2,757,864 45,902 2.22
___________ __________ ___________ __________
Total interest bearing liabilities 19,792,778 563,739 3.81 18,928,219 230,393 1.63
__________ __________
Noninterest bearing deposits 10,288,593 11,915,106
Other liabilities 1,049,511 968,204
___________ ___________
Total liabilities 31,130,882 31,811,529
SHAREHOLDERS' EQUITY
Common equity 3,414,561 3,730,273
___________ ___________
Total shareholders' equity 3,414,561 3,730,273
___________ ___________
Total liabilities and shareholders'
equity $34,545,443 $35,541,802
=========== ===========
Net interest income/margin
(taxable-equivalent basis) 1,145,713 4.90% 1,159,907 4.77%
Less: taxable-equivalent adjustment 1,638 1,604
__________ __________
Net interest income $1,144,075 $1,158,303
========== ==========
<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>
31
Net interest income is interest earned on loans and investments 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.
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002
Net interest income, on a taxable-equivalent basis, was $392.6 million
in the third quarter of 2002, compared with $378.5 million in the third quarter
of 2001. This increase of $14.1 million, or 4 percent, was attributable
primarily to the impact of the decreasing interest rate environment throughout
the prior year on interest bearing liabilities, increasing average noninterest
bearing deposits, and higher earning assets, partly offset by significantly
lower yields on our earning assets. Decreasing market rates resulted in a lower
average yield of 118 basis points, which was favorably impacted by higher
interest rate derivatives income of $12.5 million, on average earning assets of
$32.8 billion. This lower average yield on earning assets was partly offset by
lower rates on our interest bearing liabilities of 170 basis points on average
balances of $18.5 billion. Mitigating the impact of the lower interest rate
environment on our net interest margin was an increase in average earning assets
of $1.4 billion, primarily in securities, funded by a $1.9 billion, or 18
percent, increase in average noninterest bearing deposits. The resulting impact
of these changes on our net interest margin was a decrease of 4 basis points to
4.77 percent.
Average earning assets were $32.8 billion in the third quarter of 2002,
compared with $31.3 billion in the third quarter of 2001. This growth was
attributable to a $1.1 billion, or 21 percent, increase in average securities.
The increase in average securities, which were comprised primarily of fixed rate
securities, reflected liquidity and interest rate risk management actions. While
average loans increased $54.4 million, or less than 1 percent, over the prior
year, our loan mix has substantially changed. Average commercial loans decreased
by $1.5 billion mainly attributable to slower loan growth due to economic
conditions, loan sales, and a reduction in our exposure to nonrelationship
syndicated loans while average residential mortgages increased by $1.3 billion,
which was a result of a strategic portfolio shift from more volatile commercial
loans. Other loan categories included an increase in average commercial
mortgages of $451.3 million and a decrease in average consumer loans and lease
financing of $208.4 million and $145.0 million, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002
Net interest income, on a taxable-equivalent basis, was $1.2 billion in
the first nine months of 2002, compared with $1.1 billion in the first nine
months of 2001. This increase of $14.2 million, or 1 percent, was attributable
primarily to the impact of decreasing interest rate environment throughout the
prior year on interest bearing liabilities, increasing average noninterest
bearing deposits, and higher earning assets, partly offset by significantly
lower yields on our earning assets. Decreasing market rates resulted in a lower
average yield of 159 basis points, which was favorably impacted by higher
interest rate derivatives income of $55.3 million, on average earning assets of
$32.5 billion. This lower average yield on earning assets was partly offset by
lower rates on our interest bearing liabilities of 218 basis points on average
balances of $18.9 billion. Mitigating the impact of the lower interest rate
environment on our net interest margin was an increase in average earning assets
of $1.2 billion, primarily in securities, funded by a $1.6 billion, or 16
percent, increase in average noninterest bearing deposits. The resulting impact
of these changes on our net interest margin was a decrease of 13 basis points to
4.77 percent.
Average earning assets were $32.5 billion in the first nine months of
2002, compared with $31.2 billion in the first nine months of 2001. This growth
was attributable to a $1.2 billion, or 26 percent, increase in average
securities, partly offset by a $585.4 million, or 2 percent, decrease in average
loans. The increase in average securities, which were comprised primarily of
fixed rate securities, reflected liquidity and interest rate risk management
actions. The decline in average loans was mostly due to a $2.2 billion decrease
in average commercial loans mainly attributable to slower loan growth due to
economic conditions, loan sales, and a reduction in our exposure to
nonrelationship syndicated loans. The decrease in commercial
32
loans was partly offset by an increase in average residential mortgages of $1.6
billion, which was a result of a strategic portfolio shift from more volatile
commercial loans. Other loan categories included an increase in average
commercial mortgages of $388.8 million and a decrease in average consumer loans
and lease financing of $273.9 million and $152.8 million, respectively.
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) 2001 2002 CHANGE 2001 2002 CHANGE
______________________ ________ ________ _______ ________ ________ ________
Service charges on deposit accounts $ 62,742 $ 68,629 9.38% $181,614 $204,641 12.68%
Trust and investment management
fees 37,965 35,368 (6.84) 116,880 109,680 (6.16)
Merchant transaction processing
fees 21,315 22,860 7.25 60,814 65,982 8.50
International commissions and
fees 18,053 20,131 11.51 53,288 57,593 8.08
Brokerage commissions and fees 8,786 9,183 4.52 26,764 28,090 4.95
Merchant banking fees 7,742 6,819 (11.92) 26,671 22,845 (14.35)
Gain on exchange of STAR System
stock -- -- -- 20,700 -- (100.00)
Foreign exchange trading gains,
net 6,351 8,193 29.00 19,472 21,653 11.20
Insurance commissions -- 6,120 nm -- 19,525 nm
Securities gains (losses), net (1,699) 550 nm 4,318 (3,313) nm
Other 12,150 4,573 (62.36) 12,082 15,955 32.06
________ ________ _______ ________ ________ ________
Total noninterest income $173,405 $182,426 5.20% $522,603 $542,651 3.84%
======== ======== ======= ======== ======== ========
<FN>
___________
nm = not meaningful
</FN>
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002
In the third quarter of 2002, noninterest income was $182.4 million, an
increase of $9.0 million, or 5 percent, over the third quarter of 2001. This
increase was mainly attributable to incremental insurance commissions of $6.1
million related to the acquisition of Armstrong/Robitaille, a $5.9 million
increase in service charges on deposit accounts, a $2.1 million increase in
international commissions and fees, and a $1.5 million increase in merchant
transaction processing fees, partly offset by a $2.6 million decrease in trust
and investment management fees and a $0.9 million decrease in merchant banking
fees. In addition, securities gains, net, were $0.6 million in the third quarter
of 2002 compared to securities losses, net, of $1.7 million in the third quarter
of 2001.
Revenue from service charges on deposit accounts was $68.6 million, an
increase of 9 percent over the third quarter of 2001. This increase was
primarily attributable to an 18 percent increase in quarterly average demand
deposits and reductions in the earnings credit rates, caused by the lower
interest rate environment on analyzed deposit accounts, which resulted in
customers paying fees for services rather than increasing required deposit
balances.
Trust and investment management fees were $35.4 million, a decrease of
7 percent over the third quarter of 2001. This decrease is primarily
attributable to declining market conditions and their impact on transaction and
asset-based fees. Total assets under administration of $129.7 billion at
September 30, 2002 decreased by $5.8 billion, or 4 percent, from September 30,
2001.
Merchant transaction processing fees were $22.9 million, an increase of
7 percent over the third quarter of 2001. This increase was primarily
attributable to an increase in the volume of credit card drafts deposited by
merchants and increased consumer usage of our enhanced Gold and Platinum version
of our standard MasterMoney Card (debit card) aimed at stimulating consumer
usage for higher dollar purchases.
Insurance commissions were $6.1 million reflecting the incremental
revenues associated with our acquisition of Armstrong/Robitaille.
33
Securities gains, net, were $0.6 million compared to securities losses,
net, of $1.7 million in the prior year. In the current quarter, we realized
gains of $1.9 million on the sale of securities, offset by permanent writedowns
on private capital securities of $1.4 million. In the third quarter of 2001, we
realized net gains of $7.8 million on the sale of securities, offset by
permanent writedowns on private capital securities of $9.5 million.
Other noninterest income was $4.6 million, a decrease of $7.6 million
from the third quarter of 2001. This decrease was mainly attributable to $5.6
million in higher valuation reserves for commercial loans held for sale and $3.4
million in unrealized losses on other non-publicly traded securities compared to
an unrealized loss of $0.6 million in the third quarter of 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002
In the first nine months of 2002, noninterest income was $542.7
million, an increase of $20.0 million, or 4 percent, over the first nine months
of 2001. In the prior year, we recognized a $20.7 million gain when our stock
holding in STAR System was exchanged for Concord EFS stock. Excluding the gain
on the exchange of our STAR System holdings, noninterest income increased $40.7
million, or 8 percent. This increase was mainly attributable to lower residual
value writedowns in our auto lease portfolio of $19.3 million, a $23.0 million
increase in service charges on deposit accounts, incremental insurance
commissions of $19.5 million related to our acquisition of Armstrong/Robitaille,
a $5.2 million increase in merchant transaction processing fees, and a $4.3
million increase in international commissions and fees, partly offset by a $7.2
million decrease in trust and investment management fees, and a $3.8 million
decrease in merchant banking fees. In addition, securities losses, net, were
$3.3 million in the first nine months of 2002 compared to securities gains, net,
of $4.3 million in the first nine months of 2001.
Revenue from service charges on deposit accounts was $204.6 million, an
increase of 13 percent over the first nine months of 2001. This increase was
primarily attributable to a 16 percent increase in average demand deposits and
reductions in the earnings credit rates, caused by the lower interest rate
environment on analyzed deposit accounts, which resulted in customers paying
fees for services rather than increasing required deposit balances.
Trust and investment management fees were $109.7 million, a decrease of
6 percent over the first nine months of 2001. This decrease is attributable to
declining market conditions and their impact on transaction and asset-based
fees.
Merchant transaction processing fees were $66.0 million, an increase of
9 percent over the first nine months of 2001. This increase was primarily
attributable to an increase in the volume of credit card drafts deposited by
merchants and increased consumer usage of our enhanced Gold and Platinum version
of our standard MasterMoney Card (debit card) aimed at stimulating consumer
usage for higher dollar purchases.
Merchant banking fees were $22.8 million, a decrease of 14 percent from
the first nine months of 2001. This decrease was primarily attributable to fewer
and smaller syndication and investment banking transactions as a result of
current market conditions.
Insurance commissions were $19.5 million reflecting the incremental
revenues associated with our acquisition of Armstrong/Robitaille.
Securities losses, net, were $3.3 million compared to securities gains,
net, of $4.3 million in the prior year. In the first nine months of 2002, we had
permanent writedowns on private capital securities of $10.3 million, partly
offset by realized gains of $7.0 million on the sale of securities. In the first
nine months of 2001, we realized net gains of $23.9 million on the sale of
securities, including a $9.5 million gain on the sale of Concord EFS shares,
partly offset by permanent writedowns on private capital securities of $19.6
million.
Other noninterest income was $16.0 million, an increase of $3.9 million
over the first nine months of 2001. The increase was mainly attributable to
lower residual value writedowns in our auto lease portfolio of
34
$9.0 million in the first nine months of 2002 compared to $28.3 million in the
first nine months of 2001. This increase was partly offset by higher unrealized
losses on other non-publicly traded securities of $7.2 million in the current
year compared to an unrealized loss of $1.7 million in the first nine months of
2001, $5.6 million in higher valuation reserve for loans held for sale in the
current year, and a $3.1 million gain on the sale of leased equipment in the
prior year.
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) 2001 2002 CHANGE 2001 2002 CHANGE
_____________________ ________ ________ _______ ________ ________ ________
Salaries and other compensation $140,147 $152,057 8.50% $408,413 $448,690 9.86%
Employee benefits 31,025 30,218 (2.60) 91,830 98,561 7.33
________ ________ _______ ________ ________ ________
Salaries and employee benefits 171,172 182,275 6.49 500,243 547,251 9.40
Net occupancy 23,779 27,340 14.98 70,375 75,750 7.64
Equipment 16,985 16,343 (3.78) 48,252 48,650 0.82
Merchant transaction processing 13,324 14,644 9.91 39,687 41,993 5.81
Communications 13,074 13,186 0.86 36,582 39,695 8.51
Software 8,250 10,061 21.95 22,614 31,610 39.78
Professional services 9,982 10,350 3.69 29,155 30,789 5.60
Advertising and public relations 10,084 9,145 (9.31) 28,134 27,774 (1.28)
Data processing 8,885 7,944 (10.59) 26,935 24,475 (9.13)
Intangible asset amortization 3,635 1,497 (58.82) 10,806 3,661 (66.12)
Foreclosed asset expense (income) (60) 18 nm 1 130 nm
Other 37,932 38,331 1.05 119,195 112,510 (5.61)
________ ________ _______ ________ ________ ________
Total noninterest expense $317,042 $331,134 4.44% $931,979 $984,288 5.61%
======== ======== ======= ======== ======== ========
<FN>
_____________
nm = not meaningful
</FN>
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002
In the third quarter of 2002, noninterest expense was $331.1 million,
an increase of $14.1 million, or 4 percent, over the third quarter of 2001. This
increase was primarily due to a $11.1 million increase in salaries and employee
benefits, a $3.6 million increase in net occupancy expense, a $1.8 million
increase in software expense, and a $1.3 million increase in merchant
transaction processing expense. These increases were partly offset by a $2.1
million decrease in intangible asset expense mostly attributable to the adoption
of SFAS No. 142, "Goodwill and Other Intangible Assets," in the first quarter of
2002, which eliminated the amortization of goodwill.
Salaries and employee benefits were $182.3 million, an increase of 7
percent over the third quarter of 2001. This increase was primarily attributable
to salary expense increases necessary to achieve our strategic goals to expand
key businesses, to annual merit increases, to higher incentive expense,
partially offset by lower benefit expenses primarily due to higher COLI
(company-owned life insurance) income. Excluding higher COLI income, benefit
expenses, including higher medical costs, would have been $2.9 million higher.
Net occupancy expense was $27.3 million, an increase of 15 percent over
the third quarter of 2001. This increase was primarily attributable to higher
building rent, depreciation, leasehold amortization and maintenance expenses
mainly associated with the opening of new branches and the Armstrong/Robitaille
and First Western Bank acquisitions.
35
Software expense was $10.1 million, an increase of 22 percent over the
third quarter of 2001. This increase was primarily attributable to increased
software purchases and development to support strategic technology initiatives.
Merchant transaction processing expense was $14.6 million, an increase
of 10 percent over the third quarter of 2001. This increase was primarily
attributable to an increase in the volume of credit card drafts deposited by
merchants.
Intangible asset amortization expense was $1.5 million, a decrease of
59 percent from the third quarter of 2001. This decrease was primarily
attributable to lower goodwill amortization related to the adoption of SFAS No.
142 in the first quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002
In the first nine months of 2002, noninterest expense was $984.3
million, an increase of $52.3 million, or 6 percent, over the same period in
2001. This increase was primarily due to a $47.0 million increase in salaries
and employee benefits, a $9.0 million increase in software expense, and a $3.1
million increase in communications expense. These increases were partly offset
by a $7.1 million decrease in intangible asset expense mostly attributable to
the adoption of SFAS No. 142 in the first quarter of 2002, which eliminated the
amortization of goodwill, a $2.5 million decrease in data processing expense,
and a $6.7 million decrease in other noninterest expense.
Salaries and employee benefits were $547.3 million, an increase of 9
percent over the first nine months of 2001. This increase was primarily
attributable to increases in staff necessary to achieve our strategic goals to
expand key businesses, to annual merit increases, to higher incentive expense,
and to higher other benefit expenses including higher pension and medical costs.
Software expense was $31.6 million, an increase of 40 percent over the
first nine months of 2001. This increase was primarily attributable to increased
software purchases and development to support strategic technology initiatives.
Net occupancy expense was $75.8 million, an increase of 8 percent over
the third quarter of 2001. This increase was primarily attributable to higher
building rent, depreciation, leasehold amortization and maintenance expenses
mainly associated with the opening of new branches and the Armstrong/Robitaille
and First Western Bank acquisitions.
Communications expense was $39.7 million, an increase of 9 percent over
the first nine months of 2001. This increase was primarily attributable to
higher costs associated with increased rates and usage for data and voice
communication.
Merchant transaction processing expense was $42.0 million, an increase
of 6 percent over the third quarter of 2001. This increase was primarily
attributable to an increase in the volume of credit card drafts deposited by
merchants.
Professional services expense was $30.8 million, an increase of 6
percent over the first nine months of 2001. This increase was primarily
attributable to higher consulting expenses related to process improvement
projects and higher legal expenses.
Data processing expense was $24.5 million, a decrease of 9 percent over
the first nine months of 2001. This decrease was primarily attributable to the
impact of reductions in the earnings credit rates, caused by the lower interest
rate environment, on analyzed deposit accounts used to offset vendor expenses.
Intangible asset amortization expense was $3.7 million, a decrease of
66 percent from the third quarter of 2001. This decrease reflects the adoption
of SFAS No. 142 in the first quarter of 2002.
Other noninterest expense was $112.5 million, a decrease of 6 percent
from the first nine months of 2001. This decrease was mainly due to the
recognition of a $6.2 million loss at the adoption of SFAS No.133, "Accounting
for Derivative Instruments and Hedging Activities," and higher
derivative-related
36
expenses of $3.6 million due to changes in the value of a portion of the
interest rate options that were excluded from hedge accounting under SFAS No.
133, both of which occurred in the prior year.
INCOME TAX EXPENSE
Income tax expense in the third quarter of 2002 was $65.2 million, a 32
percent effective income tax rate, which included a $3.3 million net reduction
in income tax expense resulting from a change in a tax law in the State of
California concerning the tax treatment of loan loss reserves. For the third
quarter of 2001, the effective income tax rate was also 32 percent.
Income tax expense in the first nine months of 2002 was $188.7 million,
a 33 percent effective income tax rate, which included a $3.3 million net
reduction in income tax expense resulting from a change in a tax law in the
State of California concerning the tax treatment of loan loss reserves. For the
first nine months of 2001, the effective income tax rate was also 33 percent.
LOANS
The following table shows loans outstanding by loan type.
PERCENT CHANGE TO
SEPTEMBER 30, 2002 FROM:
______________________________
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2001 2001 2002 2001 2001
______________________________________ ___________ ___________ ____________ _____________ ____________
Domestic:
Commercial, financial and industrial $12,227,368 $11,476,361 $10,759,876 (12.00)% (6.24)%
Construction 1,119,854 1,059,847 1,259,435 12.46 18.83
Mortgage:
Residential 4,537,854 4,788,219 5,852,932 28.98 22.24
Commercial 3,434,037 3,590,318 3,950,568 15.04 10.03
___________ ___________ ___________ _____________ ____________
Total mortgage 7,971,891 8,378,537 9,803,500 22.98 17.01
Consumer:
Installment 1,326,056 1,200,047 899,263 (32.19) (25.06)
Revolving lines of credit 810,188 859,021 1,057,245 30.49 23.08
___________ ___________ ___________ _____________ ____________
Total consumer 2,136,244 2,059,068 1,956,508 (8.41) (4.98)
Lease financing 981,290 979,242 836,688 (14.74) (14.56)
___________ ___________ ___________ _____________ ____________
Total loans in domestic offices 24,436,647 23,953,055 24,616,007 0.73 2.77
Loans originated in foreign branches 1,157,642 1,040,975 1,346,152 16.28 29.32
___________ ___________ ___________ _____________ ____________
Total loans $25,594,289 $24,994,030 $25,962,159 1.44% 3.87%
=========== =========== ============ ============= ============
Our lending activities are predominantly domestic, with such loans
comprising 95 percent of the total loan portfolio at September 30, 2002. Total
loans at September 30, 2002 were $26.0 billion, an increase of 1 percent, from
September 30, 2001. The increase was mainly attributable to an increase in the
residential mortgage portfolio of $1.3 billion and an increase in the commercial
mortgage portfolio of $516.5 million, partly offset by a decline in the
commercial, financial and industrial loan portfolio of $1.5 billion and a
decline in the consumer loan portfolio of $179.7 million.
Commercial, financial and industrial loans continue to be a significant
portion of our loan portfolio. These loans are extended principally to
corporations, middle market businesses, and small businesses, with no industry
concentration exceeding 10 percent of total loans. The commercial, financial and
industrial
37
loan portfolio was $10.8 billion, or 41 percent of total loans, at September 30,
2002, compared with $12.2 billion, or 48 percent of total loans, at September
30, 2001. The decrease of $1.5 billion, or 12 percent, from the prior year was
primarily attributable to current economic conditions, loan sales, and
reductions in our exposure in nonrelationship syndicated loans. The reduction in
commercial, financial, and industrial loans is consistent with our strategy to
reduce our exposure in more volatile commercial loans and increase the
percentage of more stable consumer loans.
The construction loan portfolio totaled $1.3 billion, or 5 percent of
total loans, at September 30, 2002, compared with $1.1 billion, or 4 percent of
total loans, at September 30, 2001. This growth of $139.6 million, or 12
percent, from the prior year was primarily attributable to a reasonably stable
Southern California housing market during 2001 and 2002, despite the slowdown in
the economy.
Commercial mortgages were $4.0 billion, or 15 percent of total loans,
at September 30, 2002, compared with $3.4 billion, or 13 percent of total loans,
at September 30, 2001. The mortgage loan portfolio consists of loans on
commercial and industrial projects primarily in California. The increase in
commercial mortgages of $516.5 million, or 15 percent, from September 30, 2001,
was primarily due to demand in the Southern California real estate market.
Residential mortgages were $5.9 billion, or 23 percent of total loans,
at September 30, 2002, compared with $4.5 billion, or 18 percent of total loans,
at September 30, 2001. 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 $1.3 billion, or 29
percent, from September 30, 2001, continues to be influenced by our strategic
decision to increase our residential mortgage portfolio through increased
in-house production and additional wholesale and correspondent channels.
Consumer loans totaled $2.0 billion, or 8 percent of total loans, at
September 30, 2002, compared with $2.1 billion, or 8 percent of total loans, at
September 30, 2001. The decrease of $179.7 million, or 8 percent, was
attributable to the impact of our decision to exit the indirect auto lending
business in the third quarter of 2000, partly offset by an increase in home
equity loans.
Lease financing totaled $836.7 million, or 3 percent of total loans, at
September 30, 2002, compared with $981.3 million, or 4 percent of total loans,
at September 30, 2001. As we previously announced, effective April 20, 2001, we
discontinued our auto leasing activity.
Loans originated in foreign branches totaled $1.3 billion, or 5 percent
of total loans, at September 30, 2002, compared with $1.2 billion, or 5 percent,
at September 30, 2001. The increase in loans originated in foreign branches of
$188.5 million, or 16 percent, from September 30, 2001, was attributable to an
increase in trade related short-term loans and funded acceptances.
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, 2001, December 31, 2001 and September 30, 2002 for any
country where such outstandings exceeded 1 percent of total assets. The
cross-border outstandings were compiled based upon category and domicile of
ultimate risk and are comprised of balances with banks, trading account assets,
securities available for sale, securities purchased under resale agreements,
loans, accrued interest receivable, acceptances outstanding and investments with
foreign entities. The amounts outstanding exclude local
38
currency outstandings. For any country shown in the table below, we do not have
significant local currency outstandings that are not hedged or are not funded by
local currency borrowings.
FINANCIAL PUBLIC CORPORATIONS TOTAL
INSTITUTIONS SECTOR AND OTHER OUTSTANDINGS
(DOLLARS IN MILLIONS) ENTITIES BORROWERS
__________________________________________ ____________ _________ ____________ ____________
September 30, 2001
Korea $425 $-- $50 $475
December 31, 2001
Korea $468 $-- $46 $514
September 30, 2002
Korea $580 $-- $55 $635
PROVISION FOR CREDIT LOSSES
We recorded a $40 million provision for credit losses in the third
quarter of 2002, compared with a $50 million provision for credit losses for the
same period in the prior year. The provision for credit losses in the first nine
months of 2002 was $145 million, compared with a $215 million provision for
credit losses for the same period in the prior year. 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.
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, leases and commitments. Changes in risk
grades affect the amount of the formula allowance. Loss factors are based on our
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are developed in the following ways:
o pass graded, for commercial, financial, and industrial loans, as
well as all problem graded loan loss factors are derived from a
migration model that tracks historical losses over a period,
which we believe captures the inherent losses in our loan
portfolio;
o pass graded loan loss factors for commercial real estate loans
and construction loans are based on the average annual net
charge-off rate over a period reflective of a full economic
cycle; and
o pooled loan loss factors (not individually graded loans) are
based on expected net charge-offs for one year. Pooled loans are
loans that are homogeneous in nature, such as consumer
installment, home equity, residential mortgage loans and
automobile leases.
We believe that an economic cycle is a period in which both upturns and
downturns in the economy have been reflected. We calculate loss factors over a
time interval that spans what we believe constitutes a complete and
representative economic cycle.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit 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
39
Creditors for Impairment of a Loan," or methods that include a range of probable
outcomes based upon certain qualitative factors.
The unallocated allowance contains amounts that are based on
management's evaluation of conditions that are not directly reflected in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they may not be identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the unallocated
allowance include the following, which existed at the balance sheet date:
o general economic and business conditions affecting our key
lending areas;
o credit quality trends (including trends in nonperforming loans
expected to result from existing conditions);
o collateral values;
o loan volumes and concentrations;
o seasoning of the loan portfolio;
o specific industry conditions within portfolio segments;
o recent loss experience in particular segments of the portfolio;
o duration of the current economic cycle;
o bank regulatory examination results; and
o findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion
with our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of such conditions
may be reflected as a specific allowance, applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable
losses inherent in the loan portfolio. The actual losses can vary from the
estimated amounts. Our methodology includes several features that are intended
to reduce the differences between estimated and actual losses. The loss
migration model that is used to establish the loan loss factors for problem
graded loans and pass graded commercial, financial, and industrial loans is
designed to be self-correcting by taking into account our loss experience over
prescribed periods. Similarly, by basing the pass graded loan loss factors over
a period reflective of an economic cycle, the methodology is designed to take
our recent loss experience for commercial real estate mortgages and construction
loans into account. 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, 2001
During the third quarter of 2002, there were no changes in estimation
methods or assumptions that affected our methodology for assessing the
appropriateness of the formula and specific allowances for credit losses.
Changes in estimates and assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
affected the assessment of the unallocated allowance.
40
At December 31, 2001, our total allowance for credit losses was $635
million or 2.54 percent of the total loan portfolio and 129 percent of total
nonaccrual loans. At September 30, 2002, our total allowance for credit losses
was $623 million or 2.40 percent of the total loan portfolio and 158 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,
2001, total impaired loans were $492 million and the associated impairment
allowance was $98 million compared with $395 million and $87 million,
respectively, at September 30, 2002. The impairment allowance at September 30,
2002 reflects a refinement of methodology for estimating losses for impaired
loans. The December 31, 2001 impairment allowance has not been restated.
We recorded a $40 million provision in the third quarter of 2002 as a
result of management's assessment of factors, including the continued slow US
economy, uncertainty in the communication/media, power, real estate, airlines,
and other sectors in domestic markets in which we operate, and growth and
changes in the composition of the loan portfolio. Losses inherent in large
commercial loans are more difficult to assess because historically these have
been more volatile than losses from other credits.
CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES
At September 30, 2002, the formula allowance remained relatively
unchanged at $321 million, compared to $325 million at December 31, 2001, a
decrease of $4 million.
At September 30, 2002, the specific allowance was $124 million compared
to $138 million at December 31, 2001, a net decrease of $14 million. The
specific allowance includes $15 million related to aircraft leases. The net
decline was primarily due to charge-offs recognized year-to-date as well as a
refinement in our estimated losses for impaired loans and a decline in
nonaccrual loans.
CHANGES IN THE UNALLOCATED ALLOWANCE
At September 30, 2002, the unallocated allowance was $178 million,
compared to $172 million at December 31, 2001, an increase of $6 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 adverse effects of declining wholesale power prices,
continued accounting concerns, and uncertainties regarding the
course of deregulation on borrowers in the power industry, which
could be in the range of $25 million to $50 million;
o the 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 $18 million to $40
million;
o the adverse effects of the general weakening in commercial real
estate markets reflecting weak demand, as well as the specific
deterioration in Northern California, which could be in the range
of $16 million to $32 million;
o the adverse effects of the continued weak economic conditions in
certain Asia/Pacific Rim countries and the reduced strength of
the Japanese corporate parents of our Pacific Rim borrowers,
which could be in the range of $7 million to $13 million; and
o the adverse effects of continued soft consumer confidence on
borrowers in the retailing industry, which could be in the range
of $6 million to $12 million.
41
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."
CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES
The following table sets forth a reconciliation of changes in our
allowance for credit losses.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
______________________ _____________________
(DOLLARS IN THOUSANDS) 2001 2002 2001 2002
____________________________________________________________ ________ ________ ________ ________
Balance, beginning of period $626,537 $624,948 $613,902 $634,509
Loans charged off:
Commercial, financial and industrial 65,974 48,284 230,680 178,462
Construction 567 -- 567 --
Mortgage 37 2,097 95 2,525
Consumer 3,299 1,845 9,534 6,672
Lease financing 807 479 2,595 1,986
________ ________ ________ ________
Total loans charged off 70,684 52,705 243,471 189,645
Recoveries of loans previously charged off:
Commercial, financial and industrial 22,467 8,769 40,477 26,108
Construction -- -- -- 40
Mortgage -- 75 24 214
Consumer 1,027 2,012 3,279 3,793
Lease financing 282 115 601 497
Foreign(1) -- -- 14 --
________ ________ ________ ________
Total recoveries of loans previously charged off 23,776 10,971 44,395 30,652
________ ________ ________ ________
Net loans charged off 46,908 41,734 199,076 158,993
Provision for credit losses 50,000 40,000 215,000 145,000
Foreign translation adjustment and other net additions
(deductions)(2) 54 (136) (143) 2,562
________ ________ ________ ________
Balance, end of period $629,683 $623,078 $629,683 $623,078
======== ======== ======== ========
Allowance for credit losses to total loans 2.46% 2.40% 2.46% 2.40%
Provision for credit losses to net loans charged off 106.59 95.85 108.00 91.20
Net loans charged off to average loans outstanding for
the period(3) 0.72 0.64 1.02 0.83
<FN>
____________
(1) Foreign loans are those loans originated in foreign branches.
(2) Includes a second quarter 2002 addition of $2.4 million related to the
First Western Bank acquisition.
(3) Annualized.
</FN>
Total loans charged off in the third quarter of 2002 decreased by $18.0
million from the third quarter of 2001, primarily due to a $17.7 million
decrease in commercial, financial and industrial loans charged off. Charge-offs
reflect the realization of losses in the portfolio that were recognized
previously through provisions for credit losses.
Third quarter 2002 recoveries of loans previously charged off decreased
by $12.8 million from the third quarter of 2001. The percentage of net loans
charged off to average loans outstanding for the third quarter of 2002 decreased
by 8 basis points from the same period in 2001. At September 30, 2002, the
allowance for credit losses exceeded the annualized net loans charged off during
the third quarter of 2002,
42
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) 2001 2001 2002
_____________________________________________________ ____________ ___________ ____________
Commercial, financial and industrial $ 419,544 $ 471,509 $ 367,888
Construction -- -- 1,096
Commercial mortgage 24,975 17,430 24,133
Lease financing -- 2,946 2,095
____________ ___________ ____________
Total nonaccrual loans 444,519 491,885 395,212
Foreclosed assets 378 597 309
Distressed loans held for sale 5,349 -- --
____________ ___________ ____________
Total nonperforming assets $ 450,246 $ 492,482 $ 395,521
============ =========== ============
Allowance for credit losses $ 629,683 $ 634,509 $ 623,078
============ =========== ============
Nonaccrual loans to total loans 1.74% 1.97% 1.52%
Allowance for credit losses to nonaccrual loans 141.65 129.00 157.66
Nonperforming assets to total loans, distressed loans
held for sale and foreclosed assets 1.76 1.97 1.52
Nonperforming assets to total assets 1.28 1.37 1.05
At September 30, 2002, nonperforming assets totaled $395.5 million, a
decrease of $54.7 million, or 12 percent, from September 30, 2001. The decrease
was primarily due to moderate inflows of nonaccrual loans, coupled with
continuing higher levels of pay-downs and charge-offs.
Nonaccrual loans as a percentage of total loans were 1.52 percent at
September 30, 2002, compared with 1.74 percent at September 30, 2001.
Nonperforming assets as a percentage of total loans, distressed loans held for
sale, and foreclosed assets were 1.52 percent at September 30, 2002, compared to
1.76 percent at September 30, 2001.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2001 2001 2002
_____________________________________________________ ____________ ___________ ____________
Commercial, financial and industrial $ 5,993 $ 26,571 $ 565
Mortgage:
Residential 5,063 4,854 4,127
Commercial 710 2,356 --
____________ ___________ ____________
Total mortgage 5,773 7,210 4,127
Consumer and other 2,459 2,579 2,121
____________ ___________ ____________
Total loans 90 days or more past due and still
accruing $ 14,225 $ 36,360 $ 6,813
============ =========== ============
43
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT INTEREST RATE RISK MANAGEMENT
(OTHER THAN TRADING)
THE FOLLOWING INFORMATION ON MARKET RISK ASSOCIATED WITH INTEREST RATE
RISK IS BEING PROVIDED IN ORDER TO EXPAND THE INFORMATION ON THE ASSUMPTIONS
USED IN OUR SIMULATION MODELS, WHICH QUANTIFY OUR SENSITIVITY TO CHANGES IN
INTEREST RATES. SEE ALSO PART I, ITEM 3 OF THIS DOCUMENT, TITLED "MARKET RISK."
We engage in asset and liability management activities with the primary
purposes of managing the sensitivity of net interest income (NII) to changes in
interest rates within limits established by the Board of Directors (Board) and
maintaining a risk profile that is consistent with management's strategic
objectives.
The Asset & Liability Management (ALM) policy approved by the Board
requires monthly monitoring of interest rate risk by the Asset & Liability
Management Committee (ALCO), which is composed of UnionBanCal Corporation
executives. As part of the management of our interest rate risk, ALCO may direct
changes in the composition of the balance sheet and the extent to which we
utilize investment securities and derivative instruments such as interest rate
swaps, floors, and caps to hedge the our interest rate exposures. Traditionally,
we have entered into swaps and floors to offset the adverse impact that
declining interest rates would have on the interest income generated by our
variable rate commercial loans. For a further discussion of derivative
instruments see Note 6--"Derivative Instruments and Other Financial Instruments
Used For Hedging" of the Notes to Condensed Consolidated Financial Statements.
We use two types of simulation models to quantify the sensitivity of
NII to changes in interest rates: a shock simulation model and a Monte Carlo
simulation model. In both approaches, NII is adjusted to incorporate the effect
of certain noninterest expense items related to demand deposit accounts that are
nevertheless sensitive to changes in interest rates.
Our primary simulation tool involves a shock analysis in which we
estimate the impact that immediate and sustained parallel shifts in the yield
curve would have on NII over a 12-month horizon. Under policy limits established
by the Board, the negative change in simulated NII in either the up or down 200
basis point shock scenarios may not exceed 8 percent of NII as measured in the
flat rate, or no change, scenario. The following table sets forth the shock
sensitivity results in both the up and down 200 basis point scenarios as of June
30, 2002 and September 30, 2002.
JUNE 30, SEPTEMBER 30,
(DOLLARS IN MILLIONS) 2002 2002
_____________________________________ ___________ _____________
+200 basis points $ 48.3 $ 38.3
as a percentage of flat rate scenario NII 3.24% 2.64%
- -200 basis points $ (66.5) $ (7.2)
as a percentage of flat rate scenario NII 4.47% 0.50%
Asset sensitivity in the minus 200 basis point shock simulation
decreased significantly in the third quarter of 2002, primarily as a result of
the execution of interest rate hedges in July and August, which included $1
billion in "zero cost" collars and $1 billion in receive-fixed swaps. Both types
of hedges will generate income in a declining interest rate environment, thereby
offsetting the reduction in interest income from our LIBOR-based commercial
loans. However, the collars, which involve the simultaneous purchase of
at-the-money floors and sale of out-of-the-money caps, have less of a negative
impact on interest income than swaps when interest rates rise, as evidenced by
the decrease of $10 million in the plus 200 basis point shock, compared to the
$59.3 million reduction in risk in the down scenario. Overall, the flattening of
the yield curve in the third quarter and the associated increase in mortgage
asset prepayment activity had a negative effect on our NII. However, we believe
our NII sensitivity profile indicates that our exposure to further acceleration
of prepayment speeds has diminished. With Treasury yields nearing all-time lows
in late September, the prepayment levels projected by our model do not increase
significantly from current levels, even if interest rates decline further.
Consequently, the assumed loss of income from reinvesting prepaid
44
cash flows at lower rates decreased. However, in formulating our interest rate
risk management strategy we will continue to closely monitor prepayment activity
in our investment and residential mortgage portfolios and test our model
assumptions against actual data.
With federal funds and LIBOR rates at the end of the third quarter of
2002 already below two percent, a downward shock scenario of 200 basis points
would result in short-term rate levels below zero percent. As a result, we
believe that a downward shock scenario of 100 basis points provides a more
reasonable measure of asset sensitivity in a falling interest rate environment.
As of September 30, 2002, the difference between flat rate Adjusted NII and
Adjusted NII after a 100 basis point downward shock was plus $15.6 million, or
1.08% percent of a flat rate NII. This represents a favorable change of $38.1
million from the second quarter, when the difference was ($22.5) million due to
the execution of $2 billion in interest rate derivatives and slowing prepayment
speeds, described previously.
In the Monte Carlo simulation analysis, we randomly sample up to 300
paths that short-term interest rates could take over the next 12 months and
calculate the NII associated with each path. The result is a probability
distribution of 12-month NII outcomes. Earnings-at risk (EaR), defined as the
potential negative change in NII, is measured at a 97.5% confidence level and is
managed within the limit established by the Board's ALM policy at 5 percent of
mean NII. The following table summarizes our EaR as a percentage of mean NII as
of June 30, 2002 and September 30, 2002.
JUNE 30, SEPTEMBER 30,
(DOLLARS IN MILLIONS) 2002 2002
_________________________________________ _________ _____________
EaR $25.8 $19.7
EaR as a percentage of mean NII 1.78% 1.39%
Management's goal in the NII simulations is to capture the risk
embedded in the balance sheet. As a result, asset and liability balances are
kept constant throughout the analysis horizon. Two exceptions are non-maturity
deposits, which vary with levels of interest rates according to statistically
derived balance equations, and discretionary derivative hedges and fixed income
portfolios, which are allowed to run off. Additional assumptions are made to
model the future behavior of deposit rates and loan spreads based on statistical
analysis, management's outlook, and historical experience. The prepayment risks
related to residential loans and mortgage-backed securities are measured using
industry estimates of prepayment speeds. The sensitivity of the simulation
results to the underlying assumptions is tested as a regular part of the risk
measurement process by running simulations with different assumptions. In
addition, management supplements the official risk measures based on the
constant balance sheet assumption with volume-based simulations based on
forecasted balances. We believe that together, these simulations provide
management with a reasonably comprehensive view of the sensitivity of our
operating results to changes in interest rates, at least over the measurement
horizon. However, as with any financial model, the underlying assumptions are
inherently uncertain and subject to refinement as modeling techniques and theory
improve and historical data becomes more readily accessible. Consequently, our
simulation models cannot predict with certainty how rising or falling interest
rates might impact net interest income. Actual and simulated NII results will
differ to the extent there are differences between actual and assumed interest
rate changes, balance sheet volumes, and management strategies, among other
factors.
A third measure that ALCO uses to monitor our risk profile is Economic
Value of Equity (EVE). EVE is an estimate of the net present value of the future
cash flows associated with all of our assets, liabilities and derivatives.
EVE-at-Risk is defined as the negative change in the value of these cash flows
resulting from either a +200 basis point or a -200 basis point shock scenario.
Although ALCO has identified prototype guidelines for measuring EVE-at-Risk, the
Board has not established official policy limits for EVE. We will continue to
improve and refine the EVE methodology in the coming months with the goal of
proposing an official EVE risk measure in 2003.
45
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 ALM policy approved by the Board requires quarterly reviews of our
liquidity by ALCO. 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 an ALCO coordination
process on a bank-wide basis, and implemented 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 79 percent of average total assets
of $35.8 billion for the third quarter ended September 30, 2002. 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. In the fourth quarter of 2001, we issued $200 million in medium-term
notes, the proceeds of which were utilized for general corporate purposes.
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 $0.8 billion during the third quarter of
2002. Additional liquidity may be provided by investment securities available
for sale and by loan maturities.
REGULATORY CAPITAL
The following table summarizes our risk-based capital, risk-weighted
assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, MINIMUM
2001 2001 2002 REGULATORY
(DOLLARS IN THOUSANDS) REQUIREMENT
___________________________ ____________ ____________ _____________ ___________
CAPITAL COMPONENTS
Tier 1 capital $ 3,631,340 $ 3,661,231 $ 3,617,173
Tier 2 capital 605,605 598,812 568,163
___________ ___________ ___________
Total risk-based capital $ 4,236,945 $ 4,260,043 $ 4,185,336
=========== =========== ===========
Risk-weighted assets $32,473,206 $31,906,438 $32,457,228
=========== =========== ===========
Quarterly average assets $34,572,908 $34,760,203 $35,690,024
=========== =========== ===========
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
___________________________ __________ _____ __________ ______ __________ ______ __________ _____
Total capital (to
risk-weighted assets) $4,236,945 13.05% $4,260,043 13.35% $4,185,336 12.89% > $2,596,578 8.0%
-
Tier 1 capital (to
risk-weighted assets) 3,631,340 11.18 3,661,231 11.47 3,617,173 11.14 > 1,298,289 4.0
-
Leverage(1) 3,631,340 10.50 3,661,231 10.53 3,617,173 10.13 > 1,427,601 4.0
-
<FN>
____________
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
</FN>
UNION BANK OF CALIFORNIA, N.A.
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, MINIMUM "WELL-CAPITALIZED"
2001 2001 2002 REGULATORY REGULATORY
(DOLLARS IN THOUSANDS) REQUIREMENT REQUIREMENT
___________________________ ____________ ____________ _____________ ___________ _________________
CAPITAL COMPONENTS
Tier 1 capital $ 3,275,643 $ 3,323,096 $ 3,271,284
Tier 2 capital 495,165 487,640 479,792
___________ ___________ ___________
Total risk-based capital $ 3,770,808 $ 3,810,736 $ 3,751,076
=========== =========== ===========
Risk-weighted assets $31,887,207 $31,271,268 $31,803,655
=========== =========== ===========
Quarterly average assets $34,132,248 $34,282,625 $35,160,630
=========== =========== ===========
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
___________________________ __________ _____ __________ ______ __________ ______ __________ _____ __________ _____
Total capital (to
risk-weighted assets) $3,770,808 11.83% $3,810,736 12.19% $3,751,076 11.79% > $2,544,292 8.0% > $3,180,366 10.0%
- -
Tier 1 capital (to
risk-weighted assets) 3,275,643 10.27 3,323,096 10.63 3,271,284 10.29 > 1,272,146 4.0 > 1,908,219 6.0
- -
Leverage(1) 3,275,643 9.60 3,323,096 9.69 3,271,284 9.30 > 1,406,425 4.0 > 1,758,032 5.0
- -
<FN>
_____________
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
</FN>
46
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, 2001, our Tier 1 risk-based capital ratio at
September 30, 2002 decreased 33 basis points to 11.14 percent, our total
risk-based capital ratio decreased 46 basis points to 12.89 percent, and our
leverage ratio decreased 40 basis points to 10.13 percent. The decreases in the
capital ratios were primarily attributable to higher risk-weighted assets of
$550.8 million, or 1.7 percent, resulting from higher earning asset levels in
the current year. Shareholders' equity, excluding unrealized gains on securities
available for sale and on cash flow hedges as recognized in other comprehensive
income, was slightly lower by $13.5 million, or 0.4 percent. The impact of
increased retained earnings from net income in the first nine months of 2002 on
shareholders' equity was mostly offset by our $300 million common share
repurchase from Bank of Tokyo-Mitsubishi announced on August 27, 2002.
As of September 30, 2002, management believes the capital ratios of
Union Bank of California, N.A. met all regulatory requirements of a
"well-capitalized" institution, which are 10 percent for the Total risk-based
capital ratio, 6 percent for the Tier 1 risk-based capital ratio, and 5 percent
for the leverage ratio.
CERTAIN BUSINESS RISK 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. Economic conditions in California are subject to
various uncertainties at this time, including the long-term impact of the
California energy crisis and the decline in the technology sector. If economic
conditions in California continue to decline, we expect that our level of
problem assets could increase accordingly.
THE TRAGIC EVENTS OF SEPTEMBER 11 AND THE ENSUING WAR ON TERRORISM
CONTRIBUTED TO THE DOWNTURN IN US ECONOMIC CONDITIONS WHICH CONTINUES
On-going acts or threats of terrorism and actions taken by the US or
other governments as a result of such acts or threats, including possible
military action, have contributed to the continuing downturn in US economic
conditions and could further adversely affect business and economic conditions
in the US generally and in our principal markets. For example, the events of
September 11, 2001, caused a decrease in air travel in the US, which adversely
affected the airline industry and many other travel-related industries,
including those operating in California.
ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD ADVERSELY
AFFECT OUR BUSINESS
We are subject to certain industry-specific economic factors. For
example, a significant and increasing portion of our total loan portfolio is
related to residential real estate. Accordingly, a downturn in the real estate
and housing industries in California could have an adverse effect on our
operations. Similarly, a portion of our total loan portfolio is to borrowers in
the agricultural industry. Adverse weather conditions, combined with low
commodity prices, may adversely affect the agricultural industry and,
consequently, may impact our business negatively. In addition, auto leases
comprise a declining portion of our total loan portfolio. We ceased originating
auto leases in April 2001; however, continued deterioration in the used car
market may result in additional losses on the valuation of auto lease residuals
on our remaining auto leases. We provide financing to businesses in a number of
other industries that may be particularly vulnerable to industry-specific
economic factors, including the communications/media industry, the retailing
industry, the airlines industry and the technology industry. Industry-specific
risks are beyond our
47
control and could adversely affect our portfolio of loans, potentially resulting
in an increase in nonperforming loans or charge-offs.
RISKS ASSOCIATED WITH CURTAILED MARKET ACCESS OF POWER COMPANIES COULD
AFFECT OUR PORTFOLIO CREDIT QUALITY
The recent failure of Enron Corporation and WorldCom, Inc., coupled
with continued turbulence in energy markets, has significantly impacted debt
ratings and equity valuations of a broad spectrum of power companies,
particularly those involved in energy trading and in deregulated or
non-regulated markets. These developments have sharply reduced these companies'
ability to access public debt and equity markets, contributing to heightened
liquidity pressures. Should these negative trends continue and /or intensify,
the credit quality of certain of our borrowers could be adversely affected.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS
Significant increases in market interest rates, or the perception that
an increase may occur, could adversely affect both our ability to originate new
loans and our ability to grow. Conversely, a decrease in interest rates could
result in an acceleration in the prepayment of loans. An increase in market
interest rates could also adversely affect the ability of our floating-rate
borrowers to meet their higher payment obligations. If this occurred, it could
cause an increase in nonperforming assets and charge-offs, which could adversely
affect our business.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD
Changes in market interest rates, including changes in the relationship
between short-term and long-term market interest rates or between different
interest rate indices, can impact our margin spread, that is, the difference
between the interest rates we charge on interest earning assets, such as loans,
and the interest rates we pay on interest bearing liabilities, such as deposits.
The impact, particularly in a falling interest rate environment, could result in
a decrease in our interest income relative to interest expense.
SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD.;
OUR 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 (approximately 65
percent as of September 30, 2002) of the outstanding shares of our common stock.
As a result, The Bank of Tokyo-Mitsubishi, Ltd. can elect all of our directors
and as a result can control the vote on all matters, including determinations
such as: approval of mergers or other business combinations; sales of all or
substantially all of our assets; any matters submitted to a vote of our
shareholders; issuance of any additional common stock or other equity
securities; incurrence of debt other than in the ordinary course of business;
the selection and tenure of our Chief Executive Officer; payment of dividends
with respect to common stock or other equity securities; and other matters that
might be favorable to 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,
48
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 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 by
Japanese and US regulatory authorities. Our business operations and expansion
plans could be negatively affected by regulatory concerns related to the
Japanese financial system and 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 US banking industry.
SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD
ADVERSELY AFFECT US
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, as well as
nationally and internationally. Our competitors include a large number of state
and national banks, thrift institutions and major foreign-affiliated or foreign
banks, as well as many financial and non-financial firms that offer services
similar to those offered by us. Some of our competitors are community banks that
have strong local market positions. Other competitors include large financial
institutions (such as Bank of America, 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.
Banks, securities firms, and insurance companies can now combine in a
new type of financial services company called a "financial holding company."
Financial holding companies can offer virtually any type of financial service,
including banking, securities underwriting, insurance (both agency and
underwriting), and merchant banking. Recently, a number of foreign banks have
acquired financial services companies in the US, further increasing competition
in the US market.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS
PAYABLE TO US
As a holding company, a substantial portion of our cash flow typically
comes from dividends our bank and nonbank subsidiaries pay to us. Various
statutory provisions restrict the amount of dividends our subsidiaries can pay
to us without regulatory approval. In addition, if any of our subsidiaries
liquidate, that subsidiary's creditors will be entitled to receive distributions
from the assets of that subsidiary to satisfy their claims against it before we,
as a holder of an equity interest in the subsidiary, will be entitled to receive
any of the assets of the subsidiary.
ADVERSE EFFECTS OF, OR CHANGES IN, BANKING OR OTHER LAWS AND
REGULATIONS OR GOVERNMENTAL FISCAL OR MONETARY POLICIES COULD
ADVERSELY AFFECT US
We are subject to significant federal and state regulation and
supervision, which is primarily for the benefit and protection of our customers
and not for the benefit of investors. In the past, our business has been
materially affected by these regulations. This trend is likely to continue in
the future. Laws,
49
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, including legislative and regulatory reactions to the terrorist
attack on September 11, 2001, and future acts of terrorism, and the Enron
Corporation, WorldCom, Inc. and other major US corporate bankruptcies and recent
reports of accounting irregularities at US public companies, including various
large and publicly traded companies. Additionally, our international activities
may be subject to the laws and regulations of the jurisdiction where business is
being conducted. International laws, regulations and policies affecting us and
our subsidiaries may change at any time and affect our business opportunities
and competitiveness in these jurisdictions. Due to 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.
Additionally, our business is affected significantly by the fiscal and
monetary policies of the federal government and its agencies. We are
particularly affected by the policies of the Federal Reserve Board (FRB), which
regulates the supply of money and credit in the US. Under long-standing policy
of the FRB, a bank holding company is expected to act as a source of financial
strength for its subsidiary banks. As a result of that policy, we may be
required to commit financial and other resources to our subsidiary bank in
circumstances where we might not otherwise do so. Among the instruments of
monetary policy available to the FRB are (a) conducting open market operations
in US government securities, (b) changing the discount rates of borrowings of
depository institutions, (c) imposing or changing reserve requirements against
certain borrowings by banks and their affiliates. These methods are used in
varying degrees and combinations to directly affect the availability of bank
loans and deposits, as well as the interest rates charged on loans and paid on
deposits. The policies of the FRB may have a material effect on our business,
results of operations and financial condition.
POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD.
COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK
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. 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
From time to time, we develop long-term financial performance goals to
guide and measure the success of our operating strategies. We can make no
assurances that we will be successful in achieving these long-term goals or that
our operating strategies will be successful. Achieving success in these areas is
dependent on a number of factors, many of which are beyond our direct control.
Factors that may adversely affect our ability to attain our long-term financial
performance goals include:
o deterioration of our asset quality;
o our inability to control noninterest expense, including, but not
limited to, rising employee and healthcare costs;
o our inability to increase noninterest income;
50
o our inability to decrease reliance on revenues generated from
assets;
o our ability to sustain loan growth;
o our ability to find acquisition targets at valuation levels we
find attractive;
o regulatory and other impediments associated with making
acquisitions;
o deterioration in general economic conditions, especially in our
core markets;
o decreases in our net interest margin;
o increases in competition;
o adverse regulatory or legislative developments; and
o unexpected increases in costs related to acquisitions.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR
RESTRUCTURING MAY ADVERSELY AFFECT US
We may seek to acquire or invest in companies, technologies, services
or products that complement our business. There can be no assurance that we will
be successful in completing any such acquisition or investment as this will
depend on the availability of prospective target companies at valuation levels
we find attractive and the competition for such opportunities from other
bidders. In addition, we continue to evaluate the performance of all of our
businesses and business lines and may sell a business or business line. Any
acquisitions, divestitures or restructuring may result in the issuance of
potentially dilutive equity securities, significant write-offs, including those
related to goodwill and other intangible assets and/or the incurrence of debt,
any of which could have a material adverse effect on our business, financial
condition and results of operations. Acquisitions, divestitures or restructuring
could involve numerous additional risks including difficulties in obtaining any
required regulatory approvals and in the assimilation or separation of
operations, services, products and personnel, the diversion of management's
attention from other business concerns, higher than expected deposit attrition
(run-off), divestitures required by regulatory authorities, the disruption of
our business, and the potential loss of key employees. There can be no assurance
that we will be successful in overcoming these or any other significant risks
encountered.
51
WRITTEN STATEMENTS UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The written statements of our chief executive officer and chief
financial officer with respect to this report on Form 10-Q, as required by
section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), have
been submitted to the Securities and Exchange Commission as additional
correspondence accompanying this report.
ITEM 3. MARKET RISK.
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, 2001 and by reference to Part I, Item 2 of this document under the
captions "Quantitative and Qualitative Disclosure about Interest Rate Risk
Management (Other Than Trading)," "Liquidity," and "Certain Business Risk
Factors."
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation as of a date within 90 days of the filing of this
quarterly report on Form 10-Q, the Company's principal executive
officer and principal financial officer have concluded that the
Company's disclosure controls and procedures (as defined by
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934
("the "Exchange Act") are effective to ensure that information
required to be disclosed by the Company in reports that it files
or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes
in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or
material weaknesses, and therefore there were no corrective
actions taken.
52
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various pending and threatened legal actions that
arise in the normal course of business. We maintain reserves for losses from
legal actions that are both probable and estimable.
Union Bank of California, our major subsidiary, (the Bank) has been
named in two suits pending in the United States District Court for the Central
District of California, ROCKOFF V UNION BANK OF CALIFORNIA ET AL (filed December
21, 2001) and NEILSON V UNION BANK OF CALIFORNIA ET AL (filed September 4, 2002)
in which the plaintiffs seek in excess of $250 million lost by those who
invested money in various investment arrangements conducted by an individual
named Reed Slatkin. Mr. Slatkin is alleged to have been operating a fraudulent
investment scheme commonly referred to as a "Ponzi" scheme. The plaintiffs in
the ROCKOFF case are various investors in the arrangements conducted by Mr.
Slatkin and the plaintiffs in the NEILSON case include both investors and the
trustee of Mr. Slatkin's bankruptcy estate. A substantial majority of those who
invested with Mr. Slatkin had no relationship with the Bank. A small minority,
comprising less than five percent of the investors, had custodial accounts with
the Bank. The NEILSON case seeks to impose liability upon the Bank and two other
financial institutions for both the losses suffered by those custodial customers
as well as investors who had no relationship with the Bank.
Although the cases are in the preliminary stages of litigation, the
Bank has numerous legal defenses which it will invoke. Based on our evaluation
to date of these two cases, management believes that these lawsuits will not
result in a material adverse effect on our financial position or results of
operations. In addition, we believe that the disposition of all other claims
currently pending will also not have a material adverse effect on our financial
position or results of operations.
ITEM 5. OTHER INFORMATION
ANNUAL MEETING OF SHAREHOLDERS: The Annual Meeting of Shareholders will
be held on Wednesday, April 23, 2003, at 9:30 a.m. upon the approval of the
Board of Directors, expected at the December 2002 meeting. Shareholders who
expect to present a proposal at the 2003 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 November 24, 2002. 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
2.0 Agreement and Plan of Merger, dated as of August 5, 2002 by and among
Valencia Bank and Trust, Union Bank of California, N.A., and
UnionBanCal Corporation(1)
___________
(1) Incorporated by reference to Exhibit 2 of the UnionBanCal Registration
Statement on Form S-4 (file no. 333-99573) filed on September 26, 2002
53
(B) REPORTS ON FORM 8-K
We filed a report on Form 8-K on August 14, 2002 reporting under Item 9
thereof which included the written certification statements of our chief
executive officer and chief financial officer with respect to our quarterly
report on Form 10-Q for the period ended June 30, 2002, filed with the
Securities and Exchange Commission on August 14, 2002, as required by section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350).
We filed a report on Form 8-K on October 17, 2002 reporting under Item
5 thereof that UnionBanCal Corporation issued a press release concerning
earnings for the third quarter of 2002.
54
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
(Principal Financial Officer)
By:/s/ DAVID A. ANDERSON
________________________________
David A. Anderson
SENIOR VICE PRESIDENT AND
CONTROLLER
(Principal Accounting Officer)
Dated: November 13, 2002
55
CERTIFICATIONS
I, Norimichi Kanari, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UnionBanCal
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the Registrant as of, and for,
the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of Registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By:/s/ NORIMICHI KANARI
____________________________
Norimichi Kanari
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
56
I, David I. Matson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UnionBanCal
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the Registrant as of, and for,
the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of Registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By:/s/ DAVID I. MATSON
____________________________
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
57