-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J58eFQ1VEkzkbg2sq7F6KPs8t3eZWYX5i75SSRIqBiwwiktlPfrEYGx9VwlVBScU GWU4w+h2eJ2cyQy/+3Jeqg== 0001011659-02-000032.txt : 20020814 0001011659-02-000032.hdr.sgml : 20020814 20020814140921 ACCESSION NUMBER: 0001011659-02-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL CORP CENTRAL INDEX KEY: 0001011659 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 941234979 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15081 FILM NUMBER: 02734425 BUSINESS ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 BUSINESS PHONE: 4157652969 MAIL ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 10-Q 1 form10-q.txt SECOND QUARTER 2002 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 Commission file number 1-15081 UNIONBANCAL CORPORATION CALIFORNIA 94-1234979 State of Incorporation: I.R.S. Employer Identification No. 400 CALIFORNIA STREET SAN FRANCISCO, CALIFORNIA 94104-1302 Registrant's telephone number (415) 765-2969 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of Common Stock outstanding at July 31, 2002: 157,648,374 ================================================================================ UNIONBANCAL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PAGE NUMBER PART I FINANCIAL INFORMATION Consolidated Financial Highlights.................................... 2 Item 1. Financial Statements: Condensed Consolidated Statements of Income....................... 4 Condensed Consolidated Balance Sheets............................. 5 Condensed Consolidated Statements of Changes in Shareholders' Equity............................................................ 6 Condensed Consolidated Statements of Cash Flows................... 7 Notes to Condensed Consolidated Financial Statements.............. 8 Item 2. Management's Discussion and Analysis: Introduction...................................................... 18 Summary........................................................... 18 Business Segments................................................. 20 Net Interest Income............................................... 30 Noninterest Income................................................ 33 Noninterest Expense............................................... 35 Income Tax Expense................................................ 37 Loans............................................................. 37 Cross-Border Outstandings......................................... 38 Provision for Credit Losses....................................... 38 Allowance for Credit Losses....................................... 39 Nonperforming Assets.............................................. 43 Loans 90 Days or More Past Due and Still Accruing................. 43 Quantitative and Qualitative Disclosure about Interest Rate Risk Management.............................................. 44 Liquidity......................................................... 45 Regulatory Capital................................................ 46 Certain Business Risk Factors..................................... 47 Written Statements Under Section 906 of the Sarbanes-Oxley Act of 2002 .......................................................... 51 Item 3. Market Risk.................................................. 51 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.......... 52 Item 6. Exhibits and Reports on Form 8-K............................. 52 Signatures.............................................................. 53
PART I. FINANCIAL INFORMATION UnionBanCal Corporation and Subsidiaries Consolidated Financial Highlights (Unaudited) AS OF AND FOR THE THREE MONTHS ENDED ______________________________________ JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 CHANGE _____________________________________________ ________ ________ _______ RESULTS OF OPERATIONS: Net interest income(1)......................................$ 379,313 $ 386,298 1.84% Provision for credit losses................................. 65,000 50,000 (23.08) Noninterest income.......................................... 168,391 188,774 12.10 Noninterest expense......................................... 307,452 329,791 7.27 ___________ ____________ Income before income taxes(1)............................... 175,252 195,281 11.43 Taxable-equivalent adjustment............................... 590 537 (8.98) Income tax expense.......................................... 57,512 64,802 12.68 ___________ ____________ Net income..................................................$ 117,150 $ 129,942 10.92% =========== ============ PER COMMON SHARE: Net income--basic...........................................$ 0.74 $ 0.83 12.16% Net income--diluted......................................... 0.74 0.81 9.46 Dividends(2)................................................ 0.25 0.28 12.00 Book value (end of period).................................. 21.37 23.94 12.03 Common shares outstanding (end of period)...................157,839,218 157,718,215 (0.08) Weighted average common shares outstanding--basic...........158,180,799 157,314,527 (0.55) Weighted average common shares outstanding--diluted.........158,881,633 159,675,924 0.50 BALANCE SHEET (END OF PERIOD): Total assets................................................$35,758,333 $ 36,136,725 1.06% Total loans................................................. 25,656,247 25,592,306 (0.25) Nonperforming assets........................................ 460,116 414,972 (9.81) Total deposits.............................................. 27,700,624 28,833,365 4.09 Medium and long-term debt................................... 199,701 406,869 103.74 Trust preferred securities.................................. 364,269 366,265 0.55 Common equity............................................... 3,373,564 3,775,663 11.92 BALANCE SHEET (PERIOD AVERAGE): Total assets................................................$34,589,322 $ 35,730,492 3.30% Total loans................................................. 26,114,389 25,578,846 (2.05) Earning assets.............................................. 31,272,909 32,674,628 4.48 Total deposits.............................................. 26,641,335 28,222,245 5.93 Common equity............................................... 3,406,324 3,749,035 10.06 FINANCIAL RATIOS: Return on average assets(3)................................. 1.36% 1.46% Return on average common equity(3).......................... 13.79 13.90 Efficiency ratio(4)......................................... 56.13 57.35 Net interest margin(1)...................................... 4.86 4.74 Dividend payout ratio....................................... 33.78 33.73 Tangible equity ratio....................................... 9.30 10.16 Tier 1 risk-based capital ratio............................. 10.85 11.90 Total risk-based capital ratio.............................. 12.70 13.65 Leverage ratio.............................................. 10.33 10.77 Allowance for credit losses to total loans.................. 2.44 2.44 Allowance for credit losses to nonaccrual loans............. 138.18 150.78 Net loans charged off to average total loans................ 1.24 0.90 Nonperforming assets to total loans, distressed loans held for sale, and foreclosed assets.... ................ 1.79 1.62 Nonperforming assets to total assets........................ 1.29 1.15 __________________ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent basis) and noninterest income.
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UnionBanCal Corporation and Subsidiaries Consolidated Financial Highlights (Continued) (Unaudited) AS OF AND FOR THE SIX MONTHS ENDED ________________________________________ JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 CHANGE _____________________________________________ ________ ________ _______ RESULTS OF OPERATIONS: Net interest income(1)...................................................... $ 767,196 $ 767,271 0.01% Provision for credit losses................................................. 165,000 105,000 (36.36) Noninterest income.......................................................... 349,198 360,225 3.16 Noninterest expense......................................................... 614,937 653,154 6.21 ____________ ____________ Income before income taxes(1)............................................... 336,457 369,342 9.77 Taxable-equivalent adjustment............................................... 1,212 1,070 (11.72) Income tax expense.......................................................... 110,808 123,553 11.50 ____________ ____________ Net income.................................................................. $ 224,437 $ 244,719 9.04% ============ ============ PER COMMON SHARE: Net income--basic............................................................ $ 1.42 $ 1.56 9.86% Net income--diluted.......................................................... 1.41 1.54 9.22 Dividends(2)................................................................ 0.50 0.53 6.00 Book value (end of period).................................................. 21.37 23.94 12.03 Common shares outstanding (end of period)................................... 157,839,218 157,718,215 (0.08) Weighted average common shares outstanding--basic............................ 158,535,105 156,774,339 (1.11) Weighted average common shares outstanding--diluted.......................... 158,975,932 158,534,791 (0.28) BALANCE SHEET (END OF PERIOD): Total assets................................................................ $ 35,758,333 $ 36,136,725 1.06% Total loans................................................................. 25,656,247 25,592,306 (0.25) Nonperforming assets........................................................ 460,116 414,972 (9.81) Total deposits.............................................................. 27,700,624 28,833,365 4.09 Medium and long-term debt................................................... 199,701 406,869 103.74 Trust preferred securities.................................................. 364,269 366,265 0.55 Common equity............................................................... 3,373,564 3,775,663 11.92 BALANCE SHEET (PERIOD AVERAGE): Total assets................................................................ $ 34,509,101 $ 35,408,797 2.61% Total loans................................................................. 26,265,170 25,354,548 (3.47) Earning assets.............................................................. 31,171,142 32,327,489 3.71 Total deposits.............................................................. 26,206,917 27,897,401 6.45 Common equity............................................................... 3,372,321 3,687,244 9.34 FINANCIAL RATIOS: Return on average assets(3)................................................. 1.31% 1.39% Return on average common equity(3).......................................... 13.42 13.38 Efficiency ratio(4)......................................................... 55.08 57.92 Net interest margin(1)...................................................... 4.94 4.77 Dividend payout ratio....................................................... 35.21 33.97 Tangible equity ratio....................................................... 9.30 10.16 Tier 1 risk-based capital ratio............................................. 10.85 11.90 Total risk-based capital ratio.............................................. 12.70 13.65 Leverage ratio.............................................................. 10.33 10.77 Allowance for credit losses to total loans.................................. 2.44 2.44 Allowance for credit losses to nonaccrual loans............................. 138.18 150.78 Net loans charged off to average total loans(3)............................. 1.17 0.93 Nonperforming assets to total loans, distressed loans held for sale, and foreclosed assets........................................................ 1.79 1.62 Nonperforming assets to total assets........................................ 1.29 1.15 __________________ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income.
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ITEM 1. FINANCIAL STATEMENTS UnionBanCal Corporation and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2001 2002 _____________________________________________ ________ ________ __________ ________ INTEREST INCOME Loans................................................................. $486,928 $378,572 $1,023,417 $754,370 Securities............................................................ 71,210 78,244 138,518 159,580 Interest bearing deposits in banks.................................... 661 629 1,627 1,125 Federal funds sold and securities purchased under resale agreements... 2,158 4,828 3,187 8,887 Trading account assets................................................ 2,164 930 5,064 1,621 ________ ________ __________ ________ Total interest income.............................................. 563,121 463,203 1,171,813 925,583 ________ ________ __________ ________ INTEREST EXPENSE Domestic deposits..................................................... 125,426 55,411 260,543 115,346 Foreign deposits...................................................... 19,447 6,105 44,990 12,369 Federal funds purchased and securities sold under repurchase agreements 10,622 1,396 36,422 3,345 Commercial paper...................................................... 14,625 4,536 35,038 8,510 Medium and long-term debt............................................. 2,535 2,411 5,731 4,823 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust............................. 5,367 3,948 11,389 7,911 Other borrowed funds.................................................. 6,376 3,635 11,716 7,078 ________ ________ __________ ________ Total interest expense............................................. 184,398 77,442 405,829 159,382 ________ ________ __________ ________ NET INTEREST INCOME...................................................... 378,723 385,761 765,984 766,201 Provision for credit losses........................................... 65,000 50,000 165,000 105,000 ________ ________ __________ ________ Net interest income after provision for credit losses.............. 313,723 335,761 600,984 661,201 ________ ________ __________ ________ NONINTEREST INCOME Service charges on deposit accounts................................... 61,852 69,869 118,872 136,012 Trust and investment management fees.................................. 39,234 37,587 78,915 74,312 Merchant transaction processing fees.................................. 20,433 22,421 39,499 43,122 International commissions and fees.................................... 18,125 19,239 35,235 37,462 Brokerage commissions and fees........................................ 9,063 9,275 17,978 18,907 Merchant banking fees................................................. 9,681 9,081 18,929 16,026 Securities gains (losses), net........................................ 3,751 (1,297) 6,017 (3,863) Other................................................................. 6,252 22,599 33,753 38,247 ________ ________ __________ ________ Total noninterest income........................................... 168,391 188,774 349,198 360,225 ________ ________ __________ ________ NONINTEREST EXPENSE Salaries and employee benefits........................................ 164,584 186,100 329,071 364,976 Net occupancy......................................................... 23,837 25,029 46,596 48,410 Equipment............................................................. 15,469 15,967 31,267 32,307 Merchant transaction processing....................................... 13,449 14,433 26,363 27,349 Communications........................................................ 11,806 12,568 23,508 26,509 Professional services................................................. 11,349 10,936 19,173 20,439 Data processing....................................................... 9,101 7,540 18,050 16,531 Foreclosed asset expense (income)..................................... 48 (13) 61 112 Other................................................................. 57,809 57,231 120,848 116,521 ________ ________ __________ ________ Total noninterest expense.......................................... 307,452 329,791 614,937 653,154 ________ ________ __________ ________ Income before income taxes............................................ 174,662 194,744 335,245 368,272 Income tax expense.................................................... 57,512 64,802 110,808 123,553 ________ ________ __________ ________ NET INCOME............................................................... $117,150 $129,942 $ 224,437 $244,719 ======== ======== ========== ======== NET INCOME PER COMMON SHARE--BASIC........................................ $ 0.74 $ 0.83 $ 1.42 $ 1.56 ======== ======== ========== ======== NET INCOME PER COMMON SHARE--DILUTED...................................... $ 0.74 $ 0.81 $ 1.41 $ 1.54 ======== ======== ========== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC......................... 158,181 157,315 158,535 156,774 ======== ======== ========== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED....................... 158,882 159,676 158,976 158,535 ======== ======== ========== ======== See accompanying notes to condensed consolidated financial statements.
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UnionBanCal Corporation and Subsidiaries Condensed Consolidated Balance Sheets (UNAUDITED) (UNAUDITED) JUNE 30, DECEMBER 31, JUNE 30, (DOLLARS IN THOUSANDS) 2001 2001 2002 ______________________ ___________ ___________ ___________ ASSETS Cash and due from banks.................................................. $ 2,223,197 $ 2,682,392 $ 2,046,286 Interest bearing deposits in banks....................................... 51,510 64,162 153,423 Federal funds sold and securities purchased under resale agreements...... 1,491,000 918,400 640,500 ___________ ___________ ___________ Total cash and cash equivalents....................................... 3,765,707 3,664,954 2,840,209 Trading account assets................................................... 301,744 229,697 365,784 Securities available for sale: Securities pledged as collateral...................................... 287,881 137,922 133,219 Held in portfolio..................................................... 4,569,015 5,661,160 5,750,157 Loans (net of allowance for credit losses: June 30, 2001, $626,537; December 31, 2001, $634,509; June 30, 2002, $624,948)................. 25,029,710 24,359,521 24,967,358 Due from customers on acceptances........................................ 167,309 182,440 119,072 Premises and equipment, net.............................................. 483,865 494,534 500,584 Intangible assets........................................................ 2,264 16,176 23,965 Goodwill................................................................. 48,900 68,623 92,924 Other assets............................................................. 1,101,938 1,223,719 1,343,453 ___________ ___________ ___________ Total assets.......................................................... $35,758,333 $36,038,746 $36,136,725 =========== =========== =========== LIABILITIES Domestic deposits: Noninterest bearing................................................... $11,247,828 $12,314,150 $12,938,634 Interest bearing...................................................... 14,267,659 14,160,113 14,267,606 Foreign deposits: Noninterest bearing................................................... 342,656 404,708 315,416 Interest bearing...................................................... 1,842,481 1,677,228 1,311,709 ___________ ___________ ___________ Total deposits........................................................ 27,700,624 28,556,199 28,833,365 Federal funds purchased and securities sold under repurchase agreements.. 713,056 418,814 318,365 Commercial paper......................................................... 1,416,432 830,657 955,328 Other borrowed funds..................................................... 702,511 700,403 395,826 Acceptances outstanding.................................................. 167,309 182,440 119,072 Other liabilities........................................................ 1,120,867 1,040,406 965,972 Medium and long-term debt................................................ 199,701 399,657 406,869 UnionBanCal Corporation-- obligated mandatorily redeemable preferred securities of subsidiary grantor trust................................ 364,269 363,928 366,265 ___________ ___________ ___________ Total liabilities..................................................... 32,384,769 32,492,504 32,361,062 ___________ ___________ ___________ Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares, no shares issued or outstanding as of June 30, 2001, December 31, 2001, and June 30, 2002................ -- -- -- Common stock--no stated value: Authorized 300,000,000 shares, issued 157,839,218 shares as of June 30, 2001, 156,483,511 shares as of December 31, 2001, and 157,718,215 shares as of June 30, 2002......................................... 1,232,759 1,181,925 1,222,571 Retained earnings........................................................ 2,052,159 2,231,384 2,393,132 Accumulated other comprehensive income................................... 88,646 132,933 159,960 ___________ ___________ ___________ Total shareholders' equity............................................ 3,373,564 3,546,242 3,775,663 ___________ ___________ ___________ Total liabilities and shareholders' equity............................ $35,758,333 $36,038,746 $36,136,725 =========== =========== =========== See accompanying notes to condensed consolidated financial statements.
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UnionBanCal Corporation and Subsidiaries Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, ___________________________________________________________ (DOLLARS IN THOUSANDS) 2001 2002 ______________________ ___________________________ __________________________ COMMON STOCK Balance, beginning of period.................................. $1,275,587 $1,181,925 Dividend reinvestment plan.................................... 22 72 Deferred compensation--restricted stock awards................. (17) (15) Stock options exercised....................................... 3,841 70,564 Stock issued in acquisition of First Western Bank............. -- 23,852 Common stock repurchased(1)................................... (46,674) (53,827) __________ __________ Balance, end of period..................................... $1,232,759 $1,222,571 __________ __________ RETAINED EARNINGS Balance, beginning of period.................................. $1,906,093 $2,231,384 Net income.................................................... 224,437 $224,437 244,719 $244,719 Dividends on common stock(2).................................. (79,166) (83,077) Deferred compensation--restricted stock awards................. 795 106 __________ __________ Balance, end of period..................................... $2,052,159 $2,393,132 __________ __________ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period.................................. $ 29,885 $ 132,933 Cumulative effect of accounting change (SFAS No.133)(3), net of tax expense of $13,754 in 2001............................. 22,205 -- Unrealized net gains on cash flow hedges, net of tax expense of $20,825 and $23,776 in the first six months of 2001 and 2002, respectively......................................... 33,620 38,383 Less: reclassification adjustment for net gains on cash flow hedges included in net income, net of tax expense of $4,900 and $21,285 in the first six months of 2001 and 2002, respectively............................................... (7,911) (34,361) ________ ________ Net unrealized gains on cash flow hedges...................... 25,709 4,022 Unrealized holding gains arising during the period on securities available for sale, net of tax expense of $9,434 and $11,808 in the first six months of 2001 and 2002, respectively............................................... 15,230 19,063 Less: reclassification adjustment for losses (gains) on securities available for sale included in net income, net of tax expense (benefit) of $2,302 and $(1,478) in the first six months of 2001 and 2002, respectively.................. (3,715) 2,385 ________ ________ Net unrealized gains on securities available for sale......... 11,515 21,448 Foreign currency translation adjustment, net of tax expense (benefit) of $(414) and $964 in the first six months of 2001 and 2002, respectively..................................... (668) 1,557 ________ ________ Other comprehensive income.................................... 58,761 58,761 27,027 27,027 __________ ________ __________ ________ Total comprehensive income.................................... $283,198 $271,746 ======== ======== Balance, end of period..................................... $ 88,646 $ 159,960 __________ __________ TOTAL SHAREHOLDERS' EQUITY............................... $3,373,564 $3,775,663 ========== ========== __________________ (1) Common stock repurchased includes commission costs. (2) Dividends per share were $0.50 and $0.53 for the first six months of 2001 and 2002, respectively. Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date. (3) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". See accompanying notes to condensed consolidated financial statements.
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UnionBanCal Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, ____________________________ (DOLLARS IN THOUSANDS) 2001 2002 ______________________ ____________ __________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................................. $ 224,437 $ 244,719 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses.............................................................. 165,000 105,000 Depreciation, amortization and accretion................................................. 40,167 39,605 Provision for deferred income taxes...................................................... 21,076 28,359 Loss (gain) on securities available for sale............................................. (6,017) 3,863 Net (increase) decrease in trading account assets........................................ 37,951 (136,087) Other, net of acquisition................................................................ 372,303 3,245 ____________ __________ Total adjustments........................................................................ 630,480 43,985 ____________ __________ Net cash provided by operating activities................................................... 854,917 288,704 ____________ __________ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale........................................ 272,827 131,499 Proceeds from matured and called securities available for sale.............................. 367,840 584,878 Purchases of securities available for sale.................................................. (1,328,816) (772,509) Net decrease (increase) in loans, net of acquisition........................................ 205,234 (825,373) Net cash used in acquisition of First Western Bank.......................................... -- 64,689 Other, net.................................................................................. (35,464) (40,783) ____________ __________ Net cash used in investing activities.................................................... (518,379) (857,599) ____________ __________ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits, net of acquisition................................................ 417,441 72,541 Net decrease in federal funds purchased and securities sold under repurchase agreements..... (674,611) (100,449) Net increase (decrease) in commercial paper and other borrowed funds........................ 483,703 (179,906) Common stock repurchased.................................................................... (46,674) (53,827) Payments of cash dividends.................................................................. (79,502) (78,165) Stock options exercised..................................................................... 3,841 70,564 Other, net.................................................................................. 13,623 1,629 ____________ __________ Net cash provided by (used in) financing activities...................................... 117,821 (267,613) ____________ __________ Net increase (decrease) in cash and cash equivalents........................................... 454,359 (836,508) Cash and cash equivalents at beginning of period............................................... 3,322,979 3,664,954 Effect of exchange rate changes on cash and cash equivalents................................... (11,631) 11,763 ____________ __________ Cash and cash equivalents at end of period..................................................... $ 3,765,707 $2,840,209 ============ ========== CASH PAID DURING THE PERIOD FOR: Interest.................................................................................... $ 432,648 $ 168,806 Income taxes................................................................................ 34,485 73,098 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of First Western Bank: Fair value of assets acquired............................................................ -- $ 256,276 ____________ __________ Purchase price: Cash................................................................................ -- (20,940) ____________ __________ Stock issued........................................................................ -- (23,852) ____________ __________ Liabilities assumed.................................................................... -- $ 211,484 ============ ========== Loans transferred to foreclosed assets (OREO) and/or distressed loans held for sale......... $ 6,242 $ 281 Securities transferred from held to maturity to available for sale at the adoption of SFAS No. 133.................................................................................. 23,529 -- See accompanying notes to condensed consolidated financial statements.
7 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements June 30, 2002 (Unaudited) NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission. However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. The results of operations for the period ended June 30, 2002 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 2001. The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Since November 1999, the Company has announced four stock repurchase plans of $100 million each. The Company repurchased $35 million and $19 million of common stock in the first and second quarters of 2002, respectively, and $22 million and $25 million of common stock in the first and second quarters of 2001, respectively. As of June 30, 2002, $91 million of common stock is authorized for repurchase. At June 30, 2002, The Bank of Tokyo-Mitsubishi, Ltd. (BTM), which is a wholly-owned subsidiary of Mitsubishi Tokyo Financial Group, owned approximately 67 percent of the outstanding common stock of UnionBanCal Corporation. Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for by a single method--the purchase method. This Statement eliminates the pooling-of-interests method but carries forward without reconsideration the guidance in Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises," related to the application of the purchase method of accounting. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. Goodwill and intangible assets acquired in transactions completed after June 30, 2001 are accounted for in accordance with the amortization and nonamortization provisions of SFAS No. 142. SFAS No. 142 significantly changes the accounting for goodwill and other intangible assets subsequent to their initial recognition. This Statement requires that goodwill and some intangible assets no longer be amortized, but tested for impairment at least annually by comparing the fair value of those assets with their recorded amounts. Upon adoption of SFAS No. 142, as of January 1, 2002, the amortization of existing goodwill ceased and the carrying amount of goodwill was allocated to the applicable reporting units. The allocation 8 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued) was based on the sources of previously recognized goodwill as well as the reporting units to which the related acquired net assets were assigned. Management's expectations of which reporting units had benefited from the synergies of acquired businesses were considered in the allocation process. The Company performed a transitional impairment test during May 2002, with measurement as of the date of adoption. The fair market value of the goodwill tested for impairment exceeded its carrying value; therefore, no impairment loss was recognized. As of June 30, 2002, goodwill was $93 million. Net income and earnings per share for the second quarter and six months ended June 30, 2001 were adjusted on a proforma basis to exclude goodwill amortization expense (net of taxes of $0.1 million for the second quarter of 2001 and $0.3 million for the six months ended June 30, 2001) as follows:
FOR THE THREE MONTHS ENDED SIX MONTHS ENDED __________________________ _____________________ JUNE 30, JUNE 30, JUNE 30, JUNE 30, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2001 2002 _____________________________________________ ________ ________ ________ ________ NET INCOME: As reported................................................ $117,150 $129,942 $224,437 $244,719 Goodwill amortization, net of income tax................... 3,720 -- 7,345 -- As adjusted................................................ $120,870 $129,942 $231,782 $244,719 BASIC EARNINGS PER SHARE: As reported................................................ $ 0.74 $ 0.83 $ 1.42 $ 1.56 Goodwill amortization...................................... 0.02 -- 0.05 -- As adjusted................................................ $ 0.76 $ 0.83 $ 1.47 $ 1.56 DILUTED EARNINGS PER SHARE: As reported................................................ $ 0.74 $ 0.81 $ 1.41 $ 1.54 Goodwill amortization...................................... 0.02 -- 0.05 -- As adjusted................................................ $ 0.76 $ 0.81 $ 1.46 $ 1.54
On May 13, 2002, the Company completed its acquisition of First Western Bank. As a result of this acquisition, the Company recorded approximately $23.8 million of goodwill and $10 million of core deposit intangible. The core deposit intangible is being amortized on an accelerated basis over an estimated life of 12 years. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset. A legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. This Statement is effective for fiscal years beginning after June 15, 2002. Management believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations. 9 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued) ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This Statement carries over the framework established in SFAS No. 121, and was adopted by the Company on January 1, 2002. The adoption of this Statement had no material impact on the Company's financial position or results of operations. RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.13 In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement requires that capital leases that are modified so that the resulting lease agreement is classified as an operating lease be accounted for under the sale-leaseback provisions of SFAS No. 98, "Accounting for Leases." This Statement also amends other existing authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of this Statement are effective for financial statements issued on or after May 15, 2002, with early application encouraged. Management believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement replaces the accounting and reporting provisions of Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." It requires that costs associated with an exit or disposal activity be recognized when a liability is incurred rather than at the date an entity commits to an exit plan. This Statement is effective after December 31, 2002. Management believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations. 10 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 3--EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options are a common stock equivalent. The following table presents a reconciliation of basic and diluted EPS for the three months and six months ended June 30, 2001 and 2002.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, _________________________________________________ _________________________________________________ 2001 2002 2001 2002 ______________________ ______________________ ______________________ _____________________ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED ______________________ ________ ________ ________ ________ ________ ________ ________ ________ Net Income............ $117,150 $117,150 $129,942 $129,942 $224,437 $224,437 $244,719 $244,719 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding........ 158,181 158,181 157,315 157,315 158,535 158,535 156,774 156,774 Additional shares due to: Assumed conversion of dilutive stock options... -- 701 -- 2,361 -- 441 -- 1,761 ________ ________ ________ ________ ________ ________ ________ ________ Adjusted weighted average common shares outstanding. 158,181 158,882 157,315 159,676 158,535 158,976 156,774 158,535 ======== ======== ======== ======== ======== ======== ======== ======== Net income per share.. $ 0.74 $ 0.74 $ 0.83 $ 0.81 $ 1.42 $1.41 $1.56 $1.54 ======== ======== ======== ======== ======== ======== ======== ========
11 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME The following table presents a summary of the components of accumulated other comprehensive income.
NET UNREALIZED GAINS ON SECURITIES FOREIGN CURRENCY NET UNREALIZED GAINS AVAILABLE FOR SALE TRANSLATION ADJUSTMENT ON CASH FLOW HEDGES _____________________ _______________________ ____________________ FOR THE SIX MONTHS ENDED JUNE 30, ___________________________________________________________________________ (DOLLARS IN THOUSANDS) 2001 2002 2001 2002 2001 2002 ______________________ _______ ________ ________ ________ _______ _______ Beginning balance................................. $41,879 $ 83,271 $(11,191) $(12,205) $ -- $62,840 Cumulative effect of accounting change, net of tax -- -- -- -- 22,205 -- Change during the period.......................... 11,515 21,448 (668) 1,557 25,709 4,022 _______ ________ ________ ________ _______ _______ Ending balance.................................... $53,394 $104,719 $(11,859) $(10,648) $47,914 $66,862 ======= ======== ======== ======== ======= =======
MINIMUM PENSION ACCUMULATED OTHER LIABILITY ADJUSTMENT COMPREHENSIVE INCOME ____________________ ____________________ FOR THE SIX MONTHS ENDED JUNE 30, ___________________________________________ (DOLLARS IN THOUSANDS) 2001 2002 2001 2002 ______________________ _____ _____ _______ ________ Beginning balance.................................................................. $(803) $(973) $29,885 $132,933 Cumulative effect of accounting change, net of tax................................................................. -- -- 22,205 -- Change during the period........................................................... -- -- 36,556 27,027 _____ _____ _______ ________ Ending balance..................................................................... $(803) $(973) $88,646 $159,960 ===== ===== ======= ========
NOTE 5--BUSINESS SEGMENTS The Company is organized based on the products and services that it offers and operates in four principal areas: o The Community Banking and Investment Services Group offers a range of banking services, primarily to individuals and small businesses, delivered primarily through a tri-state network of branches and ATM's. These services include commercial loans, mortgages, home equity lines of credit, consumer loans, deposit services and cash management as well as fiduciary, private banking, investment and asset management services for individuals and institutions, and risk management and insurance products for businesses and individuals. o The Commercial Financial Services Group provides credit and cash management services to large corporate and middle market companies. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, cash management services and selected capital markets products. 12 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 5--BUSINESS SEGMENTS (Continued) o The International Banking Group provides correspondent banking and trade-finance products and services to financial institutions, and extends primarily short-term credit to corporations engaged in international business. The group's revenue predominately relates to foreign customers. o The Global Markets Group manages the Company's wholesale funding needs, securities portfolio, and interest rate and liquidity risks. The group also offers a broad range of risk management and trading products to institutional and business clients of the Company through the businesses described above. The information, set forth in the tables on the following page, reflects selected income statement and balance sheet items by business unit. The information presented does not necessarily represent the business units' financial condition and results of operations 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. Included in the tables are the amounts of goodwill for each reporting unit as of June 30, 2002. Prior to January 1, 2002, most of the goodwill was reflected at the corporate level. The information in these tables is derived from the internal management reporting system used by management to measure the performance of the business segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each business segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to a business segment are assigned to that business. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the business segments based on a predetermined percentage of usage. Under the Company's risk-adjusted return on capital (RAROC) methodology, credit expense is charged to business segments based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks. "Other" is comprised of goodwill amortization for periods prior to January 1, 2002, certain parent company non-bank subsidiaries, the elimination of the fully taxable-equivalent basis amounts, the amount of the provision for credit losses (over)/under the RAROC expected loss for the period, the earnings associated with the unallocated equity capital and allowance for credit losses, and the residual costs of support groups. In addition, it includes two units, the Credit Management Group, which manages nonperforming assets, and the Pacific Rim Corporate Group, which offers financial products to Asian- 13 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 5--BUSINESS SEGMENTS (Continued) owned subsidiaries located in the US. On an individual basis, none of the items in "Other" are significant to the Company's business.
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP _____________________ ______________________ ___________________ AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, _________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ _______ _______ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS) Total revenue...................................... $279,558 $309,062 $210,928 $211,253 $22,708 $25,998 Net income......................................... $ 50,912 $ 67,331 $ 65,071 $ 52,700 $ 4,349 $ 6,343 Goodwill at period end............................. $ -- $ 79 $ -- $ 14 $ -- $ -- Total assets at period end......................... $ 9,983 $ 11,047 $ 17,169 $ 15,812 $ 1,280 $ 1,466 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION _____________________ ______________________ ___________________ AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, _________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ _______ _______ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS): Total revenue......................................... $ 5,825 $ 1,430 $28,095 $26,792 $547,114 $574,535 Net income (loss)..................................... $ 2,927 $(1,622) $(6,109) $ 5,190 $117,150 $129,942 Goodwill at period end................................ $ -- $ -- $ 49 $ -- $ 49 $ 93 Total assets at period end............................ $ 6,666 $ 6,868 $ 660 $ 944 $ 35,758 $ 36,137 __________________ (1) Total revenue is comprised of net interest and noninterest income
14 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 5--BUSINESS SEGMENTS (Continued)
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP _____________________ ______________________ ___________________ AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, _________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ _______ _______ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS) Total revenue...................................... $553,007 $597,167 $439,731 $412,663 $47,813 $51,591 Net income......................................... $101,661 $120,980 $144,268 $100,348 $10,940 $12,491 Goodwill at period end............................. $ -- $ 79 $ -- $ 14 $ -- $ -- Total assets at period end......................... $ 9,983 $ 11,047 $ 17,169 $ 15,812 $ 1,280 $ 1,466 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION _____________________ ______________________ ___________________ AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, _________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ _______ _______ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS): Total revenue................................ $ 7,863 $ 12,781 $ 66,768 $ 52,224 $1,115,182 $1,126,426 Net income (loss)............................ $ (4,075) $ 2,939 $(28,357) $ 7,961 $ 224,437 $ 244,719 Goodwill at period end....................... $ -- $ -- $ 49 $ -- $ 49 $ 93 Total assets at period end................... $ 6,666 $ 6,868 $ 660 $ 944 $ 35,758 $ 36,137 __________________ (1) Total revenue is comprised of net interest and noninterest income
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING Derivative positions are integral components of the Company's designated asset and liability management activities. The Company uses interest rate 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, certificates of deposit, trust preferred securities and medium-term notes. CASH FLOW HEDGES HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT The Company engages in several types of cash flow hedging strategies for which the hedged transactions are forecasted future loan interest payments, and the hedged risk is the variability in those payments due to changes in the designated benchmark rate, e.g., US dollar LIBOR. In these strategies, the hedging instruments are matched with groups of variable rate loans such that the tenor of the variable rate loans and that of the hedging instrument is identical. Cash flow hedging strategies include the utilization of purchased floor, cap, corridor options and interest rate swaps. The Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments received under the floor contract offset the decline in loan interest income caused by the relevant LIBOR index falling below the floor's strike rate. 15 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (Continued) The Company uses interest rate corridors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the floor corridor contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the corridor's upper strike rate, but only to the extent the index falls to the lower strike rate. The corridor will not provide protection from declines in the relevant LIBOR index to the extent it falls below the corridor's lower strike rate. The Company uses interest rate swaps to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments to be received (or paid) under the swap contracts will offset the fluctuations in loan interest income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans' interest income caused by changes in the relevant LIBOR index. The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with the forecasted issuance and rollover of short-term, fixed rate negotiable certificates of deposit (CDs). In these hedging relationships, the Company hedges the LIBOR component of the CD rates, which is either 3-month LIBOR or 6-month LIBOR, based on the CD's original term to maturity, which reflects their repricing frequency. Net payments to be received under the cap contract offset the increase in interest expense caused by the relevant LIBOR index rising above the cap's strike rate. Hedging transactions are structured at inception so that the notional amounts of the hedge are matched with an equal principal amount of loans or CDs, the index and repricing frequencies of the hedge matches those of the loans or CDs, and the period in which the designated hedged cash flows occur is equal to the term of the hedge. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedge versus those of the loans or CDs. During the second quarter of 2002, the Company recognized a net loss of $0.1 million due to ineffectiveness, which is recognized in noninterest expense, compared to a net gain of $0.3 million in the second quarter of 2001. FAIR VALUE HEDGES HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST (TRUST PREFERRED SECURITIES) The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specific interest bearing liability, UnionBanCal Corporation's Trust Preferred Securities, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, US dollar LIBOR. Fair value hedging transactions are structured at inception so that the notional amounts of the swap match an associated principal amount of the Trust Preferred Securities. The interest payment dates, the expiration date, and the embedded call option of the swap match those of the Trust Preferred Securities. The ineffectiveness on the fair value hedges during the second quarter of 2002 was a net gain of $0.5 million, compared to a net loss of $0.2 million in the second quarter of 2001. 16 UnionBanCal Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Continued) June 30, 2002 (Unaudited) NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (Continued) HEDGING STRATEGY FOR MEDIUM-TERM NOTES The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specified interest bearing liability, UnionBanCal Corporation's five-year, medium-term debt issuance, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, US dollar LIBOR. The fair value hedging transaction for the medium-term notes was structured at inception to mirror all of the provisions of the medium-term notes, which allows the Company to assume that no ineffectiveness exists. OTHER The Company uses foreign currency forward contracts as a means of managing foreign exchange rate risk associated with assets and/or liabilities denominated in foreign currencies. The Company values the forward contracts, the assets and/or the liabilities at fair value, with the resultant gain or loss recognized in noninterest income. NOTE 7--ACQUISITION On May 13, 2002, the Company completed its acquisition of First Western Bank based in Simi Valley, California. As a result, the Company acquired $222.6 million in total assets, $118.8 million in loans, $204.6 million in deposits, and seven branches. The Company paid $20.9 million in cash and issued 489,676 shares of its common stock. NOTE 8--SUBSEQUENT EVENTS On July 24, 2002, the Board of Directors declared a quarterly cash dividend of $0.28 per share of common stock. The dividend will be paid on October 4, 2002 to shareholders of record as of September 6, 2002. On August 5, 2002, the Company signed a definitive agreement to acquire Valencia Bank and Trust, a commercial bank with $267 million in assets and five branches. The Company will pay $31 million in cash and will issue approximately $31 million worth of its common stock. The acquisition is expected to close in the fourth quarter of 2002. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION, WHICH IS SUBJECT TO THE "SAFE HARBOR" CREATED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OUR MANAGEMENT MAY MAKE FORWARD-LOOKING STATEMENTS IN OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH SECURITIES ANALYSTS AND SHAREHOLDERS AND WHEN WE ARE SPEAKING ON BEHALF OF UNIONBANCAL CORPORATION. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. OFTEN, THEY INCLUDE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," OR "MAY." THESE FORWARD-LOOKING STATEMENTS ARE INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL INFORMATION WITH WHICH THEY MAY ASSESS OUR FUTURE POTENTIAL. ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ASSUMPTIONS ABOUT AN UNCERTAIN FUTURE AND ARE BASED ON INFORMATION AVAILABLE AT THE DATE SUCH STATEMENTS ARE ISSUED. THERE ARE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD AND WILL CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE DISCUSSED IN OUR FORWARD-LOOKING STATEMENTS. MANY OF THESE FACTORS ARE BEYOND OUR ABILITY TO CONTROL OR PREDICT AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA, GLOBAL POLITICAL AND GENERAL ECONOMIC CONDITIONS RELATED TO THE TERRORIST ATTACKS ON SEPTEMBER 11, 2001 AND THEIR AFTERMATH, AND FUTURE ACTS OR THREATS OF TERRORISM, ADVERSE ECONOMIC CONDITIONS AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN INTEREST RATES, THE CONTROLLING INTEREST IN US BY THE BANK OF TOKYO- MITSUBISHI, LTD., WHICH IS A WHOLLY-OWNED SUBSIDIARY OF MITSUBISHI TOKYO FINANCIAL GROUP, INC., COMPETITION IN THE BANKING INDUSTRY, RESTRICTIONS ON DIVIDENDS, ADVERSE EFFECTS OF CURRENT AND FUTURE BANKING AND OTHER RULES, REGULATIONS AND LEGISLATION, AND RISKS ASSOCIATED WITH VARIOUS STRATEGIES WE MAY PURSUE, INCLUDING POTENTIAL ACQUISITIONS, DIVESTITURES AND RESTRUCTURINGS. SEE ALSO THE SECTION ENTITLED "CERTAIN BUSINESS RISK FACTORS" LOCATED NEAR THE END OF THIS SECTION, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". INTRODUCTION We are a California-based, commercial bank holding company with consolidated assets of $36.1 billion at June 30, 2002. At June 30, 2002, Union Bank of California, N.A. was the third largest commercial bank in California, based on total assets and total deposits in California. UnionBanCal Corporation and its banking subsidiary, Union Bank of California, N.A., 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. Since November 1999, we announced four stock repurchase plans of $100 million each. We repurchased $35 million and $19 million of common stock in the first and second quarters of 2002, respectively, and $22 million and $25 million of common stock in the first and second quarters of 2001, respectively. As of June 30, 2002, $91 million of common stock is authorized for repurchase. At June 30, 2002, The Bank of Tokyo-Mitsubishi, Ltd. owned approximately 67 percent of our outstanding common stock. SUMMARY COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 Reported net income was $129.9 million, or $0.81 per diluted common share, in the second quarter of 2002, compared with $117.2 million, or $0.74 per diluted common share, in the second quarter of 2001. This increase in diluted earnings per share of $0.07, or 9 percent, above the second quarter of 2001 was due to a $20.4 million, or 12 percent, increase in noninterest income, a $15.0 million, or 23 percent, decrease in 18 provision for credit losses, and a $7.0 million, or 2 percent, increase in net interest income (on a taxable-equivalent basis), partly offset by a $22.3 million, or 7 percent, increase in noninterest expense. Other highlights of the second quarter of 2002 include: o Net interest income, on a taxable-equivalent basis, was $386.3 million in the second quarter of 2002, an increase of $7.0 million, or 2 percent, over the second quarter of 2001. Net interest margin in the second quarter of 2002 was 4.74 percent, a decrease of 12 basis points from the second quarter of 2001. o A provision for credit losses of $50.0 million was recorded in the second quarter of 2002 compared with $65.0 million in the second quarter of 2001. This resulted from management's regular assessment of overall credit quality, loan portfolio composition, and business and economic conditions in relation to the level of the allowance for credit losses. The allowance for credit losses was $624.9 million, or 151 percent of total nonaccrual loans, at June 30, 2002, compared with $626.5 million, or 138 percent of total nonaccrual loans, at June 30, 2001. o Noninterest income was $188.8 million in the second quarter of 2002, an increase of $20.4 million, or 12 percent, from the second quarter of 2001. This growth included an $8.0 million increase in service charges on deposit accounts, $6.3 million in incremental revenues associated with our December 2001 acquisition of Armstrong/Robitaille Business and Insurance Services ("Armstrong/Robitaille"), merchant transaction processing fees growth of $2.0 million, and international commissions and fees growth of $1.1 million, partly offset by a $1.6 million decrease in trust and investment management fees. For the quarter, securities losses, net, were $1.3 million. In addition, we had residual value writedowns in our auto lease portfolio of $3.0 million in the second quarter of 2002 compared with $11.0 million in the second quarter of 2001. o Noninterest expense was $329.8 million in the second quarter of 2002, an increase of $22.3 million, or 7 percent, over the second quarter of 2001. Salaries and employee benefits increased $21.5 million, or 13 percent, primarily due to higher incentives of $8.6 million, higher salaries of $8.3 million, and higher employee benefits of $4.6 million. o Income tax expense in the second quarter of 2002 was $64.8 million, a 33 percent effective income tax rate. For the second quarter of 2001, the effective income tax rate was also 33 percent. o Return on average assets increased to 1.46 percent in the second quarter of 2002 compared to 1.36 percent in the second quarter of 2001. Our return on average common equity increased to 13.90 percent in the second quarter of 2002 compared to 13.79 percent in the second quarter of 2001. o Total loans at June 30, 2002 were $25.6 billion, a decrease of $63.9 million, or 0.3 percent, from June 30, 2001. o Nonperforming assets were $415.0 million at June 30, 2002, a decrease of $45.1 million, or 10 percent, from June 30, 2001. Nonperforming assets as a percentage of total assets decreased to 1.15 percent at June 30, 2002, compared with 1.29 percent at June 30, 2001. Total nonaccrual loans were $414.5 million at June 30, 2002, compared with $453.4 million at June 30, 2001, resulting in a decrease in the ratio of nonaccrual loans to total loans of 1.62 percent at June 30, 2002 from 1.77 percent at June 30, 2001. o Our Tier 1 and total risk-based capital ratios were 11.90 percent and 13.65 percent, respectively, at June 30, 2002, compared with 10.85 percent and 12.70 percent, respectively, at June 30, 2001. Our leverage ratio was 10.77 percent at June 30, 2002 compared with 10.33 percent at June 30, 2001. 19 COMPARISON OF SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 Reported net income was $244.7 million, or $1.54 per diluted common share, in the first six months of 2002 compared with $224.4 million, or $1.41 per diluted common share, in the first six months of 2001. This increase in diluted earnings per share of $0.13, or 9 percent above the first six months of 2001 was due to a $60.0 million, or 36 percent, decrease in provision for credit losses and a $11.0 million, or 3 percent, increase in noninterest income, partly offset by $38.2 million, or 6 percent, increase in noninterest expense. Other highlights of the first six months of 2002 include: o Net interest income, on a taxable-equivalent basis, was $767.3 million in the first six months of 2002, an increase of less than $0.1 million over the first six months of 2001. Net interest margin in the first six months of 2002 was 4.77 percent, a decrease of 17 basis points from the first six months of 2001. o A provision for credit losses of $105.0 million was recorded in the first six months of 2002, compared with $165.0 million in the first six months of 2001. This resulted from management's regular assessment of overall credit quality, loan portfolio composition, and business and economic conditions in relation to the level of the allowance for credit losses. o Noninterest income was $360.2 million in the first six months of 2002, an increase of $11.0 million, or 3 percent, from the first six months of 2001. Noninterest income, excluding a $20.7 million gain recognized on the exchange of our STAR System stock in the prior year, increased $31.7 million, or 10 percent. This growth was mainly attributable to a $17.1 million increase in service charges on deposit accounts, $13.4 million in incremental revenues associated with our acquisition of Armstrong/Robitaille, merchant transaction processing fees growth of $3.6 million, and international commissions and fees growth of $2.2 million, partly offset by a $4.6 million decrease in trust and investment management fees, a $2.9 million decrease in merchant banking fees, and a $9.9 million decrease in securities gains, net. In addition, we had residual value writedowns in our auto lease portfolio of $9.0 million in the first six months of 2002 compared with $28.3 million in the first six months of 2001. o Noninterest expense was $653.2 million in the first six months of 2002, an increase of $38.2 million, or 6 percent, over the first six months of 2001. Salaries and employee benefits increased $35.9 million, or 11 percent, primarily due to higher incentives of $14.4 million, higher salaries of $14.0 million, and higher employee benefits of $7.5 million. o Income tax expense in the first six months of 2002 was $123.6 million, a 34 percent effective income tax rate. For the first six months of 2001, the effective income tax rate was 33 percent. o Return on average assets increased to 1.39 percent in the first six months of 2002 compared to 1.31 percent in the first six months of 2001. Our return on average common equity decreased to 13.38 percent in the first six months of 2002 compared to 13.42 percent in the first six months of 2001. BUSINESS SEGMENTS We segregate our operations into four primary business units for the purpose of management reporting, as shown in the tables on the following pages. The results show the financial performance of our major business units. The Risk Adjusted Return on Capital (RAROC) methodology used seeks to attribute economic capital to business units consistent with the level of risk they assume. These risks are primarily credit risk, market risk and operational risk. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and volatilities. Operational risk is the potential loss due to failures in internal control, system failures, or external events. 20 The following tables reflect the condensed income statements, selected average balance sheet items and selected financial ratios for each of our primary business units. The information presented does not necessarily represent the business units' financial condition and results of operations as if they were independent entities. Also, the tables have been expanded to include performance center earnings. A performance center is a special unit of the bank whose income generating activities, unlike typical profit centers, are based on other business segment units' customer base. A performance center has direct interactions with customers, and its purpose is to foster cross selling with a total profitability view of the product and services it manages. For example, the Global Trading and Sales unit, within the Global Markets Group, is a performance center that manages the foreign exchange, derivatives, and fixed income securities activities within the Global Markets organization. However the revenues generated and expenses incurred for those transactions entered into to accommodate our customers are allocated to other business segments where the customer relationships reside. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. The RAROC measurement methodology recognizes credit expense for expected losses arising from credit risk and attributes economic capital related to unexpected losses arising from credit, market and operational risks. As a result of the methodology used by the RAROC model to calculate expected losses, differences between the provision for credit losses and credit expense in any one period could be significant. However, over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same. Business unit results are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal Corporation as a whole. Our management reporting system identifies balance sheet and income statement items to each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing system, which assigns a cost of funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. The business units are assigned the costs of products and services directly attributable to their business activity through standard unit cost accounting based on volume of usage. All other corporate expenses (overhead) are assigned to the business units based on a predetermined percentage of usage. 21 We have restated the business units' results for the prior periods to reflect changes in the transfer pricing methodology and any reorganization changes that may have occurred.
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP ______________________ ______________________ _____________________ AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ _________ ________ _________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income........................... $174,274 $197,882 $176,994 $ 159,600 $ 8,627 $ 9,366 Noninterest income............................ 105,284 111,180 33,934 51,653 14,081 16,632 ________ ________ ________ _________ ________ _________ Total revenue................................. 279,558 309,062 210,928 211,253 22,708 25,998 Noninterest expense........................... 186,355 190,952 77,684 87,130 14,473 15,266 Credit expense (income)....................... 10,754 9,072 33,902 47,341 1,192 460 ________ ________ ________ _________ ________ _________ Income before income tax expense (benefit).... 82,449 109,038 99,342 76,782 7,043 10,272 Income tax expense (benefit).................. 31,537 41,707 34,271 24,082 2,694 3,929 ________ ________ ________ _________ ________ _________ Net income.................................... $ 50,912 $ 67,331 $ 65,071 $ 52,700 $ 4,349 $ 6,343 ======== ======== ======== ========= ======== ========= PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income........................... $ 917 $ 682 $ 5,567 $ 9,488 $ -- $ -- Noninterest income............................ (381) (10,995) 4,927 13,252 84 1,157 Noninterest expense........................... (1,099) (8,227) 5,002 11,300 109 861 Total loans (dollars in millions)............. 98 116 811 1,045 -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)................................ $ 8,787 $ 9,991 $ 15,927 $ 14,144 $ 967 $ 1,047 Total assets.................................. 9,730 10,871 17,739 15,772 1,301 1,403 Total deposits(1)............................. 14,159 15,549 7,037 8,121 1,351 1,567 FINANCIAL RATIOS: Return on risk adjusted capital(2)............ 36% 46% 14% 14% 19% 40% Return on average assets(2)................... 2.10 2.48 1.47 1.34 1.34 1.81 Efficiency ratio(3)........................... 66.64 61.78 36.82 41.21 63.74 58.72 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ______________________ ______________________ _____________________ AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ _________ ________ _________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income........................... $ 3,488 $ (3,278) $ 15,340 $ 22,191 $378,723 $385,761 Noninterest income............................ 2,337 4,708 12,755 4,601 168,391 188,774 ________ ________ ________ _________ ________ ________ Total revenue................................. 5,825 1,430 28,095 26,792 547,114 574,535 Noninterest expense........................... 1,085 4,007 27,855 32,436 307,452 329,791 Credit expense (income)....................... -- 50 19,152 (6,923) 65,000 50,000 ________ ________ ________ _________ ________ ________ Income before income tax expense (benefit).... 4,740 (2,627) (18,912) 1,279 174,662 194,744 Income tax expense (benefit).................. 1,813 (1,005) (12,803) (3,911) 57,512 64,802 ________ ________ ________ _________ ________ ________ Net income (loss)............................. $ 2,927 $ (1,622) $ (6,109) $ 5,190 $117,150 $129,942 ======== ======== ======== ========= ======== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income........................... $ -- $ -- $ (6,484) $ (10,170) $ -- $ -- Noninterest income............................ (5,824) (6,934) 1,194 3,520 -- -- Noninterest expense........................... (938) (1,217) (3,074) (2,717) -- -- Total loans (dollars in millions)............. -- -- (909) (1,161) -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)................................ $ 71 $ 70 $ 362 $ 327 $ 26,114 $ 25,579 Total assets.................................. 5,020 6,902 799 782 34,589 35,730 Total deposits(1)............................. 3,401 2,070 693 915 26,641 28,222 FINANCIAL RATIOS: Return on risk adjusted capital(2)............ 4% (1)% na na na na Return on average assets(2)................... 0.23 (0.09) na na 1.36% 1.46% Efficiency ratio(3)........................... 17.05 225.30 na na 56.13 57.35 __________________ (1) Represents loans and deposits for each business segment after allocation between the segments of loans and deposits originated in one segment but managed by another segment. (2) Annualized (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent basis) and noninterest income. Foreclosed asset expense (income) was $48 thousand in the first quarter of 2001 and ($13) thousand in the first quarter of 2002. na=not applicable
22
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP ______________________ ______________________ _____________________ AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ _________ ________ _________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income........................... $352,118 $381,220 $362,434 $ 315,306 $ 18,635 $ 18,871 Noninterest income............................ 200,889 215,947 77,297 97,357 29,178 32,720 ________ ________ ________ _________ ________ ________ Total revenue................................. 553,007 597,167 439,731 412,663 47,813 51,591 Noninterest expense........................... 364,947 383,189 152,378 171,118 27,731 30,409 Credit expense (income)....................... 23,428 18,058 66,330 94,246 2,365 954 ________ ________ ________ _________ ________ ________ Income before income tax expense (benefit).... 164,632 195,920 221,023 147,299 17,717 20,228 Income tax expense (benefit).................. 62,971 74,940 76,755 46,951 6,777 7,737 ________ ________ ________ _________ ________ ________ Net income.................................... $101,661 $120,980 $144,268 $ 100,348 $ 10,940 $ 12,491 ======== ======== ======== ========= ======== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income........................... $ 2,106 $ 1,092 $ 8,224 $ 18,066 $ -- $ -- Noninterest income............................ (2,295) (21,836) 11,103 27,321 150 2,041 Noninterest expense........................... (2,156) (16,018) 9,364 20,987 329 1,626 Total loans (dollars in millions)............. 88 119 728 1,045 -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)................................ $ 8,629 $ 9,768 $ 16,224 $ 14,133 $ 967 $ 1,032 Total assets.................................. 9,596 10,645 18,049 15,763 1,361 1,357 Total deposits(1)............................. 14,081 15,172 6,920 8,014 1,381 1,562 FINANCIAL RATIOS: Return on risk adjusted capital(2)............ 36% 43% 16% 13% 24% 39% Return on average assets(2)................... 2.14 2.29 1.61 1.28 1.62 1.86 Efficiency ratio(3)........................... 65.99 64.16 34.64 41.41 58.00 58.94 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ______________________ ______________________ _____________________ AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ _________ ________ _________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income..................... $ 1,567 $ 6,554 $ 31,230 $ 44,250 $765,984 $ 766,201 Noninterest income...................... 6,296 6,227 35,538 7,974 349,198 360,225 ________ ________ ________ _________ ________ _________ Total revenue........................... 7,863 12,781 66,768 52,224 1,115,182 1,126,426 Noninterest expense..................... 14,461 7,921 55,420 60,517 614,937 653,154 Credit expense (income)................. -- 100 72,877 (8,358) 165,000 105,000 ________ ________ ________ _________ ________ _________ Income before income tax expense (benefit) (6,598) 4,760 (61,529) 65 335,245 368,272 Income tax expense (benefit)............ (2,523) 1,821 (33,172) (7,896) 110,808 123,553 ________ ________ ________ _________ ________ _________ Net income (loss)....................... $ (4,075) $ 2,939 $(28,357) $ 7,961 $224,437 $ 244,719 ======== ======== ======== ========= ======== ========= PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income..................... $ -- $ -- $(10,330) $ (19,158) $ -- $ -- Noninterest income...................... (10,986) (13,569) 2,028 6,043 -- -- Noninterest expense..................... (1,995) (2,231) (5,542) (4,364) -- -- Total loans (dollars in millions)....... -- -- (816) (1,164) -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1).......................... $ 55 $ 85 $ 390 $ 337 $ 26,265 $ 25,355 Total assets............................ 4,747 6,814 756 830 34,509 35,409 Total deposits(1)....................... 3,085 2,242 740 907 26,207 27,897 FINANCIAL RATIOS: Return on risk adjusted capital(2)...... (4)% 1% na na na na Return on average assets(2)............. (0.17) 0.09 na na 1.31% 1.39% Efficiency ratio(3)..................... 161.3 58.77 na na 55.08 57.92 __________________ (1) Represents loans and deposits for each business segment after allocation between the segments of loans and deposits originated in one segment but managed by another segment. (2) Annualized (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent basis) and noninterest income. Foreclosed asset expense was $61 thousand in the first six months of 2001 and $112 thousand in the first six months of 2002. na=not applicable
23 COMMUNITY BANKING AND INVESTMENT SERVICES GROUP The Community Banking and Investment Services Group provides the best possible financial products to individuals and small businesses including a set of credit, deposit, trust, risk management, and insurance products delivered through branches, relationship managers, private bankers, trust administrators, and insurance agents. In second quarter of 2002, net income increased $16.4 million, or 32 percent, compared to the prior year. Total revenue increased $29.5 million, or 11 percent, compared to a year earlier. Increased asset and deposit volumes offset the effect of a significantly lower interest rate environment leading to an increase of $23.6 million, or 14 percent, in net interest income over the prior year quarter. Noninterest income was $5.9 million, or 6 percent, higher than the prior year quarter primarily due to our acquisition of Armstrong/Robitaille. Excluding residual value writedowns in our auto lease portfolio of $3.0 million and $11.0 million, in 2002 and 2001, respectively, and the impact of performance center earnings, noninterest income increased $8.5 million, or 7 percent, compared to a year earlier. Noninterest expense increased $4.6 million, or 3 percent, compared to a year earlier with the majority of that increase being attributable to higher salaries and employee benefits mainly related to deposit gathering, small business growth, and residential loan growth over the second quarter of 2001. In 2002, the Community Banking and Investment Services Group has been emphasizing growth in the consumer asset portfolio, expanding wealth management services, extending the small business franchise, expanding the branch network, and expanding cross selling activities throughout the bank. The strategy for growing the consumer asset portfolio primarily focuses on mortgage and home equity products, that may be originated through the branch network, as well as through channels such as wholesalers, correspondents, and whole loan purchases. As of June 30, 2002, residential loans have grown by $1.5 billion, or 35 percent, from the same period last year. The Wealth Management division is focused on becoming a growing provider of banking and investment products for affluent individuals in geographic areas already served by us. We seek to provide quality service superior to that of our competitors, offering an attractive product suite. Core elements of the initiative to extend our small business franchise include improving our sales force, increasing marketing activities, adding new locations, and developing online capabilities to complement physical distribution. Expansion of the distribution network will be achieved through acquisitions and de novo branching. On May 13, 2002, we completed the acquisition of First Western Bank. The Community Banking and Investment Services Group is comprised of five major divisions: Community Banking, Wealth Management, Institutional Services and Asset Management, Government and Not-For-Profit Markets, and Insurance Services. COMMUNITY BANKING serves its customers through 254 full-service branches in California, 6 full-service branches in Oregon and Washington, and a network of 505 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. This division is organized by service delivery method, by markets and by geography. We serve our customers in the following ways: o through community banking branches, which serve consumers and businesses with checking and deposit services, as well as various types of consumer financing; o through on-line access to our internet banking services, which augment our physical delivery channels by providing an array of customer transaction, bill payment and loan payment services; o through branches and business banking centers, which serve businesses with annual sales up to $5 million; and o through in-store branches, which also serve consumers and businesses. 24 WEALTH MANAGEMENT provides private banking services to our affluent clientele as well as brokerage products and services. o The Private Bank focuses primarily on delivering financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms. Specific products and services include trust and estate services, investment account management services, and deposit and credit products. The Private Bank's strategy is to expand its business by leveraging existing Bank client relationships. Through 12 existing locations, the Private Bank relationship managers offer all of our available products and services. o Our brokerage products and services are provided through UBOC Investment Services, Inc., a registered broker/dealer offering 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 Institutional Services provides custody, corporate trust, and retirement plan services. Custody Services provides both domestic and international safekeeping/settlement services in addition to securities lending. Corporate Trust acts as trustee for corporate and municipal debt issues. Retirement Services provides a full range of defined benefit and defined contribution administrative services, including trustee services, administration, investment management, and 401(k) valuation services. The client base of Institutional Services includes financial institutions, corporations, government agencies, unions, insurance companies, mutual funds, investment managers, and non-profit organizations. Institutional Services' strategy is to continue to leverage and expand our position in our target markets. As we announced on April 30, 2002, we acquired a substantial portion of the trust and institutional custody business of a bank located in Southern California. GOVERNMENT AND NOT-FOR-PROFIT MARKETS provides a full range of treasury management, investment, and trust services to government entities and not-for-profit organizations. o The group, which primarily focuses on local, state, and federal agencies, includes an expanding product offering to the Native American government market. Niche markets have been developed that service colleges, universities, trade associations, cultural institutions, and religious non-profit organizations. The group's strategy is to expand its market presence by continued delivery of cash management products, internet based technology solutions, and expanding its tax-exempt lending capabilities to meet existing clients' needs. INSURANCE SERVICES provides a range of risk management services and insurance products to business and retail customers. o The group, which includes our fourth quarter 2001 acquisition of Armstrong/Robitaille, a regional insurance broker, offers its risk management and insurance products through offices in California and Oregon. Through alliances with other financial institutions, the Community Banking and Investment Services Group offers additional products and services, such as credit cards, leasing, and asset-based and leveraged financing. 25 The group competes with larger banks by attempting to provide service quality superior to that of its major competitors. The group's primary means of competing with community banks include its branch network and its technology to deliver banking services. We also offer convenient banking hours to consumers through our drive-through banking locations and selected branches that are open seven days a week. The group competes with a number of commercial banks, internet banks, savings associations and credit unions, as well as more specialized financial service providers such as investment brokerage companies, consumer finance companies, and residential real estate lenders. The group's primary competitors are other major depository institutions such as Bank of America, California Federal, Washington Mutual and Wells Fargo, as well as smaller community banks in the markets in which we operate. COMMERCIAL FINANCIAL SERVICES GROUP The Commercial Financial Services Group offers financing and cash management services to middle market and large corporate businesses primarily headquartered in the western United States. The Commercial Financial Services Group has continued to focus specialized financing expertise to specific geographic markets and industry segments such as Energy, Entertainment, and Real Estate. Relationship managers in the Commercial Financial Services Group provide credit services including commercial loans, accounts receivable and inventory financing, project financing, lease financing, trade financing and real estate financing. In addition to credit services, the group offers its customers access to cash management services delivered through deposit managers with experience in cash management solutions for businesses. In the second quarter of 2002, net income decreased $12.4 million, or 19 percent, compared to the prior year. Net interest income decreased $17.4 million, or 10 percent, primarily due to the lower interest rate environment, wherein our wholesale liabilities are closely tied to the effects of the lower treasury bill rates. The impact on earnings of decreasing earning asset balances was mitigated by a significantly lower cost of funds resulting from this lower interest rate environment. Noninterest income increased $17.7 million, or 52 percent, including a net loss of $2.7 million in the private equity portfolio compared with net loss of $7.1 million in the second quarter of 2001, mainly attributable to a 32 percent growth in all other noninterest income. This 32 percent growth was primarily due to higher deposit-related service fees. Noninterest expense increased $9.4 million, or 12 percent, compared to a year earlier due to higher expenses to support increased product sales and deposit volume. Credit expense increased $13.4 million due to a refinement in the RAROC credit metrics that were implemented in late 2001 and not reflected in our second quarter of 2001 results. The group's initiatives during 2002 include expanding wholesale deposit activities and increasing domestic trade financing. Loan growth strategies include originating, underwriting and syndicating loans in core competency markets, such as the California middle market, commercial real estate, energy, entertainment, equipment leasing and commercial finance. The Commercial Financial Services Group provides strong processing services, including services such as check processing, front-end item processing, cash vault services and digital imaging. The combination of expanded products and an emphasis on core competencies are expected to contribute to growth in operating earnings in 2002. The Commercial Financial Services Group is comprised of the following business units: o the Commercial Banking Division, which serves California middle-market and large corporate companies with commercial lending, trade financing, and asset- based loans; o the Corporate Deposit Services Division, which provides deposit and cash management expertise to clients in the middle market, large corporate market and specialized industries; o the Institutional and Deposit Services Division, which provides deposit and cash management expertise to clients in specific deposit-intensive industries; 26 o the Corporate Capital Markets Division, which provides limited merchant and investment banking related products and services; o the Real Estate Industries Division, which provides real estate lending products such as construction loans, commercial mortgages and bridge financing; o the Energy Capital Services Division, which provides custom financing and project financing to oil and gas companies, as well as power and utility companies, in California and Texas; and o the Communications, Media and Entertainment Division, which provides custom financing to middle market and large corporate clients in their defined industries. The group competes with other banks primarily on the basis of the quality of its relationship managers, the delivery of quality customer service, and its reputation as a "business bank." The group's main strategy is to target industries and companies for which the group can reasonably expect to be one of a customer's primary banks. Consistent with its strategy, the group attempts to serve a large part of its targeted customers' credit and depository needs. The group competes with a variety of other financial services companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies, and insurance companies. INTERNATIONAL BANKING GROUP The International Banking Group focuses on providing correspondent banking and trade finance related products and services to international financial institutions worldwide, primarily in Asia. This focus includes products and services such as letters of credit, international payments, collections and financing of mostly short-term transactions. The group also serves certain foreign firms and US corporate clients in selected countries where we have branches, including Hong Kong, Japan, Korea, the Philippines and Taiwan. In the US, the group serves subsidiaries and affiliates of non-Japanese Asian companies and US branches/agencies of foreign banks. The majority of the revenue generated by the International Banking Group is from customers domiciled outside of the US. In the second quarter of 2002, net income increased $2.0 million, or 46 percent, compared to the prior year. Total revenue in the second quarter of 2002 increased $3.3 million, or 15 percent, compared to a year earlier. Net interest income increased $0.7 million, or 9 percent, over the prior year, mainly due to higher deposit volumes. Noninterest income was $2.6 million, or 18 percent, higher than the prior year mainly attributable to higher foreign remittance commissions reflecting a strategic focus on this business and merchant card activity in the current quarter. Noninterest expense increased $0.8 million, or 6 percent, compared to a year earlier with the majority of that increase being attributable to merchant card activity. And lastly, contributing to the group's overall increase in net income was lower portfolio exposure resulting in a $0.7 million, or 61 percent, reduction in credit expense compared to the second quarter of 2001. The nature of the International Banking Group's business revolves around short-term, trade financing mostly to banks and service-related income, which we believe tends to result in significantly lower credit risk when compared to other lending activities. The group has a long and stable history of providing correspondent banking and trade-related products and services to international financial institutions. We believe the group continues to be a market leader, achieving strong customer loyalty in the correspondent banking market by providing high quality products and services at competitive prices. The International Banking Group, headquartered in San Francisco, also maintains representative offices in Asia and Latin America and an international banking subsidiary in New York. 27 GLOBAL MARKETS GROUP The Global Markets Group conducts business activities primarily to support the previously described business groups and their customers. This group offers a broad range of risk management products, such as foreign exchange contracts and interest rate swaps and options. It trades money market, government, agency, and other securities to meet investment needs of institutional and business clients of UnionBanCal Corporation. Another primary area of the group is treasury management for UnionBanCal Corporation, which encompasses wholesale funding, liquidity management, interest rate risk management, including securities portfolio management, and hedging activities. In the second quarter of 2002, net loss was $1.6 million compared to net income of $2.9 million in the prior year. Total revenue in the second quarter of 2002 decreased $4.4 million, or 76 percent, compared to a year earlier primarily resulting from a $6.8 million decrease in net interest income, partly offset by a $2.4 million increase in noninterest income. The decrease in net interest income from the prior year was mainly attributed to a declining interest rate environment, offset in part by reduced volume and costs of wholesale funding and increased income from hedged positions. Noninterest income increased $2.4 million compared to the second quarter of 2001. This increase was mainly due to higher trading product sales and higher net gains on the sale of securities in our securities available for sale portfolio in the current year, partly offset by higher distribution of performance center earnings to other business segments of the bank in the current year. Noninterest expense increased $2.9 million, or 269 percent, compared to a year earlier, primarily as a result of a corporate decision to allocate $2.2 million of expenses recorded in first quarter 2001, relating to SFAS No. 133 transition expense, from the Global Markets Group to corporate activities (reported in "Other') in the second quarter of 2001. OTHER "Other" includes the following items: o corporate activities that are not directly attributable to one of the four major business units. Included in this category are goodwill amortization for periods prior to January 1, 2002 and certain other nonrecurring items such as merger and integration expense, certain parent company non-bank subsidiaries, and the elimination of the fully taxable-equivalent basis 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 $460 million and $415 million of nonperforming assets as of June 30, 2001 and 2002, respectively; o the Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies in the US, which are affiliated with companies headquartered outside the US, mostly in Japan; and o the residual costs of support groups. Net income for "Other" in the second quarter of 2002 was $5.2 million. The results were impacted by the following factors: o credit expense (income) of ($6.9) million was due to the difference between the $50.0 million in provision for credit losses calculated under our US GAAP methodology and the $56.9 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; o net interest income of $22.2 million, which resulted from the differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal Corporation, and a credit for demand deposits in the Pacific Rim Corporate Group; o noninterest income of $4.6 million; and 28 o noninterest expense of $32.4 million. Net loss for "Other" in the second quarter of 2001 was $6.1 million. The results were impacted by the following factors: o credit expense of $19.2 million due to the difference between the $65.0 million in provision for credit losses calculated under our US GAAP methodology and the $45.8 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; offset by o net interest income of $15.3 million, which resulted from the differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal Corporation, and a credit for demand deposits in the Pacific Rim Corporate Group; o noninterest income of $12.8 million, which included a $9.5 million gain recognized when we sold our stock holding in Concord EFS, and o noninterest expense of $27.9 million. 29 NET INTEREST INCOME The following tables show the major components of net interest income and net interest margin.
FOR THE THREE MONTHS ENDED ___________________________________________________________________________________________ JUNE 30, 2001 JUNE 30, 2002 ___________________________________________ ___________________________________________ INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) ______________________ ___________ __________ _______ ___________ __________ _______ ASSETS Loans:(2) Domestic............... $25,080,509 $472,070 7.55% $24,538,646 $371,173 6.06% Foreign(3)............. 1,033,880 14,909 5.78 1,040,200 7,587 2.93 Securities--taxable........ 4,488,401 70,114 6.25 5,570,242 77,553 5.57 Securities--tax-exempt..... 64,319 1,605 9.98 36,946 998 10.81 Interest bearing deposits in banks............... 65,781 661 4.03 120,411 629 2.09 Federal funds sold and securities purchased under resale agreements 189,973 2,158 4.56 1,090,306 4,828 1.78 Trading account assets.... 350,046 2,194 2.51 277,877 972 1.40 ___________ ________ ___________ ________ Total earning assets......... 31,272,909 563,711 7.23 32,674,628 463,740 5.69 ________ ________ Allowance for credit losses (630,939) (630,120) Cash and due from banks... 2,228,293 1,833,950 Premises and equipment, net 484,049 498,683 Other assets.............. 1,235,010 1,353,351 ___________ ___________ Total assets...... $34,589,322 $35,730,492 =========== =========== LIABILITIES Domestic deposits: Interest bearing....... $ 5,920,157 35,470 2.40 $ 7,883,320 22,551 1.15 Savings and consumer time................ 3,379,890 28,361 3.37 3,599,305 15,267 1.70 Large time............. 5,029,502 61,595 4.91 3,218,788 17,593 2.19 Foreign deposits(3)....... 1,937,288 19,447 4.03 1,614,335 6,105 1.52 ___________ ________ ___________ ________ Total interest bearing deposits 16,266,837 144,873 3.57 16,315,748 61,516 1.51 ___________ ________ ___________ ________ Federal funds purchased and securities sold under repurchase agreements............. 1,021,062 10,622 4.17 361,412 1,396 1.55 Commercial paper.......... 1,344,106 14,625 4.36 1,033,358 4,536 1.76 Other borrowed funds...... 567,553 6,376 4.51 667,234 3,635 2.19 Medium and long-term debt. 200,000 2,535 5.08 399,681 2,411 2.42 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust 352,148 5,367 6.09 352,375 3,948 4.47 ___________ ________ ___________ ________ Total borrowed funds.......... 3,484,869 39,525 4.55 2,814,060 15,926 2.27 ___________ ________ ___________ ________ Total interest bearing liabilities.... 19,751,706 184,398 3.74 19,129,808 77,442 1.62 ________ ________ Noninterest bearing deposits............... 10,374,498 11,906,497 Other liabilities......... 1,056,794 945,152 ___________ ___________ Total liabilities... 31,182,998 31,981,457 SHAREHOLDERS' EQUITY Common equity............. 3,406,324 3,749,035 ___________ ___________ Total shareholders' equity......... 3,406,324 3,749,035 ___________ ___________ Total liabilities and shareholders'equity $34,589,322 $35,730,492 =========== =========== Net interest income/margin (taxable-equivalent basis)................. 379,313 4.86% 386,298 4.74% Less: taxable-equivalent adjustment............. 590 537 ________ ________ Net interest income $378,723 $385,761 ======== ======== __________________ (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.
30
FOR THE SIX MONTHS ENDED ___________________________________________________________________________________________ JUNE 30, 2001 JUNE 30, 2002 ___________________________________________ ___________________________________________ INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) ______________________ ___________ __________ _______ ___________ __________ _______ ASSETS Loans:(2) Domestic............... $25,229,819 $991,104 7.91% $24,314,639 $739,235 6.12% Foreign(3)............. 1,035,351 32,423 6.32 1,039,909 15,509 3.01 Securities--taxable........ 4,286,712 136,302 6.36 5,561,342 158,216 5.69 Securities--tax-exempt..... 65,791 3,256 9.90 37,586 1,989 10.59 Interest bearing deposits in banks............... 72,473 1,627 4.53 102,509 1,125 2.21 Federal funds sold and securities purchased under resale agreements 131,828 3,187 4.88 1,013,769 8,887 1.77 Trading account assets.... 349,168 5,126 2.96 257,735 1,692 1.32 ___________ _________ ___________ ________ Total earning assets......... 31,171,142 1,173,025 7.57 32,327,489 926,653 5.76 _________ ________ Allowance for credit losses (632,940) (637,210) Cash and due from banks... 2,211,250 1,887,985 Premises and equipment, net 482,396 497,483 Other assets.............. 1,277,253 1,333,050 ___________ ___________ Total assets...... $34,509,101 $35,408,797 =========== =========== LIABILITIES Domestic deposits: Interest bearing....... $ 6,029,529 76,812 2.57 $ 7,672,584 45,709 1.20 Savings and consumer time................ 3,350,591 58,273 3.51 3,574,422 32,237 1.82 Large time............. 4,729,912 125,458 5.35 3,351,398 37,400 2.25 Foreign deposits(3)....... 1,985,220 44,990 4.57 1,681,420 12,369 1.48 ___________ _________ ___________ ________ Total interest bearing deposits 16,095,252 305,533 3.83 16,279,824 127,715 1.58 ___________ _________ ___________ ________ Federal funds purchased and securities sold under repurchase agreements............. 1,422,984 36,422 5.16 450,800 3,345 1.50 Commercial paper.......... 1,410,964 35,038 5.01 976,624 8,510 1.76 Other borrowed funds...... 482,405 11,716 4.90 682,558 7,078 2.09 Medium and long-term debt. 200,000 5,731 5.78 399,834 4,823 2.43 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust 352,139 11,389 6.46 352,337 7,911 4.47 ___________ _________ ___________ ________ Total borrowed funds.......... 3,868,492 100,296 5.22 2,862,153 31,667 2.23 ___________ _________ ___________ ________ Total interest bearing liabilities.... 19,963,744 405,829 4.10 19,141,977 159,382 1.68 _________ ________ Noninterest bearing deposits............... 10,111,665 11,617,577 Other liabilities......... 1,061,371 961,999 ___________ ___________ Total liabilities... 31,136,780 31,721,553 SHAREHOLDERS' EQUITY Common equity............. 3,372,321 3,687,244 ___________ ___________ Total shareholders' equity......... 3,372,321 3,687,244 ___________ ___________ Total liabilities and shareholders' equity......... $34,509,101 $35,408,797 =========== =========== Net interest income/margin (taxable-equivalent basis)................. 767,196 4.94% 767,271 4.77% Less: taxable-equivalent adjustment............. 1,212 1,070 _________ ________ Net interest income $ 765,984 $766,201 ========= ======== __________________ (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.
31 Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and average interest bearing liabilities. THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 Net interest income, on a taxable-equivalent basis, was $386.3 million in the second quarter of 2002, compared with $379.3 million in the second quarter of 2001. This increase of $7.0 million, or 2 percent, was attributable primarily to the impact of the decreasing interest rate environment throughout the prior year on interest bearing liabilities, increasing average noninterest bearing deposits, and higher earning assets, partly offset by significantly lower yields on our earning assets. Decreasing market rates resulted in a lower average yield of 154 basis points on average earning assets of $32.7 billion, which were partly offset by lower cost of fund rates on our interest bearing liabilities of 212 basis points on average balances of $19.1 billion. Mitigating the impact of this lower interest rate environment on our net interest margin was an increase in average earning assets of $1.4 billion, primarily in securities, funded by a $1.5 billion, or 15 percent, increase in average noninterest bearing deposits. The resulting impact of these changes on our net interest margin was a decrease of 12 basis points to 4.74 percent. Average earning assets were $32.7 billion in the second quarter of 2002, compared with $31.3 billion in the second quarter of 2001. This growth was attributable to a $1.1 billion, or 23 percent, increase in average securities, offset by a $535.5 million, or 2 percent, decrease in average loans. The increase in average securities, which were comprised primarily of fixed rate available for sale securities, reflected liquidity and interest rate risk management actions. The decline in average loans was mostly due to a $2.3 billion decrease in average commercial loans mainly attributable to slower loan growth due to economic conditions, loan sales, and a reduction in our exposure in nonrelationship syndicated loans. The decrease in commercial loans was partly offset by an increase in average residential mortgages of $1.7 billion, which was a result of a strategic portfolio shift from more volatile commercial loans. Other loan categories included an increase in average commercial mortgages of $407.0 million and a decrease in average consumer loans and lease financing of $276.5 million and $156.0 million, respectively. SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 Net interest income, on a taxable-equivalent basis, was $767.3 million in the first six months of 2002, compared with $767.2 million in the first six months of 2001. This slight increase of less than $0.1 million was attributable primarily to the decreasing interest rate environment throughout the prior year on interest bearing liabilities, increasing average noninterest bearing deposits, and higher earning assets, partly offset by significantly lower yields on our earning assets. Decreasing market rates resulted in a lower average yield of 181 basis points on average earning assets of $32.3 billion, which were partly offset by lower cost of fund rates on our interest bearing liabilities of 242 basis points on average balances of $19.1 billion. Mitigating the impact of this lower interest rate environment on our net interest margin was an increase in average earning assets of $1.2 billion, primarily in securities, funded by a $1.5 billion, or 15 percent, increase in average noninterest bearing deposits. The resulting impact of these changes on our net interest margin was a decrease of 17 basis points to 4.77 percent. Average earning assets were $32.3 billion in the first six months of 2002, compared with $31.2 billion in the first six months of 2001. This growth was attributable to a $1.2 billion, or 29 percent, increase in average securities, offset by a $910.6 million, or 4 percent, decrease in average loans. The increase in average securities, which were comprised primarily of fixed rate available for sale securities, reflected liquidity and interest rate risk management actions. The decline in average loans was mostly due to a $2.6 billion decrease in average commercial loans mainly attributable to slower loan growth due to economic conditions, loan sales, and a reduction in our exposure in nonrelationship syndicated loans. The decrease in commercial loans was partly offset by an increase in average residential mortgages of $1.7 billion, which was a result of a strategic portfolio shift from more volatile commercial loans. Other 32 loan categories included an increase in average commercial mortgages of $357.0 million and a decrease in average consumer loans and lease financing of $307.1 million and $156.8 million, respectively.
NONINTEREST INCOME FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ___________________________________ ________________________________________ JUNE 30, JUNE 30, PERCENT JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS) 2001 2002 CHANGE 2001 2002 CHANGE ______________________ ________ ________ _______ ________ ________ ________ Service charges on deposit accounts... $ 61,852 $ 69,869 12.96% $118,872 $136,012 14.42% Trust and investment management fees.. 39,234 37,587 (4.20) 78,915 74,312 (5.83) Merchant transaction processing fees.. 20,433 22,421 9.73 39,499 43,122 9.17 International commissions and fees.... 18,125 19,239 6.15 35,235 37,462 6.32 Gain on exchange of STAR System stock. -- -- -- 20,700 -- (100.00) Brokerage commissions and fees........ 9,063 9,275 2.34 17,978 18,907 5.17 Merchant banking fees................. 9,681 9,081 (6.20) 18,929 16,026 (15.34) Foreign exchange trading gains, net... 6,900 7,011 1.61 13,120 13,459 2.58 Insurance commissions................. -- 6,252 nm -- 13,405 nm Securities gains (losses), net........ 3,751 (1,297) nm 6,017 (3,863) nm Other................................. (648) 9,336 nm (67) 11,383 nm ________ ________ ________ ________ Total noninterest income.............. $168,391 $188,774 12.10% $349,198 $360,225 3.16% ======== ======== ======== ======== __________________ nm = not meaningful
THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 In the second quarter of 2002, noninterest income was $188.8 million, an increase of $20.3 million, or 12 percent, over the second quarter of 2001. This increase was mainly attributable to an $8.0 million increase in service charges on deposit accounts, lower residual value writedowns in our auto lease portfolio of $8.0 million, a $6.3 million increase in insurance commissions related to the acquisition of Armstrong/Robitaille, a $2.0 million increase in merchant transaction processing fees, and a $1.1 million increase in international commissions and fees, partly offset by a $1.6 million decrease in trust and investment management fees. In addition, securities losses, net, were $1.3 million. Revenue from service charges on deposit accounts was $69.9 million, an increase of 13 percent over the second quarter of 2001. This increase was primarily attributable to a 15 percent increase in quarterly average demand deposits and reductions in the earnings credit rates, caused by the lower interest rate environment on analyzed deposit accounts, which resulted in customers paying fees for services rather than increasing required deposit balances. Trust and investment management fees were $37.6 million, a decrease of 4 percent over the second quarter of 2001. This decrease is primarily attributable to declining market conditions and their impact on transaction and asset-based fees. Merchant transaction processing fees were $22.4 million, an increase of 10 percent over the second quarter of 2001. This increase was primarily due to an increase in the volume of credit card drafts deposited by merchants and the July 2001 introduction of our enhanced Gold and Platinum version of our standard MasterMoney Card (debit card) aimed at stimulating consumer usage for higher dollar purchases. Insurance commissions were $6.3 million reflecting the incremental revenues associated with our acquisition of Armstrong/Robitaille. Securities losses, net, were $1.3 million compared to securities gains, net, of $3.8 million in the prior year. In the second quarter of 2001, we realized net gains of $10.5 million on the sale of securities 33 (including a $9.5 million realized gain on the sale of our Concord EFS holdings, which we received in exchange for our stock holdings of STAR System), partly offset by permanent writedowns on private capital securities of $6.8 million. In the current quarter, we realized gains of $4.6 million on the sale of securities, offset by permanent writedowns on private capital securities of $5.9 million. Other noninterest income was $9.3 million, an increase of $10.0 million over the second quarter of 2001. This increase was mainly attributable to lower residual value writedowns in our auto lease portfolio of $3.0 million in the second quarter of 2002 compared to $11.0 million in the second quarter of 2001. SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 In the first six months of 2002, noninterest income was $360.2 million, an increase of $11.0 million, or 3 percent, over the first six months of 2001. In the prior year, we recognized a $20.7 million gain when our stock holding in STAR System was exchanged for Concord EFS stock. Excluding the gain on the exchange of our STAR System holdings, noninterest income increased $31.7 million, or 10 percent. This increase was mainly attributable to lower residual value writedowns in our auto lease portfolio of $19.3 million, a $17.1 million increase in service charges on deposit accounts, a $13.4 million increase in insurance commissions related to our acquisition of Armstrong/Robitaille, a $3.6 million increase in merchant transaction processing fees, and a $2.2 million increase in international commissions and fees, partly offset by a $4.6 million decrease in trust and investment management fees, a $2.9 million decrease in merchant banking fees, and a $9.9 million decrease in securities gains, net. Revenue from service charges on deposit accounts was $136.0 million, an increase of 14 percent over the first six months of 2001. This increase was primarily attributable to a 15 percent increase in average demand deposits and reductions in the earnings credit rates, caused by the lower interest rate environment on analyzed deposit accounts, which resulted in customers paying fees for services rather than increasing required deposit balances. Trust and investment management fees were $74.3 million, a decrease of 6 percent over the first six months of 2001. This decrease is attributable to declining market conditions and their impact on transaction and asset-based fees. Total assets under administration decreased by $2.7 billion, or 2 percent, from June 30, 2001. Merchant transaction processing fees were $43.1 million, an increase of 9 percent over the first six months of 2001. This increase was primarily due to an increase in the volume of credit card drafts deposited by merchants and the July 2001 introduction of our enhanced Gold and Platinum version of our standard MasterMoney Card (debit card) aimed at stimulating consumer usage for higher dollar purchases. Merchant banking fees were $16.0 million, a decrease of 15 percent from the first six months of 2001. This decrease was primarily attributable to fewer and smaller syndication and investment banking transactions as a result of the current market situation. Insurance commissions were $13.4 million reflecting the incremental revenues associated with our acquisition of Armstrong/Robitaille. Securities losses, net, were $3.9 million compared to securities gains, net, of $6.0 million in the prior year. In the first six months of 2001, we realized net gains of $16.2 million on the sale of securities, including a $9.5 million gain on the sale of Concord EFS shares, partly offset by permanent writedowns on private capital securities of $10.1 million. In the first six months of 2002, we realized gains of $5.1 million on the sale of securities, partly offset by permanent writedowns on private capital securities of $8.9 million. Other noninterest income was $11.4 million, an increase of $11.5 million over the first six months of 2001. This increase was mainly attributable to lower residual value writedowns in our auto lease portfolio of $9.0 million in the first six months of 2002 compared to $28.3 million in the first six months of 2001. This increase was partly offset by higher unrealized losses on other non-publicly traded securities of $3.8 million 34 in the current year (compared to $1.1 million in the first six months of 2001) and a $3.1 million gain on the sale of leased equipment in the prior year.
NONINTEREST EXPENSE FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ___________________________________ ________________________________________ JUNE 30, JUNE 30, PERCENT JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS) 2001 2002 CHANGE 2001 2002 CHANGE ______________________ ________ ________ _______ ________ ________ ________ Salaries and other compensation...... $137,294 $154,209 12.32% $268,266 $296,633 10.57% Employee benefits.................... 27,290 31,891 16.86 60,805 68,343 12.40 Salaries and employee benefits.... 164,584 186,100 13.07 329,071 364,976 10.91 Net occupancy........................ 23,837 25,029 5.00 46,596 48,410 3.89 Equipment............................ 15,469 15,967 3.22 31,267 32,307 3.33 Merchant transaction processing...... 13,449 14,433 7.32 26,363 27,349 3.74 Communications....................... 11,806 12,568 6.45 23,508 26,509 12.77 Software............................. 6,832 10,039 46.94 14,363 21,549 50.03 Professional services................ 11,349 10,936 (3.64) 19,173 20,439 6.60 Advertising and public relations..... 11,444 8,621 (24.67) 18,049 18,629 3.21 Data processing...................... 9,101 7,540 (17.15) 18,050 16,531 (8.42) Intangible asset amortization........ 3,633 1,280 (64.77) 7,171 2,164 (69.82) Foreclosed asset expense (income).... 48 (13) nm 61 112 83.61 Other................................ 35,900 37,291 3.87 81,265 74,179 (8.72) ________ ________ ________ ________ Total noninterest expense......... $307,452 $329,791 7.27% $614,937 $653,154 6.21% ======== ======== ======== ======== __________________ nm = not meaningful
THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 In the second quarter of 2002, noninterest expense was $329.8 million, an increase of $22.3 million, or 7 percent, over the same period in 2001. This increase was mostly due to a $21.5 million increase in salaries and employee benefits, a $3.2 million increase in software expense, a $1.4 million increase in other noninterest expense, a $1.2 million increase in net occupancy expense, and a $1.0 million increase in merchant transaction processing expense. These increases were partly offset by a $2.8 million decrease in advertising and public relations expense, a $2.4 million decrease in intangible asset expense mostly attributable to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," in the first quarter of 2002, which eliminated the amortization of goodwill, and a $1.6 million decrease in data processing expense. Salaries and employee benefits were $186.1 million, an increase of 13 percent over the second quarter of 2001. This increase was primarily due to salary expense increases necessary to achieve our strategic goals to expand key businesses, to annual merit increases, to higher incentive expense, to higher other benefit expenses including higher pension and medical costs and lower COLI (company-owned life insurance) income. Net occupancy expense was $25.0 million, an increase of 5 percent over the second quarter of 2001. This increase was primarily attributable to higher building rent, depreciation, and leasehold amortization expense mainly associated with new branches and the Armstrong/Robitaille and First Western Bank acquisitions. Merchant transaction processing expense was $14.4 million, an increase of 7 percent over the second quarter of 2001. This increase was primarily attributable to an increase in the volume of credit card drafts deposited by merchants. 35 Software expense was $10.0 million, an increase of 47 percent over the second quarter of 2001. This increase was primarily attributable to increased software purchases and development to support strategic technology initiatives. Advertising and public relations expenses were $8.6 million, a decrease of 25 percent from the second quarter of 2001. This decrease was mainly attributable to a new year-round approach to advertising for certain market segments, which reduced the seasonality of these expenses. Data processing expense was $7.5 million, a decrease of 17 percent from the second quarter of 2001. This decrease was primarily attributable to the impact of reductions in the earnings credit rates, caused by the lower interest rate environment, on analyzed deposit accounts used to offset vendor expenses. Intangible asset amortization expense was $1.3 million, a decrease of 65 percent from the second quarter of 2001. This decrease was primarily attributable to lower goodwill amortization related to the adoption of SFAS No. 142 in the first quarter of 2002. Other noninterest expense was $37.3 million, an increase of 4 percent over the second quarter of 2001. This increase was primarily attributable to higher stationery and supply expenses. SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2002 In the first six months of 2002, noninterest expense was $653.2 million, an increase of $38.2 million, or 6 percent, over the same period in 2001. This increase was mostly due to a $35.9 million increase in salaries and employee benefits, a $7.2 million increase in software expense, and a $3.0 million increase in communications expense. These increases were partly offset by a $5.0 million decrease in intangible asset expense mostly attributable to the adoption of SFAS No. 142 in the first quarter of 2002, which eliminated the amortization of goodwill, and a $7.1 million decrease in other noninterest expense. Salaries and employee benefits were $365.0 million, an increase of 11 percent over the first six months of 2001. This increase was primarily due to increases in staff necessary to achieve our strategic goals to expand key businesses, to annual merit increases, to higher incentive expense, and to higher other benefit expenses including higher pension and medical costs. Communications expense was $26.5 million, an increase of 13 percent over the first six months of 2001. This increase was primarily attributable to higher costs associated with increased rates and usage for data and voice communication. Software expense was $21.5 million, an increase of 50 percent over the first six months of 2001. This increase was primarily attributable to increased software purchases and development to support strategic technology initiatives. Intangible asset amortization expense was $2.2 million, a decrease of 70 percent from the second quarter of 2001. This decrease reflects the adoption of SFAS No. 142 in the first quarter of 2002. Other noninterest expense was $74.2 million, a decrease of 9 percent from the first six months of 2001. This decrease was due to the recognition of a $6.2 million loss at the adoption of SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities", and higher derivative-related expenses of $3.5 million due to changes in the value of a portion of the interest rate options that were excluded from hedge accounting under SFAS No. 133, both in the prior year. 36 INCOME TAX EXPENSE Income tax expense in the second quarter of 2002 was $64.8 million. For both second quarter 2002 and 2001, the effective income tax rate was 33 percent. Income tax expense in the first six months of 2002 was $123.6 million, a 34 percent effective income tax rate. For the first six months of 2001, the effective income tax rate was 33 percent. LOANS The following table shows loans outstanding by loan type.
PERCENT CHANGE TO JUNE 30, 2002 FROM: _________________________ JUNE 30, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 31, (DOLLARS IN THOUSANDS) 2001 2001 2002 2001 2001 ______________________ ___________ ___________ ___________ ________ ____________ Domestic: Commercial, financial and industrial.... $12,632,541 $11,476,361 $11,006,283 (12.87)% (4.10)% Construction............................ 1,094,524 1,059,847 1,163,530 6.30 9.78 Mortgage: Residential.......................... 4,196,899 4,788,219 5,673,529 35.18 18.49 Commercial........................... 3,399,316 3,590,318 3,769,068 10.88 4.98 ___________ ___________ ___________ Total mortgage..................... 7,596,215 8,378,537 9,442,597 24.31 12.70 Consumer: Installment.......................... 1,446,219 1,200,047 997,973 (30.99) (16.84) Revolving lines of credit............ 767,199 859,021 988,996 28.91 15.13 ___________ ___________ ___________ Total consumer..................... 2,213,418 2,059,068 1,986,969 (10.23) (3.50) Lease financing......................... 1,031,358 979,242 880,892 (14.59) (10.04) ___________ ___________ ___________ Total loans in domestic offices.... 24,568,056 23,953,055 24,480,271 (0.36) 2.20 Loans originated in foreign branches....... 1,088,191 1,040,975 1,112,035 2.19 6.83 ___________ ___________ ___________ Total loans........................ $25,656,247 $24,994,030 $25,592,306 (0.25)% 2.39% =========== =========== ===========
Our lending activities are predominantly domestic, with such loans comprising 96 percent of the total loan portfolio at June 30, 2002. Total loans at June 30, 2002 were $25.6 billion, a decrease of 0.3 percent, from June 30, 2001. The decrease was mainly attributable to a decline in the commercial, financial and industrial loan portfolio of $1.6 billion and a decline in the consumer loan portfolio of $226.4 million, partly offset by an increase in the residential mortgage portfolio of $1.5 billion and an increase in the commercial mortgage portfolio of $369.8 million. Commercial, financial and industrial loans represent the largest category in the loan portfolio. These loans are extended principally to corporations, middle market businesses, and small businesses, with no industry concentration exceeding 10 percent of total commercial, financial and industrial loans. The commercial, financial and industrial loan portfolio was $11.0 billion, or 43 percent of total loans, at June 30, 2002, compared with $12.6 billion, or 49 percent of total loans, at June 30, 2001. The decrease of $1.6 billion, or 13 percent, from the prior year was primarily attributable to current economic conditions, loan sales, and reductions in our exposure in nonrelationship syndicated loans. The reduction in commercial, financial, and industrial loans is consistent with our strategy to reduce our exposure in more volatile commercial loans and increase the percentage of more stable consumer loans. The construction loan portfolio totaled $1.2 billion, or 5 percent of total loans, at June 30, 2002, compared with $1.1 billion, or 4 percent of total loans, at June 30, 2001. This growth of $69.0 million, or 6 percent, from the prior year was primarily attributable to a reasonably stable Southern California housing market during 2001 and 2002, despite the slowdown in the economy. 37 Commercial mortgages were $3.8 billion, or 15 percent of total loans, at June 30, 2002, compared with $3.4 billion, or 13 percent of total loans, at June 30, 2001. The mortgage loan portfolio consists of loans on commercial and industrial projects primarily in California. The increase in commercial mortgages of $369.8 million, or 11 percent, from June 30, 2001, was primarily due to demand in the Southern California real estate market. Residential mortgages were $5.7 billion, or 22 percent of total loans, at June 30, 2002, compared with $4.2 billion, or 16 percent of total loans, at June 30, 2001. The residential mortgage portfolio consists of residential loans secured by one-to-four family residential properties primarily in California. The increase in residential mortgages of $1.5 billion, or 35 percent, from June 30, 2001, continues to be influenced by our strategic decision to increase our residential mortgage portfolio through increased in-house production and additional wholesale and correspondent channels. Consumer loans totaled $2.0 billion, or 8 percent of total loans, at June 30, 2002, compared with $2.2 billion, or 9 percent of total loans, at June 30, 2001. The decrease of $226.4 million, or 10 percent, was attributable to the impact of our decision to exit the indirect auto lending business in the third quarter of 2000, partly offset by an increase in home equity loans. Lease financing totaled $880.9 million, or 3 percent of total loans, at June 30, 2002, compared with $1.0 billion, or 4 percent of total loans, at June 30, 2001. As we previously announced, effective April 20, 2001, we discontinued our auto leasing activity. Loans originated in foreign branches totaled $1.1 billion, or 4 percent of total loans, at June 30, 2002, unchanged from June 30, 2001. 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 June 30, 2001, December 31, 2001 and June 30, 2002 for any country where such outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding exclude local currency outstandings. For any country shown in the table below, we do not have significant local currency outstandings that are not hedged or are not funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL (DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS _____________________ ____________ ________ ____________ ____________ June 30, 2001 Korea............................................... $378 $ - $46 $424 December 31, 2001 Korea............................................... $468 $ - $46 $514 June 30, 2002 Korea............................................... $483 $ - $38 $521
PROVISION FOR CREDIT LOSSES We recorded a $50 million provision for credit losses in the second quarter of 2002, compared with a $65 million provision for credit losses for the same period in the prior year. The provision for credit losses in the first six months of 2002 was $105 million, compared with a $165 million provision for credit losses for the same period in the prior year. Provisions for credit losses are charged to income to bring our allowance 38 for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowance for Credit Losses" below. Our provision for the second quarter and first six months of 2002, reflects our application of strict standards to the definitions of potential and well-defined weaknesses in our loan portfolio, which impact the level of our criticized assets. ALLOWANCE FOR CREDIT LOSSES We maintain an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio, and to a lesser extent, unused commitments to provide financing. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, specific allowances for identified problem loans and portfolio segments, and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans, leases and commitments. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Loss factors are developed in the following ways: o pass graded, for commercial, financial, and industrial loans, as well as all problem graded loan loss factors are derived from a migration model that tracks historical losses over a period, which we believe captures the inherent losses in our loan portfolio; o pass graded loan loss factors for commercial real estate loans and construction loans are based on the average annual net charge-off rate over a period reflective of a full economic cycle; and o pooled loan loss factors (not individually graded loans) are based on expected net charge-offs for one year. Pooled loans are loans that are homogeneous in nature, such as consumer installment, home equity, residential mortgage loans and automobile leases. We believe that an economic cycle is a period in which both upturns and downturns in the economy have been reflected. We calculate loss factors over a time interval that spans what we believe constitutes a complete and representative economic cycle. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred. This amount may be determined either by a method prescribed by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," or methods that include a range of probable outcomes based upon certain qualitative factors. The unallocated allowance contains amounts that are based on management's evaluation of conditions that are not directly 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 may not be identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following, which existed at the balance sheet date: o general economic and business conditions affecting our key lending areas; o credit quality trends (including trends in nonperforming loans expected to result from existing conditions); o collateral values; 39 o loan volumes and concentrations; o seasoning of the loan portfolio; o specific industry conditions within portfolio segments; o recent loss experience in particular segments of the portfolio; o duration of the current economic cycle; o bank regulatory examination results; and o findings of our internal credit examiners. Executive management reviews these conditions quarterly in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such 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 and pass graded commercial, financial, and industrial loans is designed to be self-correcting by taking into account our loss experience over prescribed periods. Similarly, by basing the pass graded loan loss factors over a period reflective of an economic cycle, the methodology is designed to take our recent loss experience for commercial real estate mortgages and construction loans into account. Pooled loan loss factors are adjusted quarterly based upon the level of net charge-offs expected by management in the next twelve months. Furthermore, based on management's judgement, our methodology permits adjustments to any loss factor used in the computation of the formula allowance for significant factors, which affect the collectibility of the portfolio as of the evaluation date, but are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information that has become available. COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES FROM DECEMBER 31, 2001 During the second quarter of 2002, there were no changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the formula and specific allowances for credit losses, except for a refinement of our allowance estimations for impaired loans. Changes in estimates and assumptions regarding the effects of economic and business conditions on borrowers and other factors, which are described below, affected the assessment of the unallocated allowance. At December 31, 2001, our total allowance for credit losses was $635 million or 2.54 percent of the total loan portfolio and 129 percent of total nonaccrual loans. At June 30, 2002, our total allowance for credit losses was $625 million or 2.44 percent of the total loan portfolio and 151 percent of total nonaccrual loans. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114 and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. At December 31, 2001, total impaired loans were $492 million and the associated impairment allowance was $98 million compared with $414 million and $37 million, respectively, at June 30, 2002. 40 We recorded a $50 million provision in the second quarter of 2002 as a result of management's assessment of factors, including the continued slow US economy, uncertainty in the communication/media, power, real estate, and other sectors in domestic markets in which we operate, and growth and changes in the composition of the loan portfolio. Losses inherent in large commercial loans are more difficult to assess because historically these have been more volatile than losses from other credits. CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES At June 30, 2002, the formula allowance remained relatively unchanged at $334 million, compared to $325 million at December 31, 2001, an increase of $9 million. At June 30, 2002, the specific allowance was $101 million compared to $138 million at December 31, 2001, a decrease of $37 million. This was primarily due to charge-offs recognized during the quarter as well as a refinement in our estimated losses for impaired loans and a decline in nonaccrual loans. CHANGES IN THE UNALLOCATED ALLOWANCE At June 30, 2002, the unallocated allowance was $190 million, compared to $172 million at December 31, 2001, an increase of $18 million. In evaluating the appropriateness of the unallocated allowance, we considered the following factors as well as more general factors such as the interest rate environment and the impact of the economic downturn on those borrowers who have a more leveraged financial profile: o the adverse effects of declining debt ratings and weak equity prices on borrowers in the power industry, which could be in the range of $20 million to $40 million; o the adverse effects of changes in the economic, regulatory, and technology environments on borrowers in the communications/media industry, which could be in the range of $18 million to $40 million; o the adverse effects of the general weakening in commercial real estate markets, as well as the specific deterioration in Northern California, which could be in the range of $16 million to $32 million; o the adverse effects of continued soft consumer confidence on borrowers in the retailing industry, which could be in the range of $10 million to $25 million; and o the adverse effects of the continued weak economic conditions in certain Asia/Pacific Rim countries and the reduced strength of the Japanese corporate parents of our Pacific Rim borrowers, which could be in the range of $7 million to $13 million. There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth above. See "Certain Business Risks Factors". 41 CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES The following table sets forth a reconciliation of changes in our allowance for credit losses.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2001 2002 _____________________________________________ ________ ________ ________ ________ Balance, beginning of period.......................................... $642,334 $629,367 $613,902 $634,509 Loans charged off: Commercial, financial and industrial............................... 90,151 67,952 164,706 130,178 Mortgage........................................................... 28 248 58 428 Consumer........................................................... 2,897 2,228 6,234 4,827 Lease financing.................................................... 1,007 674 1,788 1,507 ________ ________ ________ ________ Total loans charged off......................................... 94,083 71,102 172,786 136,940 Recoveries of loans previously charged off: Commercial, financial and industrial............................... 12,073 12,822 18,010 17,339 Construction....................................................... -- 40 -- 40 Mortgage........................................................... -- 44 24 139 Consumer........................................................... 1,125 873 2,252 1,781 Lease financing.................................................... 171 182 319 383 Foreign(1)......................................................... -- -- 14 -- ________ ________ ________ ________ Total recoveries of loans previously charged off................ 13,369 13,961 20,619 19,682 ________ ________ ________ ________ Net loans charged off......................................... 80,714 57,141 152,167 117,258 Provision for credit losses........................................... 65,000 50,000 165,000 105,000 Foreign translation adjustment and other net additions (deductions)(2) (83) 2,722 (198) 2,697 ________ ________ ________ ________ Balance, end of period................................................ $626,537 $624,948 $626,537 $624,948 ======== ======== ======== ======== Allowance for credit losses to total loans............................ 2.44% 2.44% 2.44% 2.44% Provision for credit losses to net loans charged off.................. 80.53 87.50 108.43 89.55 Net loans charged off to average loans outstanding for the period(3).. 1.24 0.90 1.17 0.93 __________________ (1) Foreign loans are those loans originated in foreign branches. (2) Includes a second quarter 2002 transfer of $2.4 million related to the First Western Bank acquisition. (3) Annualized.
Total loans charged off in the second quarter of 2002 decreased by $23.0 million from the second quarter of 2001, primarily due to a $22.2 million decrease in commercial, financial and industrial loans charged off. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through provisions for credit losses. Second quarter 2002 recoveries of loans previously charged off increased by $0.6 million from the second quarter of 2001. The percentage of net loans charged off to average loans outstanding for the second quarter of 2002 decreased by 34 basis points from the same period in 2001. At June 30, 2002, the allowance for credit losses exceeded the annualized net loans charged off during the second quarter of 2002, reflecting management's belief, based on the foregoing analysis, that there are additional losses inherent in the portfolio. Historical net charge-offs are not necessarily indicative of the amount of net charge-offs that we will realize in the future. 42
NONPERFORMING ASSETS JUNE 30, DECEMBER 31, JUNE 30, (DOLLARS IN THOUSANDS) 2001 2001 2002 ______________________ ________ __________ ________ Commercial, financial and industrial........................................... $432,756 $471,509 $386,912 Construction................................................................... 3,967 -- -- Commercial mortgage............................................................ 16,699 17,430 24,201 Lease financing................................................................ -- 2,946 3,369 ________ __________ ________ Total nonaccrual loans...................................................... 453,422 491,885 414,482 Foreclosed assets.............................................................. 1,345 597 490 Distressed loans held for sale................................................. 5,349 -- -- ________ __________ ________ Total nonperforming assets.................................................. $460,116 $492,482 $414,972 ======== ========== ======== Allowance for credit losses.................................................... $626,537 $634,509 $624,948 ======== ========== ======== Nonaccrual loans to total loans................................................ 1.77% 1.97% 1.62% Allowance for credit losses to nonaccrual loans................................ 138.18 129.00 150.78 Nonperforming assets to total loans, distressed loans held for sale and foreclosed assets........................................................... 1.79 1.97 1.62 Nonperforming assets to total assets........................................... 1.29 1.37 1.15
At June 30, 2002, nonperforming assets totaled $415.0 million, a decrease of $45.1 million, or 10 percent, from June 30, 2001. The decrease was primarily due to moderate inflows of nonaccrual loans, coupled with continuing higher levels of pay-downs and charge-offs. Nonaccrual loans as a percentage of total loans were 1.62 percent at June 30, 2002, compared with 1.77 percent at June 30, 2001. Nonperforming assets as a percentage of total loans, distressed loans held for sale, and foreclosed assets were 1.62 percent at June 30, 2002, compared to 1.79 percent at June 30, 2001.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING JUNE 30, DECEMBER 31, JUNE 30, (DOLLARS IN THOUSANDS) 2001 2001 2002 ______________________ ________ ____________ ________ Commercial, financial and industrial................................................ $ 12,812 $ 26,571 $11,096 Mortgage: Residential...................................................................... 3,376 4,854 5,104 Commercial....................................................................... 1,087 2,356 523 ________ ____________ ________ Total mortgage................................................................ 4,463 7,210 5,627 Consumer and other.................................................................. 3,286 2,579 1,513 ________ ____________ ________ Total loans 90 days or more past due and still accruing.......................... $ 20,561 $ 36,360 $18,236 ======== ============ ========
43 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) THE FOLLOWING INFORMATION ON MARKET RISK ASSOCIATED WITH INTEREST RATE RISK IS BEING PROVIDED IN ORDER TO EXPAND THE INFORMATION ON THE ASSUMPTIONS USED IN OUR SIMULATION MODELS, WHICH QUANTIFY OUR SENSITIVITY TO CHANGES IN INTEREST RATES. We engage in asset and liability management activities with the primary purposes of managing the sensitivity of net interest income (NII) to changes in interest rates within limits established by the Board of Directors (Board) and maintaining a risk profile that is consistent with management's strategic objectives. The Asset & Liability Management (ALM) policy approved by the Board requires monthly monitoring of interest rate risk by the Asset & Liability Management Committee (ALCO), which is composed of UnionBanCal Corporation executives. As part of the management of our interest rate risk, ALCO may direct changes in the composition of the balance sheet and the extent to which we utilize investment securities and derivative instruments such as interest rate swaps, floors, and caps to hedge the our interest rate exposures. Traditionally, we have entered into swaps and floors to offset the adverse impact that declining interest rates would have on the interest income generated by our variable rate commercial loans. For a further discussion of derivative instruments see Note 6--"Derivative Instruments and Other Financial Instruments Used For Hedging" of the Notes to Consolidated Financial Statements. We use two types of simulation models to quantify the sensitivity of NII to changes in interest rates: a shock simulation model and a Monte Carlo simulation model. In both approaches, NII is adjusted to incorporate the effect of certain noninterest expense items related to demand deposit accounts that are nevertheless sensitive to changes in interest rates. Our primary simulation tool involves a shock analysis in which we estimate the impact that immediate and sustained parallel shifts in the yield curve would have on NII over a 12-month horizon. Under policy limits established by the Board, the negative change in simulated NII in either up or down 200 basis point shock scenarios may not exceed 8 percent of NII as measured in the flat rate, or no change, scenario. The following table sets forth the shock sensitivity results in both the up and down 200 basis point scenarios as of March 31, 2002 and June 30, 2002.
MARCH 31, JUNE 30, (DOLLARS IN MILLIONS) 2002 2002 _____________________ _________ ________ +200 basis points................................... $ 12.6 $ 48.3 as a percentage of mean NII......................... 0.83% 3.24% - -200 basis points................................... $(56.3) $(66.5) as a percentage of mean NII......................... 3.72% 4.47%
Asset sensitivity increased in the second quarter of 2002 following the implementation of ALCO's decision to unwind longer-term swap hedges. Other contributing factors included a flattening in the Treasury yield curve, which caused modeled prepayment levels in our mortgage-related portfolios to increase in the lower rate scenarios, and continued strong growth in our core deposit businesses. However, the increase in asset sensitivity was substantially offset in the down 200 basis point simulation by the purchase of $1 billion in LIBOR floors. This reflected management's decision to adjust the rate sensitivity profile. These activities allow us to benefit if interest rates should rise in the next 12 months, while maintaining a prudent level of hedge protection if the economy unexpectedly weakens and the Federal Reserve finds it necessary to lower interest rates. With federal funds and LIBOR rates at the end of the second quarter of 2002 already below two percent, a downward shock scenario of 200 basis points would result in short-term rate levels below zero percent. As a result, we believe that a downward shock scenario of 100 basis points provides a more reasonable measure of asset sensitivity in a falling rate environment. As of June 30, 2002, the difference between flat rate NII and NII after a 100 basis point downward shock was ($22.5) million, or (1.5) percent of a flat rate NII. 44 In the Monte Carlo simulation analysis, we randomly sample up to 300 paths that short-term interest rates could take over the next 12 months and calculate the NII associated with each path. The result is a probability distribution of 12-month NII outcomes. Earnings-at risk (EaR), defined as the potential negative change in NII, is measured at a 97.5% confidence level and is managed within the limit established by the Board's ALM policy at 5 percent of mean NII. The following table summarizes our EaR as a percentage of mean NII as of March 31, 2002 and June 30, 2002.
MARCH 31, JUNE 30, (DOLLARS IN MILLIONS) 2002 2002 _____________________ _________ ________ EaR....................................................... $19.0 $25.8 EaR as a percentage of mean NII........................... 1.32% 1.78%
Management's goal in the NII simulations is to capture the risk embedded in the balance sheet. As a result, asset and liability balances are kept constant throughout the analysis horizon. Two exceptions are non-maturity deposits, which vary with levels of interest rates according to statistically derived balance equations, and discretionary derivative hedges and fixed income portfolios, which are allowed to run off. Additional assumptions are made to model the future behavior of deposit rates and loan spreads based on statistical analysis, management's outlook, and historical experience. The prepayment risks related to residential loans and mortgage-backed securities are measured using industry estimates of prepayment speeds. The sensitivity of the simulation results to the underlying assumptions is tested as a regular part of the risk measurement process by running simulations with different assumptions. In addition, management supplements the official risk measures based on the constant balance sheet assumption with volume-based simulations based on forecasted balances. We believe that together, these simulations provide management with a reasonably comprehensive view of the sensitivity of our operating results to changes in interest rates, at least over the measurement horizon. However, as with any financial model, the underlying assumptions are inherently uncertain and subject to refinement as modeling techniques and theory improve and historical data becomes more readily accessible. Consequently, our simulation models cannot predict with certainty how rising or falling interest rates might impact net interest income. Actual and simulated NII results will differ to the extent there are differences between actual and assumed interest rate changes, balance sheet volumes, and management strategies, among other factors. A third measure that ALCO uses to monitor our risk profile is Economic Value of Equity (EVE). EVE is an estimate of the net present value of the future cash flows associated with all of our assets, liabilities and derivatives. EVE-at-Risk is defined as the negative change in the value of these cash flows resulting from either a +200 basis point or a !200 basis point shock scenario. Although ALCO has identified prototype guidelines for measuring EVE-at-Risk, the Board has not established official policy limits for EVE. We will continue to improve and refine the EVE methodology in the coming months with the goal of proposing an official EVE risk measure in 2003. LIQUIDITY Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust our future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The ALM policy approved by the Board requires quarterly reviews of our liquidity by ALCO. Our liquidity management draws upon the strengths of our extensive retail and commercial market business franchise, coupled with the ability to obtain funds for various terms in a variety of domestic and international money markets. Liquidity is managed through 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 76 percent of average total assets of $35.7 billion for the second quarter ended June 30, 2002. Most of the remaining funding was 45 provided by short-term borrowings in the form of negotiable certificates of deposit, foreign deposits, federal funds purchased and securities sold under repurchase agreements, commercial paper and other borrowings. In the fourth quarter of 2001, we issued $200 million in medium-term notes, the proceeds of which were utilized for general corporate purposes. Liquidity may also be provided by the sale or maturity of assets. Such assets include interest bearing deposits in banks, federal funds sold and securities purchased under resale agreements, and trading account securities. The aggregate of these assets averaged $1.5 billion during the second quarter of 2002. Additional liquidity may be provided by investment securities available for sale and by loan maturities. REGULATORY CAPITAL The following table summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION MINIMUM JUNE 30, DECEMBER 31, JUNE 30, REGULATORY (DOLLARS IN THOUSANDS) 2001 2001 2002 REQUIREMENT ______________________ ___________ ___________ ___________ ___________ CAPITAL COMPONENTS Tier 1 capital............... $ 3,570,022 $ 3,661,231 $ 3,834,103 Tier 2 capital............... 607,791 598,812 562,165 ___________ ___________ ___________ Total risk-based capital..... $ 4,177,813 $ 4,260,043 $ 4,396,268 =========== =========== =========== Risk-weighted assets......... $32,908,813 $31,906,438 $32,213,352 =========== =========== =========== Quarterly average assets..... $34,568,113 $34,760,203 $35,613,957 =========== =========== =========== CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ______________ __________ _____ __________ _____ __________ _____ __________ _____ Total capital (to risk-weighted assets).. $4,177,813 12.70% $4,260,043 13.35% $4,396,268 13.65% $2,577,068 8.0% Tier 1 capital (to risk-weighted assets).. 3,570,022 10.85 3,661,231 11.47 3,834,103 11.90 1,288,534 4.0 Leverage(1)............... 3,570,022 10.33 3,661,231 10.53 3,834,103 10.77 1,424,558 4.0 __________________ (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
UNION BANK OF CALIFORNIA, N.A. MINIMUM "WELL-CAPITALIZED" JUNE 30, DECEMBER 31, JUNE 30, REGULATORY REGULATORY (DOLLARS IN THOUSANDS) 2001 2001 2002 REQUIREMENT REQUIREMENT ______________________ ___________ ___________ ___________ ___________ __________________ CAPITAL COMPONENTS Tier 1 capital............... $ 3,187,528 $ 3,323,096 $ 3,473,828 Tier 2 capital............... 500,739 487,640 471,258 ___________ ___________ ___________ Total risk-based capital..... $ 3,688,267 $ 3,810,736 $ 3,945,086 =========== =========== =========== Risk-weighted assets......... $32,344,858 $31,271,268 $31,581,189 =========== =========== =========== Quarterly average assets..... $34,179,220 $34,282,625 $35,113,945 =========== =========== =========== CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ______________ __________ _____ __________ _____ __________ _____ __________ _____ __________ _____ Total capital (to risk-weighted assets).. $3,688,267 11.40% $3,810,736 12.19% $3,945,086 12.49% $2,526,495 8.0% $3,158,119 10.0% Tier 1 capital (to risk-weighted assets).. 3,187,528 9.85 3,323,096 10.63 3,473,828 11.00 1,263,248 4.0 1,894,871 6.0 Leverage(1)............... 3,187,528 9.33 3,323,096 9.69 3,473,828 9.89 1,404,558 4.0 1,755,697 5.0 __________________ (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
46 We and Union Bank of California, N.A. are subject to various regulations issued by federal banking agencies, including minimum capital requirements. We and Union Bank of California, N.A. are required to maintain minimum ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the leverage ratio). Compared with December 31, 2001, our Tier 1 risk-based capital ratio at June 30, 2002 increased 43 basis points to 11.90 percent, our total risk-based capital ratio increased 30 basis points to 13.65 percent, and our leverage ratio increased 24 basis points to 10.77 percent. The increases in the capital ratios were primarily attributable to higher shareholder equity, partly offset by slightly higher risk-weighted assets. Shareholder equity was higher mainly due to increased retained earnings driven by net income in the first and second quarters of 2002 as well as higher unrealized gains on securities available for sale and on cash flow hedges as recognized in other comprehensive income. As of June 30, 2002, management believes the capital ratios of Union Bank of California, N.A. met all regulatory requirements of a "well-capitalized" institution, which are 10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio, and 5 percent for the leverage ratio. CERTAIN BUSINESS RISK FACTORS ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS A substantial majority of our assets and deposits are generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time, including the long-term impact of the California energy crisis and the decline in the technology sector. If economic conditions in California continue to decline, we expect that our level of problem assets could increase accordingly. THE TRAGIC EVENTS OF SEPTEMBER 11 AND THE ENSUING WAR ON TERRORISM CONTRIBUTED TO THE CONTINUING DOWNTURN IN US ECONOMIC CONDITIONS The terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001, as well as the threat of further terrorist attacks, have contributed to the continuing downturn in the US economic conditions. Further acts or threats of terrorism, and actions taken by the US or other governments as a result of such acts or threats, could further adversely affect business and economic conditions in the US generally and in our principal markets. For example, the events of September 11, 2001, caused a decrease in air travel in the US which adversely affected the airline industry and many other travel-related industries, including those operating in California. ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD ADVERSELY AFFECT OUR BUSINESS We are subject to certain industry-specific economic factors. For example, a significant and increasing portion of our total loan portfolio is related to real estate. Accordingly, a downturn in the real estate industry in California could have an adverse effect on our operations. Similarly, a portion of our total loan portfolio is to borrowers in the agricultural industry. Adverse weather conditions, combined with low commodity prices, may adversely affect the agricultural industry and, consequently, may impact our business negatively. In addition, auto leases comprise a declining portion of our total loan portfolio. We ceased originating auto leases in April 2001; however, continued deterioration in the used car market may result in additional losses on the valuation of auto lease residuals on our remaining auto leases. We provide loans to businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors, including the communications/media industry, the retailing industry, and the technology industry. Industry- specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans or charge-offs. 47 RISKS ASSOCIATED WITH CURTAILED MARKET ACCESS OF POWER COMPANIES COULD AFFECT OUR PORTFOLIO CREDIT QUALITY The recent failure of Enron, coupled with continued turbulence in energy markets, has significantly impacted debt ratings and equity valuations of a broad spectrum of power companies, particularly those involved in energy trading and deregulated or non-regulated markets. These developments have sharply reduced these companies' ability to access public debt and equity markets, contributing to heightened liquidity pressures. Should these negative trends continue and/or intensify, the credit quality of certain of our borrowers could be adversely effected. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, a decrease in interest rates could result in an acceleration in the prepayment of loans. An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs, which could adversely affect our business. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD Changes in market interest rates, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact our margin spread, that is, the difference between the interest rates we charge on interest earning assets, such as loans, and the interest rates we pay on interest bearing liabilities, such as deposits. The impact, particularly in a falling interest rate environment, could result in a decrease in our interest income relative to interest expense. SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD.; OUR INTERESTS MAY NOT BE THE SAME AS THE BANK OF TOKYO-MITSUBISHI'S INTERESTS The Bank of Tokyo-Mitsubishi, Ltd., a wholly owned subsidiary of Mitsubishi Tokyo Financial Group, Inc., owns a majority (approximately 67 percent as of June 30, 2002) of the outstanding shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi, Ltd. can elect all of our directors and as a result can control the vote on all matters, including determinations such as: approval of mergers or other business combinations; sales of all or substantially all of our assets; any matters submitted to a vote of our shareholders; issuance of any additional common stock or other equity securities; incurrence of debt other than in the ordinary course of business; the selection and tenure of our Chief Executive Officer; payment of dividends with respect to common stock or other equity securities; and other matters that might be favorable to The Bank of Tokyo-Mitsubishi, Ltd. A majority of our directors are not officers or employees of UnionBanCal Corporation or any of our affiliates, including The Bank of Tokyo- Mitsubishi, Ltd. However, because of The Bank of Tokyo-Mitsubishi, Ltd.'s control over the election of our directors, The Bank of Tokyo- Mitsubishi, Ltd. could change the composition of our Board of Directors so that the Board would not have a majority of outside directors. The Bank of Tokyo- Mitsubishi, Ltd.'s ability to prevent an unsolicited bid for us or any other change in control could have an adverse effect on the market price for our common stock. THE BANK OF TOKYO-MITSUBISHI, LTD.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS Although we fund our operations independently of The Bank of Tokyo-Mitsubishi, Ltd. and believe our business is not necessarily closely related to The Bank of Tokyo-Mitsubishi, Ltd.'s business or outlook, 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- 48 Mitsubishi, Ltd. is also subject to regulatory oversight and review by Japanese and US regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns related to the Japanese financial system and The Bank of Tokyo-Mitsubishi, Ltd. POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT US As part of The Bank of Tokyo-Mitsubishi, Ltd.'s normal risk management processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit exposures and concentrations on an aggregate basis, including UnionBanCal Corporation. Therefore, at certain levels, our ability to approve certain credits and categories of customers is subject to concurrence by The Bank of Tokyo-Mitsubishi, Ltd. We may wish to extend credit to the same customer as The Bank of Tokyo-Mitsubishi, Ltd. Our ability to do so may be limited for various reasons, including The Bank of Tokyo-Mitsubishi, Ltd.'s aggregate credit exposure and marketing policies. Certain directors' and officers' ownership interests in The Bank of Tokyo-Mitsubishi, Ltd.'s common stock or service as a director or officer or other employee of both us and The Bank of Tokyo-Mitsubishi, Ltd. could create or appear to create potential conflicts of interest, especially since both of us compete in the US banking industry. SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY AFFECT US Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions and major foreign-affiliated or foreign banks, as well as many financial and non-financial firms that offer services similar to those offered by us. Some of our competitors are community banks that have strong local market positions. Other competitors include large financial institutions (such as Bank of America, California Federal, Washington Mutual, and Wells Fargo) that have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. Banks, securities firms, and insurance companies can now combine in a new type of financial services company called a "financial holding company". Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Recently, a number of foreign banks have acquired financial services companies in the US, further increasing competition in the US market. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS PAYABLE TO US As a holding company, a substantial portion of our cash flow typically comes from dividends our bank and nonbank subsidiaries pay to us. Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any of our subsidiaries liquidate, that subsidiary's creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. ADVERSE EFFECTS OF, OR CHANGES IN, BANKING OR OTHER LAWS AND REGULATIONS OR GOVERNMENTAL FISCAL OR MONETARY POLICIES COULD ADVERSELY AFFECT US We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by any future changes in laws, regulations, policies or interpretations, including 49 legislative and regulatory reactions to the terrorist attack on September 11, 2001, and future acts of terrorism, and the Enron Corporation and WorldCom Inc. bankruptcies and recent reports of accounting irregularities at public companies, including various large and seemingly well regarded companies. Additionally, our international activities may be subject to the laws and regulations of the jurisdiction where business is being conducted. International laws, regulations and policies affecting us and our subsidiaries may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi, Ltd.'s controlling ownership of us, laws, regulations and policies adopted or enforced by the Government of Japan may adversely affect our activities and investments and those of our subsidiaries in the future. Under long-standing policy of the Federal Reserve Board (FRB), a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Additionally, our business is affected significantly by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the FRB, which regulates the supply of money and credit in the US. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in US government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on our business, results of operations and financial condition. POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK Although The Bank of Tokyo-Mitsubishi, Ltd. has announced it has no plan to sell 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. Although we can make no prediction as to the effect, if any, that such sales would have on the market price of our common stock, sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect the market price of our common stock. If The Bank of Tokyo-Mitsubishi, Ltd. sells or transfers shares of our common stock as a block, another person or entity could become our controlling shareholder. WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR OPERATING STRATEGIES From time to time, we develop long-term financial performance goals to guide and measure the success of our operating strategies. We 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 expense, including, but not limited to, rising employee and healthcare costs; o our inability to increase noninterest income; o our inability to decrease reliance on revenues generated from assets; 50 o our ability to sustain loan growth; o our ability to find acquisition targets at valuation levels we find attractive; o regulatory and other impediments associated with making acquisitions; o deterioration in general economic conditions, especially in our core markets; o decreases in our net interest margin; o increases in competition; o adverse regulatory or legislative developments; and o unexpected increases in costs related to acquisitions. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR RESTRUCTURING MAY ADVERSELY AFFECT US We may seek to acquire or invest in companies, technologies, services or products that complement our business. There can be no assurance that we will be successful in completing any such acquisition or investments as this will depend on the availability of prospective target companies at valuation levels we find attractive and the competition for such opportunities from other bidders. In addition, we continue to evaluate the performance of all of our businesses and business lines and may sell a business or business lines. Any acquisitions, divestitures or restructuring may result in the potentially dilutive issuance of equity securities, significant write-offs, including those related to goodwill and other intangible assets and/or the incurrence of debt, any of which could have a material adverse effect on our business, financial condition and results of operations. Acquisitions, divestitures or restructuring could involve numerous additional risks including difficulties in obtaining any required regulatory approvals and in the assimilation or separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, higher than expected deposit attrition (run-off), divestitures required by regulatory authorities, the disruption of our business, and the potential loss of key employees. There can be no assurance that we will be successful in overcoming these or any other significant risks encountered. WRITTEN STATEMENTS UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The written statements of our chief executive officer and chief financial officer with respect to this report on Form 10-Q, as required by section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), have been submitted to the Securities and Exchange Commission as additional correspondence accompanying this report. ITEM 3. MARKET RISK. A more inclusive explanation concerning our market risk exposure is incorporated by reference from the text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in the Form 10-K for the year ended December 31, 2001 and by reference to the previous text in this document under the caption "Quantitative and Qualitative Disclosure about Interest Rate Risk Management (Other Than Trading)". 51 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS For information regarding matters submitted to shareholders at the Annual Meeting of Shareholders on April 24, 2002, see Part II, Item 4 of Form 10-Q for the quarter ended March 31, 2002, incorporated herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: NO. DESCRIPTION 3.1 Restated Articles of Incorporation of the Registrant, as amended(1) 3.2 By-laws of the Registrant, as amended January 27, 1999(2) 10.1 UnionBanCal Corporation Management Stock Plan. (As restated effective June 1, 1997)*(3) 10.2 Union Bank of California Deferred Compensation Plan. (January 1, 1997, Restatement, as amended November 21, 1996)*(4) 10.3 Union Bank of California Senior Management Bonus Plan. (Effective January 1, 2000)*(5) 10.4 Richard C. Hartnack Employment Agreement.(Effective January 1, 1998)*(6) 10.5 Robert M. Walker Employment Agreement. (Effective January 1, 1998)*(6) 10.6 Union Bank of California, N.A. Supplemental Executive Retirement Plan. (Effective January 1, 1988)(Amended and restated as of January 1, 1997)* (3) 10.7 Union Bank Financial Services Reimbursement Program. (Effective January 1, 1996)*(7) 10.8 1997 UnionBanCal Corporation Performance Share Plan, as amended. (As amended, effective January 1, 2001)*(5) 10.9 Service Agreement Between Union Bank of California and The Bank of Tokyo-Mitsubishi Ltd. (Effective October 1, 1997)*(3) 10.10 Year 2000 UnionBanCal Corporation Management Stock Plan. (As restated effective January 1, 2000)*(8) 10.11 Union Bank of California, N.A. Supplemental Retirement Plan for Policy Making Officers (Effective November 1, 1999)(9) 10.12 Philip B. Flynn Employment Agreement (Effective September 21, 2000)(10) __________________ (1) Incorporated by reference to Form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to Form 10-Q for the quarter ended March 31, 1999. (3) Incorporated by reference to Form 10-K for the year ended December 31, 1997. (4) Incorporated by reference to Form 10-K for the year ended December 31, 1996. (5) Incorporated by reference to Form DEF-14A dated March 28, 2001. (6) Incorporated by reference to Form 10-Q for the quarter ended September 30, 1998. (7) Incorporated by reference to Form 8-K dated April 1, 1996. (8) Incorporated by reference to form 10-Q for the quarter ended June 30, 1999. (9) Incorporated by reference to form 10-Q for the quarter ended June 30, 2000. (10) Incorporated by reference to form 10-K for the year ended December 31, 2001. * Management contract or compensatory plan, contract or arrangement. (b) Reports on Form 8-K We filed a report on Form 8-K on April 17, 2002 to report that UnionBanCal Corporation issued a press release concerning earnings for first quarter 2002. 52 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIONBANCAL CORPORATION (Registrant) By: /s/ DAVID I. MATSON ________________________________________ David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) By: /s/ DAVID A. ANDERSON _______________________________________ David A. Anderson SENIOR VICE PRESIDENT AND CONTROLLER (Principal Accounting Officer) Dated: August 14, 2002 53 -----END PRIVACY-ENHANCED MESSAGE-----