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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15() OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15() OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-28118
UnionBanCal Corporation
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1234979
(State of Incorporation) (I.R.S. Employer Identification No.)
400 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104-1476
(Address of principal executive offices)
Registrant's telephone number (415) 765-2969
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
As of January 31, 2001 , the aggregate market value of voting and
non-voting common equity held by non-affiliates of the registrant was
$1,596,599,167. The aggregate market value was computed by reference to the last
sales price of such stock.
As of January 31, 2001, the number of shares outstanding of the
registrant's Common Stock was 159,068,439.
DOCUMENTS INCORPORATED BY REFERENCE
INCORPORATED DOCUMENT LOCATION IN FORM 10-K
- --------------------- ---------------------
Portions of the Proxy Statement for the April 25, Part III
2001 Annual Meeting of Shareholders
INDEX
PAGE
----
PART I
Item 1. Business......................................................................................... 2
General............................................................................................... 2
Banking............................................................................................... 2
Employees............................................................................................. 3
Competition........................................................................................... 3
Monetary Policy....................................................................................... 3
Supervision and Regulation............................................................................ 3
Item 2. Properties....................................................................................... 5
Item 3. Legal Proceedings................................................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 5
Executive Officers of the Registrant................................................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters............................ 9
Item 6. Selected Financial Data.......................................................................... 10, F-1
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10, F-1
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 10, F-38
Item 8. Financial Statements and Supplementary Data...................................................... 10, F-45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 10
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 10
Item 11. Executive Compensation.......................................................................... 11
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 11
Item 13. Certain Relationships and Related Transactions.................................................. 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 11
Signatures.................................................................................................. II-1
PART I
ITEM 1. BUSINESS
THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION, WHICH IS SUBJECT TO
THE "SAFE HARBOR" CREATED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OUR
MANAGEMENT MAY MAKE FORWARD-LOOKING STATEMENTS IN OTHER SECURITIES AND EXCHANGE
COMMISSION FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH WALL
STREET ANALYSTS AND SHAREHOLDERS AND WHEN WE ARE SPEAKING ON BEHALF OF
UNIONBANCAL CORPORATION. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE
FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. OFTEN,
THEY INCLUDE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "PLAN,"
"ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL
VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," OR "MAY." THESE
FORWARD-LOOKING STATEMENTS ARE INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL
INFORMATION WITH WHICH THEY MAY ASSESS OUR FUTURE POTENTIAL. ALL OF THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON ASSUMPTIONS ABOUT AN UNCERTAIN FUTURE
AND ARE BASED ON INFORMATION AVAILABLE AT THE DATE SUCH STATEMENTS ARE ISSUED.
THERE ARE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD AND WILL CAUSE
ACTUAL RESULTS TO DIFFER FROM THOSE DISCUSSED IN OUR FORWARD-LOOKING STATEMENTS.
MANY OF THESE FACTORS ARE BEYOND OUR ABILITY TO CONTROL OR PREDICT AND COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE, FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE FOLLOWING FACTORS' ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA
(INCLUDING PROBLEMS ARISING FROM THE CALIFORNIA ENERGY CRISIS), ADVERSE ECONOMIC
CONDITIONS AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN INTEREST RATES, THE
CONTROLLING INTEREST IN US BY THE BANK OF TOKYO-MITSUBISHI, LTD., COMPETITION IN
THE BANKING INDUSTRY, RESTRICTIONS ON DIVIDENDS, ADVERSE EFFECTS OF CURRENT AND
FUTURE BANKING RULES, REGULATIONS AND LEGISLATION, AND RISKS ASSOCIATED WITH
VARIOUS STRATEGIES WE MAY PURSUE, INCLUDING POTENTIAL ACQUISITIONS, DIVESTITURES
AND RESTRUCTURINGS. SEE ALSO THE SECTION ENTITLED, "CERTAIN BUSINESS RISK
FACTORS" ON PAGE F-41.
GENERAL
UnionBanCal Corporation is a commercial bank holding company
incorporated in the State of California in 1952 and is among the oldest banks on
the West Coast, having roots as far back as 1864. We were formed as a result of
the combination of Union Bank with BanCal Tri-State Corporation on April 1,
1996. At December 31, 2000, Union Bank of California, N.A., our bank subsidiary,
was the third largest commercial bank in California, based on total assets and
total deposits. At December 31, 2000, we were 66 percent owned by The Bank of
Tokyo-Mitsubishi, Ltd. and 34 percent owned by other shareholders.
We provide a wide range of financial services to consumers, small
businesses, middle-market companies and major corporations, primarily in
California, Oregon, and Washington, but nationally and internationally as well.
BANKING
Our operations are divided into four primary segments, which are
described more fully in Note 23 of the Consolidated Financial Statements.
THE COMMUNITY BANKING AND INVESTMENT SERVICES GROUP. This group offers its
customers a complete spectrum of financial needs under one convenient umbrella.
With a full line of checking and savings, investment, loan and fee-based banking
products, individual and business clients, including not-for-profit, small and
institutional investors, can each have their specific needs met. These products
are offered in 244 full-service branches, primarily in California, as well as in
Oregon, Washington, Guam and Saipan. In addition, the group offers international
and settlement services, e- banking through our web site, check cashing services
at our Cash & Save(R) locations and tailored loan investment products to our
high net worth consumer customers through the Private Bank. Institutional
customers are offered employee benefit, 401(k) administration, corporate trust,
securities lending and custody (global and domestic) services. The
2
group also includes a registered broker-dealer and a registered investment
advisor, which provides investment advisory services and manages a proprietary
fund family.
THE COMMERCIAL FINANCIAL SERVICES GROUP. This group offers a variety of
commercial financial services, including commercial and project loans, real
estate financing, asset-based and leveraged commercial financing, trade finance
and letters of credit, lease financing, customized cash management services and
selected capital markets products. The group's customers include middle- market
companies, large corporations, real estate companies and other more specialized
industry customers. In addition, specialized depository services are offered to
title and escrow companies, retailers, domestic financial institutions,
bankruptcy trustees and other customers with significant deposit volumes.
THE INTERNATIONAL BANKING GROUP. This group primarily provides correspondent
banking and trade finance-related products and services to financial
institutions worldwide, primarily in Asia. The group also serves selected
foreign firms and U.S. corporate clients in selected countries worldwide,
particularly in Asia. This group has a long and stable history of providing
correspondent and trade- related services to international financial
institutions.
THE GLOBAL MARKETS GROUP. This group, in collaboration with our other business
groups, offers customers a broad range of products. They include a variety of
foreign exchange products and risk management products, such as interest rate
swaps and caps. The group trades money market and fixed income securities in the
secondary market and serves institutional investment needs. The group manages
the market-related risks for us as part of its responsibilities for
asset/liability management, including funding our own liquidity needs and
addressing our interest rate risk.
EMPLOYEES
At January 31, 2001, we had 8,715 full-time-equivalent employees.
COMPETITION
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, Oregon, and
Washington, as well as nationally and internationally. Our competitors include a
large number of state and national banks and major foreign-affiliated or foreign
banks, as well as many financial and nonfinancial firms which offer services
similar to those offered by us or our subsidiaries.
We believe that continued emphasis on enhanced services and
distribution systems, an expanded customer base, increased productivity and
strong credit quality, together with an established capital base, will position
us to meet the challenges provided by this competition.
MONETARY POLICY
The operations of bank holding companies and their subsidiaries are
affected by the credit and monetary policies of the Federal Reserve Board (FRB).
The FRB influences the financial performance of bank holding companies and their
subsidiaries through its management of the discount rate, the money supply, and
reserve requirements on bank deposits. Monetary policies of the FRB have had,
and will continue to have, a significant effect on the operating results of
financial institutions, including us.
SUPERVISION AND REGULATION
We and The Bank of Tokyo-Mitsubishi, Ltd. are subject to regulation
under the Bank Holding Company Act of 1956 (BHCA), as amended, which subjects us
to FRB reporting and examination requirements. Generally, the BHCA restricts any
investment that we may make to no more than 5 percent of the voting shares of
any non-banking entity, and we may not acquire more than 5 percent of the voting
shares of any domestic bank without the prior approval of the FRB. Our
activities are limited, with some
3
exceptions, to banking, the business of managing or controlling banks, and
activities which the regulatory authorities deem to be so closely related to
banking as to be a "proper incident thereto".
Union Bank of California, N.A. and most of its subsidiaries are
regulated by the Office of the Comptroller of the Currency (OCC). Our
subsidiaries are also subject to extensive regulation, supervision, and
examination by various other federal and state regulatory agencies. In addition,
Union Bank of California, N.A. and its subsidiaries are subject to certain
restrictions under the Federal Reserve Act, including restrictions on affiliate
transactions. Dividends payable by Union Bank of California, N.A. to us are
subject to a formula imposed by the OCC unless express approval is given to
deviate from the formula. For more information regarding restrictions on loans
and dividends by Union Bank of California, N.A. to its affiliates and on
transactions with affiliates, see Notes 17 and 22 to our Consolidated Financial
Statements included in this Form 10-K.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) imposed stricter capital requirements on banks. FDICIA requires federal
bank regulatory authorities to take "prompt corrective action" in dealing with
inadequately capitalized banks. FDICIA established five tiers of capital
measurement ranging from "well capitalized" to "critically undercapitalized". It
is our policy to maintain risk-based capital ratios at or above the required
minimum capital adequacy levels for both Union Bank of California, N.A. and us.
At December 31, 2000, management believes Union Bank of California, N.A. met the
requirements of a "well capitalized" institution.
Furthermore, the activities of HighMark Capital Management, Inc. and
UBOCIS are subject to the rules and regulations of the Securities and Exchange
Commission as well as state securities regulators. UBOCIS is also subject to the
rules and regulations of the NASD.
There are additional requirements and restrictions in the laws of the
United States and the states of California, Oregon, and Washington, as well as
other states in which Union Bank of California, N.A. and its subsidiaries may
conduct operations. These include restrictions on the amount of loans and the
nature and amount of investments, as well as activities as an underwriter of
securities, the opening and closing of branches and the acquisition of other
financial institutions. The Bank is subject to certain fair lending requirements
and reporting obligations involving home mortgage lending operations and
Community Reinvestment Act (CRA) activities. The CRA generally requires the
federal banking agencies to evaluate the record of a financial institution in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods. In addition to substantive penalties and corrective
measures that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into account
when regulating and supervising other activities.
The international activities of Union Bank of California, N.A. are
subject to the laws and regulations of the jurisdiction where business is being
conducted which may change from time to time and affect Union Bank of
California, N.A.'s business opportunities and competitiveness in these
jurisdictions. Furthermore, due to the controlling ownership of us by The Bank
of Tokyo-Mitsubishi, Ltd., regulatory requirements adopted or enforced by the
Government of Japan may have an effect on the activities and investments of
Union Bank of California, N.A. and us in the future.
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Act (the GLB Act), key portions of which became effective on
March 11, 2000. The GLB Act repeals provisions of the Glass-Steagall Act, which
prohibited commercial banks and securities firms from affiliating with each
other and engaging in each other's businesses. Thus, many of the barriers
prohibiting affiliations between commercial banks and securities firms have been
eliminated. The BHCA is also amended by the GLB Act, to allow new "financial
holding companies" (FHC) to offer banking, insurance, securities and other
financial products. Specifically, the GLB Act amends section 4 of the BHCA in
order to provide a framework for the engagement in new financial activities.
Bank holding companies (BHC) such as we may elect to become a financial holding
company if all of their subsidiary depository institutions are well-capitalized
and well-managed. Under current FRB interpretations, a foreign bank, such as The
Bank of Tokyo-Mitsubishi Ltd., which owns a subsidiary U.S. bank holding
company, must make the election on
4
behalf of itself and its U.S. holding company. In addition, the foreign bank
must be well capitalized and well managed in accordance with standards
comparable to those required of U.S. banks as determined by the FRB and must
have a satisfactory or better CRA rating. We do not expect that The Bank of
Tokyo-Mitsubishi, Ltd. will make a financial holding company election in the
immediate future. Under the GLB Act, "financial subsidiaries" of banks may
engage in some types of activities beyond those permitted to banks themselves,
provided certain conditions are met.
In 2000, the Union Bank of California, N.A. filed a "Financial
Subsidiary Certification" with the OCC that the applicable conditions were met
at that time. Although the Union Bank of California N.A. does not presently have
any "financial subsidiaries", this certification would expedite the process for
the Bank to form or acquire "financial subsidiaries", if it decides to do so.
Under the GLB Act, national banks (as well as FDIC-insured state banks, subject
to various requirements), such as Union Bank of California, N.A., are permitted
to engage through these "financial subsidiaries" in certain financial activities
permissible for affiliates of FHCs. However, to be able to engage in such
activities, the national bank must also be well-capitalized and well-managed and
receive at least a "satisfactory" rating in its most recent CRA examination. In
addition, if the national bank ranks as one of the 50 largest insured banks in
the United States, as we do, it must have an issue of outstanding long-term debt
rated in one of the 3 highest rating categories by an independent rating agency,
which we presently do not. If the national bank falls within the next group of
50, it must either meet the debt rating test described above or satisfy a
comparable test jointly agreed to by the FRB and the Treasury Department. No
debt rating is required for a national bank not within the top 100 largest
insured banks in the United States.
We cannot be certain of the effect of the foregoing legislation on our
business, although there is likely to be consolidation among financial
institutions and increased competition for us.
Changes in the laws, regulations, or policies that impact Union Bank of
California, N.A. and us cannot necessarily be predicted and may have a material
effect on our business and earnings.
See Consolidated Financial Statements starting on page F-46 for
specific financial information on UnionBanCal Corporation and its subsidiaries.
ITEM 2. PROPERTIES
At December 31, 2000, we operated 244 full service branches in
California, 6 full service branches in Oregon and Washington, and 18 overseas
branches and business offices. In addition, we have another 40 limited service
branches, including 5 Cash & Save(R) facilities, and 3 Private Bank offices. We
own the property occupied by 85 of the domestic offices and lease the remaining
properties for periods of five to twenty years.
We own two administrative facilities in San Francisco, one in Los
Angeles, and three in San Diego. Other administrative offices in San Francisco,
Los Angeles, Portland, Seattle, and New York operate under long-term leases
expiring in one to twenty-six years.
Rental expense for branches and administrative premises are included in
Note 4 to our Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various pending and threatened legal actions that
arise in the normal course of business. We maintain reserves for losses from
legal actions that are both probable and estimable. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information pertains to our executive officers:
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- ---------------------------------- --- ----------------------------------------------------------------------------------
Kaoru Hayama...................... 66 Mr. Hayama has served as Chairman of the UnionBanCal Corporation and Union Bank of
California, N.A. since September 1998. He served as Deputy President of The Bank of
Tokyo-Mitsubishi, Ltd. from April 1996 to June 1998 and as Deputy President of the Bank
of Tokyo, Ltd. from June 1994 to April 1996. Mr. Hayama has served as a Director of the
UnionBanCal Corporation and Union Bank of California, N.A. since September 1998.
Takahiro Moriguchi................ 56 Mr. Moriguchi has served as President and Chief Executive Officer of the UnionBanCal
Corporation and Union Bank of California, N.A. since May 1997. He served as Vice
Chairman and Chief Financial Officer of the UnionBanCal Corporation and Union Bank of
California, N.A. from April 1996 to May 1997. He served as Vice Chairman and Chief
Financial Officer of Union Bank from June 1993 until March 1996. He has served as a
Director of The Bank of Tokyo-Mitsubishi, Ltd. since April 1996 and as a Managing
Director of The Bank of Tokyo-Mitsubishi, Ltd. since July 2000. Mr. Moriguchi has been
a Director of the UnionBanCal Corporation and Union Bank of California, N.A. since
June 1993.
Yoshihiko Someya.................. 53 Mr. Someya has served as Deputy Chairman and head of Credit and Administration for
UnionBanCal Corporation and Union Bank of California, N.A. since July 1998. He served
as Executive Vice President and head of Credit Management and Support Liaison for
UnionBanCal Corporation and Union Bank of California, N.A. from March 1998 to
July 1998. He served as Deputy General Manager of the Osaka Branch of The Bank of
Tokyo- Mitsubishi Ltd. from May 1996 to March 1998. He served as General Manager,
Financial Institutions Division of Mitsubishi Bank, Ltd. from May 1995 to May 1996.
Mr. Someya has served as a Director of UnionBanCal Corporation since July 1998.
Richard C. Hartnack............... 55 Mr. Hartnack has served as Vice Chairman and head of the Community Banking and
Investment Services Group for UnionBanCal Corporation and Union Bank of California,
N.A. since September 1999, and from April 1996 to September 1999 as head of the
Community Banking Group. He served as Vice Chairman of Union Bank from June 1991 until
March 1996. Mr. Hartnack has served as a Director of UnionBanCal Corporation since
June 1991.
6
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- ---------------------------------- --- ----------------------------------------------------------------------------------
Norimichi Kanari.................. 54 Mr. Kanari has served as Vice Chairman of the UnionBanCal Corporation and Union Bank of
California, N.A. since July 2000. From May 1999 to July 2000, he served as General
Manager of the Corporate Banking Division in Osaka Branch of The Bank of Tokyo-
Mitsubishi, Ltd., after serving from August 1997 to May 1999 as General Manager of The
Bank of Tokyo- Mitsubishi, Ltd.'s New York Branch and Cayman Branch. From April 1996 to
June 1997, he was General Manager of The Bank of Tokyo-Mitsubishi, Ltd.'s Shimbashi
branch. From March 1995 to April 1996, he was General Manager of The Bank of Tokyo's
Shimbashi branch. He has served as a Director of The Bank of Tokyo-Mitsubishi, Ltd.
since June 1997. Mr. Kanari has been a Director of the UnionBanCal Corporation and
Union Bank of California, N.A. since July 2000.
Robert M. Walker.................. 59 Mr. Walker has served as Vice Chairman and head of the Commercial Financial Services
Group for UnionBanCal Corporation and Union Bank of California, N.A. since April 1996.
He served as Vice Chairman with Union Bank from July 1992 until March 1996. Mr. Walker
has served as a Director of UnionBanCal Corporation since July 1992.
Linda Betzer...................... 54 Ms. Betzer has served as Executive Vice President and head of the Operations and
Customer Services Group for UnionBanCal Corporation and Union Bank of California, N.A.
since January 2000. She served as Executive Vice President of Commercial Customer
Services from April 1996 to January 2000 and Senior Vice President of Commercial
Customer Services with Union Bank from 1994 to April 1996.
Philip B. Flynn................... 43 Mr. Flynn has served as Executive Vice President and Chief Credit Officer of
UnionBanCal Corporation and Union Bank of California, N.A. since September 2000. He
served as Executive Vice President and head of Specialized Lending from May 2000 to
September 2000 and as Executive Vice President and head of the Commercial Banking Group
from June 1998 to May 2000. He served as Executive Vice President and head of Energy
Capital Services from September 1996 to April 2000 and served as Senior Vice President
and Manager of Energy Capital Services for Union Bank of California, N.A., and Union
Bank for more than five years prior thereto.
Katsuyoshi Hamahashi.............. 52 Mr. Hamahashi has served as head of Global Markets Group for UnionBanCal Corporation
and Union Bank of California, N.A. since October 1998 and as Executive Vice President
and Treasurer of UnionBanCal Corporation and Union Bank of California, N.A. since
April 1996. He served as Executive Vice President and Treasurer of Union Bank from
February 1996 until March 1996 and Senior Vice President and Treasurer of Union Bank
from February 1993 to February 1996.
7
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- ---------------------------------- --- ----------------------------------------------------------------------------------
Ronald H. Kendrick................ 59 Mr. Kendrick has served as Executive Vice President and head of the Community Banking
Group for UnionBanCal Corporation and Union Bank of California, N.A. since
December 2000. He served as Executive Vice President and San Diego Area Executive for
Union Bank of California, N.A. and Union Bank from March 1994 to December 2000.
David I. Matson................... 56 Mr. Matson has served as Executive Vice President and Chief Financial Officer of
UnionBanCal Corporation and Union Bank of California, N.A. since July 1998. He served
as Executive Vice President and Director of Finance of UnionBanCal Corporation and
Union Bank of California, N.A. from August 1997 to July 1998. He served as Executive
Vice President and head of the Institutional and Deposit Markets Division from April
1996 until July 1997. He served in the same capacity at Union Bank from January 1994
until March 1996.
Magan C. Patel.................... 63 Mr. Patel has served as Executive Vice President and head of the International Banking
Group for UnionBanCal Corporation and Union Bank of California, N.A. since April 1996.
He served as Executive Vice President, International Banking Group of BanCal Tri-State
Corporation and the Bank of California, N.A. for more than five years prior thereto.
Charles L. Pedersen............... 57 Mr. Pedersen has served as Executive Vice President and head of the Systems, Technology
and Item Processing Group for UnionBanCal Corporation and Union Bank of California,
N.A. since April 1996. He served as Executive Vice President and head of the Bank
Operations and Automation Group for Union Bank from September 1992 until March 1996.
Michael A.C. Spilsbury............ 51 Mr. Spilsbury has served as Executive Vice President and head of e-Business Solutions
since January 2000 and of the Operations and Services Group of UnionBanCal Corporation
and Union Bank of California, N.A. since April 1996. He served as Executive Vice
President, Resources and Services with BanCal Tri-State Corporation and the Bank of
California, N.A. from January 1992 through March 1996.
Ikuzo Sugiyama.................... 51 Mr. Sugiyama has served as Executive Vice President and head of the Pacific Rim
Corporate Group for UnionBanCal Corporation and Union Bank of California, N.A., and
General Manager of the Los Angeles Branch of The Bank of Tokyo-Mitsubishi, Ltd. since
July 1997. He served as Chief Manager, Corporate Banking Division No. 3 under Corporate
Banking Group No. 1 of The Bank of Tokyo-Mitsubishi, Ltd. from April 1996 to July 1997.
From April 1994 to April 1996, he served as Deputy General Manager of the Marunonchi
Office of the Bank of Tokyo, Ltd.
8
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- ---------------------------------- --- ----------------------------------------------------------------------------------
Osamu Uno......................... 48 Mr. Uno will serve as Executive Vice President and head of the Pacific Rim Corporate
Group of UnionBanCal Corporation and Union Bank of California, N.A. and General Manager
of the Los Angeles Branch of The Bank of Tokyo-Mitsubishi, Ltd. effective March 1,
2001. He served as the General Manager, Corporate Banking Credit Division of The Bank
of Tokyo-Mitsubishi, Ltd. from July 2000 to February 2001 and as Co-General Manager,
Credit Supervision Division No. 2 of The Bank of Tokyo-Mitsubishi, Ltd. from April 1996
to June 2000. From August 1994 to March 1996 he was seconded from The Bank of Tokyo,
Ltd. to Tokyo Maruichi Shoji Co. where he served as Senior Supervisor.
Takaharu Saegusa.................. 48 Mr. Saegusa has served as Executive Vice President of the UnionBanCal Corporation and
Union Bank of California, N.A. since February 2001. He served as Deputy General
Manager, Japanese Corporate Banking Group at The Bank of Tokyo-Mitsubishi, Ltd.'s New
York Branch from June 1998 to February 2001. From January 1997 to May 1998, he served
as General Manager of The Bank of Tokyo-Mitsubishi, Ltd.'s Shirno-Akatsuka Branch, and
from May 1996 to December 1996, as an inspector in The Bank of Tokyo- Mitsubishi,
Ltd.'s Inspection Division after serving as Senior Vice President and Chief Manager,
Planning & Controllers Group, in Mitsubishi Bank, Ltd.'s North American Planning
Division from May 1995 to April 1996. Mr. Saegusa has been a Director of the
UnionBanCal Corporation and Union Bank of California, N.A. since March 2001.
The term of office of the executive officer extends until the officer
resigns, is removed, retires, or is otherwise disqualified for service. It is
anticipated that Messrs. Sugiyama and Someya will return to Japan during the
first quarter of 2001. Messrs. Uno and Saegusa, respectively, are expected to
succeed to their responsibilities. There is no family relationship among any
such officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the
symbol UB. As of January 31, 2001, our common stock was held by approximately
2,200 registered shareholders. At December 31, 2000, The Bank of
Tokyo-Mitsubishi, Ltd. held 66 percent of our common stock. During 1999 and
2000, the average daily trading volume of our common stock was approximately
398,925 shares and 445,221 shares, respectively. At December 31, 1998, 1999 and
2000, our common stock closed at $34.06 per share, $39.44 per share, and $24.06
per share, respectively. The following table presents stock quotations for each
quarterly period for the two years ended December 31, 2000.
1999 2000
----------------- -----------------
HIGH LOW HIGH LOW
First quarter................................. $37.88 $30.13 $37.25 $24.75
Second quarter................................ 38.88 31.50 35.25 18.52
Third quarter................................. 40.88 35.00 25.69 18.38
Fourth quarter................................ 46.44 34.69 24.25 18.88
9
The following table presents quarterly per share cash dividends
declared for 1999 and 2000:
1999 2000
----- -----
First quarter................................... $0.19 $0.25
Second quarter.................................. 0.19 0.25
Third quarter................................... 0.19 0.25
Fourth quarter.................................. 0.25 0.25
On November 17, 1999 our Board of Directors approved a 32 percent
increase in our quarterly common stock dividend for the fourth quarter of 1999
from $0.19 per share to $0.25 per share. Future dividends will depend upon our
earnings, financial condition, capital requirements and other factors as our
Board of Directors may deem relevant.
We offer a dividend reinvestment and stock repurchase plan that allows
shareholders to reinvest dividends in our common stock at 5 percent below the
market price. The Bank of Tokyo-Mitsubishi, Ltd. did not participate in the plan
during 1999 and 2000. For further information about these plans, see Note 13 to
our Consolidated Financial Statements.
The availability of our retained earnings for the payment of dividends
is affected by certain legal restrictions. See Note 17 to our Consolidated
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
See page F-1 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages F-1 through F-44 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages F-38 through F-40 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-46 through F-90 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to our Proxy Statement for the April 25, 2001 Annual
Meeting of Shareholders for incorporation by reference of information concerning
directors and persons nominated to become directors of UnionBanCal Corporation.
Information concerning our executive officers as of January 31, 2001 is included
in Part I above in accordance with Instruction 3 to Item 401(b) of Regulation
S-K.
10
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by
reference from the text under the caption "Compensation and Other Transactions
with Management and Others" in the Proxy Statement for the April 25, 2001 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of the equity stock of UnionBanCal
Corporation by certain beneficial owners and management is incorporated by
reference from page 1 and the text under the caption "Election of Directors" in
the Proxy Statement for the April 25, 2001 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
with officers, directors, and The Bank of Tokyo-Mitsubishi, Ltd. is incorporated
by reference from the text under the caption "Transactions with Management and
Others" in the Proxy Statement for the April 25, 2001 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Our Consolidated Financial Statements, the Management Statement, and
the independent auditors' report are set forth on pages F-46 through F-92. (See
index on page F-45).
11
(a)(2) Financial Statement Schedules
All schedules to our Consolidated Financial Statements are omitted
because of the absence of the conditions under which they are required or
because the required information is included in our Consolidated Financial
Statements or accompanying notes.
(a)(3) Exhibits
NO. DESCRIPTION
----- ---------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Registrant, as amended(1)
3.2 By-laws of the Registrant, as amended January 27, 1999(2)
10.1 Management Stock Plan. (As restated effective June 1, 1997)*(3)
10.2 Union Bank of California Deferred Compensation Plan. (January 1, 1997, Restatement,
as amended November 21, 1996)*(4)
10.3 Union Bank of California Senior Management Bonus Plan. (Effective January 1, 2000)*(5)
10.4 Richard C. Hartnack Employment Agreement. (Effective January 1, 1998)*(6)
10.5 Robert M. Walker Employment Agreement. (Effective January 1, 1998)*(6)
10.6 Union Bank of California Supplemental Executive Retirement Plan. (Effective January 1,
1988) (Amended and restated as of
January 1, 1997)*(3)
10.7 Union Bank Financial Services Reimbursement Program. (Effective January 1, 1996)*(7)
10.8 Performance Share Plan. (Effective January 1, 1997)*(3)
10.9 Service Agreement Between Union Bank of California and The Bank of Tokyo-Mitsubishi
Ltd. (Effective October 1, 1997)*(3)
10.10 Management Stock Plan. (As restated effective January 1, 2000)*(8)
10.11 Union Bank of Califorinia, N.A. Supplemental retirement Plan for Policy Making Officers
(effective November 1, 1999)(5)
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend
Requirements(9)
21.1 Subsidiaries of the Registrant(9)
23.1 Consent of Deloitte & Touche LLP(9)
24.1 Power of Attorney(9)
24.2 Resolution of Board of Directors(9)
- -----------
(1) Incorporated by reference to Form 10-K for the year ended December 31, 1998.
(2) Incorporated by reference to Form 10-Q for the quarter ended March 31, 1999.
(3) Incorporated by reference to Form 10-K for the year ended December 31, 1997.
(4) Incorporated by reference to Form 10-K for the year ended December 31, 1996.
(5) Incorporated by reference to Form 10-Q for the quarter ended June 30, 2000.
(6) Incorporated by reference to Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to Form 8-K dated April 1, 1996 (filed as exhibit 10.14).
(8) Incorporated by reference to form 10-Q for the quarter ended June 30, 1999.
(9) Filed herewith.
* Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K:
We filed a report on Form 8-K on June 16, 2000 under Item 5 to report
UnionBanCal Corporation's June 15, 2000 press release concerning estimated
operating earnings for the second quarter of 2000.
12
UNIONBANCAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT ---------------------------------------------------------------------------------------------
PER SHARE DATA) 1996 1997 1998 1999 2000
- ----------------------------- ------------ ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS:
Net interest income...... $ 1,175,302 $ 1,237,010 $ 1,322,655 $ 1,419,019 $ 1,587,008
Provision for credit losses 40,000 - 45,000 65,000 440,000
Noninterest income....... 418,676 463,001 533,531 586,759 647,180
Noninterest expense...... 1,134,904 1,044,665 1,135,218 1,281,973 1,130,185
------------ ------------ ------------ ------------ ------------
Income before income taxes 419,074 655,346 675,968 658,805 664,003
Taxable-equivalent
adjustment............ 6,724 5,328 4,432 3,186 2,568
Income tax expense....... 162,892 238,722 205,075 213,888 221,535
------------ ------------ ------------ ------------ ------------
Net income............... $ 249,458 $ 411,296 $ 466,461 $ 441,731 $ 439,900
============ ============ ============ ============ ============
NET INCOME APPLICABLE TO
COMMON STOCK............. $238,152 $403,696 $466,461 $441,731 $439,900
============ ============ ============ ============ ============
PER COMMON SHARE:
Net income (basic)....... $ 1.37 $ 2.31 $ 2.66 $ 2.65 $ 2.72
Net income (diluted)..... 1.36 2.30 2.65 2.64 2.72
Dividends................ 0.47 0.51 0.61 0.82 1.00
Book value (end of period) 13.53 15.32 17.45 18.18 20.17
Common shares outstanding
(end of period)....... 174,457,603 174,917,674 175,259,919 164,282,622 159,234,454
Weighted average common
shares outstanding
(basic)............... 174,391,048 174,683,338 175,127,487 166,382,074 161,604,648
Weighted average common
shares outstanding
(diluted)............. 174,783,565 175,189,078 175,737,303 167,149,207 161,989,388
BALANCE SHEET (END OF PERIOD):
Total assets............. $ 29,234,059 $ 30,585,265 $ 32,276,316 $ 33,684,776 $ 35,162,475
Total loans.............. 21,049,787 22,741,408 24,296,111 25,912,958 26,010,398
Nonperforming assets..... 156,784 129,809 89,850 169,780 408,304
Total deposits........... 21,532,960 23,296,374 24,507,879 26,256,607 27,283,183
Subordinated capital notes 382,000 348,000 298,000 298,000 200,000
Trust preferred securities -- -- -- 350,000 350,000
Preferred stock.......... 135,000 -- -- -- --
Common equity............ 2,359,933 2,679,299 3,058,244 2,987,468 3,211,565
BALANCE SHEET (PERIOD
AVERAGE):
Total assets............. $ 27,899,734 $ 29,692,992 $ 30,523,806 $ 32,141,497 $ 33,672,058
Total loans.............. 20,727,577 21,855,911 23,215,504 25,024,777 26,310,420
Earning assets........... 24,717,326 26,291,822 27,487,390 29,017,122 30,379,730
Total deposits........... 20,101,544 22,067,155 22,654,714 23,893,045 25,527,547
Common equity............ 2,325,437 2,514,610 2,845,964 2,939,591 3,139,844
FINANCIAL RATIOS:
Return on average assets. 0.89% 1.39% 1.53% 1.37% 1.31%
Return on average common
equity................ 10.24 16.05 16.39 15.03 14.01
Efficiency ratio......... 71.02 61.53 61.31 63.98 50.59
Net interest margin...... 4.75 4.70 4.81 4.89 5.22
Dividend payout ratio.... 34.31 22.08 22.93 30.94 36.76
Tangible equity ratio.... 7.80 8.54 9.30 8.70 9.01
Tier 1 risk-based capital
ratio................. 9.08 8.96 9.64 9.94 10.24
Total risk-based capital
ratio................. 11.17 11.05 11.61 11.79 12.07
Leverage ratio........... 8.41 8.53 9.38 10.10 10.19
Allowance for credit
losses to total loans. 2.49 1.99 1.89 1.82 2.36
Allowance for credit
losses to nonaccrual
loans................. 408.48 413.12 585.50 281.00 153.48
Net loans charged off to
average total loans... 0.34 0.33 0.15 0.22 1.13
Nonperforming assets to
total loans, distressed
loans held for sale,
and foreclosed assets. 0.74 0.57 0.37 0.66 1.57
Nonperforming assets to
total assets.......... 0.54 0.42 0.28 0.50 1.16
- -----------
(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.
Amounts prior to the merger are based on Union Bank only and do not
include the dividend of $145 million paid to The Mitsubishi Bank
Limited in the first quarter of 1996 by BanCal Tri-State Corporation
and The Bank of California, N.A.
(3) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income. Foreclosed asset expense
(income) was $2.9 million, $(1.3) million, $(2.8) million, $(1.3)
million, and $(0.1) million for 1996 through 2000, respectively.
F-1
THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION, WHICH IS SUBJECT TO
THE "SAFE HARBOR" CREATED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OUR
MANAGEMENT MAY MAKE FORWARD-LOOKING STATEMENTS IN OTHER SECURITIES AND EXCHANGE
COMMISSION FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH WALL
STREET ANALYSTS AND SHAREHOLDERS AND WHEN WE ARE SPEAKING ON BEHALF OF
UNIONBANCAL CORPORATION. FORWARD- LOOKING STATEMENTS CAN BE IDENTIFIED BY THE
FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. OFTEN,
THEY INCLUDE THE WORDS "BELIEVE," "EXPECT," '"ANTICIPATE," "INTEND," "PLAN,"
"ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL
VERBS SUCH AS "WILL," "WOULD," "SHOULD,"' "COULD," OR "MAY." THESE FORWARD
- -LOOKING STATEMENTS ARE INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL
INFORMATION WITH WHICH THEY MAY ASSESS OUR FUTURE POTENTIAL. ALL OF THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON ASSUMPTIONS ABOUT AN UNCERTAIN FUTURE
AND ARE BASED ON INFORMATION AVAILABLE AT THE DATE SUCH STATEMENTS ARE ISSUED.
THERE ARE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD AND WILL CAUSE
ACTUAL RESULTS TO DIFFER FROM THOSE DISCUSSED IN OUR FORWARD-LOOKING STATEMENTS.
MANY OF THESE FACTORS ARE BEYOND OUR ABILITY TO CONTROL OR PREDICT AND COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE, FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE FOLLOWING FACTORS' ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA
(INCLUDING PROBLEMS ARISING FROM THE CALIFORNIA ENERGY CRISIS), ADVERSE ECONOMIC
CONDITIONS AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN INTEREST RATES, THE
CONTROLLING INTEREST IN US BY THE BANK OF TOKYO-MITSUBISHI, LTD., COMPETITION IN
THE BANKING INDUSTRY, RESTRICTIONS ON DIVIDENDS, ADVERSE EFFECT OF CURRENT AND
FUTURE BANKING RULES, REGULATIONS AND LEGISLATION, AND RISKS ASSOCIATED WITH
VARIOUS STRATEGIES WE MAY PURSUE, INCLUDING POTENTIAL ACQUISITIONS, DIVESTITURES
AND RESTRUCTURINGS. SEE ALSO THE SECTION ENTITLED "CERTAIN BUSINESS RISK
FACTORS" ON PAGE F-41.
You should read the following discussion and analysis of our
consolidated financial position and the results of our operations for the years
ended December 31, 1998, 1999 and 2000 together with our Consolidated Financial
Statements and the Notes to Consolidated Financial Statements included in this
Form 10-K. Averages as presented in the following tables are substantially all
based upon daily average balances.
INTRODUCTION
We are a California-based, commercial bank holding company with
consolidated assets of $35.2 billion at December 31, 2000. At year-end 2000,
Union Bank of California, N.A. was the third largest commercial bank in
California, based on total assets and total deposits in California, and one of
the 30 largest commercial banks in the United States.
UnionBanCal Corporation and its banking subsidiary, Union Bank of
California, N.A., (the Bank) was created on April 1, 1996 by the combination of
Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The
Bank of California, N.A. The combination was accounted for as a reorganization
of entities under common control, similar to a pooling of interests.
On March 3, 1999, we completed a secondary offering of 28.75 million
shares of our Common Stock owned by our majority shareholder, The Bank of
Tokyo-Mitsubishi, Ltd. We received no proceeds from this transaction. Concurrent
with the secondary offering, we repurchased 8.6 million shares of our
outstanding Common Stock from The Bank of Tokyo-Mitsubishi, Ltd. and 2.1 million
shares owned by Meiji Life Insurance Company with $311 million of the net
proceeds from the issuance of $350 million of 7 3/8 percent capital securities.
After the secondary offering and the repurchase, The Bank of Tokyo-Mitsubishi,
Ltd. owned 64 percent of our stock, or 105.6 million shares, compared with 82
percent prior to the transaction.
We completed the repurchase of $100 million in common stock between
December 1999 and July 2000, under a stock repurchase plan authorized in
November 1999. In July 2000, we announced an additional $100 million stock
repurchase plan. The amount purchased under the new plan as of
F-2
December 31, 2000 was $51.9 million. At December 31, 2000, The Bank of
Toyko-Mitsubishi, Ltd. owned 66 percent of our common stock.
SELECTED SUPPLEMENTAL PRO FORMA FINANCIAL DATA
To facilitate the discussion of the results of operations, the
following table includes certain pro forma earnings disclosures and ratios.
These presentations supplement the Consolidated Statements of Income on page
F-46, which are prepared in accordance with accounting principles generally
accepted in the United States of America (US GAAP), by excluding the effects of
the following items: (1) the restructuring charge, which was recorded in the
third quarter of 1999, (2) the 1998 reduction of California Franchise Tax
liability, which related to 1997, and (3) the restructuring credit recorded in
the first and second quarters of 2000. Management believes that it is meaningful
to understand the operating results and trends excluding these items and,
therefore, has included information in this table and in the management's
discussion and analysis which follows, that presents income excluding these
items and related pro forma ratio and per share calculations.
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1999 2000
- --------------------------------------------- ---- ---- ----
INCOME BEFORE INCOME TAXES (TAXABLE-EQUIVALENT BASIS)............................ $ 675,968 $ 658,805 $ 664,003
Restructuring charge (credit)................................................. -- 85,000 (19,000)
Taxable equivalent adjustment................................................. (4,432) (3,186) (2,568)
Income tax expense(1)(2)...................................................... (234,325) (243,704) (214,376)
--------- --------- ---------
PRO FORMA EARNINGS(1)(2)......................................................... $ 437,211 $ 496,915 $ 428,059
========= ========= =========
PER COMMON SHARE, EXCLUDING RESTRUCTURING CHARGE (CREDIT) AND
CERTAIN INCOME TAXES
Pro forma earnings (basic)(1)(2).............................................. $2.50 $2.99 $2.65
Pro forma earnings (diluted)(1)(2)............................................ 2.49 2.97 2.64
SELECTED FINANCIAL RATIOS, EXCLUDING RESTRUCTURING CHARGE (CREDIT)
AND CERTAIN INCOME TAXES
Pro forma return on average assets(1)(2)...................................... 1.43% 1.55% 1.27%
Pro forma return on average common equity(1)(2)............................... 15.36% 16.83% 13.63%
Pro forma efficiency ratio.................................................... 61.31% 59.74% 51.44%
Pro forma dividend payout ratio(1)(2)......................................... 24.40% 27.42% 37.74%
- -----------
(1) Excludes 3rd Quarter 1998 reduction in California Franchise Tax
liability of $29.250 million (net of federal tax), which related to
1997.
(2) Excludes an income tax benefit of $29.816 million related to the
restructuring charge recorded in 1999 and income tax expense of $7.159
million related to the restructuring credit in 2000.
(3) The pro forma efficiency ratio is noninterest expense, excluding
foreclosed asset income and restructuring charge/credit, as a
percentage of net interest income (taxable-equivalent) and noninterest
income. Foreclosed asset income was $2.8 million in 1998, $1.3 million
in 1999 and $0.1 million in 2000.
Reported net income was $441.7 million, or $2.64 per diluted common
share in 1999, compared with $439.9 million, or $2.72 per diluted common share
in 2000. Excluding the effects of the $85 million restructuring charge ($55.2
million net of tax), which was recorded in the third quarter of 1999, and the
effects of the $19.0 million in restructuring credits ($11.8 million net of
taxes) recorded in 2000, pro forma net earnings were $496.9 million, or $2.97
per diluted common share in 1999, compared to $428.1 million,
F-3
or $2.64 per diluted common share in 2000. This decrease in pro forma diluted
earnings per share of 11 percent in 2000 was due to an increase of $375.0
million, or 577 percent in the provision for credit losses, offset by a $168.0
million, or 12 percent, increase in net interest income, and a $60.4 million, or
10 percent, increase in noninterest income, and a $47.8 million, or 4 percent,
decrease in noninterest expense. Other highlights in 2000 include:
o Net interest income, on a taxable-equivalent basis, was $1.6
billion in 2000, an increase of $168.0 million, or 12 percent
from 1999. Net interest margin for 2000 was 5.22 percent, or
33 basis points higher than 1999.
o The provision for credit losses was $440.0 million in 2000, compared
with $65.0 million in 1999.
o Noninterest income was $647.2 million in 2000, an increase of $60.4
million, or 10 percent from 1999.
o Noninterest expense, excluding the restructuring charge and credits,
was $1.1 billion in 2000, a decrease of $47.8 million, or 4 percent
over 1999.
o Reported return on average assets in 2000 was 1.31 percent,
while reported return on average common equity for the same
period was 14.01 percent. Our pro forma return on average
assets in 2000 decreased to 1.27 percent, compared to 1.55
percent in 1999. Our pro forma return on average common equity
in 2000 decreased to 13.63 percent, compared to 16.83 percent
in 1999.
MISSION EXCEL
Mission Excel, a project begun in the second quarter 1999, was a
company-wide initiative to slow the rate of growth of our expenses, increase
sustainable growth in our revenues, and increase productivity through
elimination of unnecessary or duplicate functions. The goal of this project was
to help us achieve or exceed an efficiency ratio of 54 to 56 percent by the
fourth quarter 2000. This goal was achieved both on a reported basis, as well as
on a pro forma earnings basis by June 30, 2000.
In connection with Mission Excel, we incurred an $85 million
restructuring charge in the third quarter of 1999. The charge consisted of $70
million in personnel expense for approximately 1,400 employees to be terminated
under the plan. The remaining $15 million related to lease termination costs for
8 facilities that were to be vacated and professional service costs incurred in
connection with Mission Excel.
In 2000, we reduced the original restructuring charge by $19.0 million.
The reduction arose primarily in the severance portion of our reserve due to a
change in the attrition assumptions. The strength of the California economy
during the first half of 2000, coupled with a tight labor market, resulted in a
markedly higher attrition rate than we had anticipated.
At the completion of the plan, we currently expect to sever
approximately 800 employees who are not concentrated in any group or class of
staff. Of the total, 680 employees have been severed as of December 31, 2000 and
the remaining 120 employees are expected to be severed during the first quarter
of 2001.
The following table presents the restructuring reserve for the period,
the cash and noncash utilization of the reserve, and the resulting balance as of
December 31, 2000.
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1999 2000
- ---------------------- ---- ----
Balance at January 1......................................$ -- $ 69,359
Restructuring charge (credit)............................. 85,000 (19,000)
Less: Utilization for the period:
Cash................................................... 11,950 33,566
Noncash................................................ 3,691 720
------- --------
Balance at December 31....................................$69,359 $ 16,073
======= ========
F-4
BUSINESS SEGMENTS
We segregate our operations into four primary business units for the
purpose of management reporting, as shown in the table on the following pages.
The results show the financial performance of our major business units.
During 1999, we introduced a new method for measuring the contribution
provided by each of our business units. The Risk Adjusted Return on Capital
(RAROC) methodology seeks to attribute economic capital to business units
consistent with the level of risk they assume. These risks are primarily credit
risk, market risk and operational risk. Credit risk is the potential loss in
economic value due to the likelihood that the obligor will not perform as
agreed. Market risk is the potential loss in fair value due to changes in
interest rates, currency rates and volatilities. Operational risk is the
potential loss due to failures in internal control, system failures, or external
events.
The following table reflects the condensed income statements, selected
average balance sheet items and selected financial ratios for each of our
primary business units. The information presented does not necessarily represent
the business units' financial condition and results of operations as if they
were independent entities. 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. The management reporting system
identifies balance sheet and income statement items to each business unit based
on internal management accounting policies. Net interest income is determined
using our internal funds transfer pricing system, which assigns a cost of funds
to assets or a credit for funds to liabilities and capital, based on their type,
maturity or repricing characteristics. Noninterest income and expense directly
or indirectly attributable to a business unit are assigned to that business.
F-5
We have restated the business units' results for the prior periods to
reflect any reorganizational changes that may have occurred.
COMMUNITY BANKING
AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL
SERVICES GROUP SERVICES GROUP BANKING GROUP
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
---------------------------- ------------------------ ------------------------
1998 1999 2000 1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income.. $704,783 $697,113 $731,741 $462,271 $596,082 $719,202 $51,450 $43,824 $35,129
Noninterest income... 333,345 370,917 412,197 109,819 133,994 173,089 57,750 56,201 60,352
--------- --------- --------- -------- -------- -------- ------- ------- -------
Total revenue........ 1,038,128 1,068,030 1,143,938 572,090 730,076 892,291 109,200 100,025 95,481
Noninterest expense(1) 742,477 760,163 721,907 250,651 284,680 299,963 58,650 52,275 55,558
Credit expense (income) 63,854 53,410 48,582 73,329 98,916 120,619 14,086 13,948 7,268
--------- --------- --------- -------- -------- -------- ------- ------- -------
Income (loss) before 231,797 254,457 373,449 248,110 346,480 471,709 36,464 33,802 32,655
income tax expense
(benefit).........
Income tax expense 91,583 98,375 142,844 96,268 127,175 168,137 13,684 12,927 12,491
(benefit)......... --------- --------- --------- -------- -------- -------- ------- ------- -------
Net income........... $140,214 $156,082 $230,605 $151,842 $219,305 $303,572 $22,780 $20,875 $20,164
========= ========= ========= ======== ======== ======== ======= ======= =======
AVERAGE BALANCES
(DOLLARS IN MILLIONS):
Total loans.......... $9,587 $8,320 $8,094 $ 11,162 $14,729 $16,798 $1,356 $1,050 $959
Total assets......... 10,640 9,315 9,020 12,358 16,127 18,596 2,070 1,589 1,492
Total deposits....... 13,742 14,201 14,155 5,362 5,888 6,393 851 815 1,031
FINANCIAL RATIOS:
Risk adjusted return 23% 26% 41% 17% 18% 20% 17% 18% 21%
on capital........
Return on average 1.32 1.68 2.56 1.23 1.36 1.63 1.10 1.31 1.35
assets............
Efficiency ratio(2).. 71.5 71.2 63.1 43.6 39.0 33.6 54.6 52.3 58.2
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------ ---------------------------- ------------------------------
1998 1999 2000 1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income.. $41,972 $60,884 $42,976 $ 57,747 $17,930 $ 55,392 $1,318,223 $1,415,833 $1,584,440
Noninterest income... 18,614 15,954 (7,083) 14,003 9,693 8,625 533,531 586,759 647,180
------- ------- ------- -------- -------- --------- ---------- ---------- ----------
Total revenue........ 60,586 76,838 35,893 71,750 27,623 64,017 1,851,754 2,002,592 2,231,620
Noninterest expense(1) 24,709 20,826 15,757 58,731 164,029 37,000 1,135,218 1,281,973 1,130,185
Credit expense (income) -- -- -- (106,269) (101,274) 263,531 45,000 65,000 440,000
------- ------- ------- -------- -------- --------- ---------- ---------- ----------
Income (loss) before 35,877 56,012 20,136 119,288 (35,132) (236,514) 671,536 655,619 661,435
income tax expense
(benefit).........
Income tax expense 13,958 21,517 7,702 (10,418) (46,106) (109,639) 205,075 213,888 221,535
(benefit)......... ------- ------- ------- -------- -------- --------- ---------- ---------- ----------
Net income........... $21,919 $34,495 12,434 $129,706 $10,974 $(126,875) $466,461 $ 441,731 $439,900
======= ======= ======= ======== ======== ========= ========== ========== ==========
AVERAGE BALANCES
(DOLLARS IN MILLIONS):
Total loans.......... $ -- $ -- $ -- $ 1,111 $926 $459 $23,216 $ 25,025 $26,310
Total assets......... 4,090 3,887 3,740 1,366 1,223 824 30,524 32,141 33,672
Total deposits....... 2,662 3,053 3,235 38 (64) 714 22,655 23,893 25,528
FINANCIAL RATIOS:
Risk adjusted return 13% 21% 7% na na na na na na
on capital........
Return on average 0.54 0.89 0.33 na na na 1.53% 1.37% 1.31%
assets............
Efficiency ratio(2).. 37.2 27.1 43.9 na na na 61.5 64.1 50.6
- -----------
(1) "Other" includes 3rd quarter 1999 restructuring charge of $85.0 million
($55.2 million, net of tax) and 2000 restructuring credits of $19.0
million ($11.8 million, net of taxes).
(2) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income and
noninterest income. Foreclosed asset expense (income) was $2.9 million,
$(1.3) million, $(2.8) million, $(1.3) million, and $(0.1) million for
1996 through 2000, respectively.
na = not applicable
COMMUNITY BANKING AND INVESTMENT SERVICES GROUP
The Community Banking and Investment Services Group strives to provide
the best possible financial products to individuals and small businesses
including a broad set of credit, deposit and trust products delivered through
branches, relationship managers, private bankers and trust administrators. The
Community Banking and Investment Services Group provides its customers with high
quality customer service executed through a number of responsive and efficient
delivery channels.
F-6
In addition to our traditional network channels, the Community Banking
and Investment Services Group announced earlier this year the establishment of
an alliance with Navicert Financial Corp., doing business as NIX Check Cashing
and Operation Hope designed to bring convenient banking services to a broader
community. This alliance will allow our small business and consumer clients
access to a unique blend of financial services combining the NIX Check Cashing
services, Union Bank of California Banking Services and Operation Hope small
business education services. Checking and savings account services are available
today through selected NIX Check Cashing locations with future services planned
to include applications for consumer loans, credit cards, new and used car
loans, home equity loans and residential mortgages. The NIX Check Cashing
alliance complements our current network of 15 Cash and Save(R) outlets located
throughout Southern and Central California.
In 2000, noninterest expense decreased in the Community Banking and
Investment Services Group by $38.3 million, due to a combination of the
continued implementation of Mission Excel cost reduction efforts and the
introduction of technology improvements in back office operations and call
centers.
Continued success in these strategies has resulted in increased
revenues, reduced costs, improved efficiency ratios and higher returns on
capital. In 2000, net income increased $74.5 million, an increase of over 48
percent compared to 1999. Total revenue increased $75.9 million compared to a
year earlier with the majority of that increase coming from a $41.3 million
increase in noninterest income. Noninterest income increases arose primarily
from a strategic repricing effort initiated through Mission Excel, and from the
purchase of trust assets of the Imperial Trust Company, which occurred in
mid-1999. Net interest income increased $34.6 million over the prior year due to
a combination of higher earning asset volume and a higher interest rate
environment.
In 2001, the Community Banking and Investment Services Group will
emphasize growth in the consumer asset portfolio, expanding wealth management
services, extending the small business franchise and expanding the branch
network. The strategy for growing the consumer asset portfolio will primarily
focus on mortgage and home equity products, originated through the branch
network, as well as indirectly. The Wealth Management division is focused on
becoming the preferred provider of banking and investment products for affluent
individuals in geographic areas already served by the Bank. This will be
achieved through a combination of superior service, a broad product suite, an
increased number of banking locations convenient to the targeted clientele and
improved cross-selling programs. On January 31, 2001, we completed the
acquisition of Copper Mountain Trust Company, which will enhance our growing
custody and 401(k) administration businesses. Core elements of the initiative to
extend the Bank's small business franchise include enhancing the sales force,
increasing marketing activities, introducing new insurance and trade finance
products, adding new locations, and developing online capabilities to complement
physical distribution. Expansion of the distribution network will be achieved
through acquisitions and de novo branching. Expansion opportunities exist in
both Southern California, where we have a particularly strong presence, and
Northern California.
The Community Banking and Investment Services Group is comprised of
three major divisions: Community Banking, Wealth Management, and Institutional
Services and Asset Management.
COMMUNITY BANKING serves over one million consumer households and
businesses through its 244 full-service branches in California, 6 full-service
branches in Oregon and Washington, 3 full-service branches in Guam and Saipan
and its network of 438 proprietary ATMs. Customers may also access our services
24 hours a day by telephone or through our Bank@Home product at www.UBOC.com. In
addition, the division offers automated teller and point-of-sale debit services
through our founding membership in the Star System(TM), the largest shared ATM
network in the Western United States.
F-7
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 indirect and direct financing, including
leasing and residential real estate lending;
o through on-line access to our internet banking services which
augment our physical delivery channels by providing a wide
array of customer transaction, bill payment and loan payment
services;
o through business banking centers, which serve businesses with sales up
to $5 million; and
o through in-store branches, which also serve consumers and businesses.
WEALTH MANAGEMENT provides private banking services to our affluent
clientele as well as brokerage products and services.
o The Private Bank focuses primarily on delivering integrated
and customized financial services to high net worth
individuals with sophisticated financial needs as well as to
professional service firms. Specific products and services
include trust and estate services, investment account
management services, and customized deposit and credit
products. The Private Bank's strategy is to expand its
business by leveraging existing Bank client relationships,
increasing its geographic market coverage and the breadth of
its products and services. Through 8 existing locations, plus
4 newly converted Priority Banking locations, the Private Bank
relationship managers offer all of the Bank's available
products and services.
o Our brokerage products and services are provided through UBOC
Investment Services, Inc., a registered broker/dealer offering
a full line of investment products to individuals and
institutional clients. Its primary strategy is to further
penetrate our existing client base.
INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment
management and administration services for a broad range of individuals and
institutions.
o HighMark Capital Management, Inc., a registered investment
advisor, provides investment advisory services to affiliated
domestic and offshore mutual funds, including the HighMark
Funds. It also provides advisory services to Union Bank of
California trust clients, including corporations, pension
funds and individuals. HighMark Capital Management also
provides mutual fund support services. HighMark Capital
Management's strategy is to increase assets under management
by broadening its client base and helping to expand the
distribution of shares of its mutual fund clients.
o Business Trust provides retirement services, which includes
trustee services, investment management, and 401(k)
administration and record keeping, to businesses, professional
corporations, government agencies, unions and non-profit
organizations. Business Trust's strategy is to leverage the
Bank's existing commercial relationships and third-party
distribution network which includes attorneys, certified
public accountants, and third party administration firms.
o Securities Services is engaged in domestic and multi-currency
custody, safekeeping, mutual fund accounting, securities
lending, and corporate trust services. Its client base
includes financial institutions, businesses, government
agencies, unions, insurance companies, mutual funds,
investment managers and non-profit organizations. Securities
Services is the only West Coast based, in-house provider of a
full range of institutional trust services.
Through alliances with other financial institutions, the group offers
additional products and services, such as credit cards, leasing, and asset-based
and leveraged financing.
F-8
The group competes with larger banks by providing service quality
superior to that of its major competitors. We have been recognized as among the
highest rated banks in California for customer service quality and satisfaction.
The group's primary means of competing with community banks include its
large and convenient branch network and its reputation for innovative use of
technology to deliver banking services. We have the fifth largest branch network
among depository institutions in California. We also offer convenient banking
hours to consumers through our drive-through banking locations and selected
branches that are open seven days a week.
The group competes with a number of commercial banks, internet banks,
savings associations and credit unions, as well as more specialized financial
service providers such as investment brokerage companies, consumer finance
companies, and residential real estate lenders. The group's primary competitors
are other major depository institutions such as Bank of America, California
Federal, Washington Mutual and Wells Fargo, as well as smaller community banks
in the markets in which we operate.
COMMERCIAL FINANCIAL SERVICES GROUP
The Commercial Financial Services Group offers customized financing and
cash management services to middle market and large corporate businesses
primarily headquartered in the western United States. The Commercial Financial
Services Group has continued to produce strong earnings growth by focusing on
customer segmentation, allowing the group to provide specialized financing
expertise to specific geographic markets and industry segments such as
Communications, Energy, Entertainment, and Retail. Relationship managers and
credit executives in the Commercial Financial Services Group provide credit
services including commercial loans, accounts receivables and inventory
financing, project financing, lease financing, trade financing and real estate
financing. In addition to credit services, the group offers its customers access
to high quality cash management services delivered through specialized deposit
managers with extensive experience in cash management solutions for businesses.
The group's continued success in their focused approach to the
wholesale market led to 2000 net income growth of $84.3 million over a year
earlier. Revenues increased by $162.2 million primarily due to strong loan
growth, higher interest rates and improved noninterest income. Noninterest
expense increased $15.3 million over a year earlier due to higher expenses to
support increased deposit volume. Despite this increase, the group continues to
improve efficiency with revenue growth significantly outpacing expense growth.
Credit expenses increased $21.7 million in response to the loan growth over the
prior year (see F-4 for an explanation of credit expense under our RAROC
methodology).
The group's initiatives for 2001 include expanding capital markets
activities, increasing domestic trade financing and expanding the item
processing business. Loan growth strategies include originating, underwriting
and syndicating loans in core competency markets, such as the California middle
market, commercial real estate, communications, media, energy, equipment leasing
and commercial finance. In expanding capital markets activities, the group aims
to broaden the range of services offered to business customers seeking bundled
financial services. Some services that Commercial Financial Services Group
intends to begin offering in this arena include debt underwriting and private
placements. The Commercial Financial Services Group operates a strong processing
business, including services such as check processing, front-end item
processing, cash vault services and digital imaging. Opportunities for
outsourcing these capabilities for correspondent banks, e-banks and credit
unions are significant. In the processing business, Commercial Financial
Services Group intends to build new capabilities, in addition to leveraging
existing capabilities. Some new initiatives underway include cash management
products with internet delivery, check truncation at point-of-sale, digital
certificates and e-bill payment and presentment. The combination of expanded
products and an emphasis on core competencies are expected to contribute to
strong growth in operating earnings in 2001.
F-9
The Commercial Financial Services Group comprises the following
business units:
o the Commercial Banking Division, which serves California middle-market
companies;
o the Corporate Deposit Services Division, which provides
deposit and cash management expertise to clients in the middle
market, large corporate market and specialized industries;
o the Institutional and Deposit Services Division, which provides deposit
and cash management expertise to clients in specific deposit-intensive
industries;
o the Corporate Capital Markets Division, which provides
merchant and investment banking related products and services.
o the National Banking Division, which provides credit services
to a variety of specialized industries including retailers,
finance companies and insurance companies, as well as large
corporate clients headquartered outside the United States;
o the Real Estate Industries Division, which provides real
estate lending products such as construction loans, commercial
mortgages and bridge financing;
o the Energy Capital Services Division, which provides custom
financing and project financing to oil and gas companies, as
well as power and utility companies, in California and Texas;
o the Communications and Media Division, which provides custom
financing to middle market and large corporate clients in the
communications, entertainment and media industries; and
o the Commercial Finance Division, which provides asset based lending to
middle market companies.
The group competes with other banks primarily on the basis of its
reputation as a "business bank," the quality of its relationship managers, and
the delivery of superior customer service. We are recognized in California as
having a superior "business banking" reputation relative to other large banks.
We are also highly rated among financial institutions for our cash management
services and systems.
The group's main strategy is to target industries and companies for
which the group can reasonably expect to be one of a customer's primary banks.
Consistent with its strategy, the group attempts to serve a large part of its
targeted customers' credit and depository needs.
The group competes with a variety of other financial services
companies. Competitors include other major California banks, as well as
regional, national and international banks. In addition, we compete with
investment banks, commercial finance companies, leasing companies, and insurance
companies.
INTERNATIONAL BANKING GROUP
The International Banking Group focuses on providing correspondent
banking and trade finance related products and services to international
financial institutions worldwide, primarily in Asia. This focus includes
products and services such as letters of credit, international payments,
collections and financing of mostly short-term transactions. The group also
serves certain foreign firms and U.S. corporate clients in selected countries
where we have branches, including Taipei, Taiwan, Seoul, Korea and Tokyo, Japan.
In the U.S., the group serves subsidiaries and affiliates of non-Japanese Asian
companies and U.S. branches/agencies of foreign banks. In addition, the group
also provides international services to domestic corporate clients along the
West Coast. The majority of revenue generated by the International Banking Group
is from customers domiciled outside of the U.S.
In 2000, net income decreased by $0.7 million compared to the prior
year. Slower than expected economic recovery in Asia and a related increase in
liquidity put significant pressure on spreads in the region. Lower portfolio
exposure and a $6.7 million reduction in credit expense versus 1999 helped
offset these lower spreads. In addition, noninterest expense was $3.3 million
lower than the prior year, as Mission Excel initiatives continued to be
implemented. The nature of the International Banking Group business
F-10
revolves around short-term, trade financing and service related income, which
tends to result in significantly lower credit risk when compared to other
long-term lending activities.
The group has a long and stable history of providing correspondent and
trade-related services to international financial institutions. The group
continues to be a market leader, achieving strong customer loyalty in the Asia
Pacific correspondent banking market by providing high quality products and
services at competitive prices. The International Banking Group head office is
located in San Francisco with branches in Tokyo, Taipei, Seoul, Manila and Hong
Kong. In addition, the group maintains representative offices in other parts of
Asia and Latin America and an international banking subsidiary in New York.
GLOBAL MARKETS GROUP
The Global Markets Group conducts business activities primarily to
support the previously described business groups and their customers. This group
offers a broad range of risk management products, such as foreign exchange and
interest rate swaps, caps and floors. Additionally, it places debt securities,
including Union Bank of California, N.A.'s own liabilities, with institutional
investors and trades debt instruments in the secondary market. At the same time,
this group manages our market-related risks as part of its responsibilities for
asset/liability management including wholesale funding, liquidity, securities
portfolio, and off-balance sheet interest rate risk hedges.
In 2000, total Company revenue from risk management products increased
$11.4 million or 63 percent from the prior year, primarily due to higher foreign
exchange profits. The majority of the revenue generated from these risk
management products are distributed to the other business segments responsible
for the cross-selling of these products. The group's net income of $12.4 million
decreased $22.1 million compared to 1999, mainly due to a higher level of
revenue from these risk management products being distributed to the other
business segments responsible for the cross selling of these products.
Noninterest income for 2000 decreased $23.0 million compared to 1999, mainly due
to losses on the sale of securities in our investment portfolio in order to
replace low yielding with higher yielding securities as part of the bank's
asset/liability management strategy. Noninterest expense in 2000 decreased $5.1
million compared to 1999, largely due to personnel expense reductions.
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 and certain other nonrecurring items such as
restructuring charges and credits, merger and integration
expense, certain parent company non-bank subsidiaries, and the
elimination of the fully taxable-equivalent amounts;
o the adjustment between the credit expense under RAROC and the
provision for credit losses under US GAAP and earnings
associated with unallocated equity capital;
o the Credit Management Group, containing the Special Assets
Division, which includes $169.8 million and $408.3
million of nonperforming assets for 1999 and 2000, respectively;
o the Pacific Rim Corporate Group, which offers a range of credit,
deposit, and investment management products and services to
companies in the U.S., which are affiliated with companies
headquartered outside the U.S., mostly in Japan; and
o the residual costs of support groups.
Net loss for "other" in 2000 was $126.9 million. The results were
impacted by the following factors:
o Credit expense of $263.5 million due to the difference between
the $440 million in provision for credit losses calculated
under the company's GAAP methodology and the $176.5 million in
F-11
expected losses for the reportable business segments, which
utilizes the RAROC methodology, offset by
o Net interest income of $55.4 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 Group.
o Noninterest expense of $37 million, which included the $19
million restructuring credit.
Net income for "other" in 1999 was $11 million. The results were
impacted by the following factors:
o Net interest income of $17.9 million, which resulted from the
differences between the credit for equity for the reportable
segments and the net interest income earned by UnionBancCal
Corporation and
o Credit benefit of $101.3 million due to the difference between
the $65 million in provision for credit losses calculated
under the company's GAAP methodology and the $166.3 million in
expected losses for the reportable business segments, which
utilizes the RAROC methodology, and
o Noninterest expense of $164 million, which included the $85 million
restructuring charge.
STRATEGIC INITIATIVES
In connection with our strategic initiatives, we have established long-
term financial performance goals. These goals will serve as a tool for
measuring the long-term success of our operating strategies, based on normal
business operations, without including unusual events that may occur from time
to time. Our long-term financial performance goals include:
PERFORMANCE RATIO GOAL
- --------------------------------------------------------- ------------
o Return on average common equity....................... 15% to 17%
o Earnings per share growth............................. 10% to 12%
o Efficiency ratio...................................... 54% to 56%
o Tangible common equity to assets...................... 7.5% to 8.5%
Although we believe these goals are realizable given our proposed
operating strategies and our current asset quality, we cannot assure you that we
will attain these long-term financial performance goals at any particular time.
See paragraph on certain business risk factors on page F-41.
F-12
NET INTEREST INCOME
The table below shows the major components of net interest income and
net interest margin.
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
1998 1999 2000
-------------------------------- --------------------------------- -----------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield Average Income/ Yield/
(Dollars in thousands) Balance Expense(1) Rate(1) Balance Expense(1) Rate(1) Balance Expense(1) Rate(1)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:(2)
Domestic.............. $21,890,350 $1,736,847 7.93% $23,931,438 $1,862,037 7.78% $25,260,924 $2,170,653 8.59%
Foreign(3)............ 1,325,154 90,011 6.79 1,093,339 69,593 6.37 1,049,496 71,812 6.84
Securities--taxable(4)... 3,056,152 192,404 6.30 3,287,983 205,899 6.26 3,426,164 221,606 6.47
Securities--tax-exempt(4) 103,097 11,384 11.04 78,289 7,852 10.03 68,759 6,772 9.85
Interest bearing deposits 260,720 17,080 6.55 203,752 12,174 5.97 174,769 9,126 5.22
in banks..............
Federal funds sold and 296,285 16,056 5.42 156,839 8,108 5.17 131,449 8,160 6.21
securities purchased
under resale agreements
Trading account assets... 555,632 25,829 4.65 265,482 12,293 4.63 268,169 15,519 5.79
----------- --------- ---------- --------- ---------- ---------
Total earning assets 27,487,390 2,089,611 7.60 29,017,122 2,177,956 7.51 30,379,730 2,503,648 8.24
--------- --------- ---------
Allowance for credit losses (471,113 (453,126) (509,653)
Cash and due from banks.. 1,919,714 2,026,730 2,140,369
Premises and equipment, net 405,562 434,313 429,668
Other assets............. 1,182,253 1,116,458 1,231,944
----------- ----------- -----------
Total assets....... $30,523,806 $32,141,497 $33,672,058
=========== =========== ===========
LIABILITIES
Domestic deposits:
Interest bearing...... $5,482,257 153,805 2.81 $5,704,138 143,334 2.51 $6,039,773 163,446 2.71
Savings and consumer 3,205,823 120,778 3.77 3,368,328 107,974 3.21 3,371,948 119,910 3.56
time...............
Large time............ 3,644,732 194,324 5.33 4,107,360 205,587 5.01 4,550,938 274,052 6.02
Foreign deposits(3)...... 1,704,027 86,221 5.06 1,600,047 73,829 4.61 1,924,839 107,183 5.57
---------- ------- ---------- ------- ---------- -------
Total interest 14,036,839 555,128 3.95 14,779,873 530,724 3.59 15,887,498 664,591 4.18
bearing deposits. ---------- ------- ---------- ------- ---------- -------
Federal funds purchased 1,604,675 84,440 5.26 1,489,214 72,083 4.84 1,548,730 96,606 6.24
and securities sold
under repurchase
agreements............
Commercial paper......... 1,631,216 88,358 5.42 1,529,814 77,041 5.04 1,521,614 94,905 6.24
Other borrowed funds..... 328,872 18,683 5.68 708,625 37,420 5.28 314,425 16,709 5.31
Subordinated capital notes 325,808 20,347 6.24 298,000 17,100 5.74 255,426 17,617 6.90
UnionBanCal -- -- -- 303,014 24,569 8.11 350,000 26,212 7.49
Corporation-obligated
mandatorily redeemable
preferred securities of
subsidiary grantor trust
---------- ------- ---------- ------- --------- -------
Total borrowed funds 3,890,571 211,828 5.44 4,328,667 228,213 5.27 3,990,195 252,049 6.32
---------- ------- ---------- ------- --------- -------
Total interest 17,927,410 766,956 4.28 19,108,540 758,937 3.97 19,877,693 916,640 4.61
bearing liabilities ------- ------- -------
Noninterest bearing 8,617,875 9,113,172 9,640,049
deposits..............
Other liabilities........ 1,132,557 980,194 1,014,472
---------- ---------- ---------
Total liabilities.. 27,677,842 29,201,906 30,532,214
SHAREHOLDERS' EQUITY
Common equity............ 2,845,964 2,939,591 3,139,844
---------- ---------- ----------
Total shareholders' 2,845,964 2,939,591 3,139,844
equity........... ---------- ---------- ----------
Total liabilities $30,523,806 $32,141,497 $33,672,058
and shareholders' =========== =========== ===========
equity...........
1,322,655 4.81% 1,419,019 4.89% 1,587,008 5.22%
Net interest income/margin
(taxable-equivalent
basis)................
Less: taxable-equivalent 4,432 3,186 2,568
adjustment............ ---------- ---------- ----------
Net interest income $1,318,223 $1,415,833 $1,584,440
========== ========== ==========
- -----------
(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.
(4) For the purpose of the net interest margin analysis, yields on
securities available for sale are based on fair value.
F-13
Net interest income, on a taxable-equivalent basis, was $1.4 billion
in 1999, compared with $1.6 billion in 2000. This increase of $168.0 million, or
12 percent, was attributable partially to a $1.4 billion, or 5 percent, increase
in average earning assets, which was in part funded by a $526.9 million, or 6
percent, increase in average noninterest bearing deposits. In addition, the net
interest margin was favorably impacted by the interest rate environment that
contributed to higher yields on loans and other interest bearing assets,
partially offset by higher rates on deposits and other average interest bearing
liabilities (see table at F-15). The net interest margin increased 33 basis
points to 5.22 percent.
Average earning assets were $29.0 billion in 1999, compared with $30.4
billion in 2000. This growth was primarily attributable to a $1.3 billion, or 5
percent, increase in average loans, and a $128.7 million, or 4 percent increase
in average securities. The growth in average loans was mostly due to an increase
in average commercial, financial and industrial loans of $670.0 million,
commercial mortgage loans of $269.8 million, construction loans of $279.7
million, and residential mortgage loans of $217.9 million, partially offset by
lower average consumer loans of $179.4 million, (see page F-18 for further
discussion of loans). The increase in average securities, which is comprised
primarily of fixed rate available for sale securities, reflected liquidity and
interest rate risk management actions.
The higher interest rate environment resulted in higher yields on
average earning assets of 73 basis points, partially offset by higher rates paid
on average interest bearing liabilities of 64 basis points. The decision to
maintain an asset sensitive balance sheet contributed to the higher yields in
2000. The $769.2 million, or 4 percent, increase in average interest bearing
liabilities during 2000 was due to an increase in average interest bearing
deposits of $1.1 billion, or 8 percent, partially in large time deposits and
partially in interest bearing core deposits.
Average noninterest bearing deposits increased $526.9 million, or 6
percent, over 1999. This large base of interest-free funding continues to
benefit our lower cost of funds.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table shows the changes in the components of net interest
income on a taxable-equivalent basis. The changes in net interest income between
periods have been reflected as
F-14
attributable either to volume or to rate changes. For purposes of this table,
changes that are not solely due to volume or rate changes are allocated to rate.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 VERSUS 1998 2000 VERSUS 1999
---------------------------------- -----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN CHANGE IN
---------------------------------- -----------------------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGES IN INTEREST INCOME
Loans:
Domestic.................................... $161,858 $(36,668) $125,190 $103,434 $205,182 $308,616
Foreign(1).................................. (15,740) (4,678) (20,418) (2,793) 5,012 2,219
Securities--taxable............................. 14,605 (1,110) 13,495 8,650 7,057 15,707
Securities--tax-exempt.......................... (2,739) (793) (3,532) (956) (124) (1,080)
Interest bearing deposits in banks............. (3,731) (1,175) (4,906) (1,730) (1,318) (3,048)
Federal funds sold and securities purchased (7,558) (390) (7,948) (1,313) 1,365 52
under resale agreements.....................
Trading account assets......................... (13,492) (44) (13,536) 124 3,102 3,226
-------- -------- -------- -------- -------- --------
Total earning assets..................... 133,203 (44,858) 88,345 105,416 220,276 325,692
-------- -------- -------- -------- -------- --------
CHANGES IN INTEREST EXPENSE
Domestic deposits:.............................
Interest bearing............................ $ 6,235 $(16,706) $(10,471) $ 8,424 $ 11,688 $ 20,112
Savings and consumer time................... 6,126 (18,930) (12,804) 116 11,820 11,936
Large time.................................. 24,658 (13,395) 11,263 22,223 46,242 68,465
Foreign deposits(1)............................ (5,261) (7,131) (12,392) 14,973 18,381 33,354
-------- -------- -------- -------- -------- --------
Total interest bearing deposits.......... 31,758 (56,162) (24,404) 45,736 88,131 133,867
-------- -------- -------- -------- -------- --------
Federal funds purchased and securities sold (6,073) (6,284) (12,357) 2,881 21,642 24,523
under repurchase agreements.................
Commercial paper............................... (5,496) (5,821) (11,317) (413) 18,277 17,864
Other borrowed funds........................... 21,570 (2,833) 18,737 (20,814) 103 (20,711)
Subordinated capital notes..................... (1,735) (1,512) (3,247) (2,444) 2,961 517
UnionBanCal Corporation-obligated mandatorily 24,569 -- 24,569 3,811 (2,168) 1,643
redeemable preferred securities of subsidiary -------- -------- -------- -------- -------- --------
grantor trust...............................
Total borrowed funds..................... 32,835 (16,450) 16,385 (16,979) 40,815 23,836
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities....... 64,593 (72,612) (8,019) 28,757 128,946 157,703
-------- -------- -------- -------- -------- --------
Changes in net interest income........... $ 68,610 $ 27,754 $ 96,364 $ 76,659 $ 91,330 $167,989
======== ======== ======== ======== ======== ========
- -----------
(1) Foreign loans and deposits are those loans and deposits originated in foreign branches.
NONINTEREST INCOME
INCREASE (DECREASE)
----------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
YEARS ENDED DECEMBER 31, 1999 VERSUS 1998 2000 VERSUS 1999
----------------------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000 AMOUNT PERCENT AMOUNT PERCENT
- ---------------------- ---- ---- ---- ------ ------- ------ -------
Service charges on deposit accounts $138,847 $172,700 $210,257 $33,853 24% $37,557 22%
Trust and investment management fees 121,226 140,878 154,387 19,652 16 13,509 10
Merchant transaction processing fees 56,929 68,037 73,521 11,108 20 5,484 8
International commissions and fees. 72,036 70,801 71,189 (1,235) (2) 388 1
Merchant banking fees.............. 31,402 38,036 48,985 6,634 21 10,949 29
Brokerage commissions and fees..... 19,085 27,038 35,755 7,953 42 8,717 32
Securities gains, net.............. 5,686 7,941 8,784 2,255 40 843 11
Other.............................. 88,320 61,328 44,302 (26,992) (31) (17,026) (28)
-------- -------- -------- ------- --- ------- ---
Total noninterest income........ $533,531 $586,759 $647,180 $53,228 10% $60,421 10%
======== ======== ======== ======= === ======= ===
- -----------
nm = not meaningful
F-15
Noninterest income in 2000 was $647.2 million, an increase of $60.4
million, or 10 percent, over 1999. This increase was primarily attributed to
growth in deposit-related income, trust and investment management fees, merchant
banking fees, brokerage commissions & fees, and merchant transaction processing
fees, partially offset by other income.
o Revenue from service charges on deposit accounts was $210.3
million, an increase of $37.6 million or 22 percent over 1999.
The increase was primarily attributable to a 7 percent
increase in average deposits, higher overdraft fees due to a
change in fee structure, and the expansion of several products
and services over the last two years.
o Trust and investment management fees were $154.4 million, an
increase of $13.5 million or 10 percent over 1999. The
acquisition of the assets of Imperial Trust accounted for
approximately 30 percent of the increase with the rest
attributed to growth in our SelectBENEFIT 401(k) product which
increased $3.7 million or 23 percent, and institutional
custody services which increased $4.0 million or 21 percent.
Overall assets under administration grew to 136.5 billion at
year-end, an increase of 7 percent over 1999.
o Merchant banking fees were $49.0 million, an increase of $10.9
million or 29 percent over 1999. The increase was primarily
related to higher syndication fees. Although the number of
syndicated deals closed was one less than in 1999, our 2000
deals were larger in size generating higher revenues per deal.
o Brokerage commissions and fees were $35.8 million, an increase
of $8.7 million or 32 percent over 1999. The increase was
primarily related to brokerage commissions on sales of
non-proprietary mutual funds, annuities, and insurance
products and pricing changes implemented in the fourth quarter
of 1999.
o Merchant transaction processing fees were $73.5 million, an
increase of $5.5 million or 8 percent over 1999. This increase
was primarily attributed to product pricing changes
implemented in mid-1999.
o Securities gains, net were $8.8 million, an increase of $0.8
million or 11 percent over 1999. This increase was primarily
related to the gains on sale of venture capital securities
investments, partially offset by the losses on sale of certain
lower yielding securities in our portfolio where the proceeds
were used to purchase higher yielding securities.
o Other noninterest income was $44.3 million, a decrease of
$17.0 million or 28 percent over 1999. The decrease was mainly
attributed to higher losses on the valuation of auto lease
residuals of $23.5 million, as a result of deterioration in
the used car market. Continued deterioration in the used car
market for 2001 would lead us to anticipate further losses on
the valuation of auto lease residuals. The decrease in other
noninterest income was also due to losses on the sale of loans
of $3.9 million, partially offset by foreign exchange profits
of $7.6 million mainly resulting from an increase in
exporters' cross border transactions reflecting a stronger US
dollar in the first half of the year, which resulted in an
increase in overseas direct investments and capital market
securities investments, and a $4.1 million gain on the sale of
a property.
F-16
NONINTEREST EXPENSE
INCREASE (DECREASE)
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
YEARS ENDED DECEMBER 31, 1999 VERSUS 1998 2000 VERSUS 1999
------------------------ ---------------- ----------------
(DOLLARS IN THOUSANDS) 1998 1999 2000 AMOUNT PERCENT AMOUNT PERCENT
- ---------------------- ---- ---- ---- ------ ------- ------ -------
Salaries and other $501,220 $539,056 $517,459 $37,836 8% $(21,597) (4)%
compensation............
Employee benefits.......... 116,344 122,288 83,003 5,944 5 (39,285) (32)
-------- -------- -------- ------- --- -------- ---
Salaries and employee 617,564 661,344 600,462 43,780 7 (60,882) (9)
benefits.............
Net occupancy.............. 90,917 90,162 92,567 (755) (1) 2,405 3
Equipment.................. 56,252 67,095 63,290 10,843 19 (3,805) (6)
Merchant transaction 43,926 49,435 49,609 5,509 13 174 --
processing..............
Communications............. 41,710 43,179 43,744 1,469 4 565 1
Professional services...... 36,748 38,399 42,042 1,651 4 3,643 9
Data processing............ 28,091 31,811 34,803 3,720 13 2,992 9
Advertising and public 31,897 27,163 29,125 (4,734) (15) 1,962 7
relations...............
Printing and office supplies 26,716 22,535 20,057 (4,181) (16) (2,478) (11)
Intangible asset amortization 13,581 13,980 13,352 399 3 (628) (4)
Foreclosed asset income.... (2,821) (1,344) (80) 1,477 nm 1,264 nm
Restructuring charge (credit) -- 85,000 (19,000) 85,000 nm (104,000) nm
Other...................... 150,637 153,214 160,214 2,577 2 7,000 5
-------- -------- -------- ------- --- --------- ---
Total noninterest expense $1,135,218 $1,281,973 $1,130,185 $146,755 13% $(151,788) (12)%
========== ========== ========== ======== =========
- -----------
nm = not meaningful
Noninterest expense, excluding the restructuring charge of $85.0
million recorded in 1999 and the restructuring credit of $19.0 million recorded
in 2000, was $1.1 billion, a decrease of $47.8 million, or 4 percent, over 1999.
This decrease was attributed to lower expenses realized through our Mission
Excel expense reduction efforts, higher expenses in the prior year related to
the Year 2000 conversion, and a one-time credit related to an accounting change,
partially offset by higher expenses related to growth in our e-business group.
o Salaries and employee benefits expense was $600.5 million, a
decrease of $60.9 million or 9 percent over 1999. This
decrease was attributed to personnel reductions achieved
through Mission Excel, a one-time credit for an accounting
methodology change in pension expense of $16.0 million, and
changes to our pension plan assumptions.
INCOME TAX EXPENSE
YEARS ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- ---------------------- ---- ---- ----
Income before income taxes.................$671,536 $655,619 $661,435
Income tax expense......................... 205,075 213,888 221,535
Effective tax rate......................... 31% 33% 33%
F-17
The effective tax rate for 1999 and 2000 was 33 percent. During 1999,
we recognized a net tax benefit of $10.7 million as a result of various tax
refunds. Excluding this tax benefit, our effective tax rate would have been 34
percent. For further explanation see Note 9.
Our effective tax rate in 1998 was 31 percent compared with 33 percent
in 1999. Our effective tax rate in 1999 was affected by various tax credits of
$10.7 million. The lower 1998 effective tax rate was due to our ability to file
our 1997 and 1998 California franchise tax returns on a worldwide unitary basis,
incorporating the financial results of The Bank of Tokyo-Mitsubishi, Ltd. and
its worldwide affiliates. As a result, we reduced our state income tax
liabilities by $29 million, net of federal tax, for previously accrued 1997
state tax liabilities, and lowered our 1998 state tax provision by $31 million,
net of federal tax. It is our intention to file our 2000 California franchise
tax returns on a worldwide unitary basis as well. In 1997, we received an
after-tax refund from the California Franchise Tax Board (FTB) of $25 million to
settle litigation, administration, and audit disputes covering the years
1975-1987. Excluding the various tax refunds, the effective tax rates were 35
percent in 1998, and 34 percent in 1999.
CREDIT RISK MANAGEMENT
Our principal business activity is the extension of credit in the form
of loans and credit substitutes to individuals and businesses. Our policies and
applicable laws and regulations governing the extension of credit require risk
analysis including an extensive evaluation of the purpose of the request and
borrowers' ability and willingness to repay as scheduled. Our evaluation also
includes ongoing portfolio and credit management through portfolio
diversification, lending limit constraints, credit review and approval policies,
and extensive internal monitoring.
We manage and control credit risk through diversification of the
portfolio by type of loan, industry concentration, dollar limits on multiple
loans to the same borrower, geographic distribution and type of borrower.
Geographic diversification of loans originated through our branch network is
generally within California, Oregon and Washington, which we consider to be our
principal markets. In addition, we will continue to originate and participate in
lending activities outside these states, as well as internationally.
In analyzing our existing loan portfolios, we apply specific monitoring
policies and procedures that vary according to the relative risk profile and
other characteristics of the loans within the various portfolios. Our
residential and consumer loans and leases are relatively homogeneous and no
single loan is individually significant in terms of its size or potential risk
of loss. Therefore, we review our residential and consumer portfolios by
analyzing their performance as a pool of loans. In contrast, our monitoring
process for the commercial, financial and industrial, construction, commercial
mortgage, leases, and foreign loan portfolios includes a periodic review of
individual loans. Loans that are performing but have shown some signs of
weakness are subjected to more stringent reporting and oversight. We review
these loans to assess the ability of the borrowing entity to continue to service
all of its interest and principal obligations and as a result may adjust the
risk grade accordingly. In the event that we believe that full collection of
principal and interest is not reasonably assured, the loan will be appropriately
downgraded and, if warranted, placed on nonaccrual status, even though the loan
may be current as to principal and interest payments.
We have a Credit Review and Management Committee composed of the Chief
Executive Officer, the Chief Credit Officer, and other executive officers that
establishes overall risk appetite, portfolio concentration limits, and credit
risk rating methodology. This committee is supported by the Credit Policy Forum,
composed of lending group Senior Credit Officers that have responsibility for
establishing credit policy, credit underwriting criteria, and other risk
management controls including the approval of business strategies. Credit
Administration under the direction of the Senior Credit Officers has
responsibility for administering the credit approval process and related
policies. Policies require an extensive evaluation of credit requests and
continuing review of existing credit in order to promptly identify, monitor, and
quantify evidence of deterioration in asset credit quality or potential loss. As
another part of the control process, an internal credit examination function
provides the Board of Directors with an independent assessment of
F-18
both the level of portfolio quality and the effectiveness of the Bank's credit
management process. At the portfolio level the Credit Examination Group reviews
existing and proposed credit policies, underwriting guidelines, and portfolio
management practices to determine that credit risks are defined and controlled.
In addition, this group routinely reviews the accuracy and timeliness of risk
grades assigned to individual borrowers to ensure that the line driven credit
risk identification and grading process is functioning properly. The Credit
Examination Group summarizes its significant findings on a regular basis and
provides recommendations for corrective action when credit management or control
deficiencies are identified.
LOANS
The following table shows loans outstanding by loan type and as a
percentage of total loans for 1996 through 2000.
DECEMBER 31,
------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1996 1997 1998 1999 2000
- ------------------------------------ ------------- ---------------- -------------- --------------- --------------
Domestic:
Commercial, financial and $9,496 45% $10,747 47% $13,120 54% $14,177 55% $13,749 53%
industrial...................
Construction.................... 358 2 293 1 440 2 648 3 939 4
Mortgage:
Residential.................. 2,961 14 2,961 13 2,628 11 2,581 10 3,295 13
Commercial................... 2,598 12 2,952 13 2,975 12 3,572 14 3,348 13
------ ------ ------ ------ ------
Total mortgage............. 5,559 26 5,913 26 5,603 23 6,153 24 6,643 26
Consumer:
Installment.................. 2,063 10 2,091 9 1,985 8 1,922 7 1,656 6
Home equity.................. 1,113 5 993 5 818 4 728 3 755 3
Credit card and other lines of 303 1 270 1 -- -- -- -- -- --
credit..................... ------ ------ ------ ------ ------
Total consumer............. 3,479 16 3,354 15 2,803 12 2,650 10 2,411 9
Lease financing................. 800 4 875 4 1,032 4 1,149 4 1,134 4
------ ------ ------ ------ ------
Total loans in domestic 19,692 93 21,182 93 22,998 95 24,777 96 24,876 96
offices.................
Loans originated in foreign branches 1,358 7 1,559 7 1,298 5 1,136 4 1,134 4
------ ------ ------ ------ ------
Total loans................ $21,050 100% $22,741 100% $24,296 100% $25,913 100% $26,010 100%
======= ======= ======= ======= =======
Our lending activities are predominantly domestic, with such loans
comprising 96 percent of the total loan portfolio at December 31, 2000. Total
loans at December 31, 2000 were $26.0 billion, an increase of $97 million, or
0.4 percent, over December 31, 1999. The increase was attributable to growth in
residential mortgage loan portfolio, which increased $714 million and the
construction loan portfolio, which increased $291 million, partially offset by
the commercial, financial and industrial loan portfolio, which decreased $428
million, the consumer loan portfolio, which decreased $239 million, and the
commercial mortgage loan portfolio, which decreased $224 million.
COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS
Commercial, financial and industrial loans represent the largest
category in the loan portfolio. These loans are extended principally to major
corporations, middle market businesses, and small businesses, with no industry
concentration exceeding 10 percent of total commercial, financial and industrial
loans. This
F-19
portfolio has a high degree of geographic diversification based upon our
customer's revenue bases, which lowers our vulnerability to changes in the
economic outlook of any particular region of the U.S.
Our commercial market lending originates primarily through our banking
office network. These offices, which rely extensively on relationship-oriented
banking, provide many services including cash management services, lines of
credit, accounts receivable and inventory financing. Separately, we originate or
participate in a wide variety of financial services to major corporations. These
services include traditional commercial banking and specialized financing
tailored to the needs of each customer's specific industry. Presently, we are
active in the communications, media and entertainment, energy capital services,
technology, agribusiness, retailing and financial services industries.
At December 31, 2000, the commercial, financial and industrial loan
portfolio was $13.7 billion, or 53 percent of the total loan portfolio. The
decrease of $428 million, or 3 percent, from the previous year- end was impacted
by a higher level of charge-offs, distressed loan sales of $151 million, as well
as reductions in our exposure in nonrelationship participations. This portfolio
of loans, which comprises $2.0 billion of our total commercial, financial and
industrial loans, has caused a disproportionate share of our credit problems.
CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS
We engage in non-residential real estate lending that includes
commercial mortgage loans and construction loans secured by deeds of trust.
Construction loans are made primarily to commercial property developers and to
residential builders.
At December 31, 2000, construction loans were $939 million, or 4
percent of the total loan portfolio. The increase of $291 million, or 45
percent, from the previous year-end was primarily attributable to the favorable
California real estate market and West Coast economy.
At December 31, 2000, the commercial mortgage loan portfolio was $3.3
billion, or 13 percent of the total loan portfolio. Commercial mortgage loans
decreased by $224 million, or 6 percent, from December 31, 1999, primarily due
to the refinancing of bridge loans, which are classified as commercial mortgage
loans, with other permanent lenders (such as life insurance companies and
institutional investors). The demand for commercial mortgage loans reflects both
the favorable California real estate market and West Coast economy.
RESIDENTIAL MORTGAGE LOANS
We originate residential mortgage loans, secured by one-to-four family
residential properties, through our multiple channel network (including
branches, mortgage brokers, and loan by phone) throughout California, Oregon and
Washington, and periodically purchase loans in our market area.
At December 31, 2000, residential mortgage loans were $3.3 billion, or
13 percent of the total loan portfolio. The increase of $714 million, or 28
percent, from December 31, 1999 was influenced by purchases of $133.0 million in
adjustable rate mortgages (ARM) primarily originated in California, Oregon, and
Washington and a strategic decision to hold to maturity a larger portion of our
ARM loan originations resulting in lesser loan sales in the current year.
CONSUMER LOANS
Through our branch network, we originate consumer loans, such as auto
loans and home equity loans and lines. Auto leases are originated through our
dealer network. Approximately 95 percent of our consumer loans are secured. Most
of the unsecured portfolio is in personal lines of credit.
F-20
At December 31, 2000, consumer loans were $2.4 billion, or 9 percent of
the total loan portfolio. The decrease of $239 million, or 9 percent, from the
previous year-end was primarily attributable to exiting the dealer automobile
loan business in the third quarter of 2000.
LEASE FINANCING
We enter into direct financing and leveraged leases through our
Equipment Leasing Division, and also through an agreement with a subsidiary of
The Bank of Tokyo-Mitsubishi, Ltd. In addition, we originate auto leases through
our Consumer Asset Management section of the Community Banking and Investment
Services Group.
At December 31, 2000, lease financing outstandings were $1.1 billion,
or 4 percent of the total loan portfolio, remaining relatively unchanged from
the prior year.
LOANS ORIGINATED IN FOREIGN BRANCHES
Our loans originated in foreign branches consist primarily of
short-term extensions of credit to financial institutions located primarily in
Asia and to corporations in Japan, Korea and Taiwan.
At December 31, 2000, loans originated in foreign branches totaled $1.1
billion, or 4 percent of the total loan portfolio, remaining relatively
unchanged from the prior year, as we continue to monitor the economic situation
in the Asian markets.
CROSS-BORDER OUTSTANDINGS
Our cross-border outstandings reflect certain additional economic and
political risks that are not reflected in domestic outstandings. These risks
include those arising from exchange rate fluctuations and restrictions on the
transfer of funds. The following table sets forth our cross-border outstandings
as of December 31, 1998, 1999 and 2000 for each country where such outstandings
exceeded 1 percent of total assets. The cross-border outstandings were compiled
based upon category and domicile of ultimate risk and are comprised of balances
with banks, trading account assets, securities available for sale, securities
purchased under resale agreements, loans, accrued interest receivable,
acceptances outstanding and investments with foreign entities. The amounts
outstanding for each country exclude local currency outstandings. For those
individual countries shown in the table below, we do not have significant local
currency outstandings that are not hedged or are not funded by local currency
borrowings.
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
(DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
- ----------------------------------------------------------- ------------ -------- ------------ ------------
December 31, 1998
Japan.................................................... $173 $-- $464 $637
Korea.................................................... 448 1 117 566
December 31, 1999
Japan.................................................... $82 $-- $339 $421
Korea.................................................... 422 -- 53 475
December 31, 2000
Korea.................................................... $507 $-- $ 46 $553
PROVISION FOR CREDIT LOSSES
We recorded a $65 million provision for credit losses in 1999, compared
with a $440 million provision for credit losses in 2000. Provisions for credit
losses are charged to income to bring our allowance for credit losses to a level
deemed appropriate by management based on the factors discussed under "Allowance
for Credit Losses" below.
F-21
Our provision for 2000, compared with the 1999 provision was affected
by the following factors:
o The application of stricter standards to the definitions of
potential and well-defined weaknesses in our loan portfolio,
resulting in higher levels of criticized assets and downward
migration within the criticized grades,
o The deteriorating asset quality in our commercial loan portfolio and,
in particular, non-agented syndicated credits,
o The increased impairment and higher volume of loans placed on non-
accrual during the period,
o The establishment of a separate loss factor for foreign loans
based on historical losses in our foreign loan portfolio,
which reduced our provision requirement,
o The refinement of our reserve methodology, which eliminated the
portion of the unallocated allowance related to model and
estimation risk, and
o The higher level of charge-offs resulting from more active management
of the portfolio through loan sales.
F-22
ALLOWANCE FOR CREDIT LOSSES
The following table reflects the allowance allocated to each respective
loan category at period end and as a percentage of the total period end balance
of that loan category, as set forth in the "Loans" table on page F-19.
DECEMBER 31,
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1997 1998
- ------------------------------------------------------ -------------------- --------------------- -------------------
Domestic:
Commercial, financial, and industrial.............. $166,100 1.75% $123,610 1.15% $145,100 1.11%
Construction....................................... 5,700 1.59 3,221 1.10 5,500 1.25
Mortgage:
Residential..................................... 4,000 0.14 2,700 0.09 1,100 0.04
Commercial...................................... 39,000 1.50 60,680 2.06 17,500 0.59
-------- -------- --------
Total mortgage................................ 43,000 0.77 63,380 1.07 18,600 0.33
Consumer:
Installment..................................... 10,400 0.50 11,400 0.55 20,900 1.05
Home equity..................................... 4,900 0.44 3,600 0.36 3,800 0.46
Credit card and other lines of credit........... 34,000 11.22 30,500 11.30 -- --
-------- -------- --------
Total consumer................................ 49,300 1.42 45,500 1.36 24,700 0.88
Lease financing.................................... 5,300 0.66 4,862 0.56 3,800 0.37
-------- -------- --------
Total domestic allowance...................... 269,400 1.37 240,573 1.14 197,700 0.86
Foreign allowance..................................... 9,394 0.69 39,313 2.52 47,000 3.62
Unallocated........................................... 245,152 171,806 214,628
-------- -------- --------
Total allowance for credit losses............. $523,946 2.49% $451,692 1.99% $459,328 1.89%
======== ======== ========
DECEMBER 31,
---------------------------------------------
(DOLLARS IN THOUSANDS) 1999 2000
- ------------------------------------------------------ ------------------ ---------------------
Domestic:
Commercial, financial, and industrial.............. $238,200 1.68% $452,400 3.29%
Construction....................................... 10,000 1.54 10,200 1.09
Mortgage:
Residential..................................... 800 0.03 1,000 0.03
Commercial...................................... 21,900 0.61 19,100 0.57
-------- --------
Total mortgage................................ 22,700 0.37 20,100 0.30
Consumer:
Installment..................................... 14,900 0.78 17,500 1.06
Home equity..................................... 900 0.12 1,000 0.13
Credit card and other lines of credit........... -- --
-------- --------
Total consumer................................ 15,800 0.60 18,500 0.77
Lease financing.................................... 4,600 0.40 7,900 0.70
-------- --------
Total domestic allowance...................... 291,300 1.18 509,100 2.05
Foreign allowance..................................... 17,200 1.51 3,400 0.30
Unallocated........................................... 161,878 101,402
-------- --------
Total allowance for credit losses............. $470,378 1.82% $613,902 2.36%
======== ========
F-23
ALLOWANCE POLICY AND METHODOLOGY
We maintain an allowance for credit losses to absorb losses inherent in
the loan portfolio. The allowance is based on our regular, quarterly assessments
of the probable estimated losses inherent in the loan portfolio, and to a lesser
extent, unused commitments to provide financing. Our methodology for measuring
the appropriate level of the allowance relies on several key elements, which
include the formula allowance, specific allowances for identified problem loans
and portfolio segments and the unallocated allowance.
The formula allowance is calculated by applying loss factors to
outstanding loans and certain unused commitments, in each case based on the
internal risk grade of such loans, pools of loans, leases and commitments.
Changes in risk grades of both performing and nonperforming loans affect the
amount of the formula allowance. Loss factors are based on our historical loss
experience and may be adjusted for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are developed in the following ways:
o Problem graded loan loss factors are derived from a migration
model that tracks historical loss over a period, which we
believe captures the inherent default losses on our loan
portfolio,
o Pass graded loan loss factors are based on the average annual
net charge-off rate over a period of 10 years, which we
believe is reflective of a full economic cycle,
o Pooled loan loss factors (not individually graded loans) are
based on expected net charge-offs for one year. Pooled loans
are loans that are homogeneous in nature, such as consumer
installment and residential mortgage loans and automobile
leases.
We believe that a business cycle is a period in which both upturns and
downturns in the economy have been reflected. The long-term nature of the
current economic expansion has required us to extend our historical perspective
to capture the highs and lows of a more typical economic cycle.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to 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 Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan", or by a method which identifies certain qualitative factors.
The unallocated allowance contains amounts that are based on
management's evaluation of conditions that are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the unallocated
allowance include the following, which existed at the balance sheet date:
o General economic and business conditions affecting our key lending
areas,
o Credit quality trends (including trends in nonperforming loans expected
to result from existing conditions),
o Collateral values,
o Loan volumes and concentrations,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Recent loss experience in particular segments of the portfolio,
o Duration of the current business cycle,
F-24
o Bank regulatory examination results, and
o Findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion
with our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of such condition
may be reflected as a specific allowance, applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable
losses inherent in the loan portfolio. The actual losses can vary from the
estimated amounts. Our methodology includes several features that are intended
to reduce the differences between estimated and actual losses. The loss
migration model that is used to establish the loan loss factors for problem
graded 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 a business cycle, the methodology is
designed to take our recent loss experience 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 PROVISON FOR CREDIT LOSSES
At December 31, 1998, our total allowance for credit losses was $459
million or 1.89 percent of the total loan portfolio and 586 percent of total
nonaccrual loans. At December 31, 1999, our total allowance for credit losses
was $470 million, or 1.82 percent of the total loan portfolio and 281 percent of
total nonaccrual loans. At December 31, 2000, our total allowance for credit
losses was $614 million, or 2.36 percent of the total loan portfolio and 153
percent of total nonaccruals. 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,
1998, total impaired loans were $78 million, and the associated impairment
allowance was $11 million compared with $167 million and $42 million,
respectively, at December 31, 1999 and $400 million and $118 million,
respectively, at December 31, 2000.
Historically, our credit policy prescribed that our unallocated
allowance include a component in respect of model and estimation risk equal to
20% to 25% of the allocated allowance. The primary reason for this component of
the unallocated allowance was the dissimilarity of the loss histories of our
predecessor institutions, Union Bank and the Bank of California, prior to their
combination in 1996. As part of our ongoing effort to refine our allowance
methodology, we conducted a review of model imprecision for our pass and problem
graded loans, which was completed during the third quarter of 2000. The review
indicated the following:
o In light of the expansion to a 10-year loss history for our
pass graded loans and our analysis of our loss experience for
the 10-year period, we have concluded that model risk is
adequately reflected in the factors and that it is not
necessary to provide a separate amount for model risk with
respect to this portion of the formula allowance.
F-25
o Our loss migration model, upon which we calculate loss factors
for problem graded loans contains adequate default loss data
to eliminate the need to provide for additional model risk
with respect to this portion of the formula allowance.
o In addition, we have concluded that our impaired loans, which
are re-measured on a monthly basis, have no significant,
evidenced estimation risk within our specific allowance.
As a result of this refinement, we eliminated the requirement for
separately calculated model imprecision as a component of the unallocated
allowance.
During 1998, 1999 and 2000, there were no changes in estimation methods
or assumptions that affected our methodology for assessing the appropriateness
of the formula and specific allowances for credit losses, except that we
adjusted the periods contained within the model and what we believe reflects a
business cycle as explained on page F-24. The impact of these adjustments in the
formula allowance for 1998 and 1999 increased the formula allowance by $19
million and $28 million, respectively. There was no impact on the formula
allowance for these adjustments in 2000. Changes in estimates and assumptions
regarding the effects of economic and business conditions on borrowers and other
factors, which are described below, also affected the assessment of the
unallocated allowance. Estimation risk, which continues to be present in the
allowance for credit losses, will now be included as part of our attributed
factors within the unallocated allowance for credit losses.
We recorded a $45 million provision in 1998, a $65 million provision in
1999, and a $440 provision in 2000. Although the level of net charge-offs and
the decline of nonperforming loans during 1998 favorably impacted our asset
quality ratios, losses on certain sectors of our commercial, financial and
industrial loans have been steadily increasing since then. Losses inherent in
this type of credit are more difficult to assess because historically these have
been more volatile than losses from other credits.
The following table sets forth the allowance for credit losses.
DECEMBER 31,
--------------------
(DOLLARS IN MILLIONS) 1998 1999 2000
- --------------------- ---- ---- ----
Allocated allowance:
Formula............................................. $206 $257 $380
Specific............................................ 38 51 133
---- ---- ----
Total allocated allowance........................ 244 308 513
Unallocated allowance.................................. 215 162 101
---- ---- ----
Total allowance for credit losses...................... $459 $470 $614
==== ==== ====
CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES
At December 31, 1999, the formula allowance increased by $51 million
from the prior year, primarily due to a rise in criticized credits and downward
migration within the criticized range. At December 31, 2000, the formula
allowance increased by $123 million from the prior year, primarily due to the
dramatic rise in criticized credits and the downward migration of loans within
the criticized range.
At December 31, 1999, the specific allowance increased by $13 million
from the prior year primarily due to both the level of our impaired loans and
the degree of the impairment offset by the elimination of the $26 million
allowance on Asian country exposures. This exposure has been captured in the
formula allowance. At December 31, 2000, the specific allowance increased by $82
million, due to the significant rise in our impaired loans.
At December 31, 1998, the allocated portion of the allowance for credit
losses included $53 million related to special mention and classified credits,
compared to $145 million at December 31, 1999 and $346 million at December 31,
2000. Special mention and classified credits are those that are internally risk
F-26
graded as "special mention", "substandard" or "doubtful". Special mention
credits are potentially weak, as the borrower has begun to exhibit deteriorating
trends which, if not corrected, could jeopardize repayment of the loan and
result in further downgrade. Substandard credits have well-defined weaknesses
which, if not corrected, could jeopardize the full satisfaction of the debt. A
credit classified as "doubtful" has critical weaknesses that make full
collection improbable.
Our problem credits continue to be centered in the commercial loan
portfolio and mostly within syndicated loan purchases. We continue to see no
deterioration in the real estate or consumer loan portfolios. Within our
commercial loan portfolio, we are seeing a higher incidence of problem credits
outside our primary areas of industry expertise.
CHANGES IN THE UNALLOCATED ALLOWANCE
At December 31, 1999, the unallocated allowance declined $53 million
from the prior year because management believed that the inherent losses related
to certain conditions, described on page F-24, considered in its evaluation of
the unallocated allowance at December 31, 1998 which had been recognized through
charge-offs, had been reflected in the formula or specific allowance or had
declined.
At December 31, 2000, the unallocated allowance was $101 million
compared to $162 million at December 31, 1999, a decrease of $61 million. As
discussed previously, during the third quarter 2000 we refined our reserve
methodology to eliminate the prescribed component of the unallocated allowance
in respect of model and estimation risk. In light of the elimination of this
mandatory component of the unallocated reserve, we have increased the remaining
component of the unallocated allowance to reflect the estimation risk that
management believes exists in the formula and specific allowances, primarily in
respect of the probable downward regradings of loans in certain identified
sectors of our portfolio. Management believes that other inherent losses related
to certain conditions considered in its evaluation of the unallocated allowance
have been recognized in the formula allowance during the year ended December 31,
2000.
The following table identifies the components of the attribution of the
unallocated allowance and the range of inherent loss.
1998 1999 2000
--------------------------- --------------------------- ---------------------------
CONCENTRATION OUTSTANDING LOW HIGH OUTSTANDING LOW HIGH OUTSTANDING LOW HIGH
- ---------------------------- ----------- --- ---- ----------- --- ---- ----------- --- ----
Communications.............. $na $ -- $ -- $na $ -- $ -- $1,743 $21 $35
Utilities................... na -- -- na -- -- 1,427 17 31
Retailing................... na -- -- na -- -- 642 6 13
Foreign..................... 988 65 95 1,540 22 46 816 5 10
Technology.................. 913 18 27 729 15 22 714 4 7
Other....................... 2,066 32 48 4,419 18 39 1,994 5 12
Model Imprecision........... 49 61 62 77 -- --
---- ---- ---- ---- --- ----
Total Attributed............ $164 $231 $117 $184 $58 $108
==== ==== ==== ==== === ====
- -----------
na = not applicable to this assessment.
F-27
In our assessment as of December 31, 1998, management focused, in
particular, on the following factors:
o With respect to the margin for model and estimation risk, which
could be in the range of $49 million to $61 million.
o With respect to cross-border loans and acceptances to certain
Asia/Pacific countries, management considered the improving
but continuing effects of the global financial turmoil, which
changed the range to $55 million to $80 million.
o With respect to the technology industry, management considered
the effects of export market conditions and cyclical
over-capacity on borrowers in the chip and semiconductor
industries, which could be in the range of $18 million to $27
million.
o With respect to oil and gas, we considered the effects of the
decline in oil prices on the cash flows of borrowers in the
oil and gas industry, which could be in the range of $14
million to $22 million.
o With respect to the agricultural industry, we considered the
effects of abnormal weather conditions and export market
conditions on agricultural borrowers, which could be in the
range of $11 million to $16 million.
o With respect to cross-border loans and acceptances to Latin
American countries, management considered the continued
effects of the global financial turmoil, which could be in the
range of $10 million to $15 million.
In our assessment as of December 31, 1999, management focused, in
particular, on the following factors:
o With respect to the margin for model and estimation risk, which
could be in the range of $62 million to $77 million.
o With respect to cross-border loans and acceptances to certain
Asia/Pacific countries, management considered the improving
but continuing effects of the global financial turmoil, which
has reduced the exposure to a range of $18 million to $39
million.
o With respect to the technology industry, management considered
the improvements in export market conditions and the reduction
in the cyclical over-capacity on borrowers in the chip and
semiconductor industries, which has reduced the exposure to a
range of $15 million to $22 million.
o With respect to cross-border loans and acceptances to Latin
America, primarily Brazil, management considered the improving
but continuing effects of the global financial turmoil, which
has reduced the exposure to a range of $4 million to $7
million.
o With respect to the agriculture industry, we considered the
reduction of the impact of previous years' abnormal weather
conditions and improvement in export market conditions on
agricultural borrowers, which has reduced the exposure to a
range of $3 million to $6 million.
o With respect to oil and gas, management considered the effects
of rising oil prices and the improvement in the cash flows of
borrowers in the oil and gas industry, which no longer
required an attribution of the unallocated allowance.
F-28
In our assessment as of December 31, 2000, management focused, in
particular, on the following factors:
o With respect to model and estimation risk, as formerly
required by our credit policy, management determined that this
amount was no longer necessary.
o With respect to the communications industry, management
considered the adverse effects of changes in the economic,
regulatory and technology environments, which could be in the
range of $21 million to $35 million.
o With respect to the utilities industry, management considered
the adverse effects of rising fuel prices and government
regulation, which could be in the range of $17 million to $31
million.
o With respect to the retailing industry, management considered
the adverse effects of recent slowing trends in same-store
sales and softening consumer confidence, which could be in the
range of $6 million to $13 million.
o With respect to cross-border loans and acceptances to certain
foreign countries, management considered the lingering effects
of the financial crisis, which could be in the range of $5
million to $10 million.
o With respect to the technology industry, management considered
the adverse effects of export market conditions and cyclical
over-capacity, which could be in the range of $4 million to $7
million.
There can be no assurance that the adverse impact of any of these
conditions on us will not be in excess of the range set forth above. See
paragraph on forward-looking statements on page F-2.
Although in certain instances the downgrading of a loan resulting from
these effects was reflected in the formula allowance, management believed that
in most instances the impact of these events on the collectibility of the
applicable loans was not reflected in the level of nonperforming loans or in the
internal risk grading process with respect of such loans. Accordingly, our
evaluation of the probable losses related to these factors was reflected in the
unallocated allowance. The evaluations of the inherent losses with respect to
these factors were subject to higher degrees of uncertainty because they were
not identified with specific problem credits.
F-29
CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES
The following table sets forth a reconciliation of changes in our
allowance for credit losses.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1997 1998 1999 2000
- -------------------------------------------------------------- -------- -------- -------- -------- --------
Balance, beginning of period.................................. $555,149 $523,946 $451,692 $459,328 $470,378
Loans charged off:
Commercial, financial and industrial....................... 42,134 58,664 38,219 48,597 302,152
Construction............................................... 3,249 120 3 -- --
Mortgage................................................... 13,483 5,058 6,547 747 174
Consumer................................................... 56,361 55,336 29,312 15,009 11,760
Lease financing............................................ 2,623 3,601 2,709 3,232 2,925
Foreign(1)................................................. 1,250 -- -- 14,100 5,352
-------- -------- -------- -------- --------
Total loans charged off................................. 119,100 122,779 76,790 81,685 322,363
Recoveries of loans previously charged off:
Commercial, financial and industrial....................... 22,341 23,371 23,762 17,851 16,440
Construction............................................... 132 9,054 3 -- --
Mortgage................................................... 12,277 3,292 2,857 521 2,394
Consumer................................................... 12,906 14,946 14,021 8,356 6,882
Lease financing............................................ 368 351 501 811 581
Foreign(1)................................................. -- -- -- -- --
-------- -------- -------- -------- --------
Total recoveries of loans previously charged off........ 48,024 51,014 41,144 27,539 26,297
-------- -------- -------- -------- --------
Net loans charged off................................. 71,076 71,765 35,646 54,146 296,066
Provision for credit losses................................... 40,000 -- 45,000 65,000 440,000
Transfer of reserve for trading account assets................ -- -- (1,911) -- --
Foreign translation adjustment and other net additions (127) (489) 193 196 (410)
(deductions)............................................... -------- -------- -------- -------- --------
Balance, end of period........................................ $523,946 $451,692 $459,328 $470,378 $613,902
======== ======== ======== ======== ========
2.49% 1.99% 1.89% 1.82% 2.36%
Allowance for credit losses to total loans....................
Provision for credit losses to net loans charged off.......... 56.28 nm 126.24 120.05 148.62
Net loans charged off to average loans outstanding............ 0.34 0.33 0.15 0.22 1.13
- -----------
(1) Foreign loans are those loans originated in foreign branches.
nm = not meaningful
Loans charged off in 1999 increased by $5 million over 1998, primarily
due to a $10 million increase in commercial, financial and industrial loans and
a $14 million increase in foreign loans charged off, partially offset by a $14
million decrease in consumer loans charged off and a $6 million decrease in
mortgage loans charged off. The foreign loan charge-off consisted of a single
Taiwanese credit. Loans charged off in 2000 increased by $241 million over 1999,
primarily due to losses on distressed loans held for accelerated disposition as
well as reducing the carrying value on impaired loans. Charge-offs reflect the
realization of losses in the portfolio that were recognized previously through
provisions for credit losses. Recoveries of loans previously charged off in 1999
decreased by $14 million over 1998. Recoveries of loans previously charged off
in 2000 decreased by $1 million over 1999. At December 31, 2000, the allowance
for credit losses exceeded the net loans charged off during 1999, reflecting
management's belief, based on the foregoing analysis, that there were additional
losses inherent in the portfolio.
F-30
At December 31, 1998, our average annual net charge-offs for the past
five years were $88 million, compared with $59 million at December 31, 1999 and
$106 million at December 31, 2000. These net charge-offs represent 5.2 years,
8.0 years and 5.8 years of losses based on the level of the allowance for credit
losses at December 31, 1998, 1999 and 2000, respectively. Historical net
charge-offs are not necessarily indicative of the amount of net charge-offs that
we will realize in the future.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, distressed loans held
for sale, and foreclosed assets. Nonaccrual loans are those for which management
has discontinued accrual of interest because there exists significant
uncertainty as to the full and timely collection of either principal or interest
or such loans have become contractually past due 90 days with respect to
principal or interest. For a more detailed discussion of the accounting for
nonaccrual loans, see Note 1 to our Consolidated Financial Statements.
Distressed loans held for sale are loans, which would otherwise be
included in nonaccrual loans, but that have been identified for accelerated
disposition. Disposition of these assets is contemplated within a short period
of time, not to exceed one year.
Foreclosed assets include property where we acquired title through
foreclosure or "deed in lieu" of foreclosure.
The following table sets forth an analysis of nonperforming assets.
DECEMBER 31,
----------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1997 1998 1999 2000
- ------------------------------------------------------------ -------- ------- ------- -------- --------
Commercial, financial and industrial........................ $56,864 $46,392 $60,703 $159,479 $385,263
Construction................................................ 7,349 4,071 4,359 4,286 3,967
Mortgage:
Residential.............................................. 11,214 954 -- -- --
Commercial............................................... 52,593 57,921 8,254 3,629 10,769
-------- ------- ------- -------- --------
Total mortgage........................................ 63,807 58,875 8,254 3,629 10,769
Other....................................................... 247 -- 5,134 -- --
-------- ------- ------- -------- --------
Total nonaccrual loans................................ 128,267 109,338 78,450 167,394 399,999
Distressed loans held for sale.............................. -- -- -- -- 7,124
Foreclosed assets........................................... 28,517 20,471 11,400 2,386 1,181
-------- ------- ------- -------- --------
Total nonperforming assets............................ 156,784 129,809 89,850 169,780 408,304
======== ======= ======= ======== ========
$523,946 $451,692 $459,328 $470,378 $613,902
Allowance for credit losses................................. ======== ======= ======= ======== ========
0.61% 0.48% 0.32% 0.65% 1.54%
Nonaccrual loans to total loans.............................
Allowance for credit losses to nonaccrual loans............. 408.48 413.12 585.50 281.00 153.48
Nonperforming assets to total loans, distressed loans held 0.74 0.57 0.37 0.66 1.57
for sale, and foreclosed assets..........................
Nonperforming assets to total assets........................ 0.54 0.42 0.28 0.50 1.16
At December 31, 2000, nonaccrual loans totaled $400 million, an
increase of $233 million, or 139 percent, from year-end 1999. Our nonperforming
assets are concentrated in our non-agented syndicated loan portfolio and
approximately 65 percent of our total nonaccrual loans are syndicated loans.
Included in nonperforming assets were $7.1 million in distressed loans that are
being held for accelerated disposition. During 2000, we sold $151.2 million of
distressed loans under this accelerated disposition program.
F-31
Nonaccrual loans as a percentage of total loans were 0.65 percent at
December 31, 1999 compared with 1.54 percent at December 31, 2000. Nonperforming
assets as a percentage of total loans, distressed loans held for sale, and
foreclosed assets increased to 1.57 percent at year-end 2000 from 0.66 percent
at December 31, 1999. At December 31, 2000, approximately 96 percent of
nonaccrual loans were related to commercial, financial and industrial.
The following table sets forth an analysis of loans contractually past
due 90 days or more as to interest or principal, but not included in nonaccrual
loans above.
DECEMBER 31,
--------------------------------------------------------
(DOLLARS IN THOSUANDS) 1996 1997 1998 1999 2000
- --------------------------------------------------------- ------- ------- ------- ------- ------
Commercial, financial and industrial..................... $ 4,527 $450 $ 913 $ 2,729 $1,713
Construction............................................. -- -- -- -- --
Mortgage:
Residential........................................... 8,969 10,170 9,338 5,830 2,699
Commercial............................................ 168 1,660 13,955 442 --
------- ------- ------- ------- ------
Total mortgage..................................... 9,137 11,830 23,293 6,272 2,699
Consumer and other....................................... 10,028 7,712 7,292 2,932 2,921
------- ------- ------- ------- ------
Total loans 90 days or more past due and still
accruing........................................... $23,692 $19,992 $31,498 $11,933 $7,333
======= ======= ======= ======= ======
Total loans 90 days or more past due and still accruing were $12
million at December 31, 1999 compared with $7 million at December 31, 2000.
INTEREST FOREGONE
Interest foregone during 1999 and 2000 for loans that were on
nonaccrual status at December 31, 1999 and 2000 was $8 million and $19 million,
respectively. We recognized interest income of $23 thousand and $1.2 million for
loans that were on nonaccrual status at December 31, 1999 and December 31, 2000,
respectively.
SECURITIES
The following tables summarize the composition of the securities
portfolio and the gross unrealized gains and losses within the portfolio.
F-32
SECURITIES AVAILABLE FOR SALE
December 31,
-----------------------------------------------------------------------
1998 1999
---------- --------------------------------------------------------
GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) VALUE COST GAINS LOSSES VALUE
- ------------------------ ---------- ---------- ---------- ---------- ----------
U.S. Treasury........... $ 770,332 $ 450,238 $ 1,302 $ 912 $ 450,628
Other U.S. government... 868,827 974,211 294 13,621 960,884
Mortgage-backed securities 1,881,778 1,665,317 62 49,094 1,616,285
State and municipal..... 84,246 55,496 7,786 -- 63,282
Corporate debt securities 8,069 50,058 -- 26 50,032
Equity securities....... 18,401 50,888 1,403 -- 52,291
Foreign securities...... 6,879 16,597 104 4 16,697
---------- ---------- ------- ---------- ----------
Total securities available $3,638,532 $3,262,805 $10,951 $ 63,657 $3,210,099
for sale.......... ========== ========== ======= ========== ==========
December 31,
--------------------------------------------------------
2000
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. Treasury........... $ 433,703 $ 6,394 $ -- $ 440,097
Other U.S. government... 1,233,908 40,441 594 1,273,755
Mortgage-backed securities 2,138,101 19,447 6,516 2,151,032
State and municipal..... 52,881 8,908 -- 61,789
Corporate debt securities 99,003 10 290 98,723
Equity securities....... 95,685 268 306 95,647
Foreign securities...... 6,570 69 12 6,627
---------- ---------- ------- ----------
Total securities available $4,059,851 $ 75,537 $ 7,718 $4,127,670
for sale.......... ========== ========== ======= ==========
SECURITIES HELD TO MATURITY
December 31,
-----------------------------------------------------------------------
1998 1999
---------- --------------------------------------------------------
GROSS GROSS
AMORTIZED AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST COST GAINS LOSSES VALUE
- ------------------------ ---------- ---------- ---------- ---------- ----------
U.S. Treasury........... $ 41,097 $ -- $ -- $ -- $ --
Other U.S. government... 91,175 19,996 35 -- 20,031
Mortgage-backed securities 16,425 11,302 577 3 11,876
State and municipal..... 14,547 15,228 -- 1,759 13,469
---------- ---------- ------- ---------- ----------
Total securities HELD TO $ 163,244 $ 46,526 $ 612 $ 1,762 $ 45,376
maturity.......... ========== ========== ======= ========== ==========
December 31,
--------------------------------------------------------
2000
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. Treasury........... $ -- $ -- $ -- $ --
Other U.S. government... -- -- -- --
Mortgage-backed securities 8,521 437 1 8,957
State and municipal..... 15,008 -- 663 14,345
---------- ---------- ------- ----------
Total securities held to $ 23,529 $ 437 $ 664 $ 23,302
maturity.......... ========== ========== ======= ==========
Management of the securities portfolio involves the maximization of
return while maintaining prudent levels of quality and liquidity. At December
31, 2000, approximately 95 percent of total securities were investment grade.
ANALYSIS OF SECURITIES PORTFOLIO
The following tables show the remaining contractual maturities and
expected yields of the securities portfolio at December 31, 2000.
F-33
SECURITIES AVAILABLE FOR SALE
MATURITY
--------------------------------------------------------------------------------------------
ONE YEAR OVER ONE YEAR OVER FIVE YEARS
OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS OVER TEN YEARS
--------------- -------------------- ----------------- -------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4)
- ---------------------- ------ -------- ------ -------- ------ -------- ------ --------
U.S. Treasury............. $220,067 6.38% $ 213,636 6.64% $ -- --% $ -- --%
Other U.S. government..... 75,278 6.18 1,798,939 6.66 178,011 7.11 -- --
Mortgage-backed 14,781 6.51 115,414 6.35 142,444 6.66 1,047,142 6.50
securities(1)..........
State and municipal(2).... 3,185 11.08 12,185 9.76 12,569 10.84 24,942 11.07
Corporate debt securities. -- -- 11,418 10.44 7,629 10.81 79,956 11.09
Equity securities(3)...... -- -- -- -- -- -- -- --
Foreign securities........ 4,980 0.30 1,590 5.27 -- -- -- --
-------- ---------- -------- ----------
Total securities $318,291 6.29% $2,153,182 6.68% $340,653 7.14% $1,152,040 6.92%
available for sale.. ======== ========== ======== ==========
TOTAL
AMORTIZED COST
--------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4)
- -------------------------- ---------- --------
U.S. Treasury............. $ 433,703 6.51%
Other U.S. government..... 2,052,228 6.68
Mortgage-backed 1,319,781 6.50
securities(1)..........
State and municipal(2).... 52,881 10.71
Corporate debt securities. 99,003 10.99
Equity securities(3)...... 95,685 --
Foreign securities........ 6,570 1.50
----------
Total securities $4,059,851 6.76%
available for sale.. ==========
SECURITIES HELD TO MATURITY
MATURITY
--------------------------------------------------------------------------------------------
ONE YEAR OVER ONE YEAR OVER FIVE YEARS
OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS OVER TEN YEARS
--------------- -------------------- ----------------- -------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4)
- ---------------------- ------ -------- ------ -------- ------ -------- ------ --------
Mortgage-backed $ 185 9.37% $ 34 9.25% $ 8,299 9.01% $ 3 8.76%
securities(1)..........
State and municipal(2).... -- -- 1,490 6.26 2,499 5.83 11,019 5.79
-------- ---------- -------- ----------
Total securities $ 185 9.37% $ 1,524 6.33% $10,798 8.27% $ 11,022 5.79%
held to maturity.... ======== ========== ======== ==========
TOTAL
AMORTIZED COST
--------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4)
- -------------------------- ---------- --------
Mortgage-backed $ 8,521 9.02%
securities(1)..........
State and municipal(2).... 15,008 5.84
----------
Total securities $ 23,529 6.99%
held to maturity.... ==========
- -----------
(1) The remaining contractual maturities of mortgage-backed securities were
allocated assuming no prepayments. The contractual maturity of these
securities is not a reliable indicator of their expected life because
borrowers have the right to repay their obligations at any time.
(2) Yields on tax-exempt municipal securities are presented on a
taxable-equivalent basis using the current federal statutory rate of 35
percent.
(3) Equity securities do not have a stated maturity and are included in the
total column only.
(4) For the purposes of the analysis of the securities portfolio, yields are
based on amortized cost.
F-34
LOAN MATURITIES
The following table presents our loans by maturity.
December 31, 2000
---------------------------------------------------------------
OVER
ONE YEAR
ONE YEAR THROUGH OVER
(DOLLARS IN THOUSANDS) OR LESS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------- ---------- ----------- ---------- ------------
Domestic:
Commercial, financial and industrial...................... $4,737,687 $ 7,089,573 $1,921,578 $13,748,838
Construction.............................................. 620,991 307,031 11,280 939,302
Mortgage:
Residential............................................ 55,409 147,539 3,091,537 3,294,485
Commercial............................................. 760,538 1,653,887 933,827 3,348,252
---------- ----------- ---------- -----------
Total mortgage....................................... 815,947 1,801,426 4,025,364 6,642,737
Consumer:
Installment............................................ 382,944 466,937 805,795 1,655,676
Home equity............................................ 31,009 72,139 651,905 755,053
---------- ----------- ---------- -----------
Total consumer....................................... 413,953 539,076 1,457,700 2,410,729
Lease financing........................................... 408,469 722,217 3,754 1,134,440
---------- ----------- ---------- -----------
Total loans in domestic offices...................... 6,997,047 10,459,323 7,419,676 24,876,046
Loans originated in foreign branches......................... 1,049,006 29,116 56,230 1,134,352
---------- ----------- ---------- -----------
Total loans.......................................... $8,046,053 $10,488,439 $7,475,906 $26,010,398
========== =========== ========== ===========
613,902
Allowance for credit losses....................... -----------
Loans, net........................................... $25,396,496
===========
$6,467,164
Total fixed rate loans due after one year....................
Total variable rate loans due after one year................. 11,497,181
----------
Total loans due after one year....................... $17,964,345
===========
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
The following table presents domestic certificates of deposit of
$100,000 and over by maturity.
(DOLLARS IN THOUSANDS) 2000
- ----------------------------------------------------------- ------------
Three months or less....................................... $3,148,198
Over three months through six months....................... 852,050
Over six months through twelve months...................... 444,143
Over twelve months......................................... 120,464
----------
Total domestic certificates of deposit
of $100,000 and over....................................... $4,564,855
==========
We offer certificates of deposit of $100,000 and over at market rates
of interest. Many of these certificates are issued to customers, both public and
private, who have done business with us for an extended period. Based on our
historical experience, we expect that as these deposits come due, the majority
will continue to be renewed at market rates of interest.
Substantially all of our deposits in foreign branches are certificates
of deposit of $100,000 and over and mature in less than one year.
F-35
BORROWED FUNDS
The following table presents information on our borrowed funds.
DECEMBER 31,
------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- ----------------------------------------------------------------- ---------- ---------- ----------
Federal funds purchased and securities sold under repurchase
agreements with weighted average interest rates of 4.88%,
5.09% and 6.52% at December 31, 1998, 1999 and 2000,
respectively................................................... $1,307,744 $1,156,799 $1,387,667
Commercial paper, with weighted average interest rates of
5.01%, 5.45% and 6.49% at December 31, 1998, 1999 and
2000, respectively............................................. 1,444,745 1,108,258 1,385,771
Other borrowed funds, with weighted average interest rates of
5.35%, 5.91% and 5.64% at December 31, 1998, 1999 and
2000, respectively............................................. 331,165 540,496 249,469
Total borrowed funds.......................................... $3,083,654 $2,805,553 $3,022,907
Federal funds purchased and securities sold under repurchase
agreements:
Maximum outstanding at any month end.......................... $2,058,610 $1,786,594 $2,095,868
Average balance during the year............................... 1,604,675 1,489,214 1,548,730
Weighted average interest rate during the year................ 5.26% 4.84% 6.24%
Commercial paper:
Maximum outstanding at any month end.......................... $1,918,700 $1,737,265 $1,525,932
Average balance during the year............................... 1,631,216 1,529,814 1,521,614
Weighted average interest rate during the year................ 5.42% 5.04% 6.24%
Other borrowed funds:
Maximum outstanding at any month end.......................... $ 438,151 $ 993,550 $ 507,782
Average balance during the year............................... 328,872 708,625 314,425
Weighted average interest rate during the year................ 5.68% 5.28% 5.31%
CAPITAL ADEQUACY AND DIVIDENDS
Our principal capital objectives are to support future growth, to
protect depositors, to absorb any unanticipated losses and to comply with
various regulatory requirements. From December 1999 to July 2000, we repurchased
$100 million in common stock under a stock repurchase plan authorized in
November 1999. In July 2000, we announced an additional $100 million stock
repurchase authorization.
Total shareholders' equity was $3.2 billion at December 31, 2000, an
increase of $224 million from year-end 1999. This change was primarily a result
of $440 million of net income for 2000, offset by dividends on common stock of
$161 million, repurchases of our common stock of $131 million, and net
unrealized gain on securities available for sale of $74 million.
We offer a dividend reinvestment plan that allows shareholders to
reinvest dividends in our common stock at 5 percent below the market price.
During 1999 and 2000, The Bank of Tokyo- Mitsubishi, Ltd. did not participate in
the plan.
Capital adequacy depends on a variety of factors including asset
quality and risk profile, liquidity, earnings stability, competitive and
economic conditions, and management. We believe that the current level of
profitability, coupled with a prudent dividend policy, is adequate to support
normal growth in operations while meeting regulatory capital guidelines.
F-36
The following table summarizes our risk-based capital, risk-weighted
assets, and risk-based capital ratios.
DECEMBER 31, MINIMUM
--------------------------------------------------------------------------- REGULATORY
(DOLLARS IN THOUSANDS) 1996 1997 1998 1999 2000 REQUIREMENT
- ---------------------- ----------- ----------- ----------- ----------- ----------- -----------
CAPITAL COMPONENTS
Tier 1 capital.......... $ 2,395,580 $ 2,587,071 $ 2,965,865 $ 3,308,912 $ 3,471,289
Tier 2 capital.......... 551,074 601,102 604,938 616,772 620,102
----------- ----------- ----------- ----------- -----------
Total risk-based capital $ 2,946,654 $ 3,188,173 $ 3,570,803 $ 3,925,684 $ 4,091,391
=========== =========== =========== =========== ===========
$26,390,288 $28,862,340 $30,753,030 $33,288,167 $33,900,404
Risk-weighted assets.... =========== =========== =========== =========== ===========
$28,496,355 $30,334,507 $31,627,022 $32,765,347 $34,075,813
Quarterly average assets =========== =========== =========== =========== ===========
CAPITAL RATIOS
Total risk-based capital 11.17% 11.05% 11.61% 11.79% 12.07% 8.0%
Tier 1 risk-based capital 9.08 8.96 9.64 9.94 10.24 4.0
Leverage ratio(1)....... 8.41 8.53 9.38 10.10 10.19 4.0
- -----------
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
We and Union Bank of California, N.A. are subject to various regula-
tions of the 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, 1999, our Tier 1 risk-based capital ratio at
December 31, 2000 increased 30 basis points to 10.24 percent, our total
risk-based capital ratio increased 28 basis points to 12.07 percent, and our
leverage ratio increased 9 basis points to 10.19 percent. The increase in our
capital ratios was primarily attributable to retained earnings growing faster
than both risk-weighted assets and average assets.
As of December 31, 2000, management believes the capital ratios of
Union Bank of California, N.A. met all regulatory requirements of a
"well-capitalized" institution.
COMPARISON OF FINANCIAL RESULTS OF 1998 TO 1999
Reported net income was $466.5 million, or $2.65 per diluted common
share in 1998, compared with $441.7 million, or $2.64 per diluted common share
in 1999. Excluding the effects of the $85 million restructuring charge ($55.2
million net of tax), which was recorded in the third quarter of 1999, and the
effects of the $29.3 million in reduced California Franchise Tax liabilities
(related to tax year 1997), recorded in 1998, pro forma net earnings were $437.2
million, or $2.49 per diluted common share in 1998, compared to $496.9 million,
or 2.97 per diluted common share in 1999. This increase in pro forma diluted
earnings per share of 19 percent in 1999 was due to a $96.4 million, or 7
percent, increase in net interest income, and a $53.2 million, or 10 percent,
increase in noninterest income, offset by an increase of $20.0 million, or 44
percent in the provision for credit losses, and a $61.8 million, or 5 percent,
increase in noninterest expense. Other highlights in 1999 include:
o Net interest income, on a taxable-equivalent basis, was
$1.4 billion in 1999, an increase of $96.4 million, or 7
percent from 1998. Net interest margin for 1999 was 4.89
percent, or 8 basis points higher than 1998.
o The provision for credit losses was $65.0 million in 1999,
compared with $45.0 million in 1998.
o Noninterest income was $586.8 million in 1999, an increase of
$53.2 million, or 10 percent from 1998. Excluding a $17.1
million pre-tax gain ($10.3 million after tax) from the sale
of our
F-37
$253 million credit card portfolio in April 1998, noninterest
income increased $70.3 million, or 14 percent in 1999.
o Noninterest expense, excluding the restructuring charge, was
$1.2 billion in 1999, an increase of $61.8 million, or
5 percent over 1998.
o Our pro forma effective tax rate in 1998 was 35 percent
(excluding the effects of the California Franchise Tax
liability reduction detailed on F-3), compared with 33 percent
in 1999.
o Reported return on average assets in 1999 was 1.37 percent,
while reported return on average common equity for the same
period was 15.03 percent. Our pro forma return on average
assets in 1999 increased to 1.55 percent, compared to 1.43
percent in 1998. Our pro forma return on average common equity
in 1999 increased to 16.83 percent, compared to 15.36 percent
in 1998.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk is the risk of loss to future earnings, to fair values, or
to future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices, and other market changes that affect market risk sensitive
instruments. Market risk is attributed to all market risk sensitive financial
instruments, including securities, loans, deposits, and borrowings, as well as
derivative instruments. Our exposure to market risk is a function of our asset
and liability management activities, our trading activities for our own account,
and our role as a financial intermediary in customer-related transactions. The
objective of market risk management is to avoid excessive exposure of our
earnings and equity to loss and to reduce the volatility inherent in certain
financial instruments.
The management of market risk is governed by policies reviewed and
approved annually by our Board of Directors (Board). The Board assigns
responsibility for market risk management to the Asset & Liability Management
Committee (ALCO), which is composed of bank senior executives and reports
quarterly to the Finance and Capital Committee of the Board on activities
related to the management of market risk. As part of the management of our
market risk, ALCO may direct changes in the mix of assets and liabilities and
the use of derivative instruments such as interest rate swaps, caps and floors.
ALCO also reviews and approves market risk-management programs and market risk
limits. The ALCO Chairman is responsible for the company-wide management of
market risk. The Treasurer is responsible for implementing funding, investment,
and hedging strategies designed to manage this risk. On a day-to-day basis, the
oversight of market risk management takes place at a centralized level within
the Risk Monitoring Unit (RMU). The RMU is responsible for measuring risks to
ensure compliance with all market risk limits and guidelines incorporated within
the policies and procedures established by ALCO. The RMU reports quarterly to
ALCO on the effectiveness of our hedging activities, on trading risk exposures,
and on compliance with policy limits. In addition, periodic reviews by internal
audit, regulators and independent accountants provide further evaluation of
controls over the risk management process.
We have separate and distinct methods for managing the market risk
associated with our trading activities and our asset and liability management
activities, as described below.
INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING)
We engage in asset and liability management activities with the
objective of reducing adverse changes in earnings as a result of changes in
interest rates. The management of interest rate risk relates to the timing and
magnitude of the repricing of assets compared to liabilities and has, as its
objective, the control of risks associated with movements in interest rates.
F-38
The Asset & Liability Management (ALM) Policy approved by the Board
requires monthly monitoring of interest rate risk by ALCO. As part of the
management of our interest rate risk, ALCO may direct changes in the composition
of the balance sheet and the extent to which we utilize off-balance sheet
derivative instruments such as interest rate swaps, floors, and caps.
Our unhedged balance sheet is inherently "asset-sensitive", which means
that assets generally reprice more often than liabilities. Since an
asset-sensitive balance sheet tends to reduce net interest income when interest
rates decline and to increase net interest income when interest rates rise,
off-balance sheet hedges and the securities portfolio are used to manage this
interest rate risk.
To quantify the impact of changing interest rates on net interest
income (NII) we use a simulation model. A frequency distribution of simulated
12-month NII outcomes based on rate scenarios produced through a Monte Carlo
rate generation process is prepared monthly to statistically determine the mean
NII. The amount of Earnings at Risk (EaR), defined as the potential negative
change in NII, is measured at a 97.5 percent confidence level and is managed
within the limit established in the Board's ALM Policy at 5 percent of mean NII.
The following table summarizes our EaR and EaR as a percentage of NII.
DECEMBER 31,
-----------------
(DOLLARS IN MILLIONS) 1999 2000
--------------------- ---- ----
EaR...................................... $53.9 $30.9
EaR as a percentage of mean NII.......... 3.69% 2.02%
During the latter part of 2000, our EaR decreased significantly from
the previous year as we reduced our asset sensitivity to protect interest income
from the likelihood of falling rates in the year ahead. With an asset-sensitive
balance sheet, EaR measures the potential risk to earnings during a falling rate
environment.
An additional limit established by the Board's ALM Policy is that under
single interest rate shock scenarios, up or down 200 basis points, the
difference between the lower simulated NII and the mean NII must be no more than
8 percent of the mean NII. The following table sets forth the change in
simulated NII for both an upward and downward shock scenario of 200 basis
points.
DECEMBER 31,
-------------------
(DOLLARS IN MILLIONS) 1999 2000
--------------------- ---- ----
+200 basis points.................... $ 48.6 $ 49.6
as a percentage of mean NII.......... 3.33% 3.25%
-200 basis points.................... $(81.2) $(50.3)
as a percentage of mean NII.......... 5.57% 3.30%
During 2000, simulated mean NII increased modestly from the previous
year, roughly in line with the $1.4 billion increase in average earning assets.
TRADING ACTIVITIES
We enter into trading account activities primarily as a financial
intermediary for customers, and, to a lesser extent, for our own account. By
acting as a financial intermediary, we are able to provide our customers with
access to a wide range of products from the securities, foreign exchange, and
derivatives markets. In acting for our own account, we may take positions in
some of these instruments with the objective of generating trading profits.
These activities expose us to two primary types of market risk: interest rate
and foreign currency exchange risk.
In order to manage interest rate and foreign currency exchange risk
associated with our trading activities, we utilize a variety of non-statistical
methods including: position limits for each trading activity, daily marking of
all positions to market, daily profit and loss statements, position reports, and
independent
F-39
verification of all inventory pricing. Additionally, the RMU reports positions
and profits and losses daily to the Treasurer and trading managers and weekly to
the ALCO Chairman. ALCO is provided reports on a monthly basis. We believe that
these procedures, which stress timely communication between the RMU and senior
management, are the most important elements of the risk management process.
We use a form of Value at Risk (VaR) methodology to measure the overall
market risk inherent in our trading account activities. Under this methodology,
management statistically calculates, with 97.5 percent confidence, the potential
loss in fair value that we might experience if an adverse shift in market prices
were to occur within a period of 5 business days. The amount of VaR is managed
within limits well below the maximum limit established by Board policy at 0.5
percent of shareholders' equity. The VaR model incorporates a number of key
assumptions, including assumed holding period and historical volatility based on
3 years of historical market data updated quarterly. The following table sets
forth the average, high and low VaR during the year for our trading activities.
DECEMBER 31,
----------------------------------------------------
1999 2000
------------------------ -----------------------
AVERAGE HIGH LOW AVERAGE HIGH LOW
(DOLLARS IN THOUSANDS) VAR VAR VAR VAR VAR VAR
- ---------------------- ------- ---- --- ------- ---- ---
Foreign exchange............ $260 $730 $78 $355 $850 $109
Securities.................. 249 741 62 156 280 63
The VaRs for foreign exchange trading increased during 2000 due to
higher volumes of foreign exchange activities as well as higher approved trading
limits. While the VaRs are significantly greater than the previous year, they
are well within the limits established by our trading policy. The VaRs for
securities trading declined significantly during 2000, reflecting the full
effect of the decision made in 1999 to exit the municipal underwriting and
certain other capital markets businesses, combined with generally lower balances
in trading inventories during much of 2000.
Our interest rate derivative contracts include $4.6 billion of
derivative contracts entered into as an accommodation for customers. We act as
an intermediary and match these contracts at a profit with contracts with The
Bank of Tokyo-Mitsubishi, Ltd. or other dealers, thus neutralizing the related
market risk. We maintain responsibility for the credit risk associated with
these contracts.
LIQUIDITY RISK
Liquidity risk represents the potential for loss as a result of
limitations on our ability to adjust our future cash flows to meet the needs of
depositors and borrowers and to fund operations on a timely and cost-effective
basis. The ALM Policy approved by the Board requires quarterly reviews of our
liquidity by ALCO. Our liquidity management draws upon the strengths of our
extensive retail and commercial market business franchise, coupled with the
ability to obtain funds for various terms in a variety of domestic and
international money markets. Liquidity is managed through the funding and
investment functions of the Global Markets Group.
Core deposits provide us with a sizable source of relatively stable and
low-cost funds. Our average core deposits, which include demand deposits, money
market demand accounts, and savings and consumer time deposits, combined with
average common shareholders' equity, funded 66 percent of average total assets
of $33.7 billion for the year ended December 31, 2000. Most of the remaining
funding was provided by short-term borrowings in the form of negotiable
certificates of deposit, foreign deposits, federal funds purchased and
securities sold under repurchase agreements, commercial paper and other
borrowings.
Liquidity may also be provided by the sale or maturity of assets. Such
assets include interest bearing deposits in banks, federal funds sold and
securities purchased under resale agreements, and trading account securities.
The aggregate of these assets averaged $0.6 billion during 2000. Additional
liquidity may be provided by investment securities available for sale that
amounted to $4.1 billion at December 31,
F-40
2000, and by loan maturities. At December 31, 2000, $8.0 billion of loans were
scheduled to mature within one year.
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. In the early 1990's, the California economy
experienced an economic recession that resulted in increases in the level of
delinquencies and losses for us and many of the state's other financial
institutions. If California were to experience another recession, we expect that
our level of problem assets would increase accordingly.
ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD ADVERSELY AFFECT
OUR BUSINESS
We are also subject to certain industry-specific economic factors. For
example, a portion of our total loan portfolio is related to real estate
obligations, and a portion of our recent growth has been fueled by the general
real estate recovery in California. Accordingly, a downturn in the real estate
industry in California could have an adverse effect on our operations.
Similarly, a portion of our total loan portfolio is to borrowers in the
agricultural industry. Adverse weather conditions, combined with low commodity
prices, may adversely affect the agricultural industry and, consequently, may
impact our business negatively. In addition, auto leases comprise a portion of
our total loan portfolio. Continued deterioration in the used car market may
result in additional losses on the valuation of auto lease residuals beyond
those reported for 2000. Further, portions of our total loan portfolio are to
borrowers in the industries referred to in "Allowance for Credit Losses", above,
which could be adversely affected by the factors referred to in that section.
RISKS ASSOCIATED WITH THE CALIFORNIA ENERGY CRISIS
Due to problems associated with the deregulation of the electrical
power industry in California, two California utilities have publicly announced
that their financial situation is grave and that bankruptcy proceedings are a
possibility unless remedial measures are adopted by the California legislature.
The utilities have also announced that they have already defaulted on certain
payment obligations. As a lender to the utility industry we face the risk that
the industry will sustain increased defaults on payments or bankruptcy filings.
In addition, customers of the utilities have been faced with increased
gas and electric prices, power shortages and, in some cases, rolling blackouts.
The long-term impact of the energy crisis in California on our markets and our
business cannot be predicted but could result in an economic slow-down. This
could have an adverse effect on the demand for new loans, the ability of
borrowers to repay outstanding loans, the value of real estate and other
collateral securing loans and, as a result, on our financial condition, results
of operations and the market value of our common stock.
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 rate 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.
F-41
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
an increase in our interest expense relative to interest income.
SHAREHOLDER VOTES ARE CONTROLLED BY 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.
owns a majority 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 matters that might be favorable to The Bank of Tokyo-
Mitsubishi, Ltd. The Bank of Tokyo-Mitsubishi, Ltd.'s ability to prevent an
unsolicited bid for us or any other change in control could have an adverse
effect on the market price for our common stock.
THE BANK OF TOKYO-MITSUBISHI, LTD.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT
OUR OPERATIONS
Although we fund our operations independently of The Bank of
Tokyo-Mitsubishi, Ltd. and believe our business is not necessarily closely
related to The Bank of Tokyo-Mitsubishi, Ltd.'s business or outlook, The Bank of
Tokyo-Mitsubishi, Ltd.'s credit ratings may affect our credit ratings.
Deterioration in The Bank of Tokyo-Mitsubishi, Ltd.'s credit ratings or
financial condition could result in an increase in our borrowing costs and could
impair our access to the public and private capital markets. The Bank of
Tokyo-Mitsubishi, Ltd. is also subject to regulatory oversight and review. Our
business operations and expansion plans could be negatively affected by
regulatory concerns related to the Japanese financial system and The Bank of
Tokyo-Mitsubishi, Ltd.
POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD
ADVERSELY AFFECT US
As part of The Bank of Tokyo-Mitsubishi, Ltd.'s normal risk management
processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit exposures
and concentrations on an aggregate basis, including us. Therefore, at certain
levels, our ability to approve certain credits and categories of customers is
subject to concurrence by The Bank of Tokyo-Mitsubishi, Ltd. We may wish to
extend credit to the same customer as The Bank of Tokyo-Mitsubishi, Ltd. Our
ability to do so may be limited for various reasons, including The Bank of
Tokyo-Mitsubishi, Ltd's aggregate credit exposure and marketing policies.
Certain directors' and officers' ownership interests in The Bank of Tokyo-
Mitsubishi, Ltd.'s common stock or service as a director or officer or other
employee of both us and The Bank of Tokyo-Mitsubishi, Ltd. could create or
appear to create potential conflicts of interest, especially since both of us
compete in the United States banking industry.
F-42
SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY AFFECT
US
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, as well as
nationally and internationally. Our competitors include a large number of state
and national banks, thrift institutions and major foreign-affiliated or foreign
banks, as well as many financial and non-financial firms that offer services
similar to those offered by us. Some of our competitors are community banks that
have strong local market positions. Other competitors include large financial
institutions (such as Bank of America, California Federal, Washington Mutual,
and Wells Fargo) that have substantial capital, technology and marketing
resources. Such large financial institutions may have greater access to capital
at a lower cost than us, which may adversely affect our ability to compete
effectively.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS PAYABLE
TO US
A substantial portion of our cash flow typically comes from dividends
our bank and nonbank subsidiaries pay to us. Various statutory provisions
restrict the amount of dividends our subsidiaries can pay to us without
regulatory approval. In addition, if any of our subsidiaries liquidates, that
subsidiary's creditors will be entitled to receive distributions from the assets
of that subsidiary to satisfy their claims against it before we, as a holder of
an equity interest in the subsidiary, will be entitled to receive any of the
assets of the subsidiary.
ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS COULD
ADVERSELY AFFECT US
We are subject to significant federal and state regulation and
supervision, which is primarily for the benefit and protection of our customers
and not for the benefit of investors. In the past, our business has been
materially affected by these regulations. This trend is likely to continue in
the future. Laws, regulations or policies currently affecting us and our
subsidiaries may change at any time. Regulatory authorities may also change
their interpretation of these statutes and regulations. Therefore, our business
may be adversely affected by any future changes in laws, regulations, policies
or interpretations. Additionally, our international activities may be subject to
the laws and regulations of the jurisdiction where business is being conducted.
International laws, regulations and policies affecting us and our subsidiaries
may change at any time and affect our business opportunities and competitiveness
in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi, Ltd.'s controlling
ownership of us, laws, regulations and policies adopted or enforced by the
Government of Japan may adversely affect our activities and investments and
those of our subsidiaries in the future. Under long- standing policy of the
Board of Governors of the Federal Reserve System, a bank holding company is
expected to act as a source of financial strength for its subsidiary banks. As a
result of that policy, we may be required to commit financial and other
resources to our subsidiary bank in circumstances where we might not otherwise
do so.
POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD
ADVERSELY AFFECT THE MARKET FOR OUR STOCK
Although The Bank of Tokyo-Mitsubishi, Ltd. has announced its intention
to maintain its majority ownership in us, The Bank of Tokyo-Mitsubishi, Ltd. may
sell shares of our common stock in compliance with the federal securities laws.
By virtue of The Bank of Tokyo-Mitsubishi, Ltd.'s current control of us, The
Bank of Tokyo-Mitsubishi, Ltd. could sell large amounts of shares of our common
stock by causing us to file a registration statement that would allow them to
sell shares more easily. In addition, The Bank of Tokyo-Mitsubishi, Ltd. could
sell shares of our common stock without registration pursuant to Rule 144 under
the Securities Act. Although we can make no prediction as to the effect, if any,
that such sales would have on the market price of our common stock, sales of
substantial amounts of our common stock, or the perception that such sales could
occur, could adversely affect our market price. 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.
F-43
STRATEGIES
In connection with our strategic plan established in 2000, we have
developed long-term financial performance goals (described on page F-12), which
we expect to result from successful implementation of our operating strategies.
We cannot assure you that we will be successful in achieving these long-term
goals or that our operating strategies will be successful. Achieving success in
these areas is dependent on a number of factors, many of which are beyond our
direct control. Factors that may adversely affect our ability to attain our
long-term financial performance goals include:
o deterioration of our asset quality,
o our inability to control noninterest expenses,
o our inability to increase noninterest income,
o our inability to decrease reliance on asset revenues,
o our ability to sustain loan growth,
o regulatory and other impediments associated with making
acquisitions,
o deterioration in general economic conditions, especially
in our core markets,
o decreases in net interest margins,
o increases in competition,
o adverse regulatory or legislative developments, and
o unexpected increases in costs related to potential
acquisitions.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR RESTRUCTURING
We may acquire or invest in companies, technologies, services or
products that complement our business. In addition, we continue to evaluate
performance of all of our businesses and business lines and may sell a business
or business lines. Any acquisitions, divestitures or restructuring may result in
potentially dilutive issuance of equity securities, significant write-offs, the
amortization of expenses 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 the assimilation or separation of operations, services, products
and personnel, the diversion of management's attention from other business
concerns, the disruption of our business, and the potential loss of key
employees. There can be no assurance that we would be successful in overcoming
these or any other significant risks encountered.
WE MIGHT BE UNABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD SLOW
THE DEVELOPMENT OF OUR BUSINESS.
Our performance is substantially dependent on the performance of our
key managerial, marketing and technical personnel. We are dependent both on our
ability to retain and motivate our key personnel and to attract new personnel.
However, the labor markets in California are tight and we cannot be sure that we
will be able to attract, motivate and retain such personnel. Competition for
qualified personnel in California is intense both within our industry and other
industry sectors, including high technology. Competitors and others, including
high technology companies, have in the past and may in the future attempt to
recruit our employees. Inability to attract, retain and motivate the personnel
necessary to support the growth of our business could have a material adverse
effect upon our business, results of operations, and financial condition.
F-44
UNIONBANCAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Statements of Income for the Years Ended December 31, 1998, 1999, and 2000................ F-46
Consolidated Balance Sheets as of December 31, 1999 and 2000........................................... F-47
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31,
1998, 1999, and 2000................................................................................. F-48
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999, and 2000............ F-49
Notes to Consolidated Financial Statements............................................................. F-50
Management Statement................................................................................... F-91
Independent Auditors' Report........................................................................... F-92
F-45
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1999 2000
- --------------------------------------------------------------------------------- ---------- ---------- ----------
INTEREST INCOME
Loans............................................................................ $1,826,096 $1,931,146 $2,242,182
Securities....................................................................... 200,337 211,192 226,194
Interest bearing deposits in banks............................................... 17,080 12,174 9,126
Federal funds sold and securities purchased under resale agreements.............. 16,056 8,108 8,160
Trading account assets........................................................... 25,610 12,150 15,418
---------- ---------- ----------
Total interest income......................................................... 2,085,179 2,174,770 2,501,080
---------- ---------- ----------
INTEREST EXPENSE
Domestic deposits................................................................ 468,907 456,895 557,408
Foreign deposits................................................................. 86,221 73,829 107,183
Federal funds purchased and securities sold under repurchase agreements.......... 84,440 72,083 96,606
Commercial paper................................................................. 88,358 77,041 94,905
Subordinated capital notes....................................................... 20,347 17,100 17,617
UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of
subsidiary grantor trust...................................................... -- 24,569 26,212
Other borrowed funds............................................................. 18,683 37,420 16,709
---------- ---------- ----------
Total interest expense........................................................ 766,956 758,937 916,640
---------- ---------- ----------
NET INTEREST INCOME.............................................................. 1,318,223 1,415,833 1,584,440
Provision for credit losses...................................................... 45,000 65,000 440,000
---------- ---------- ----------
Net interest income after provision for credit losses......................... 1,273,223 1,350,833 1,144,440
---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts.............................................. 138,847 172,700 210,257
Trust and investment management fees............................................. 121,226 140,878 154,387
Merchant transaction processing fees............................................. 56,929 68,037 73,521
International commissions and fees............................................... 72,036 70,801 71,189
Merchant banking fees............................................................ 31,402 38,036 48,985
Brokerage commissions and fees................................................... 19,085 27,038 35,755
Securities gains, net............................................................ 5,686 7,941 8,784
Other............................................................................ 88,320 61,328 44,302
---------- ---------- ----------
Total noninterest income...................................................... 533,531 586,759 647,180
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits................................................... 617,564 661,344 600,462
Net occupancy.................................................................... 90,917 90,162 92,567
Equipment........................................................................ 56,252 67,095 63,290
Merchant transaction processing.................................................. 43,926 49,435 49,609
Communications................................................................... 41,710 43,179 43,744
Professional services............................................................ 36,748 38,399 42,042
Data processing.................................................................. 28,091 31,811 34,803
Foreclosed asset income.......................................................... (2,821) (1,344) (80)
Restructuring charge (credit).................................................... -- 85,000 (19,000)
Other............................................................................ 222,831 216,892 222,748
---------- ---------- ----------
Total noninterest expense..................................................... 1,135,218 1,281,973 1,130,185
---------- ---------- ----------
Income before income taxes....................................................... 671,536 655,619 661,435
Income tax expense............................................................... 205,075 213,888 221,535
---------- ---------- ----------
NET INCOME....................................................................... $ 466,461 $ 441,731 $ 439,900
========== ========== ==========
NET INCOME PER COMMON SHARE--BASIC................................................ $ 2.66 $ 2.65 $ 2.72
========== ========== ==========
NET INCOME PER COMMON SHARE--DILUTED.............................................. $ 2.65 $ 2.64 $ 2.72
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC................................. 175,127 166,382 161,605
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED............................... 175,737 167,149 161,989
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-46
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
(DOLLARS IN THOUSANDS) 1999 2000
- ----------------------------------------------------------------------------------------------- ----------- -----------
ASSETS
Cash and due from banks........................................................................ $ 2,141,964 $ 2,957,103
Interest bearing deposits in banks............................................................. 182,719 73,936
Federal funds sold and securities purchased under resale agreements............................ 833,450 291,940
----------- -----------
Total cash and cash equivalents.......................................................... 3,158,133 3,322,979
Trading account assets......................................................................... 179,935 339,695
Securities available for sale:
Securities pledged as collateral............................................................ -- 593,686
Held in portfolio........................................................................... 3,210,099 3,533,984
Securities held to maturity (fair value: 1999, $45,376; 2000, $23,302)......................... 46,526 23,529
Loans (net of allowance for credit losses: 1999, $470,378; 2000, $613,902)..................... 25,442,580 25,396,496
Due from customers on acceptances.............................................................. 259,340 268,116
Premises and equipment, net.................................................................... 425,021 474,279
Other assets................................................................................... 963,142 1,209,711
----------- -----------
Total assets............................................................................. $33,684,776 $35,162,475
=========== ===========
LIABILITIES
Domestic deposits:
Noninterest bearing......................................................................... $ 9,395,925 $10,916,710
Interest bearing............................................................................ 14,274,310 13,986,774
Foreign deposits:
Noninterest bearing......................................................................... 325,415 323,783
Interest bearing............................................................................ 2,260,957 2,055,916
----------- -----------
Total deposits........................................................................... 26,256,607 27,283,183
Federal funds purchased and securities sold under repurchase agreements........................ 1,156,799 1,387,667
Commercial paper............................................................................... 1,108,258 1,385,771
Other borrowed funds........................................................................... 540,496 249,469
Acceptances outstanding........................................................................ 259,340 268,116
Other liabilities.............................................................................. 727,808 826,704
Subordinated capital notes..................................................................... 298,000 200,000
UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary
grantor trust............................................................................... 350,000 350,000
----------- -----------
Total liabilities........................................................................ 30,697,308 31,950,910
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares, no shares issued or outstanding at December 31, 1999 or 2000... -- --
Common stock--no stated value:
Authorized 300,000,000 shares, issued 164,282,622 shares in 1999 and 159,234,454 shares in
2000..................................................................................... 1,404,155 1,275,587
Retained earnings.............................................................................. 1,625,263 1,906,093
Accumulated other comprehensive income (loss).................................................. (41,950) 29,885
----------- -----------
Total shareholders' equity............................................................... 2,987,468 3,211,565
----------- -----------
Total liabilities and shareholders' equity............................................... $33,684,776 $35,162,475
=========== ===========
See accompanying notes to consolidated financial statements.
F-47
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1998 1999 2000
----------------------- ----------------------- ------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
- ------------------------------------------
COMMON STOCK
Balance, beginning of year................ $1,714,209 $1,725,619 $1,404,155
Dividend reinvestment plan................ 28 50 52
Deferred compensation--restricted stock
awards................................. 5,744 (221) 238
Stock options exercised................... 5,638 7,369 1,784
Common stock repurchased.................. -- (328,662) (130,642)
---------- ---------- ----------
Balance, end of year................... $1,725,619 $1,404,155 $1,275,587
---------- ---------- ----------
RETAINED EARNINGS
Balance, beginning of year................ $ 957,662 $1,314,915 $1,625,263
Net income................................ 466,461 $466,461 441,731 $441,731 439,900 $439,900
Dividends on common stock(1).............. (106,932) (134,992) (161,227)
Deferred compensation--restricted stock
awards................................. (2,276) 3,609 2,157
---------- ---------- ----------
Balance, end of year................... $1,314,915 $1,625,263 $1,906,093
---------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Balance, beginning of year................ $ 7,428 $ 17,710 $ (41,950)
Unrealized holding gains (losses) arising
during the year on securities available
for sale, net of tax expense (benefit)
of $6,672 in 1998, $(35,155) in 1999,
and $49,462 in 2000.................... 12,734 (56,753) 79,851
Less: reclassification adjustment for
gains on securities available for
sale included in net-income, net of
tax expense of $2,175 in 1998,
$3,307 in 1999, and $3,360 in 2000.. (3,511) (4,904) (5,424)
-------- -------- --------
Net unrealized gains (losses) on
securities available for sale.......... 9,223 (61,657) 74,427
Foreign currency translation adjustment,
net of tax expense (benefit) of
$1,739 in 1998, $581 in 1999, and
$(1,535) in 2000....................... 2,807 938 (2,478)
Minimum pension liability adjustment, net
of tax expense (benefit) of $(1,083)
in 1998, $427 in 1999, and $(71) in
2000................................... (1,748) 1,059 (114)
-------- -------- --------
Other comprehensive income (loss)......... 10,282 10,282 (59,660) (59,660) 71,835 71,835
---------- -------- ---------- -------- ---------- --------
Total comprehensive income................ $476,743 $382,071 $511,735
======== ======== ========
Balance, end of year................... $ 17,710 $ (41,950) $ 29,885
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......... $3,058,244 $2,987,468 $3,211,565
========== ========== ==========
- -----------
(1) Dividends per share were $0.61 in 1998, $0.82 in 1999, and $1.00 in 2000.
See accompanying notes to consolidated financial statements.
F-48
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- ------------------------------------------------------------------------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 466,461 $ 441,731 $ 439,900
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses........................................ 45,000 65,000 440,000
Depreciation, amortization and accretion........................... 67,640 79,795 72,710
Provision (benefit) for deferred income taxes...................... 28,097 (10,529) 13,709
Gain on sales of securities available for sale, net................ (5,686) (7,941) (8,784)
Utilization (in excess of) less than restructuring charge/credit... -- 69,359 (53,286)
Net (increase) decrease in trading account assets.................. 126,595 87,783 (159,760)
Other, net......................................................... (129,646) (292,064) (144,373)
----------- ----------- -----------
Total adjustments................................................ 132,000 (8,597) 160,216
----------- ----------- -----------
Net cash provided by operating activities............................. 598,461 433,134 600,116
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale.................. 418,477 209,920 422,881
Proceeds from matured and called securities available for sale........ 259,465 827,595 847,158
Purchases of securities available for sale............................ (1,528,281) (697,023) (2,056,594)
Proceeds from matured and called securities held to maturity.......... 28,540 114,168 23,003
Purchases of premises and equipment................................... (82,880) (72,020) (163,716)
Net increase in loans................................................. (1,625,149) (1,711,391) (391,672)
Other, net............................................................ 12,466 (1,893) 5,433
----------- ----------- -----------
Net cash used by investing activities................................. (2,517,362) (1,330,644) (1,313,507)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............................................. 1,211,505 1,748,728 1,026,576
Net increase (decrease) in federal funds purchased and securities sold
under repurchase agreements........................................ (28,140) (150,945) 230,868
Net increase (decrease) in commercial paper and other borrowed funds.. 333,325 (127,156) 34,441
Common stock repurchased.............................................. -- (328,662) (130,642)
Maturity and redemption of subordinated debt.......................... (50,000) -- (98,000)
Proceeds from issuance of trust preferred securities.................. -- 350,000 --
Payments of cash dividends............................................ (98,160) (127,119) (162,575)
Other, net............................................................ 8,473 (3,677) (642)
----------- ----------- -----------
Net cash provided by financing activities............................. 1,377,003 1,361,169 900,026
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..................... (541,898) 463,659 186,635
Cash and cash equivalents at beginning of year........................... 3,199,455 2,678,478 3,158,133
Effect of exchange rate changes on cash and cash equivalents............. 20,921 15,996 (21,789)
----------- ----------- -----------
Cash and cash equivalents at end of year................................. $ 2,678,478 $ 3,158,133 $ 3,322,979
=========== =========== ===========
CASH PAID DURING THE YEAR FOR:
Interest.............................................................. $ 784,023 $ 702,880 $ 883,706
Income taxes.......................................................... 234,895 145,279 260,117
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans transferred to foreclosed assets (OREO) and/or distressed loans
held for sale...................................................... $ 17,260 $ 6,979 $ 9,924
Dividends declared but unpaid......................................... 33,300 41,172 39,824
Debt assumed in purchase of building.................................. -- -- 47,955
See accompanying notes to consolidated financial statements.
F-49
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
INTRODUCTION
UnionBanCal Corporation is a commercial bank holding company (the
Company) and has, as its major subsidiary, a banking subsidiary, Union Bank of
California, N.A. (the Bank). The Company provides a wide range of financial
services to consumers, small businesses, middle market companies and major
corporations, primarily in California, Oregon, and Washington, but also
nationally and internationally.
On March 3, 1999, the Company completed a secondary offering of 28.75
million shares of its Common Stock owned by The Bank of Tokyo-Mitsubishi, Ltd.
(BTM). The Company received no proceeds from this transaction. Concurrent with
the secondary offering, the Company repurchased 8.6 million shares of its
outstanding Common Stock from BTM and 2.1 million shares owned by Meiji Life
Insurance Company with $311 million of the net proceeds from the issuance of
$350 million of 7 3/8 percent trust preferred securities that occurred on
February 19, 1999. After the secondary offering and the repurchase referred to
previously, BTM owned 64 percent of the Company, or 105.6 million shares,
compared with 82 percent prior to these transactions.
The Company completed the repurchase of $100 million in common stock
between December 1999 and July 2000, under a stock repurchase plan authorized in
November 1999. In July 2000, the Company announced an additional $100 million
stock repurchase plan. The amount purchased under the new plan as of December
31, 2000 was $51.9 million. At December 31, 2000, BTM owned 66 percent of the
Company.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America (US
GAAP) and general practice within the banking industry. Those policies that
materially affect the determination of financial position, results of
operations, and cash flows are summarized below.
The Consolidated Financial Statements include the accounts of the
Company. All material intercompany transactions and balances have been
eliminated. The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain amounts for prior periods have been reclassified
to conform with current financial statement presentation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest bearing deposits in banks, and federal funds
sold and securities purchased under resale agreements, substantially all of
which have maturities less than 90 days.
TRADING ACCOUNT ASSETS
Trading account assets are those financial instruments that management
acquires with the intent to hold for short periods of time in order to take
advantage of anticipated changes in market values. Substantially all of these
assets are securities with a high degree of liquidity and a readily determinable
market value. Interest earned, paid, or accrued on trading account assets is
included in interest income
F-50
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
using a method that generally produces a level yield. Realized gains and losses
from the close out of trading account positions and unrealized market value
adjustments are recognized in noninterest income. The reserve for derivative and
foreign exchange contracts is presented as an offset to trading account assets.
Changes in the reserve as a result of changes in the positive replacement cost
of those contracts are provided as an offset to trading gains and losses in
noninterest income.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The Company's securities portfolios consist of debt and equity
securities that are classified either as securities available for sale or
securities held to maturity.
Debt securities for which the Company has the positive intent and
ability to hold until maturity are classified as securities held to maturity and
carried at amortized cost.
Debt securities and equity securities with readily determinable market
values that are not classified as either securities held to maturity or trading
account assets are classified as securities available for sale and carried at
fair value, with the unrealized gains or losses reported net of taxes as a
component of accumulated other comprehensive income (loss) in shareholders'
equity until realized.
Realized gains and losses arising from the sale of securities are based
upon the specific identification method and included in noninterest income as
securities gains (losses), net.
Interest income on debt securities includes the amortization of
premiums and the accretion of discounts using the effective interest method and
is included in interest income on securities. Dividend income on equity
securities is included in noninterest income.
Securities available for sale that are pledged under an agreement to
repurchase and which may be sold or repledged under that agreement have been
separately identified as pledged as collateral.
LOANS
Loans are reported at the principal amounts outstanding, net of
unamortized nonrefundable loan fees and related direct loan origination costs.
Deferred net fees and costs are recognized in interest income over the loan term
using a method that generally produces a level yield on the unpaid loan balance.
Nonrefundable fees and direct loan origination costs related to loans held for
sale are deferred and recognized as a component of the gain or loss on sale.
Interest income is accrued principally on a simple interest basis.
Nonaccrual loans are those for which management has discontinued
accrual of interest because there exists significant uncertainty as to the full
and timely collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest.
Interest accruals are continued for certain small business loans that
are processed centrally, consumer loans, and one-to-four family residential
mortgage loans. These loans are charged off or written down to their net
realizable value based on delinquency time frames that range from 120 to 270
days, depending on the type of credit that has been extended. Interest accruals
are also continued for loans that are both well-secured and in the process of
collection. For this purpose, loans are considered well-secured if they are
collateralized by property having a net realizable value in excess of the amount
of principal and accrued interest outstanding or are guaranteed by a financially
responsible and willing party. Loans are
F-51
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
considered "in the process of collection" if collection is proceeding in due
course either through legal action or other actions that are reasonably expected
to result in the prompt repayment of the debt or in its restoration to current
status.
When a loan is placed on nonaccrual, all previously accrued but
uncollected interest is reversed against current period operating results. All
subsequent payments received are first applied to unpaid principal and then to
uncollected interest. Interest income is accrued at such time as the loan is
brought fully current as to both principal and interest, and, in management's
judgment, such loans are considered to be fully collectible. However, Company
policy also allows management to continue the recognition of interest income on
certain loans designated as nonaccrual. This portion of the nonaccrual portfolio
is referred to as "Cash Basis Nonaccrual" loans. This policy only applies to
loans that are well secured and in management's judgment are considered to be
fully collectible. Although the accrual of interest is suspended, any payments
received may be applied to the loan according to its contractual terms and
interest income recognized when cash is received.
Loans are considered impaired when, based on current information, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including interest payments.
Impaired loans are carried at the lower of the recorded investment in the loan,
the estimated present value of total expected future cash flows, discounted at
the loan's effective rate, or the fair value of the collateral, if the loan is
collateral dependent. Additionally, some impaired loans with commitments of less
than $1 million are aggregated for the purpose of measuring impairment using
historical loss factors as a means of measurement. Excluded from the impairment
analysis are large groups of smaller balance homogeneous loans such as consumer
and residential mortgage loans, and automobile leases.
The Company offers primarily two types of leases to customers: 1)
direct financing leases where the assets leased are acquired without additional
financing from other sources, and 2) leveraged leases where a substantial
portion of the financing is provided by debt with no recourse to the Company.
Direct financing leases are carried net of unearned income, unamortized
nonrefundable fees and related direct costs associated with the origination or
purchase of leases. Leveraged leases are carried net of nonrecourse debt.
ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. The allowance is based on ongoing, quarterly
assessments of the probable estimated losses inherent in the loan portfolio, and
to a lesser extent, unused commitments to provide financing. The allowance is
increased by the provision for credit losses, which is charged against current
period operating results and decreased by the amount of charge-offs, net of
recoveries. The Company's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula allowance,
specific allowances and the unallocated allowance.
The formula allowance is calculated by applying loss factors to
outstanding loans and certain unused commitments. Loss factors are based on the
Company's historical loss experience and may be adjusted for significant factors
that, in management's judgement, affect the collectibility of the portfolio as
of the evaluation date. The Company derives the loss factors for problem graded
loans from a loss migration model, for pass graded loans by using historical
average net charge-offs during a business cycle, and for
F-52
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
pooled loans by using expected net charge-offs for one year. Pooled loans are
homogeneous in nature and include consumer and residential mortgage loans, and
automobile leases.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss has been incurred in
excess of the amount determined by the application of the formula allowance.
The unallocated allowance is composed of attribution factors, which are
based upon management's evaluation of various conditions that are not directly
measured in the determination of the formula and specific allowances. The
conditions evaluated in connection with the unallocated allowance may include
existing general economic and business conditions affecting the key lending
areas of the Company, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the loan portfolio, specific industry conditions
within portfolio segments, recent loss experience in particular segments of the
portfolio, duration of the current business cycle, bank regulatory examination
results and findings of the Company's internal credit examiners.
The allowance also incorporates the results of measuring impaired loans
as provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures".
These accounting standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans. A loan is considered impaired when
management determines that it is probable that the Company will be unable to
collect all amounts due according to the original contractual terms of the loan
agreement. Impairment is measured by the difference between the recorded
investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount) and the estimated present value of
total expected future cash flows, discounted at the loan's effective rate, or
the fair value of the collateral, if the loan is collateral dependent.
Additionally, some impaired loans with commitments of less than $1 million are
aggregated for the purpose of measuring impairment using historical loss factors
as a means of measurement. In addition, the impairment allowance may include
amounts related to certain qualitative factors that have yet to manifest
themselves in the other measurements. Impairment is recognized by adjusting an
allocation of the existing allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated useful life of each asset.
Lives of premises range from ten to forty years; lives of furniture, fixtures
and equipment range from three to eight years. Leasehold improvements are
amortized over the term of the respective lease or 10 years, whichever is
shorter.
Long-lived assets that are held or that are to be disposed of and
certain intangibles are evaluated periodically for impairment when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. The impairment is calculated as the difference between the expected
future cash flows of a long-lived asset, if lower, and its carrying value. The
impairment loss is reflected in noninterest expense.
F-53
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
OTHER ASSETS
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of acquired companies and is reported as intangible
assets. Goodwill is amortized using the straight-line method, generally over 15
years.
Other real estate owned (OREO) represents the collateral acquired
through foreclosure in full or partial satisfaction of the related loan. OREO is
recorded at the lower of the loan's unpaid principal balance or its fair value
as established by a current appraisal, adjusted for disposition costs. Any
write-down at the date of transfer is charged to the allowance for credit
losses. OREO values, recorded in other assets, are reviewed on an ongoing basis
and any decline in value is recognized as foreclosed asset expense in the
current period. The net operating results from these assets are included in the
current period in noninterest expense as foreclosed asset expense (income).
Distressed loans held for sale are included in other assets in the
consolidated financial statements and are those loans that the Company has
identified as available for accelerated disposition. These are loans that would
otherwise be included in nonaccrual loans. Distressed loans are recorded at the
lower of the loan's unpaid principal balance or their fair value. Any write-down
at the date of transfer is charged to the allowance for credit losses.
Distressed loans values, recorded in other assets, are reviewed on a quarterly
basis and any decline in value is recognized in other noninterest income during
the period in which the decline occurs.
DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION
The Company enters into a variety of interest rate derivative
contracts, primarily swaps, options and foreign exchange contracts, either for
trading purposes, based on management's intent at inception, or as an
accommodation to customers.
Derivatives held or issued for trading or customer accommodation are
carried at fair value, with realized and unrealized changes in fair values on
contracts included in noninterest income in the period in which the changes
occur. Unrealized gains and losses are reported gross and included in trading
account assets and other liabilities, respectively. Cash flows are reported net
as operating activities.
DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into a variety of derivative contracts as a means of
reducing the Company's interest rate and foreign exchange exposures. At
inception these contracts are evaluated in order to determine if they qualify
for hedge accounting treatment and are accounted for either on a deferral,
accrual or market value basis, depending on the nature of the Company's hedge
strategy and the method used to account for the hedged item. Hedge criteria
include demonstrating the manner in which the hedge will reduce risk,
identifying the specific asset, liability or firm commitment being hedged, and
citing the time horizon being hedged. A monthly evaluation is performed to
ensure that continuing correlation exists between the hedge and the item being
hedged.
Net interest settlements on interest rate swap, cap and floor
agreements are recognized on an accrual basis as interest income or interest
expense of the related asset or liability over the lives of the agreements.
Premiums paid or received for interest rate caps and floors are amortized either
to interest income or to interest expense of the related asset or liability over
the lives of the agreements. If an agreement is
F-54
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
terminated early, any resulting gain or loss is deferred and amortized as
interest income or interest expense of the related asset or liability over the
remaining life of the original agreement. Net settlement amounts are reported
gross as other assets and other liabilities. Cash flows are reported net as
operating activities.
FOREIGN CURRENCY TRANSLATION
Assets, liabilities and results of operations for foreign branches are
recorded based on the functional currency of each branch. Since the functional
currency of the branches is the local currency, the net assets are remeasured
into U.S. dollars using a combination of current and historical exchange rates.
The resulting gains or losses are included in shareholders' equity, as a
component of accumulated other comprehensive income (loss), on a net of tax
basis.
INCOME TAXES
The Company files consolidated federal and combined state income tax
returns. Amounts provided for income tax expense are based on income reported
for financial statement purposes and do not necessarily represent amounts
currently payable under tax laws. Deferred taxes, which arise principally from
temporary differences between the period in which certain income and expenses
are recognized for financial accounting purposes and the period in which they
affect taxable income, are included in the amounts provided for income taxes.
Under this method, the computation of the net deferred tax liability or asset
gives current recognition to changes in the tax laws.
NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net income after
preferred dividends 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
(see Note 14) are a common stock equivalent. Also see Note 19.
EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company provides a variety of benefit and incentive compensation
plans for eligible employees and retirees. Provisions for the costs of these
employee benefit and incentive plans and postretirement benefit plans are
accrued and charged to expense when the benefit is earned.
On January 1, 2000, the Company changed the method it uses to calculate
the market-related value of its pension plan assets. This change increased the
value of plan assets on which the expected returns are based and, therefore,
results in lower net periodic pension cost. This change in methodology resulted
in a one-time credit to salaries and benefits of $16.0 million. The impact on
future years is not considered significant.
STOCK-BASED COMPENSATION
As allowed under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company has chosen to continue to recognize
compensation expense using the intrinsic value-based method of valuing stock
options prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations. Under the intrinsic
value-based method,
F-55
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
compensation cost is measured as the amount by which the quoted market price of
the Company's stock at the date of grant exceeds the stock option exercise price
(also see Note 14).
Compensation cost associated with the Company's unvested restricted
stock issued under the management stock plan is measured based on the market
price of the stock at the grant date and is expensed over the vesting period.
SEGMENT REPORTING
Business unit results are based on an internal management reporting
system used by management to measure the performance of the units and the
Company as a whole. The management reporting system identifies balance sheet and
income statement items to each business unit based on internal management
accounting policies. Net interest income is determined using the Company's
internal funds transfer pricing system, which assigns a cost of funds to assets
or a credit for funds to liabilities and capital based on their type, maturity
or repricing characteristics. Noninterest income and expense directly or
indirectly attributable to a business unit are assigned to that business.
Economic capital is attributed to each business units using a Risk Adjusted
Return on Capital (RAROC) methodology, which seeks to allocate capital to each
business unit consistent with the level of risk they assume. These risks are
primarily credit risk, market risk and operational risk. Credit risk is the
potential loss in economic value due to the likelihood that the obligor will not
perform as agreed. Market risk is the potential loss in fair value due to
changes in interest rates, currency rates and volatilities. Operational risk is
the potential loss due to failures in internal controls, system failures, or
external events.
RESALE AND REPURCHASE AGREEMENTS
Transactions involving purchases of securities under agreements to
resell (reverse repurchase agreements or reverse repos) or sales of securities
under agreements to repurchase (repurchase agreements or repos) are accounted
for as collateralized financings except where the Company does not have an
agreement to sell (or purchase) the same or substantially the same securities
before maturity at a fixed or determinable price. The Company's policy is to
obtain possession of collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. Collateral is valued daily, and
the Company may require counterparties to deposit additional collateral or
return collateral pledged when appropriate.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY GRANTOR TRUST
Company-obligated mandatorily redeemable preferred securities of
subsidiary grantor trust (trust preferred securities) are accounted for as a
liability on the balance sheet. Dividends (or distributions) on trust preferred
securities are treated as interest expense on an accrual basis.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. SFAS No. 133 requires that derivative instruments
used to hedge be identified specifically to assets, liabilities, firm
commitments or anticipated transactions and measured as to effectiveness and
ineffectiveness when hedging changes in fair value or cash flows.
F-56
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
Derivative instruments that do not qualify as either a fair value or cash flow
hedge will be valued at fair value with the resultant gain or loss recognized in
current earnings. Changes in the effective portion of fair value hedges will be
recognized in current earnings along with the change in fair value of the hedged
item. Changes in the effective portion of the fair value of cash flow hedges
will be recognized in other comprehensive income until realization of the cash
flows of the hedged item through current earnings. Any ineffective portion of
hedges will be recognized in current earnings. In June 1999, the FASB issued
SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133", to
defer for one year the effective date of implementation of SFAS No. 133. In June
2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities", which amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain hedging
activity. The Company's hedging strategies are primarily related to hedges of
cash flows from variable rate loans. On January 1, 2001, the Company adopted
SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138. The cumulative effect
of the change in accounting principle on net income, net of tax, was $4 million.
The cumulative effect of the change in accounting principle on accumulated other
comprehensive income, net of tax, was $22 million.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS No. 125. The Statement revises the standards for accounting
for the securitization and other transfers of financial assets and collateral,
and requires certain disclosures, but carries over most of SFAS No. 125's
provisions without reconsideration. SFAS No.140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. Management believes that adopting these components of SFAS No.
140 will not have a material impact on the Company's financial position or
results of operations. SFAS No. 140 must be applied prospectively. For
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral, this Statement was adopted as of
December 31, 2000 and did not have a material impact on the Company's financial
position.
F-57
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 2--SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses,
and fair values of securities are presented below.
SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1999 2000
------------------------------------------------- -------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Treasury.............. $ 450,238 $ 1,302 $ 912 $ 450,628 $ 433,703 $ 6,394 $ -- $ 440,097
Other U.S. government...... 974,211 294 13,621 960,884 1,233,908 40,441 594 1,273,755
Mortgage-backed securities. 1,665,317 62 49,094 1,616,285 2,138,101 19,447 6,516 2,151,032
State and municipal........ 55,496 7,786 -- 63,282 52,881 8,908 -- 61,789
Corporate debt securities.. 50,058 -- 26 50,032 99,003 10 290 98,723
Equity securities.......... 50,888 1,403 -- 52,291 95,685 268 306 95,647
Foreign securities......... 16,597 104 4 16,697 6,570 69 12 6,627
---------- ------- ------- ---------- ---------- ------- ------ ----------
Total securities
available for sale... $3,262,805 $10,951 $63,657 $3,210,099 $4,059,851 $75,537 $7,718 $4,127,670
========== ======= ======= ========== ========== ======= ====== ==========
SECURITIES HELD TO MATURITY
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1999 2000
------------------------------------------------- -------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ----------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other U.S. government........ $ 19,996 $ 35 $ -- $ 20,031 $ -- $ -- $ -- $ --
Mortgage-backed securities... 11,302 577 3 11,876 8,521 437 1 8,957
State and municipal.......... 15,228 -- 1,759 13,469 15,008 -- 663 14,345
---------- ------- ------- ---------- ---------- ------- ------ ---------
Total securities held
to maturity.......... $ 46,526 $ 612 $ 1,762 $ 45,376 $ 23,529 $ 437 $ 664 $ 23,302
========== ======= ======= ========== ========== ======= ====== =========
The amortized cost and fair value of securities, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations,
with or without call or prepayment penalties.
On January 1, 2001, as permitted by SFAS No. 133, the Company
reclassified all of its securities held to maturity to securities available for
sale.
F-58
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
NOTE 2--SECURITIES (CONTINUED)
MATURITY SCHEDULE OF SECURITIES
SECURITIES SECURITIES
AVAILABLE FOR SALE(1) HELD TO MATURITY(1)
-------------------------- --------------------
DECEMBER 31, 2000 DECEMBER 31, 2000
-------------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- --------------------------------------------------------- --------- ---------- ------- -------
Due in one year or less.................................. $ 318,072 $ 318,972 $ 185 $ 187
Due after one year through five years.................... 2,153,182 2,198,276 1,524 1,503
Due after five years through ten years................... 340,653 346,407 10,798 11,165
Due after ten years...................................... 1,152,040 1,168,368 11,022 10,447
Equity securities........................................ 95,685 95,647 -- --
---------- ---------- ------- -------
Total securities...................................... $4,059,851 $4,127,670 $23,529 $23,302
========== ========== ======= =======
- -----------
(1) The remaining contractual maturities of mortgage-backed securities are
classified without regard to prepayments. The contractual maturity of
these securities is not a reliable indicator of their expected life
since borrowers have the right to repay their obligations at any time.
During the years ended 1998, 1999 and 2000, there were no sales or
transfers from the securities held to maturity portfolio.
In 1998, proceeds from sales of securities available for sale were $418
million with gross realized gains of $6 million and no gross realized losses. In
1999, proceeds from sales of securities available for sale were $210 million
with gross realized gains of $8 million and no gross realized losses. In 2000,
proceeds from sales of securities available for sale were $423 million with
gross realized gains of $27 million and $18 million of gross realized losses.
COLLATERAL
The Company reports securities pledged as collateral in secured
borrowings and other arrangements when the secured party can sell or repledge
the securities. These securities have been separately identified. If the secured
party cannot resell or repledge the securities of the Company, those securities
are not separately identified. As of December 31, 2000, the Company had no
pledged collateral to secured parties who are not permitted to resell or
repledge those securities.
As of December 31, 2000, the Company had no reverse repurchase
agreements or accepted collateral that it is permitted by contract to sell or
repledge.
F-59
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of loans, net of unearned interest and fees of $120 million
and $83 million, at December 31, 1999 and 2000, respectively, is as follows:
DECEMBER 31,
-----------------------------
(DOLLARS IN THOUSANDS) 1999 2000
- ---------------------------------------------------------- ----------- -----------
Domestic:
Commercial, financial and industrial................... $14,176,630 $13,748,838
Construction........................................... 648,478 939,302
Mortgage:
Residential......................................... 2,581,141 3,294,485
Commercial.......................................... 3,572,347 3,348,252
----------- -----------
Total mortgage.................................... 6,153,488 6,642,737
Consumer:
Installment......................................... 1,922,158 1,655,676
Home equity......................................... 727,776 755,053
----------- -----------
Total consumer.................................... 2,649,934 2,410,729
Lease financing........................................ 1,148,542 1,134,440
----------- -----------
Total loans in domestic offices................... 24,777,072 24,876,046
Loans originated in foreign branches...................... 1,135,886 1,134,352
----------- -----------
Total loans....................................... 25,912,958 26,010,398
Allowance for credit losses....................... 470,378 613,902
----------- -----------
Loans, net........................................ $25,442,580 $25,396,496
=========== ===========
Changes in the allowance for credit losses were as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- --------------------------------------------------------------------------- --------- --------- ----------
Balance, beginning of year................................................. $ 451,692 $ 459,328 $ 470,378
Loans charged off.......................................................... (76,790) (81,685) (322,363)
Recoveries of loans previously charged off................................. 41,144 27,539 26,297
--------- --------- ----------
Total net loans charged off............................................. (35,646) (54,146) (296,606)
Provision for credit losses................................................ 45,000 65,000 440,000
Transfer of reserve for trading account assets............................. (1,911) -- --
Foreign translation adjustment and other net additions (deductions)........ 193 196 (410)
--------- --------- ----------
Balance, end of year....................................................... $ 459,328 $ 470,378 $ 613,902
========= ========= ==========
In 1998, the Company reclassified a $1.9 million previously established
reserve for credit losses related to interest rate derivatives and foreign
exchange contracts from the unallocated portion of the allowance for credit
losses. The reserve for derivative and foreign exchange contracts is presented
as an offset to trading account assets.
F-60
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Nonaccrual loans totaled $167 million and $400 million at December 31,
1999 and 2000, respectively. There were no renegotiated loans at December 31,
1999 and 2000. Interest foregone on loans designated as nonaccrual at December
31, 1998, 1999 and 2000 was $4 million, $8 million and $19 million,
respectively.
LOAN IMPAIRMENT
Impaired loans of the Company include commercial, financial and
industrial, construction and commercial mortgage loans designated as nonaccrual.
When the value of an impaired loan is less than the recorded investment in the
loan, a portion of the Company's allowance for credit losses is allocated as an
impairment allowance.
The Company's policy for recognition of interest income, charge-offs of
loans, and application of payments on impaired loans is the same as the policy
applied to nonaccrual loans.
The following table sets forth information about the Company's impaired
loans.
DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- --------------------------------------------------------------------------- ------- -------- --------
Impaired loans with an allowance........................................... $49,741 $128,576 $318,418
Impaired loans without an allowance(1)..................................... 28,709 38,818 81,581
------- -------- --------
Total impaired loans(2)................................................. $78,450 $167,394 $399,999
======= ======== ========
Allowance for impaired loans............................................... $11,219 $42,429 $118,378
Average balance of impaired loans during the year.......................... $91,233 $128,403 $257,650
Interest income recognized on nonaccrual loans during the year............. $274 $23 $1,221
- -----------
(1) These loans do not require an allowance for credit losses since the
fair values of the impaired loans equal or exceed the recorded
investments in the loans.
(2) This amount was evaluated for impairment using three measurement
methods as follows: $53 million, $141 million, and $361 million was
evaluated using the present value of the expected future cash flows at
December 31, 1998, 1999 and 2000, respectively; $8 million, $6 million,
and $13 million was evaluated using the fair value of the collateral at
December 31, 1998, 1999 and 2000, respectively; and $17 million, $21
million, and $26 million was evaluated using historical loss factors at
December 31, 1998, 1999 and 2000, respectively.
RELATED PARTY LOANS
In some cases, the Company makes loans to related parties including its
directors, executive officers, and their affiliated companies. At December 31,
1999, related party loans outstanding to individuals who served as directors or
executive officers at anytime during the year totaled $133 million, as compared
to $107 million at December 31, 2000. In the opinion of management, these
related party loans were made on substantially the same terms, including
interest rates and collateral requirements, as those terms prevailing at the
date these loans were made. During 1999 and 2000, there were no loans to related
parties which were charged off. Additionally, at December 31, 1999 and 2000,
there were no loans to related parties which were nonperforming.
F-61
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 4--PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. As of December 31, 1999 and 2000, the amounts
were:
DECEMBER 31,
--------------------------------------------------------------------------------------
1999 2000
--------------------------------------- -----------------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION AND NET BOOK DEPRECIATION AND NET BOOK
(DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE
- ------------------------ -------- ----------------- -------- ---------- ---------------- --------
Land.................... $ 67,532 $ -- $ 67,532 $ 66,090 $ -- $ 66,090
Premises................ 265,156 103,948 161,208 314,255 103,144 211,111
Leasehold improvements.. 155,409 101,526 53,883 168,778 112,240 56,538
Furniture, fixtures and
equipment............ 473,371 330,973 142,398 494,357 353,817 140,540
-------- -------- -------- ---------- -------- --------
Total............. $961,468 $536,447 $425,021 $1,043,480 $569,201 $474,279
======== ======== ======== ========== ======== ========
Rental and depreciation and amortization expenses were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- ---------------------------------------------------------------------- ------- ------- --------
Rental expense of premises............................................ $51,695 $49,719 $ 52,085
Less: rental income.................................................. 12,161 13,900 15,464
------- ------- --------
Net rental expense................................................. $39,534 $35,819 $ 36,621
======= ======= ========
Other net rental expense (income), primarily for equipment............ $ (374) $ (821) $ (1,300)
======= ======= ========
Depreciation and amortization of premises and equipment............... $56,490 $68,090 $ 66,503
======= ======= ========
Future minimum lease payments are as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 2000
- --------------------------------------------------------------------------------- -----------------
Years ending December 31,
2001.......................................................................... $ 48,855
2002.......................................................................... 44,430
2003.......................................................................... 39,673
2004.......................................................................... 32,706
2005.......................................................................... 26,673
Later years................................................................... 87,826
--------
Total minimum operating lease payments........................................... $280,163
========
Minimum rental income due in the future under noncancellable subleases........... $ 67,708
========
Included in other liabilities in the accompanying December 31, 2000
Consolidated Balance Sheet is $9.1 million of future operating lease payments
accrued in connection with the 1996 merger and the 1999 restructuring charge
(also see Note 7).
F-62
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 4--PREMISES AND EQUIPMENT (CONTINUED)
A majority of the leases provide for the payment of taxes, maintenance,
insurance, and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions, escalation clauses, and purchase
options. There are no restrictions on paying dividends, incurring additional
debt or negotiating additional leases under the terms of the present lease
agreements.
NOTE 5--DEPOSITS
At December 31, 2000, the Company had $389 million in domestic interest
bearing time deposits with a remaining term of greater than one year, of which
$120 million exceeded $100,000. Maturity information for all domestic interest
bearing time deposits with a remaining term of greater than one year is
summarized below.
(DOLLARS IN THOUSANDS) DECEMBER 31, 2000
- --------------------------------------------------------------------------------- -----------------
Due after one year through two years............................................. $222,210
Due after two years through three years.......................................... 73,109
Due after three years through four years......................................... 37,093
Due after four years through five years.......................................... 49,248
Due after five years............................................................. 7,325
--------
Total......................................................................... $388,985
========
Substantially all of the foreign interest bearing time deposits
exceeding $100,000 mature in less than one year.
NOTE 6--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
RETIREMENT PLANS
The Company maintains the Union Bank of California, N.A. Retirement
Plan (the Plan), which is a noncontributory defined benefit plan covering
substantially all of the employees of the Company. The Plan provides retirement
benefits based on years of credited service and the final average compensation
amount, as defined in the Plan. Employees become eligible for this plan after
one year of service and become fully vested after five years of service. The
Company's funding policy is to make contributions equal to the maximum
deductible amount as allowed by the Internal Revenue Code. Contributions are
intended to provide not only for benefits attributed to services to date, but
also for those expected to be earned in the future. Plan assets are invested in
U.S. government securities, corporate bonds, and commingled investment funds.
OTHER POSTRETIREMENT BENEFITS
The Company provides certain health care benefits for its retired
employees and life insurance benefits for those employees who retired prior to
January 1, 2001. The health care cost is shared between the Company and the
retiree. The life insurance plan is noncontributory. The accounting for the
health care plan anticipates future cost-sharing changes that are consistent
with the Company's intent to maintain a level of cost-sharing at approximately
25 percent. Assets set aside to cover such obligations are primarily invested in
mutual funds.
F-63
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 6--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following table sets forth the funded status of the Company's
defined benefit pension plan and its other postretirement benefit plans.
PENSION BENEFITS OTHER BENEFITS
------------------------- ------------------------
YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ------------------------
(DOLLARS IN THOUSANDS) 1999 2000 1999 2000
- ---------------------- --------- -------- --------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year..................... $ 489,378 $439,908 $ 83,029 $ 96,257
Service cost.............................................. 25,107 20,688 3,450 3,024
Interest cost............................................. 31,295 34,429 5,552 6,708
Plan participants' contributions.......................... -- -- 1,033 1,143
Amendments................................................ -- -- (855) (1,537)
Actuarial (gain) loss..................................... (91,286) 30,805 10,237 (4,286)
Benefits paid............................................. (14,586) (16,814) (6,189) (7,201)
--------- -------- --------- ---------
Benefit obligation, end of year........................... 439,908 509,016 96,257 94,108
--------- -------- --------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year.............. 537,087 601,527 39,468 46,666
Actual return on plan assets.............................. 63,814 (12,328) 2,390 (1,319)
Employer contribution..................................... 15,212 16,084 9,964 11,007
Plan participants' contributions.......................... -- -- 1,033 1,143
Benefits paid............................................. (14,586) (16,814) (6,189) (7,201)
--------- -------- --------- ---------
Fair value of plan assets, end of year.................... 601,527 588,469 46,666 50,296
--------- -------- --------- ---------
Funded status............................................. 161,619 79,453 (49,590) (43,812)
Unrecognized transition amount............................ -- -- 44,918 38,595
Unrecognized net actuarial gain........................... (144,845) (39,240) (8,339) (6,624)
Unrecognized prior service cost........................... 7,725 6,658 -- (1,537)
--------- -------- --------- ---------
Prepaid (accrued) benefit cost............................ $ 24,499 $ 46,871 $ (13,011) $(13,378)
========= ======== ========= =========
The following table summarizes the assumptions used in computing the
present value of the projected benefit obligation and the net pension expense.
PENSION BENEFITS OTHER BENEFITS
------------------------- ------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------- ------------------------
1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ----
Discount rate in determining expense...................................... 7.00% 6.50% 7.75% 7.00% 6.50% 7.75%
Discount rate in determining benefit obligations at year end.............. 6.50 7.75 7.50 6.50 7.75 7.50%
Rate of increase in future compensation levels for determining expense.... 5.00 5.00 5.00 -- -- --
Rate of increase in future compensation levels for determining benefit
obligations at year end................................................ 5.00 5.00 5.00 -- -- --
Expected return on plan assets............................................ 8.25 8.25 8.25 8.00 8.00 8.00
F-64
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 6--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following table sets forth the components of postretirement benefit
expense.
PENSION BENEFITS OTHER BENEFITS
------------------------------------- ------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------------- ------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000 1998 1999 2000
- ----------------------------------------------- ------- ------- ------- ------ ------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................... $22,697 $25,107 $20,688 $3,067 $ 3,450 $ 3,025
Interest cost.................................. 28,475 31,295 34,429 5,068 5,552 6,708
Expected return on plan assets................. (31,648) (36,194) (45,357) (2,491) (3,317) (3,894)
Amortization of prior service cost............. 3,175 2,016 1,067 -- -- --
Amortization of transition amount.............. (149) (61) -- 3,987 3,987 3,455
Recognized net actuarial (gain) loss........... 1,330 2,435 (1,077) (2,000) (878) (858)
------- ------- ------- ------ ------- -------
Net periodic benefit cost................... 23,880 24,598 9,750 7,631 8,794 8,436
Loss due to curtailment........................ -- -- -- -- 6,132 2,868
------- ------- ------- ------ ------- -------
Total benefit cost for year................. $23,880 $24,598 $ 9,750 $7,631 $14,926 $11,304
======= ======= ======= ====== ======= =======
For 1998, the Company assumed a 9 percent annual rate of increase in
the per capita cost of postretirement medical benefits for the indemnity plan
and a 7 percent annual rate of increase for the health maintenance organization
(HMO) plan. For future periods, the assumed rate for the indemnity plan
gradually decreased from 9 percent to 5.5 percent in 2007 remaining level
thereafter. The rate for the HMO plan was expected to gradually decrease to 5.5
percent in 2007 and thereafter.
For 1999, the Company assumed an 11 percent annual rate of increase in
the per capita cost of postretirement medical benefits for the indemnity plan
and an 8.5 percent annual rate of increase for the HMO plan. For future periods,
the rate for the indemnity plan was expected to gradually decrease from 11
percent to 5 percent in 2007 remaining level thereafter. The rate for the HMO
plan was expected to gradually decrease from 8.5 percent to 5.0 percent in 2007
and remain at that level thereafter.
For 2000, the Company assumed a 10 percent annual rate of increase in
the per capita cost of postretirement medical benefits for the indemnity plan
and an 8 percent annual rate of increase for the HMO plan. For future periods,
the rate for the indemnity plan was expected to gradually decrease from 10
percent to 5 percent in 2007 and will remain at that level thereafter. The rate
for the HMO plan was expected to gradually decrease from 8 percent to 5 percent
in 2007 and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on
the amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects.
1-PERCENTAGE- 1-PERCENTAGE-
(DOLLARS IN THOUSANDS) POINT INCREASE POINT DECREASE
- --------------------------------------------------------------------------------------- -------------- --------------
Effect on total of service and interest cost components................................ $1,243 $ (846)
Effect on postretirement benefit obligation............................................ 9,596 (8,156)
F-65
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 6--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
EXECUTIVE SUPPLEMENTAL BENEFIT PLANS
The Company has several Executive Supplemental Benefit Plans (ESBP)
which provide eligible employees with supplemental retirement benefits. The
plans are unfunded. The accrued liability for ESBP's included in other
liabilities in the Consolidated Balance Sheets was $25 million at December 31,
1999 and $28 million at December 31, 2000. The Company's expense relating to the
ESBP's was $3 million for each of the years ended December 31, 1998, 1999, and
$2 million for the year ended December 31, 2000.
SECTION 401(K) SAVINGS PLANS
The Company has a defined contribution plan authorized under Section
401(k) of the Internal Revenue Code. All benefits-eligible employees with at
least one year of service are eligible to participate in the plan. Employees may
contribute up to 16 percent of their pre-tax covered compensation or up to 10
percent of their after-tax covered compensation through salary deductions. The
Company contributes 50 percent of every pre-tax dollar an employee contributes
up to the first 6 percent of the employee's pre-tax covered compensation.
Employees are fully vested in the employer's contributions immediately. In
addition, the Company may make a discretionary annual profit-sharing
contribution up to 2.5 percent of an employee's pay. This profit-sharing
contribution is for all eligible employees, regardless of whether an employee is
participating in the 401(k) plan, and depends on the Bank's annual financial
performance. All employer contributions are tax deductible by the Company. The
Company's combined matching contribution expense was $12 million, $17 million
and $6 million for the years ended December 31, 1998, 1999 and 2000,
respectively.
NOTE 7--RESTRUCTURING CHARGE
A restructuring charge of $85 million was recorded in the third quarter
of 1999. The restructuring charge was incurred in connection with a company-wide
project referred to as "Mission Excel". Mission Excel is an initiative to slow
the rate of growth of expenses, increase sustainable growth in revenues, and
increase productivity through elimination of unnecessary or duplicate functions.
The restructuring charge includes only direct and incremental costs associated
with the program.
The Company reduced the restructuring charge by $19.0 million during
the year ended December 31, 2000. The reduction was primarily related to the
severance portion of the reserve reflecting changes in attrition assumptions.
F-66
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 7--RESTRUCTURING CHARGE (CONTINUED)
The table, which follows, provides details of the restructuring related
reserve:
OCCUPANCY
(DOLLARS IN THOUSANDS) PERSONNEL AND OTHER TOTAL
- ----------------------------------------------------------------- --------- --------- --------
Balances at January 1, 1999...................................... $ -- $ -- $ --
Restructuring charge............................................. 70,000 15,000 85,000
Less: Utilization
Cash.......................................................... 6,859 5,091 11,950
Noncash....................................................... 3,616 75 3,691
-------- ------- --------
Total utilization.......................................... 10,475 5,166 15,641
-------- ------- --------
Balances at December 31, 1999.................................... 59,525 9,834 69,359
Restructuring credit............................................. (18,000) (1,000) (19,000)
Less: Utilization
Cash.......................................................... 27,162 6,404 33,566
Noncash....................................................... -- 720 720
-------- ------- --------
Total utilization.......................................... 27,162 7,124 34,286
-------- ------- --------
Balances at December 31, 2000.................................... $ 14,363 $ 1,710 $ 16,073
======== ======= ========
Personnel expense consists of severance and related benefits to be paid
under the Company's enhanced severance plans. At the completion of Mission
Excel, the Company expects to have terminated approximately 800 employees. From
August 16, 1999 to December 31, 2000, 680 employees were terminated under the
plan. Occupancy and other consists of lease termination costs and professional
services costs incurred during the assessment phase of the project.
NOTE 8--OTHER EXPENSES
The detail of other expenses is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- ---------------------- -------- -------- --------
Advertising and public relations............................. $ 31,897 $ 27,163 $ 29,125
Printing and office supplies................................. 26,716 22,535 20,057
Intangible asset amortization................................ 13,581 13,980 13,352
Other........................................................ 150,637 153,214 160,214
-------- -------- --------
Total other expenses...................................... $222,831 $216,892 $222,748
======== ======== ========
F-67
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 9--INCOME TAXES
The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- ------------------------------------------------------------------ -------- -------- --------
Taxes currently payable:
Federal........................................................ $218,949 $217,713 $202,427
State.......................................................... (44,731) 5,140 3,595
Foreign........................................................ 2,760 1,564 1,804
-------- -------- --------
Total currently payable..................................... 176,978 224,417 207,826
-------- -------- --------
Taxes deferred:
Federal........................................................ 25,458 (7,600) 9,300
State.......................................................... 2,152 (2,040) 3,998
Foreign........................................................ 487 (889) 411
-------- -------- --------
Total deferred.............................................. 28,097 (10,529) 13,709
-------- -------- --------
Total income tax expense.................................... $205,075 $213,888 $221,535
======== ======== ========
The components of the net deferred tax balances of the Company were as
follows:
DECEMBER 31,
---------------------
(DOLLARS IN THOUSANDS) 1999 2000
- --------------------------------------------------------------------------- -------- --------
Deferred tax assets:
Allowance for credit losses............................................. $184,377 $245,985
Accrued income and expense.............................................. 34,114 27,617
Accrued restructuring expenses.......................................... 41,782 15,871
Unrealized loss on securities available for sale........................ 20,273 --
Net operating loss carryforwards........................................ 14,974 --
Deferred state taxes.................................................... 3,406 4,740
Other................................................................... 6,745 7,973
Valuation allowance..................................................... (14,974) --
-------- --------
Total deferred tax assets............................................ 290,697 302,186
-------- --------
Deferred tax liabilities:
Leasing................................................................. 365,169 399,034
Unrealized gain on securities available for sale........................ -- 25,940
Depreciation............................................................ 3,345 13,735
-------- --------
Total deferred tax liabilities....................................... 368,514 438,709
-------- --------
Net deferred tax liability......................................... $ 77,817 $136,523
======== ========
During 1998, a valuation allowance was established to offset deferred
tax assets related to state income tax net operating loss carryforwards that
expire on December 31, 2002. The net operating loss carryforwards are expected
to be utilized in the Company's 2000 California tax return, and therefore the
tax benefits of the net operating losses were recognized as a reduction to state
income tax expense in 2000. In management's opinion, the valuation allowance is
no longer necessary.
F-68
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 9--INCOME TAXES (CONTINUED)
The following table is an analysis of the effective tax rate:
YEARS ENDED
DECEMBER 31,
---------------------
1998 1999 2000
---- ---- ----
Federal income tax rate............................................... 35% 35% 35%
Net tax effects of:
State income taxes, net of federal income tax benefit.............. (4) -- 1
Tax credits........................................................ -- (1) (2)
Net refunds from tax audits........................................ -- (2) --
Other.............................................................. -- 1 (1)
---- ---- ----
Effective tax rate.............................................. 31% 33% 33%
==== ==== ====
During 1999, the Company recognized tax benefits of $10.7 million from
federal and California audit settlements covering the years 1986 to 1994.
The Company has filed its 1998 and 1999 and intends to file its 2000
California franchise tax returns on a worldwide unitary basis, incorporating the
financial results of BTM and its worldwide affiliates. During 1998, the Company
reduced its state income tax liabilities by $29 million, net of federal tax, for
previously accrued 1997 state tax liabilities as a result of its decision to
file its California tax returns on the worldwide unitary basis.
Federal and state tax returns for several years are under or subject to
examination by the respective taxing authorities. Although the ultimate outcome
of such examinations cannot be determined at this time, management believes that
the resolution of issues that have been or may be raised will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
F-69
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 10--BORROWED FUNDS
The following is a summary of the major categories of borrowed funds:
DECEMBER 31,
----------------------------
(DOLLARS IN THOUSANDS) 1999 2000
- ----------------------------------------------------------------------------------------------- ---------- ----------
Federal funds purchased and securities sold under repurchase agreements with weighted average
interest rates of 5.09% and 6.52% at December 31, 1999 and 2000, respectively............... $1,156,799 $1,387,667
Commercial paper, with weighted average interest rates of 5.45% and 6.49% at December 31, 1999
and 2000, respectively...................................................................... 1,108,258 1,385,771
Other borrowed funds, with weighted average interest rates of 5.91% and 5.64% at December 31,
1999 and 2000, respectively................................................................. 540,496 249,469
---------- ----------
Total borrowed funds........................................................................... $2,805,553 $3,022,907
========== ==========
Federal funds purchased and securities sold under repurchase agreements:
Maximum outstanding at any month end........................................................ $1,786,594 $2,095,868
Average balance during the year............................................................. 1,489,214 1,548,730
Weighted average interest rate during the year.............................................. 4.84% 6.24%
Commercial paper:
Maximum outstanding at any month end........................................................ $1,737,265 $1,525,932
Average balance during the year............................................................. 1,529,814 1,521,614
Weighted average interest rate during the year.............................................. 5.04% 6.24%
Other borrowed funds:
Maximum outstanding at any month end........................................................ $ 993,550 $ 507,782
Average balance during the year............................................................. 708,625 314,425
Weighted average interest rate during the year.............................................. 5.28% 5.31%
Included in other borrowed funds in 2000 are assumed mortgage notes
related to the purchase of the Company's administrative facility at Monterey
Park. The notes consist of 20 zero coupon notes with varying maturity dates
through 2011. Maturities of these notes for the next five years are as follows:
no maturities in 2001, $6.5 million in each of 2002, 2003, and 2004, $5.3
million in 2005 and $34.4 million thereafter.
NOTE 11--SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK
The following is a summary of capital notes that are subordinated to
other obligations of the Company.
DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1999 2000
- -------------------------------------------------------------------------------------------------- --------- --------
Floating rate notes due June 2007. These notes bear interest at 0.325% above 3-month
London Interbank Offered Rate (LIBOR) and are payable to BTM................................... $200,000 $200,000
Floating rate notes due July 2000. These notes bear interest at 0.30% above 3-month LIBOR......... 98,000 --
-------- --------
Total subordinated capital notes.................................................................. $298,000 $200,000
======== ========
F-70
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 11--SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED)
The above notes qualify as Tier 2 risk-based capital under the Federal
Reserve guidelines for assessing regulatory capital. For the total risk-based
capital ratio, the amount of notes that qualify as capital is reduced as the
notes approach maturity. At December 31, 1999 and 2000, $200 million of the
notes qualified as risk-based capital.
Provisions of certain notes restrict the use of the Company's property
as security for borrowings, and place limitations on leases, indebtedness,
distributions to shareholders, mergers, sales of certain assets, transactions
with affiliates, and changes in majority stock ownership of the Company. All of
the notes mature after 2005.
NOTE 12-- UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY GRANTOR TRUST
In February 1999, UnionBanCal Finance Trust I issued $350 million
preferred securities to the public and $10,824,750 common securities to the
Company. The proceeds of such issuances were invested by UnionBanCal Finance
Trust I in $360,824,750 aggregate principal amount of the Company's 7 3/8
percent debt securities due May 15, 2029 (the Trust Notes). The Trust Notes
represent the sole asset of UnionBanCal Finance Trust I. The Trust Notes mature
on May 15, 2029, bear interest at the rate of 7 3/8 percent, payable quarterly,
and are redeemable by the Company beginning on or after February 19, 2004 at 100
percent of the principal amount thereof, plus any accrued and unpaid interest to
the redemption date.
Holders of the preferred securities and common securities are entitled
to cumulative cash distributions at an annual rate of 7 3/8 percent of the
liquidation amount of $25 per security. The preferred securities are subject to
mandatory redemption upon repayment of the Trust Notes and are callable by the
Company at 100 percent of the liquidation amount beginning on or after February
19, 2004. The Trust exists for the sole purpose of issuing the preferred
securities and investing the proceeds in the Trust Notes issued by the Company.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the preferred securities (the Guarantee). The Guarantee,
when taken together with the Company's obligations under the Trust Notes and in
the indenture pursuant to which the Trust Notes were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
subsidiary trust, provide a full and unconditional guarantee of amounts due on
the Trust Preferred securities.
The grantor trust is a wholly owned subsidiary of UnionBanCal
Corporation. The Trust Notes and related trust investment in the Trust Notes
have been eliminated in consolidation and the preferred securities are reflected
as outstanding in the accompanying financial statements.
NOTE 13--DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has a dividend reinvestment and stock purchase plan for
shareholders. The plan allows shareholders to automatically reinvest all or part
of their dividends in additional shares of the Company's common stock at a cost
of 5 percent below the market price. Participating shareholders also have the
option of purchasing additional shares at the full market price with cash
payments of $25 to $3,000 per quarter. The Company obtains shares required for
reinvestment through open market purchases or through the issuance of new shares
from its authorized but unissued stock. During 1998, 1999, and 2000, 83,727,
101,570, and 440,677 shares, respectively, were required for dividend
reinvestment purposes, of
F-71
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 13--DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN (CONTINUED)
which 5,166, 6,407, and 24,245 shares were considered new issuances during 1998,
1999, and 2000, respectively. BTM did not participate in the plan in 1998, 1999
or 2000.
NOTE 14--MANAGEMENT STOCK PLAN
The Company has a management stock plan (the Stock Plan), which has 10
million shares of the Company's common stock authorized to be awarded to key
employees and outside directors of the Company at the discretion of the
Executive Compensation and Benefits Committee of the Board of Directors (the
Committee). Committee members and employees on rotational assignment from BTM
are not eligible for stock awards.
The Committee determines the term of each stock option grant, up to a
maximum of ten years from the date of grant. The exercise price of the options
issued under the Stock Plan shall not be less than the fair market value on the
date the option is granted. Unvested restricted stock issued under the Stock
Plan is shown as a reduction to retained earnings. The value of the restricted
shares at the date of grant is amortized to compensation expense over its
vesting period. All cancelled or forfeited options and restricted stock become
available for future grants.
In 1998, 1999 and 2000, the Company granted options to non-employee
directors and various key employees, including policy-making officers under the
1997 and 2000 Management Stock Plans. Under both Stock Plans, options granted to
employees vest pro-rata on each anniversary of the grant date and become fully
exercisable three years from the grant date, provided that the employee has
completed the specified continuous service requirement. The options vest earlier
if the employee dies, is permanently disabled, or retires under certain grant,
age, and service conditions. Options granted to non-employee directors are fully
vested on the grant date and exercisable 33 1/3 percent on each anniversary
under the 1997 Stock Plan, and fully vested and exercisable on the grant date
under the 2000 Stock Plan.
The following is a summary of stock option transactions under the Stock
Plan.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1998 1999 2000
---------------------------- ----------------------------- ------------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Options outstanding, beginning 1,397,178 $15.41 1,740,081 $21.47 3,281,273 $28.46
of year...................
Granted................ 533,850 35.08 1,747,750 34.31 2,126,506 27.99
Exercised.............. (169,995) 13.34 (157,007) 14.65 (98,004) 13.18
Forfeited.............. (20,952) 30.63 (49,551) 33.04 (117,876) 32.04
--------- --------- ---------
Options outstanding,
end of year.................. 1,740,081 $21.47 3,281,273 $28.46 5,191,899 $28.47
========= ========= =========
Options exercisable,
end of year.................. 894,432 $13.77 1,266,976 $20.01 2,135,228 $25.90
========= ========= =========
The weighted-average fair value of options granted was $11.99 during
1998, $9.77 during 1999, and $10.21 during 2000.
F-72
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED)
The following table summarizes information about stock options
outstanding.
OPTIONS OUTSTANDING AT DECEMBER 31, 20000 OPTIONS EXERCISABLE
------------------------------------------------------------ AT DECEMBER 31, 2000
WEIGHTED-AVERAGE -----------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTURAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------------- ---------------- ----------- ----------------
$ 6.67 - 9.08 117,304 1.9 years $ 8.54 117,304 $ 8.54
11.25 - 12.83 335,753 3.0 11.75 335,753 11.75
18.29 - 25.00 698,598 5.7 21.48 548,712 20.98
27.56 - 39.25 4,017,244 8.2 31.58 1,125,793 34.19
44.56 - 44.56 23,000 8.9 44.56 7,666 44.56
----------- ---------
5,191,899 2,135,228
=========== =========
In 1998, 1999, and 2000, the Company also granted 184,935, 1,050, and
13,500 shares, respectively, of restricted stock to key officers, including
policy-making officers, under the Stock Plan. The awards of restricted stock
vest pro rata on each anniversary of the grant date and become fully vested four
years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age,
and service conditions. Restricted shareholders have the right to vote their
restricted shares and receive dividends.
The following is a summary of restricted stock transactions under the
Stock Plan.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1998 1999 2000
---------------------------- ---------------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE
--------- ---------------- --------- ---------------- --------- ---------------
Restricted stock awards
outstanding, beginning of
year...................... 1,337,217 $11.59 1,504,302 $14.12 1,496,106 $14.05
Granted................... 184,935 33.43 1,050 32.88 13,500 25.00
Cancelled................. (17,850) 24.58 (9,246) 27.60 (3,444) 31.66
--------- --------- ---------
Restricted stock awards
outstanding, end of year.. 1,504,302 $14.12 1,496,106 $14.05 1,506,162 $14.11
========= ========= =========
Restricted stock awards vested,
end of year................... 1,115,229 $10.18 1,290,900 $11.84 1,408,696 $13.00
========= ========= =========
At December 31, 1998, 1999 and 2000, 2,685,603, 989,811, and 8,969,424
shares, respectively, were available for future grants as either stock options
or restricted stock under the Stock Plan.
F-73
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED)
The Company follows the intrinsic value based method in accounting for
its employee stock-based compensation plan. Accordingly, no compensation cost
has been recognized for its stock option grants. Had compensation cost for the
Company's stock-based plan been determined based on the fair value at the grant
dates for awards under that plan consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and net
income per share would have decreased to the pro forma amounts indicated in the
following table.
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------
Net income As reported $466,461 $441,731 $439,900
Pro forma 463,998 435,766 429,730
Net income per share--basic As reported $ 2.66 $ 2.65 $ 2.72
Pro forma 2.65 2.62 2.66
Net income per share--diluted As reported $ 2.65 $ 2.64 $ 2.72
Pro forma 2.64 2.61 2.65
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants made in 1998, 1999 and 2000; risk-free interest
rates of 5.8 percent in 1998, 5.2 percent in 1999, and 6.4 percent in 2000;
expected volatility of 29 percent in 1998, 30 percent in 1999, and 44 percent in
2000; expected lives of 6, 5, and 5 years for 1998, 1999, and 2000,
respectively; and expected dividend yields of 1.5 percent in 1998, 2.2 percent
in 1999, and 3.5 percent in 2000.
Effective January 1, 1997, the Company established a Performance Share
Plan. Eligible participants may earn performance share awards to be redeemed in
cash three years after the date of grant. Performance shares are linked to
shareholder value in two ways: (1) the market price of the Company's common
stock, and (2) return on assets, a performance measure closely linked to value
creation. Eligible participants generally receive grants of performance shares
annually. The total number of performance shares granted under the plan cannot
exceed 600,000. The Company granted 24,900 shares in 1998, 22,000 shares in 1999
and 31,500 shares in 2000. In 1998, 2,400 performance shares were forfeited. No
performance shares were forfeited in either 1999 or in 2000. The value of a
performance share is equal to the market price of the Company's common stock.
All cancelled or forfeited performance shares become available for future
grants.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. All of the fair values presented
below are as of their respective period ends and have been made under this
definition of fair value unless otherwise disclosed.
It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of December 31, 1999 and 2000, as more fully described below. It should be
noted that the operations of the Company are managed on a going concern basis
and not on a liquidation basis. As a result, the ultimate value realized for the
financial instruments presented could be substantially different when actually
recognized over time through the normal course of
F-74
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
operations. Additionally, a substantial portion of an institution's inherent
value is its capitalization and franchise value. Neither of these components has
been given consideration in the presentation of fair values that follow.
The table below presents the carrying value and fair value of the
specified assets and liabilities held by the Company.
DECEMBER 31,
----------------------------------------------------------------
1999 2000
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
ASSETS
Cash and cash equivalents................................ $ 3,158,133 $ 3,158,133 $ 3,322,979 $ 3,322,979
Trading account assets................................... 179,935 179,935 339,695 339,695
Securities available for sale:
Securities pledged as collateral...................... -- -- 593,686 593,686
Held in portfolio..................................... 3,210,099 3,210,099 3,533,984 3,533,984
Securities held to maturity.............................. 46,526 45,376 23,529 23,302
Loans, net of allowance for credit losses (1)............ 24,298,638 24,016,569 24,269,956 24,475,952
LIABILITIES
Deposits:
Noninterest bearing................................... 9,721,340 9,721,340 11,240,493 11,240,493
Interest bearing...................................... 16,535,267 16,536,770 16,042,690 16,042,718
----------- ----------- ----------- -----------
Total deposits...................................... 26,256,607 26,258,110 27,283,183 27,283,211
Borrowed funds........................................... 2,805,553 2,805,125 3,022,907 3,019,884
Subordinated capital notes............................... 298,000 298,000 200,000 200,000
UnionBanCal Corporation-obligated mandatorily redeemable
preferred securities of subsidiary grantor trust...... 350,000 280,000 350,000 317,100
- -----------
(1) Excludes lease financing.
The Company is also a party to financial instruments that are not
reflected on the balance sheet but represent obligations of the Company in the
normal course of business. For information regarding the fair value of
off-balance sheet financial instruments, see Note 16.
The following methods and assumptions were used to estimate fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents
is considered a reasonable estimate of fair value.
TRADING ACCOUNT ASSETS: Trading account assets are short term in nature
and valued at market based on quoted market prices or dealer quotes. If a quoted
market price is not available, the recorded amounts are estimated using quoted
market prices for similar securities. Thus, carrying value is considered a
reasonable estimate of fair value for these financial instruments.
F-75
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SECURITIES: The fair value of securities is based on quoted market
prices or dealer quotes. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities. Securities
available for sale are carried at their aggregate fair value, while securities
held to maturity are carried at amortized cost.
LOANS: The fair value for performing fixed and non-reference rate loans
was estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for similar remaining maturities and, where available, discount rates were based
on current market rates.
Loans that are on nonaccrual status were not included in the loan
valuation methods discussed previously. The fair value of these assets was
estimated assuming these loans were sold at their carrying value less their
impairment allowance.
The fair value of performing mortgage loans was based on quoted market
prices for loans with similar credit and interest rate risk characteristics.
The fair value of credit lines is assumed to approximate their book
value.
NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing
deposits is the amount payable on demand at the reporting date. The fair value
of the demand deposit intangible has not been estimated.
INTEREST BEARING DEPOSITS: The fair value of savings accounts and
certain money market accounts is the amount payable on demand at the reporting
date. The fair value of fixed maturity certificates of deposit was estimated
using rates currently being offered on certificates with similar maturities.
BORROWED FUNDS: The book values of federal funds purchased and
securities sold under repurchase agreements and other short-term borrowed funds
are assumed to approximate their fair value due to their limited duration
characteristics. The fair value for commercial paper and term federal funds
purchased was estimated using market quotes.
SUBORDINATED CAPITAL NOTES: The book values for variable-rate
subordinated capital notes are assumed to approximate fair market value.
TRUST PREFERRED SECURITIES: The fair value of fixed-rate trust
preferred securities was estimated using market quotes.
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK
The Company is a party to certain derivative and other financial
instruments that are not reflected on the balance sheet but represent
obligations or assets of the Company in the normal course of business. These
financial instruments are used for trading activities of the Company, to meet
the needs of customers, and to reduce the impact on the Company's operating
results due to market fluctuations in currency or interest rates.
These financial instruments involve, to varying degrees, elements of
credit and market risk which are not recognized on the balance sheet. Credit
risk is defined as the possibility that a loss may occur from the failure of
another party to perform in accordance with the terms of the contract which
exceeds the value of the existing collateral, if any. Market risk is the
possibility that future changes in market conditions may make the financial
instrument less valuable.
F-76
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK (CONTINUED)
The fair value of the derivative financial instruments was calculated
based on quoted market prices where available. If quoted market prices were not
available, the Company used the estimated amount it would receive or pay to
offset or terminate the agreements at December 31, 1999 and 2000 based upon the
terms of such contracts relative to prevailing interest rates.
TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS
The following table reflects the Company's positions relating to
trading activities in derivative instruments. Trading activities include both
activities for the Company's own account and for customers. At December 31, 1999
and 2000, the majority of the Company's derivative transactions for customers
are hedged with essentially offsetting contracts with other counterparties. The
average fair value of derivatives held or written for trading purposes during
the year is not significant. The notional amount of derivative instruments
reflects the extent of the Company's involvement in these instruments. For
interest rate swap, cap and floor agreements, notional amounts do not represent
exposure to credit or market risk. Notional amounts are not exchanged, but serve
as a point of reference for calculating payments.
F-77
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK (CONTINUED)
The following is a summary of derivative instruments held or written
for trading purposes.
DECEMBER 31,
--------------------------------------------------------------------------------------
1999 2000
---------------------------------------- ----------------------------------------
NOTIONAL CREDIT ESTIMATED NOTIONAL CREDIT ESTIMATED
(DOLLARAS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE AMOUNTS RISK(1) FAIR VALUE
- --------------------------------------
HELD OR WRITTEN FOR TRADING PURPOSES
AND CUSTOMER ACCOMMODATIONS
Foreign exchange forward contracts:
Commitments to purchase............ $ 422,614 $21,914 $ 20,520 $ 968,876 $ 7,273 $ (54,745)
Commitments to sell................ 560,357 2,725 (19,951) 1,041,029 66,610 58,023
Foreign exchange OTC options:
Options purchased.................. 104,370 204 204 171,637 102 102
Options written.................... 104,370 -- (204) 171,637 -- (102)
Currency swap agreements:
Commitments to pay................. 36,725 5,338 5,338 19,417 2,310 2,310
Commitments to receive............. 36,725 -- (5,250) 19,417 -- (2,239)
Interest rate contracts:
Caps purchased..................... 1,111,622 3,311 3,311 1,547,849 4,261 4,261
Floors purchased................... 579,610 110 110 884,890 5,789 5,789
Caps written....................... 1,111,622 -- (3,311) 1,547,849 -- (4,259)
Floors written..................... 579,610 -- (110) 884,890 -- (5,789)
Swap contracts:
Pay variable/receive variable... 40,000 88 -- -- -- --
Pay fixed/receive variable...... 1,107,472 13,815 7,983 2,124,058 3,025 (47,006)
Pay variable/receive fixed...... 1,107,472 6,316 (6,402) 2,124,058 54,671 61,881
- -----------
(1) Credit risk amounts reflect the replacement cost for those contracts in
a gain position in the event of default.
ASSET AND LIABILITY MANAGEMENT DERIVATIVE INSTRUMENTS
Derivative positions are integral components of the Company's
designated asset and liability management activities. Therefore, the Company
does not believe it is meaningful to separately analyze the derivative
components of its risk management activities in isolation from related
positions. The Company uses interest rate derivative instruments as part of its
management of asset and liability positions. Derivatives are used to manage
interest rate risk relating to specified groups of assets and liabilities,
primarily LIBOR based commercial loans and trust preferred securities. The
Company uses foreign currency forward contracts as a means of managing foreign
exchange rate risk associated with assets or liabilities denominated in foreign
currencies.
The following table reflects summary information on derivative
contracts used to hedge or modify the Company's risk as of December 31, 1999 and
2000. Amounts included in the fair value column do not include gains or losses
from changes in the value of the underlying asset or liability being hedged.
Notional
F-78
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK (CONTINUED)
amounts are not exchanged, but serve as a point of reference for calculating
payments. For interest rate swap, cap and floor agreements, notional amounts do
not represent exposure to credit or market risk.
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1999 2000
---------------------------------------------- ------------------------------------------------
NOTIONAL UNAMORTIZED CREDIT ESTIMATED NOTIONAL UNAMORTIZED CREDIT ESTIMATED
AMOUNTS PREMIUM RISK(1) FAIR VALUE AMOUNTS PREMIUM RISK(1) FAIR VALUE
PAID PAID
(DOLLARS IN THOUSANDS) (RECEIVED) (RECEIVED)
- ----------------------------- ---------- ----------- ------- ---------- ---------- ----------- ------- ----------
HELD FOR ASSET AND LIABILITY
MANAGEMENT PURPOSES
Foreign exchange forward
contracts:
Commitments to purchase. $ 213,025 $ -- $1,468 $ 401 $ 157,348 $ -- $ 2,215 $ 550
Commitments to sell..... 32,832 -- 98 48 35,858 -- 6 (291)
Currency swap agreements:
Commitments to pay...... 24,464 -- -- (3,960) 23,496 -- -- (815)
Interest rate contracts:
Caps purchased.......... -- -- -- -- -- --
Floors purchased........ 2,300,000 3,576 1,084 (2,491) 1,350,000 7,945 24,514 16,569
Caps written............ -- -- -- -- -- -- -- --
Floors written.......... 1,450,000 -- -- (65) 500,000 -- -- (2,117)
Swap contracts:
Pay variable/receive
fixed.............. 900,000 -- 106 (10,165) 1,200,000 -- 19,653 17,941
- -----------
(1) Credit risk amounts reflect the replacement cost for those contracts in
a gain position in the event of default.
OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Commitments to extend credit are legally binding agreements to lend to
a customer provided there are no violations of any condition established in the
contract. Commitments have fixed expiration dates or other termination clauses
and may require payment of a fee or maintenance of compensatory balances. Such
fees are deferred and, upon partial or full exercise of the commitment,
amortized over the life of the loan or, if exercise is deemed remote, amortized
over the commitment period. Since many of the commitments are expected to expire
without being drawn upon, the contractual amounts do not necessarily represent
future cash requirements. With respect to commitments to extend credit and
letters of credit, the Company's exposure to credit risk in the event of
nonperformance by customers is represented by the contractual amount of those
instruments.
Standby letters of credit are provided to customers to assure their
performance to a third party, generally in the production of goods and services
or under contractual commitments in the financial markets. Commercial letters of
credit are issued to customers to facilitate foreign or domestic trade
transactions. The Company charges fees for the issuance of standby and
commercial letters of credit. The majority of these types of commitments have
terms of one year or less and any fees charged are recognized as noninterest
income upon extension of the commitment. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers and is represented by the contractual amount of those
instruments. When deemed necessary, the Company holds appropriate collateral
supporting those commitments.
F-79
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK (CONTINUED)
The Company uses the same credit underwriting policies in granting or
accepting such commitments or contingent obligations as it does for on-balance
sheet instruments, by evaluating customers' credit worthiness. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's evaluation of the customer. The nature of the
collateral varies but may include deposits held in financial institutions,
marketable securities, accounts receivable, inventory, property and equipment,
and real estate. The Company also provides for probable losses from either
commitments to extend credit or standby letters of credit as a component of its
evaluation in determining the adequacy of its allowance for credit losses and
resulting level of provision charged against current period earnings.
The Company's pricing of these financial instruments is based on the
credit quality and other covenants or requirements. Management believes that the
current fees assessed on these off-balance sheet items represent market rates
that would be charged for similar agreements. Based on this belief, the Company
feels that the carrying amounts are reasonable estimates of the fair value of
these financial instruments. At December 31, 1999 and 2000, fair value
represents management's estimate of the unamortized fee income associated with
these instruments. The following is a summary of other financial instruments
with off-balance sheet risk.
DECEMBER 31,
-----------------------------------------------------
1999 2000
----------------------- ------------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR
(DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE
- ----------------------------------------------- ------------- ------- ----------- -------
Commitments to extend credit................... $16,022,479 $62,947 $15,330,751 $54,942
Standby letters of credit...................... 2,422,032 7,761 2,742,788 7,960
Other letters of credit........................ 352,499 -- 272,076 --
The Company conducts securities lending transactions for institutional
customers as a fully disclosed agent, and, at times, indemnifies its customers
against counterparty default. All lending transactions are collateralized,
primarily by cash. The amount of securities lent with indemnification was $1,023
million and $1,218 million at December 31, 1999 and 2000, respectively. The
market value of the associated collateral was $1,043 million and $1,247 million
at December 31, 1999 and 2000, respectively.
NOTE 17--RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND
DIVIDENDS
Federal Reserve Board regulations require the Bank to maintain reserve
balances based on the types and amounts of deposits received. Average reserve
balances were approximately $202 million and $201 million for the years ended
December 31, 1999 and 2000, respectively.
As of December 31, 1999 and 2000, securities carried at $1.7 billion
and $1.8 billion and loans of $6.9 billion and $6.2 billion, respectively, were
pledged as collateral for borrowings, to secure public and trust department
deposits, and for repurchase agreements as required by contract or law.
The Federal Reserve Act restricts the extension of credit by the Bank
to BTM and affiliates and to the Company and its non-bank subsidiaries and
requires that such loans be secured by certain types of collateral. At December
31, 2000, $132.9 million remained outstanding on eight Bankers Commercial
F-80
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 17--RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND
DIVIDENDS (CONTINUED)
Corporation notes payable to the Bank. The respective notes were fully
collateralized with equipment leases pledged by Bankers Commercial Corporation.
The payment of dividends by the Bank to the Company is subject to the
approval of the Office of the Comptroller of the Currency (OCC) if the total of
all dividends declared in any calendar year exceeds certain calculated amounts.
The payment of dividends is also limited by minimum capital requirements imposed
on national banks by the OCC. At December 31, 2000, the Bank could have declared
dividends aggregating $336 million without prior regulatory approval.
NOTE 18--REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and the Bank's prompt
corrective action classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. Prompt
corrective action provisions are not applicable to Bank Holding Companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to quarterly average assets (as defined). Management believes, as of
December 31, 1999 and 2000, that the Company and the Bank met all capital
adequacy requirements to which they are subject.
On February 19, 1999, the Company issued $350 million of trust
preferred securities, which qualify as Tier 1 capital. See Note 12 for a
complete description of these securities.
As of December 31, 1999 and 2000, the most recent notification from the
OCC categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized", the Bank
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
F-81
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 18--REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Company's and the Bank's capital amounts and ratios are presented
in the following tables.
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------------- -------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------- ---------- ------ ----------- ------
CAPITAL RATIOS FOR THE COMPANY:
As of December 31, 1999:
Total capital (to risk-weighted assets)...................... $3,925,684 11.79% > $2,663,054 > 8.0%
- -
Tier 1 capital (to risk-weighted assets)..................... 3,308,912 9.94 > 1,331,527 > 4.0
- -
Tier 1 capital (to quarterly average assets)(1).............. 3,308,912 10.10 > 1,310,614 > 4.0
- -
As of December 31, 2000
Total capital (to risk-weighted assets)...................... $4,091,391 12.07% > $2,712,032 > 8.0%
- -
Tier 1 capital (to risk-weighted assets)..................... 3,471,289 10.24 > 1,356,016 > 4.0
- -
Tier 1 capital (to quarterly average assets)(1).............. 3,471,289 10.19 > 1,363,033 > 4.0
- -
- -----------
(1) Excludes certain intangible assets.
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- -------------------- ----------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------- ---------- ----- ----------- ----- ----------- ------
CAPITAL RATIOS FOR THE BANK:
As of December 31, 1999:
Total capital (to risk-weighted assets)........... $3,614,651 11.00% > $2,628,046 > 8.0% > $3,285,058 > 10.0%
- - - -
Tier 1 capital (to risk-weighted assets).......... 3,103,324 9.45 > 1,314,023 > 4.0 > 1,971,035 > 6.0
- - - -
Tier 1 capital (to quarterly average assets)(1)... 3,103,324 9.55 > 1,300,283 > 4.0 > 1,625,354 > 5.0
- - - -
As of December 31, 2000
Total capital (to risk-weighted assets)........... $3,670,660 11.01% > $2,667,340 > 8.0% > $3,334,175 > 10.0%
- - - -
Tier 1 capital (to risk-weighted assets).......... 3,157,516 9.47 > 1,333,670 > 4.0 > 2,000,505 > 6.0
- - - -
Tier 1 capital (to quarterly average assets)(1)... 3,157,516 9.24 > 1,366,949 > 4.0 > 1,708,686 > 5.0
- - - -
- -----------
(1) Excludes certain intangible assets.
NOTE 19--EARNINGS PER SHARE
Basic EPS is computed by dividing net income after preferred dividends
by the weighted average number of common shares outstanding during the period.
For all periods presented, there were no dividends on preferred stock. Diluted
EPS is computed based on the weighted average number of common shares
outstanding adjusted for common stock equivalents, which include stock options.
The following
F-82
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 19--EARNINGS PER SHARE (CONTINUED)
table presents a reconciliation of basic and diluted EPS for the years ended
December 31, 1998, 1999 and 2000:
DECEMBER 31,
----------------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ---------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ------------------------------------------------- -------- --------- -------- -------- -------- ---------
Net income....................................... $466,461 $466,461 $441,731 $441,731 $439,900 $439,900
Weighted average common shares outstanding....... 175,127 175,127 166,382 166,382 161,605 161,605
Additional shares due to:
Assumed conversion of dilutive stock options.. -- 610 -- 767 -- 384
-------- -------- -------- -------- -------- --------
Adjusted weighted average common shares outstanding 175,127 175,737 166,382 167,149 161,605 161,989
======== ======== ======== ======== ======== ========
Net income per share............................. $ 2.66 $ 2.65 $ 2.65 $ 2.64 $ 2.72 $ 2.72
======== ======== ======== ======== ======== ========
Options to purchase 519,600 shares of common stock at $35 per share
were outstanding but not included in the computation of diluted EPS in 1998.
Options to purchase 1,500 shares of common stock at $39.25 per share and options
to purchase 23,000 shares of common stock at $44.56 per share were outstanding
but not included in the computation of diluted EPS in 1999. Options to purchase
4,040,244 shares of common stock with the range from $27.56 to $44.56 per share
were outstanding but not included in the computation of diluted EPS in 2000.
These options to purchase shares were not included in the computation of diluted
EPS in each of 1998, 1999, and 2000 because they were anti-dilutive
NOTE 20--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the components of accumulated other
comprehensive income (loss):
FOREIGN NET UNREALIZED GAINS (LOSSES)
CURRENCY TRANSLATION ON SECURITIES AVAILABLE FOR SALE
------------------------------------- -------------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------------- -------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000 1998 1999 2000
- --------------------------------------------- --------- -------- -------- ------- --------- ---------
Beginning balance............................ $(12,458) $(9,651) $ (8,713) $19,886 $ 29,109 $(32,548)
Change during the year....................... 2,807 938 (2,478) 9,223 (61,657) 74,427
--------- -------- -------- ------- -------- --------
Ending balance............................... $ (9,651) $(8,713) $(11,191) $29,109 $(32,548) $ 41,879
======== ======= ======== ======= ======== ========
MINIMUM PENSION ACCUMULATED OTHER
LIABILITY ADJUSTMENT COMPREHENSIVE INCOME (LOSS)
----------------------------------- -------------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
----------------------------------- -------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000 1998 1999 2000
- --------------------------------------------- -------- ------- ------ ------- -------- ---------
Beginning balance............................ $ -- $ (1,748) $(689) $ 7,428 $ 17,710 $(41,950)
Change during the year....................... (1,748) 1,059 (114) 10,282 (59,660) 71,835
-------- -------- ----- ------- -------- --------
Ending balance............................... $ (1,748) $ (689) $(803) $17,710 $(41,950) $ 29,885
======== ======== ===== ======= ======== ========
F-83
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 21--CONTINGENCIES
The Company is subject to various pending and threatened legal actions
that arise in the normal course of business. The Company maintains reserves for
losses from legal actions that are both probable and estimable. In the opinion
of management, the disposition of claims currently pending will not have a
material adverse effect on the Company's financial position or results of
operations.
NOTE 22--TRANSACTIONS WITH AFFILIATES
The Company had, and expects to have in the future, banking
transactions and other transactions in the ordinary course of business with BTM
and with its affiliates. During 1998, 1999 and 2000, such transactions included,
but were not limited to, origination, participation, servicing and remarketing
of loans and leases, purchase and sale of acceptances, interest rate derivatives
and foreign exchange transactions, funds transfers, custodianships, electronic
data processing, investment advice and management, deposits and credit
examination, and trust services. In the opinion of management, such transactions
were made at prevailing rates, terms, and conditions and do not involve more
than the normal risk of collectibility or present other unfavorable features. In
addition, some compensation for services rendered to the Company is paid to the
expatriate officers from BTM, and reimbursed by the Company to BTM under a
service agreement.
NOTE 23--BUSINESS SEGMENTS
The Company is organized based on the products and services that it
offers and operates in four principal areas:
o The Community Banking and Investment Services Group offers a
full range of banking services, primarily to individuals and
small businesses, delivered through a tri-state network of
branches and ATM's. These services include commercial loans,
mortgages and home equity lines of credit, consumer loans,
deposit services and cash management as well as fiduciary,
private banking, investment and asset management services for
individuals and institutions.
o The Commercial Financial Services Group primarily provides
tailored credit and cash management services to large
corporate and middle market companies. Services include
commercial loans, asset based lending, commercial real estate
lending, leasing and a comprehensive product array of deposit
and cash management services.
o The International Banking Group provides trade-finance
products to banks, and extends primarily short-term credit to
corporations engaged in international business. The group's
revenue predominately relates to foreign customers.
o The Global Markets Group manages the Company's securities
portfolio, trading operations, wholesale funding needs, and
interest rate and liquidity risk.
The information, set forth in the table on page F-86 reflects selected
income statement items and a selected balance sheet item by business unit. The
information presented does not necessarily represent the business units'
financial condition and results of operations as if they were independent
entities. Unlike financial accounting, there is no authoritative body of
guidance for management accounting equivalent to generally accepted accounting
principles. Consequently, reported results are not necessarily comparable with
those presented by other companies.
F-84
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 23--BUSINESS SEGMENTS (CONTINUED)
The information in this table is derived from the internal management
reporting system used by management to measure the performance of the segments
and the Company overall. The management reporting system assigns balance sheet
and income statement items to each segment based on internal management
accounting policies. Net interest income is determined by the Company's internal
funds transfer pricing system, which assigns a cost of funds or a credit for
funds to assets or liabilities based on their type, maturity or repricing
characteristics. Noninterest income and expense directly attributable to a
segment are assigned to that business, other than restructuring charges
(credits). Indirect costs, such as overhead, operations, and technology expense,
are allocated to the segments based on studies of billable unit costs for
product or data processing. Under the Company's risk-adjusted return on capital
(RAROC) methodology, credit expense is charged to businesses based upon expected
losses arising from credit risk. In addition, the attribution of economic
capital is related to unexpected losses arising from credit, market and
operational risks.
"Other" is comprised of goodwill, certain parent company non-bank
subsidiaries, the elimination of the fully taxable-equivalent amounts, the
allowance and related provision for credit losses in excess of that ascribed
through the Company's RAROC methodology, the earnings associated with the
unallocated equity capital, and the residual costs of support groups, as well as
certain nonrecurring items such as restructuring charges (credits). In addition,
it includes two units, the Credit and Compliance Group, which manages
nonperforming assets, and the Pacific Rim Group, which offers financial products
to Asian-owned subsidiaries located in the U.S. On an individual basis, none of
the items in "Other" are significant to the Company's business.
F-85
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 23--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL
AND INVESTMENT SERVICES GROUP SERVICES GROUP BANKING GROUP
------------------------------------ ----------------------------- -----------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------------ ----------------------------- -----------------------------
1998 1999 2000 1998 1999 2000 1998 1999 2000
---------- ---------- ---------- -------- -------- -------- -------- -------- -------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income........ $ 704,783 $ 697,113 $ 731,741 $462,271 $596,082 $719,202 $ 51,450 $ 43,824 $35,129
Noninterest income......... 333,345 370,917 412,197 109,819 133,994 173,089 57,750 56,201 60,352
---------- ---------- ---------- -------- -------- -------- -------- -------- -------
Total revenue.............. 1,038,128 1,068,030 1,143,938 572,090 730,076 892,291 109,200 100,025 95,481
Noninterest expense(1)..... 742,477 760,163 721,907 250,651 284,680 299,963 58,650 52,275 55,558
Credit expense (income).... 63,854 53,410 48,582 73,329 98,916 120,619 14,086 13,948 7,268
---------- ---------- ---------- -------- -------- -------- -------- -------- -------
Income (loss) before income 231,797 254,457 373,449 248,110 346,480 471,709 36,464 33,802 32,655
tax expense (benefit)...
Income tax expense (benefit) 91,583 98,375 142,844 96,268 127,175 168,137 13,684 12,927 12,491
---------- ---------- ---------- -------- -------- -------- -------- -------- -------
Net income................. $ 140,214 $ 156,082 $ 230,605 $151,842 $219,305 $303,572 $ 22,780 $ 20,875 $20,164
========== ========== ========== ======== ======== ======== ======== ======== =======
Total assets (DOLLARS IN
MILLIONS):.............. $ 10,604 $ 9,148 $ 9,441 $ 13,543 $17,420 $18,259 $ 1,717 $ 1,555 $1,571
========== ========== ========== ======== ======== ======== ======== ======== =======
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------- ------------------------------------
1998 1999 2000 1998 1999 2000 1998 1999 2000
------ ------- ------- -------- -------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS
(DOLLARS
IN THOUSANDS):
Net interest income....... $41,972 $60,884 $42,976 $ 57,747 $ 17,930 $ 55,392 $1,318,223 $1,415,833 $1,584,440
Noninterest income........ 18,614 15,954 (7,083) 14,003 9,693 8,625 533,531 586,759 647,180
Total revenue............. 60,586 76,838 35,893 71,750 27,623 64,017 1,851,754 2,002,592 2,231,620
Noninterest expense(1).... 24,709 20,826 15,757 58,731 164,029 37,000 1,135,218 1,281,973 1,130,185
Credit expense (income)... -- -- -- (106,269) (101,274) 263,531 45,000 65,000 440,000
Income (loss) before 35,877 56,012 20,136 119,288 (35,132) (236,514) 671,536 655,619 661,435
income tax expense
(benefit)..............
Income tax expense 13,958 21,517 7,702 (10,418) (46,106) (109,639) 205,075 213,888 221,535
(benefit)..............
Net income................ $21,919 $34,495 $12,434 $129,706 $ 10,974 $(126,875) $ 466,461 $ 441,731 $439,900
Total assets (DOLLARS IN $ 4,479 $ 3,776 $ 4,662 $ 1,933 $ 1,786 $ 1,229 $ 32,276 $ 33,685 $ 35,162
MILLIONS):.............
- -----------
(1) "Other" includes 3rd quarter 1999 restructuring charge of $85.0 million ($55.2 million, net of tax) and 2000
restructuring credits of $19.0 million ($11.8 million, net of taxes).
F-86
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1999 2000
- -------------------------------------------------------------------------------- ---------- ----------
ASSETS
Cash and cash equivalents.................................................... $167,171 $126,371
Investment in and advances to subsidiaries................................... 3,510,326 3,778,355
Loans........................................................................ -- 4,074
Other assets................................................................. 17,072 10,311
---------- ----------
Total assets.............................................................. $3,694,569 $3,919,111
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper............................................................. $97,985 $99,969
Other liabilities............................................................ 48,291 46,752
Subordinated capital notes................................................... 200,000 200,000
Junior subordinated debt payable to subsidiary grantor trust................. 360,825 360,825
---------- ----------
Total liabilities......................................................... 707,101 707,546
Shareholders' equity......................................................... 2,987,468 3,211,565
---------- ----------
Total liabilities and shareholders' equity................................ $3,694,569 $3,919,111
========== ==========
F-87
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- --------------------------------------------------------------------------------------- -------- -------- --------
INCOME:
Dividends from bank subsidiary...................................................... $98,159 $227,099 $283,471
Dividends from nonbank subsidiaries................................................. 23,000 -- 10,000
Interest income on advances to subsidiaries and deposits in bank.................... 11,744 15,120 18,850
Other income........................................................................ 404 1,292 458
-------- -------- --------
Total income..................................................................... 133,307 243,511 312,779
-------- -------- --------
EXPENSE:
Interest expense.................................................................... 15,573 41,736 47,172
Other expense, net.................................................................. 2,706 3,203 3,313
-------- -------- --------
Total expense....................................................................... 18,279 44,939 50,485
-------- -------- --------
Income before income taxes and equity in undistributed net income of subsidiaries... 115,028 198,572 262,294
Provision for credit losses......................................................... -- -- (25)
Income tax benefit.................................................................. (2,346) (11,266) (11,935)
-------- -------- --------
Income before equity in undistributed net income of subsidiaries.................... 117,374 209,838 274,204
Equity in undistributed net income (loss) of subsidiaries:
Bank subsidiary.................................................................. 360,738 208,699 138,105
Nonbank subsidiaries(1).......................................................... (11,651) 23,194 27,591
-------- -------- --------
NET INCOME............................................................................. $466,461 $441,731 $439,900
======== ======== ========
- -----------
(1) In 1998, the amount represents dividends distributed by nonbank
subsidiaries in excess of their 1998 net income.
F-88
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------
(DOLLARS IN THOUSANDS) 1998 1999 2000
- --------------------------------------------------------------------------------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $466,461 $441,731 $439,900
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed net income of subsidiaries......................... (349,087) (231,893) (165,696)
Provision for credit losses................................................ -- -- 25
Other, net................................................................. (6,007) 839 7,953
-------- -------- --------
Net cash provided by operating activities................................ 111,367 210,677 282,182
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to subsidiaries...................................................... (34,747) (79,370) (43,704)
Repayment of advances to subsidiaries......................................... 18,088 8,766 11,903
-------- -------- --------
Net cash used by investing activities.................................... (16,659) (70,604) (31,801)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term borrowings.............................. 99,958 (1,973) 1,984
Maturity and redemption of subordinated capital notes and long term debt...... (50,000) -- --
Proceeds from issuance of junior subordinated debt payable to subsidiary
grantor trust.............................................................. -- 360,825 --
Payments of cash dividends.................................................... (98,160) (127,119) (162,575)
Repurchase of common stock.................................................... -- (328,662) (130,642)
Other, net.................................................................... 10,598 51 52
-------- -------- --------
Net cash used by financing activities.................................... (37,604) (96,878) (291,181)
-------- -------- --------
Net increase (decrease) in cash and due from banks............................... 57,104 43,195 (40,800)
Cash and due from banks at beginning of year..................................... 66,872 123,976 167,171
-------- -------- --------
Cash and due from banks at end of year........................................... $123,976 $167,171 $126,371
======== ======== ========
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest...................................................................... $ 16,056 $ 35,828 $ 44,327
Income taxes.................................................................. (4,836) 137 26,704
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared but unpaid................................................. $ 33,300 $ 41,172 $ 39,824
F-89
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999, AND 2000
NOTE 25--SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly results are summarized as follows:
1999 QUARTERS ENDED
-----------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------------------ -------- -------- ------------ -----------
Interest income............................................. $521,167 $530,978 $550,277 $572,348
Interest expense............................................ 181,346 183,815 190,264 203,512
-------- -------- -------- --------
Net interest income......................................... 339,821 347,163 360,013 368,836
Provision for credit losses................................. 5,000 10,000 20,000 30,000
Noninterest income.......................................... 139,308 144,798 148,349 154,304
Noninterest expense......................................... 301,164 305,229 384,298 291,282
-------- -------- -------- --------
Income before income taxes.................................. 172,965 176,732 104,064 201,858
Income tax expense.......................................... 54,470 62,005 32,483 64,930
-------- -------- -------- --------
Net income.................................................. $118,495 $114,727 $ 71,581 $136,928
======== ======== ======== ========
Net income per common share--basic.......................... $ 0.69 $ 0.70 $ 0.43 $ 0.83
======== ======== ======== ========
Net income per common share--diluted........................ $ 0.69 $ 0.69 $ 0.43 $ 0.83
======== ======== ======== ========
Dividends per share(1)...................................... $ 0.19 $ 0.19 $ 0.19 $ 0.25
======== ======== ======== ========
2000 QUARTERS ENDED
-----------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------------------ -------- -------- ------------ -----------
Interest income............................................. $597,816 $626,383 $640,481 $636,400
Interest expense............................................ 212,294 230,091 236,496 237,759
-------- -------- -------- --------
Net interest income......................................... 385,522 396,292 403,985 398,641
Provision for credit losses................................. 40,000 70,000 80,000 250,000
Noninterest income.......................................... 152,010 173,070 168,928 153,172
Noninterest expense......................................... 256,038 282,319 291,378 300,450
-------- -------- -------- --------
Income before income taxes.................................. 241,494 217,043 201,535 1,363
Income tax expense (benefit)................................ 83,023 75,628 69,959 (7,075)
-------- -------- -------- --------
Net income.................................................. $158,471 $141,415 $131,576 $8,438
======== ======== ======== ========
Net income per common share--basic.......................... $ 0.97 $ 0.87 $ 0.82 $ 0.05
======== ======== ======== ========
Net income per common share--diluted........................ $ 0.96 $ 0.87 $ 0.82 $ 0.05
======== ======== ======== ========
Dividends per share(1)...................................... $ 0.25 $ 0.25 $ 0.25 $ 0.25
======== ======== ======== ========
- -----------
(1) Dividends per share are based on the Company's common stock outstanding
as of the declaration date.
F-90
UNIONBANCAL CORPORATION AND SUBSIDIARIES
MANAGEMENT STATEMENT
The management of UnionBanCal Corporation is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (US GAAP) and, as such,
include amounts based on informed judgments and estimates made by management.
We maintain a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and recorded properly to
permit the preparation of financial statements in accordance with US GAAP.
Management recognizes that even a highly effective internal control system has
inherent risks, including the possibility of human error and the circumvention
or overriding of controls, and that the effectiveness of an internal control
system can change with circumstances. However, management believes that the
internal control system provides reasonable assurance that errors or
irregularities that could be material to the financial statements would be
prevented or detected on a timely basis and corrected through the normal course
of business. As of December 31, 2000, management believes that the internal
controls are in place and operating effectively.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of our management; it includes members
with banking or related financial management expertise and who are not large
customers of Union Bank of California, N.A. The Audit Committee has access to
outside counsel. The Audit Committee is responsible for recommending to the
Board of Directors the selection of independent auditors. It meets periodically
with management, the independent auditors, and the internal auditors to ensure
that they are carrying out their responsibilities. The Audit Committee is also
responsible for performing an oversight role by reviewing and monitoring our
financial, accounting, and auditing procedures in addition to reviewing our
financial reports. The independent auditors and internal auditors have full and
free access to the Audit Committee, with or without the presence of management,
to discuss the adequacy of internal controls for financial reporting and any
other matters which they believe should be brought to the attention of the Audit
Committee.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, who were given unrestricted access to all financial
records and related data, including minutes of all meetings of shareholders, the
Board of Directors and committees of the Board. Management believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The independent auditors' report is presented on page F-92.
/s/ TAKAHIRO MORIGUCHI
-------------------------------------
Takahiro Moriguchi
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ YOSHIHIKO SOMEYA
-------------------------------------
Yoshihiko Someya
DEPUTY CHAIRMAN OF THE BOARD
/s/ DAVID I. MATSON
-------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
/s/ DAVID A. ANDERSON
-------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
F-91
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of UnionBanCal Corporation:
We have audited the accompanying consolidated balance sheets of
UnionBanCal Corporation and subsidiaries as of December 31, 1999 and 2000, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of UnionBanCal Corporation and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
San Francisco, California
January 22, 2001
F-92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, UnionBanCal Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION
(Registrant)
By:/s/ TAKAHIRO MORIGUCHI
-------------------------------------
Takahiro Moriguchi
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By:/s/ DAVID I. MATSON
-------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
By:/s/ DAVID A. ANDERSON
-------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
Dated: March 20, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
UnionBanCal Corporation and in the capacities and on the date indicated below.
SIGNATURE TITLE
- --------- -----
*
- --------------------------------- Director
David R. Andrews
- --------------------------------- Director
L. Dale Crandall
*
- ---------------------------------- Director
Richard D. Farman
*
- ---------------------------------- Director
Stanley F. Farrar
II-1
SIGNATURE TITLE
- --------- -----
*
- ---------------------------------- Director
Herman E. Gallegos
*
- ---------------------------------- Director
Jack L. Hancock
*
- ---------------------------------- Director
Richard C. Hartnack
*
- --------------------------------- Director
Kaoru Hayama
*
- ---------------------------------- Director
Norimichi Kanari
*
- ---------------------------------- Director
Satoru Kishi
- ---------------------------------- Director
Monica C. Lozano
*
- ---------------------------------- Director
Mary S. Metz
- ---------------------------------- Director
Raymond E. Miles
*
- ---------------------------------- Director
Takahiro Moriguchi
- ---------------------------------- Director
J. Fernando Niebla
*
- ---------------------------------- Director
Sidney R. Petersen
*
- ---------------------------------- Director
Carl W. Robertson
II-2
SIGNATURE TITLE
- --------- -----
- ---------------------------------- Director
Yoshihiko Someya
*
- ---------------------------------- Director
Henry T. Swigert
*
- ---------------------------------- Director
Robert M. Walker
- ---------------------------------- Director
Kenji Yoshizawa
* By /s/ JOHN H. MCGUCKIN, JR.
----------------------------
John H. McGuckin, Jr.
Attorney-in-Fact
Dated: March 20, 2001
II-3