10-K/A 1 form10ka123102.txt 2002 FORM 10-K/A DATED JULY 10, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number 1-15081 UnionBanCal Corporation (Exact name of registrant as specified in its charter) CALIFORNIA 94-1234979 (State of incorporation) (I.R.S. Employer Identification No.) 400 CALIFORNIA STREET SAN FRANCISCO, CALIFORNIA 94104-1302 (Address and zip code of principal executive offices) Registrant's telephone number: (415) 765-2969 Securities registered pursuant to Section 12(b) of the Act: Common Stock, no stated value (Title of each class) New York Stock Exchange (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No --- --- As of June 28, 2002, the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $2,443,293,746. The aggregate market value was computed by reference to the last sales price of such stock. As of January 31, 2003, the number of shares outstanding of the registrant's Common Stock was 150,694,382. DOCUMENTS INCORPORATED BY REFERENCE INCORPORATED DOCUMENT LOCATION IN FORM 10-K Portions of the Proxy Statement for the April 23, 2003 Part III Annual Meeting of Shareholders ================================================================================ EXPLANATORY NOTE After filing our Annual Report on Form 10-K for the year ended December 31, 2002, we discovered a tabulation error in the Consolidated Statements of Cash Flows. This error caused the "other, net of acquisitions" line within "cash flows from operating activities" to be overstated by $542 million, with a corresponding offset in "net decrease (increase) in loans" within "cash flows from investing activities." Accordingly, we are filing this 10-K/A for the purpose of correcting this error and we have amended Items 8 and 15 (pages F-46 through F-98) of our Annual Report on Form 10-K for the year ended December 31, 2002 by restating the Consolidated Statements of Cash Flows. Such correction has no impact on the Company's financial position or results of operations. INDEX PAGE ---- PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 1, F-46 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................................................... 1 SIGNATURES............................................................. II-1 CERTIFICATIONS......................................................... II-4 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages F-46 through F-98 of this Form 10-K/A. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS Our Consolidated Financial Statements, the Management Statement, and the independent auditors' report are set forth on pages F-47 through F-98. (See index on page F-46). (A)(2) FINANCIAL STATEMENT SCHEDULES All schedules to our Consolidated Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in our Consolidated Financial Statements or accompanying notes. 2 (A)(3) EXHIBITS NO. DESCRIPTION ---- --------------------------------------------------------------------- 3.1 Restated Articles of Incorporation of the Registrant, as amended(1) 3.2 By-laws of the Registrant, as amended December 4, 2002(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) 10.13 David I. Matson Employment Agreement (Effective January 1, 1998)*(2) 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements(2) 21.1 Subsidiaries of the Registrant(2) 23.1 Consent of Deloitte & Touche LLP(11) 24.1 Power of Attorney(2) 24.2 Resolution of Board of Directors(2) 99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(11) 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(11) __________ (1) Incorporated by reference to the UnionBanCal Corporation Annual Report on Form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to the UnionBanCal Corporation Annual Report on Form 10-K for the year ended December 31, 2002. (3) Incorporated by reference to the UnionBanCal Corporation Annual Report on Form 10-K for the year ended December 31, 1997. (4) Incorporated by reference to the UnionBanCal Corporation Annual Report on Form 10-K for the year ended December 31, 1996. (5) Incorporated by reference to the UnionBanCal Corporation Definitive Proxy Statement on Form 14A filed on March 27, 2001. (6) Incorporated by reference to the UnionBanCal Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (7) Incorporated by reference to the UnionBanCal Corporation Current Report on Form 8-K dated April 1, 1996. (8) Incorporated by reference to the UnionBanCal Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (9) Incorporated by reference to the UnionBanCal Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. (10) Incorporated by reference to the UnionBanCal Corporation Annual Report on Form 10-K for the year ended December 31, 2001. (11) Filed herewith. * Management contract or compensatory plan, contract or arrangement. (B) REPORTS ON FORM 8-K We filed a report on Form 8-K on October 17, 2002, reporting under Item 5 thereof that UnionBanCal Corporation issued a press release concerning earnings for the third quarter of 2002. 3 We filed a report on Form 8-K on November 13, 2002, reporting under Item 9 thereof, which included the written certification statements of our chief executive officer and chief financial officer with respect to our quarterly report on Form 10-Q for the period ended September 30, 2002, filed with the SEC on November 13, 2002, as required by section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350). 4 UNIONBANCAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Consolidated Statements of Income for the Years Ended December 31, 2000, 2001, and 2002.................................................... F-47 Consolidated Balance Sheets as of December 31, 2001 and 2002.............. F-48 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2000, 2001, and 2002........................... F-49 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001, and 2002................................................ F-50 Notes to Consolidated Financial Statements................................ F-51 Management Statement...................................................... F-97 Independent Auditors' Report.............................................. F-98 F-46
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, __________________________________________ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002 ____________________________________________________________________________ __________ __________ __________ INTEREST INCOME Loans....................................................................... $2,242,182 $1,883,835 $1,518,918 Securities.................................................................. 226,194 294,066 315,956 Interest bearing deposits in banks.......................................... 9,126 2,850 2,806 Federal funds sold and securities purchased under resale agreements......... 8,160 6,844 13,895 Trading account assets...................................................... 15,418 7,716 4,397 __________ __________ __________ Total interest income..................................................... 2,501,080 2,195,311 1,855,972 __________ __________ __________ INTEREST EXPENSE Domestic deposits........................................................... 557,408 445,486 215,138 Foreign deposits............................................................ 107,183 69,830 21,110 Federal funds purchased and securities sold under repurchase agreements................................................................ 96,606 52,153 6,030 Commercial paper............................................................ 94,905 52,439 16,645 Medium and long-term debt................................................... 17,617 10,445 9,344 UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust.................................... 26,212 20,736 15,625 Other borrowed funds........................................................ 16,709 20,180 10,111 __________ __________ __________ Total interest expense.................................................... 916,640 671,269 294,003 __________ __________ __________ NET INTEREST INCOME......................................................... 1,584,440 1,524,042 1,561,969 Provision for credit losses................................................. 440,000 285,000 175,000 __________ __________ __________ Net interest income after provision for credit losses..................... 1,144,440 1,239,042 1,386,969 __________ __________ __________ NONINTEREST INCOME Service charges on deposit accounts......................................... 210,257 245,116 275,820 Trust and investment management fees........................................ 154,387 154,092 143,953 Merchant transaction processing fees........................................ 73,521 80,384 87,961 International commissions and fees.......................................... 71,189 71,337 76,956 Brokerage commissions and fees.............................................. 35,755 36,317 36,301 Merchant banking fees....................................................... 48,985 33,532 32,314 Foreign exchange trading gains, net......................................... 28,057 26,565 28,548 Insurance commissions....................................................... -- 920 27,208 Securities gains (losses), net.............................................. 8,784 8,654 (3,796) Other....................................................................... 16,245 59,487 30,711 __________ __________ __________ Total noninterest income.................................................. 647,180 716,404 735,976 __________ __________ __________ NONINTEREST EXPENSE Salaries and employee benefits.............................................. 600,462 659,840 731,166 Net occupancy............................................................... 92,567 95,152 106,592 Equipment................................................................... 63,290 64,357 66,160 Merchant transaction processing............................................. 49,609 52,789 55,767 Communications.............................................................. 43,744 50,439 53,382 Professional services....................................................... 42,042 38,480 44,851 Data processing............................................................. 34,803 35,732 32,589 Foreclosed asset expense (income)........................................... (80) (13) 146 Restructuring credit........................................................ (19,000) -- -- Other....................................................................... 222,748 243,398 257,013 __________ __________ __________ Total noninterest expense................................................. 1,130,185 1,240,174 1,347,666 __________ __________ __________ Income before income taxes.................................................. 661,435 715,272 775,279 Income tax expense.......................................................... 221,535 233,844 247,376 __________ __________ __________ NET INCOME.................................................................. $ 439,900 $ 481,428 $ 527,903 ========== ========== ========== NET INCOME PER COMMON SHARE--BASIC.......................................... $2.72 $3.05 $3.41 ========== ========== ========== NET INCOME PER COMMON SHARE--DILUTED........................................ $2.72 $3.04 $3.38 ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC........................... 161,605 157,845 154,758 ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED......................... 161,989 158,623 156,415 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-47
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, _____________________________ (DOLLARS IN THOUSANDS) 2001 2002 _______________________________________________________________________________________________ ___________ ___________ ASSETS Cash and due from banks........................................................................ $ 2,682,392 $ 2,823,573 Interest bearing deposits in banks............................................................. 64,162 278,849 Federal funds sold and securities purchased under resale agreements............................ 918,400 1,339,700 ___________ ___________ Total cash and cash equivalents............................................................ 3,664,954 4,442,122 Trading account assets......................................................................... 229,697 276,021 Securities available for sale: Securities pledged as collateral............................................................. 137,922 157,823 Held in portfolio............................................................................ 5,661,160 7,180,677 Loans (net of allowance for credit losses: 2001, $634,509; 2002, $609,190)..................... 24,359,521 25,828,893 Due from customers on acceptances.............................................................. 182,440 62,469 Premises and equipment, net.................................................................... 494,534 504,666 Intangible assets.............................................................................. 16,176 38,518 Goodwill....................................................................................... 68,623 150,542 Other assets................................................................................... 1,223,719 1,528,042 ___________ ___________ Total assets............................................................................... $36,038,746 $40,169,773 =========== =========== LIABILITIES Domestic deposits: Noninterest bearing.......................................................................... $12,314,150 $15,537,906 Interest bearing............................................................................. 14,160,113 15,258,479 Foreign deposits: Noninterest bearing.......................................................................... 404,708 583,836 Interest bearing............................................................................. 1,677,228 1,460,594 ___________ ___________ Total deposits............................................................................. 28,556,199 32,840,815 Federal funds purchased and securities sold under repurchase agreements........................ 418,814 334,379 Commercial paper............................................................................... 830,657 1,038,982 Other borrowed funds........................................................................... 700,403 267,047 Acceptances outstanding........................................................................ 182,440 62,469 Other liabilities.............................................................................. 1,040,406 1,083,836 Medium and long-term debt...................................................................... 399,657 418,360 UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust.................................................................. 363,928 365,696 ___________ ___________ Total liabilities.......................................................................... 32,492,504 36,411,584 ___________ ___________ Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares, no shares issued or outstanding at December 31, 2001 or 2002............................................................................... -- -- Common stock-- no stated value: Authorized 300,000,000 shares, issued 156,483,511 shares in 2001 and 150,702,363 shares in 2002............................................................................. 1,181,925 926,460 Retained earnings.............................................................................. 2,231,384 2,591,635 Accumulated other comprehensive income......................................................... 132,933 240,094 ___________ ___________ Total shareholders' equity................................................................. 3,546,242 3,758,189 ___________ ___________ Total liabilities and shareholders' equity................................................. $36,038,746 $40,169,773 =========== ===========
See accompanying notes to consolidated financial statements. F-48
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, ___________________________________________________________________________________________ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002 _________________________________ __________________________ ___________________________ __________________________ COMMON STOCK Balance, beginning of year...... $1,404,155 $1,275,587 $1,181,925 Dividend reinvestment plan...... 52 44 99 Deferred compensation--restricted stock awards.................. 238 190 255 Stock options exercised......... 1,784 13,733 75,311 Stock issued in bank acquisitions -- -- 54,830 Common stock repurchased(1)..... (130,642) (107,629) (385,960) __________ __________ __________ Balance, end of year........ $1,275,587 $1,181,925 $926,460 __________ __________ __________ RETAINED EARNINGS Balance, beginning of year...... $1,625,263 $1,906,093 $2,231,384 Net income...................... 439,900 $439,900 481,428 $481,428 527,903 $527,903 Dividends on common stock(2).... (161,227) (157,736) (167,593) Deferred compensation--restricted stock awards.................. 2,157 1,599 (59) __________ __________ __________ Balance, end of year............ $1,906,093 $2,231,384 $2,591,635 __________ __________ __________ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of year...... $ (41,950) $ 29,885 $ 132,933 Cumulative effect of accounting change (SFAS No.133)(3), net of tax expense of $13,754........ -- 22,205 -- Unrealized net gains on cash flow hedges, net of tax expense of $45,015 in 2001, and $70,195 in 2002.......................... -- 72,672 113,322 Less: reclassification adjustment for net gains on cash flow hedges included in net income, net of tax expense of $19,844 in 2001, and $44,472 in 2002 -- (32,037) (71,794) ________ ________ ________ Net unrealized gains on cash flow hedges........................ -- 62,840 41,528 Unrealized holding gains arising during the year on securities available for sale, net of tax expense of $49,462 in 2000, $28,950 in 2001, and $38,303 in 2002.......................... 79,851 46,736 61,835 Less: reclassification adjustment for losses (gains) on securities available for sale included in net income, net of tax expense (benefit) of $3,360 in 2000, $3,310 in 2001, and $(1,452) in 2002.............. (5,424) (5,344) 2,344 ________ ________ ________ Net unrealized gains on securities available for sale. 74,427 41,392 64,179 Foreign currency translation adjustment, net of tax expense (benefit) of $(1,535) in 2000, $(628) in 2001, and $964 in 2002 (2,478) (1,014) 1,556 Minimum pension liability adjustment, net of tax benefit of $71 in 2000, $105 in 2001, and $63 in 2002............... (114) (170) (102) ________ ________ ________ Other comprehensive income...... 71,835 71,835 103,048 103,048 107,161 107,161 __________ ________ __________ ________ __________ ________ Total comprehensive income...... $511,735 $584,476 $635,064 ======== ======== ======== Balance, end of year.......... $ 29,885 $ 132,933 $ 240,094 __________ __________ __________ TOTAL SHAREHOLDERS' EQUITY...... $3,211,565 $3,546,242 $3,758,189 ========== ========== ========== __________ (1) Common stock repurchased includes commission costs. (2) Dividends per share were $1.00 in 2000, $1.00 in 2001, and $1.09 in 2002. Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date. (3) Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities".
See accompanying notes to consolidated financial statements. F-49
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, _________________________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 ________________________________________________________________________ ___________ ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $ 439,900 $ 481,428 $ 527,903 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses......................................... 440,000 285,000 175,000 Depreciation, amortization and accretion............................ 72,710 81,487 87,040 Provision for deferred income taxes................................. 13,709 58,655 38,448 Loss (gain) on sales of securities available for sale, net.......... (8,784) (8,654) 3,796 Net increase in prepaid expenses.................................... (23,724) (44,746) (167,188) Net increase (decrease) in accrued expenses......................... (85,537) 172,605 144,329 Net (increase) decrease in trading account assets................... (159,760) 109,998 (46,324) Other, net of acquisitions.......................................... (88,398) (46,174) (254,319) ___________ ___________ ___________ Total adjustments................................................. 160,216 608,171 (19,218) ___________ ___________ ___________ Net cash provided by operating activities............................... 600,116 1,089,599 508,685 ___________ ___________ ___________ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale.................. 422,881 931,479 187,556 Proceeds from matured and called securities available for sale........ 847,158 1,007,273 1,472,573 Purchases of securities available for sale............................ (2,056,594) (3,510,621) (3,116,001) Proceeds from matured and called securities held to maturity.......... 23,003 -- -- Net purchases of premises and equipment............................... (163,716) (95,041) (87,521) Net decrease (increase) in loans...................................... (391,672) 766,089 (1,374,958) Net cash received in acquisitions..................................... -- -- 86,590 Other, net............................................................ 5,433 7,313 12,425 ___________ ___________ ___________ Net cash used in investing activities................................. (1,313,507) (893,508) (2,819,336) ___________ ___________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits.............................................. 1,026,576 1,273,016 3,852,835 Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements........................................... 230,868 (968,853) (84,435) Net increase (decrease) in commercial paper and other borrowed funds.. 34,441 (104,180) (225,031) Proceeds from issuance of medium-term debt............................ -- 200,000 -- Maturity and redemption of subordinated debt.......................... (98,000) -- -- Common stock repurchased.............................................. (130,642) (107,629) (385,960) Payments of cash dividends............................................ (162,575) (158,406) (164,440) Stock options exercised............................................... 1,784 13,733 75,311 Other, net............................................................ (2,426) 11,577 1,655 ___________ ___________ ___________ Net cash provided by financing activities............................. 900,026 159,258 3,069,935 ___________ ___________ ___________ Net increase in cash and cash equivalents............................... 186,635 355,349 759,284 Cash and cash equivalents at beginning of year.......................... 3,158,133 3,322,979 3,664,954 Effect of exchange rate changes on cash and cash equivalents............ (21,789) (13,374) 17,884 ___________ ___________ ___________ Cash and cash equivalents at end of year................................ $ 3,322,979 $ 3,664,954 $ 4,442,122 =========== =========== =========== CASH PAID DURING THE YEAR FOR: Interest.............................................................. $ 883,706 $ 747,271 $ 311,299 Income taxes.......................................................... 260,117 99,735 166,875 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisitions: Fair value of assets acquired....................................... -- -- $ 571,065 Purchase price: Cash.................................................................. -- -- (52,524) Stock issued.......................................................... -- -- (54,830) ___________ ___________ ___________ Fair value of liabilities assumed................................... $ -- $ -- $ 463,711 =========== =========== =========== Loans transferred to foreclosed assets (OREO) and/or distressed loans held for sale................................................. $ 9,924 $ 1,677 $ 826 Securities transferred from held to maturity to available for sale.... -- 23,529 -- Debt assumed in purchase of building.................................. 47,955 -- --
See accompanying notes to consolidated financial statements. F-50 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS INTRODUCTION UnionBanCal Corporation is a commercial bank holding company and has, as its major subsidiary, a banking subsidiary, Union Bank of California, N.A. (the Bank). UnionBanCal Corporation and its subsidiaries (the Company) provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, and Washington, but also nationally and internationally. Since November 1999, the Company has announced stock repurchase plans totaling $400 million. The Company repurchased $131 million, $108 million and $86 million in 2000, 2001, and 2002, respectively, as part of these repurchase plans. As of December 31, 2002, $59 million of the Company's common stock is authorized for repurchase. In addition, on August 27, 2002, the Company announced that it purchased $300 million of its common stock from its majority owner, The Bank of Tokyo-Mitsubishi, Ltd. (BTM), which is a wholly-owned subsidiary of Mitsubishi Tokyo Financial Group, Inc. At December 31, 2002, BTM owned approximately 65 percent of the Company's outstanding common stock. BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and general practice within the banking industry. Those policies that materially affect the determination of financial position, results of operations, and cash flows are summarized below. The Consolidated Financial Statements include the accounts of the Company, and all material intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts for prior periods have been reclassified to conform with current financial statement presentation. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest bearing deposits in banks, and federal funds sold and securities purchased under resale agreements, substantially all of which have maturities less than 90 days. TRADING ACCOUNT ASSETS Trading account assets are those financial instruments that management acquires with the intent to hold for short periods of time in order to take advantage of anticipated changes in market values. Substantially all of these assets are securities with a high degree of liquidity and a readily determinable market value. Interest earned, paid, or accrued on trading account assets is included in interest income using a method that produces a level yield. Realized gains and losses from the close-out of trading account positions and unrealized market value adjustments are recognized in noninterest income. The reserve for derivative and foreign exchange contracts is presented as an offset to trading account assets. Changes in the reserve as a result of changes in F-51 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) the positive replacement cost of those contracts are provided as an offset to trading gains and losses in noninterest income. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY The Company's securities portfolios consist of debt and equity securities that are classified either as securities available for sale or securities held to maturity. Debt securities for which the Company has the positive intent and ability to hold until maturity are classified as securities held to maturity and carried at amortized cost. Debt securities and equity securities with readily determinable market values that are not classified as either securities held to maturity or trading account assets are classified as securities available for sale and carried at fair value, with the unrealized gains or losses reported net of taxes as a component of accumulated other comprehensive income (loss) in shareholders' equity until realized. Realized gains and losses on the sale of and other-than-temporary impairment charges on available for sale securities are included in noninterest income as securities gains (losses), net. The specific identification method is used to calculate realized gains or losses. Interest income on debt securities includes the amortization of premiums and the accretion of discounts using the effective interest method and is included in interest income on securities. Dividend income on equity securities is included in noninterest income. Securities available for sale that are pledged under an agreement to repurchase and which may be sold or repledged under that agreement have been separately identified as pledged as collateral. LOANS Loans are reported at the principal amounts outstanding, net of unamortized nonrefundable loan fees and related direct loan origination costs. Deferred net fees and costs are recognized in interest income over the loan term using a method that generally produces a level yield on the unpaid loan balance. Nonrefundable fees and direct loan origination costs related to loans held for sale are deferred and recognized as a component of the gain or loss on sale. Interest income is accrued principally on a simple interest basis. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. Interest accruals are continued for certain small business loans that are processed centrally, consumer loans, and one-to-four family residential mortgage loans. These loans are charged off or written down to their net realizable value based on delinquency time frames that range from 120 to 270 days, depending on the type of credit that has been extended. Interest accruals are also continued for loans that are both well-secured and in the process of collection. For this purpose, loans are considered well-secured if they are collateralized by property having a net realizable value in excess of the amount of principal and accrued interest outstanding or are guaranteed by a financially responsible and willing party. Loans are considered "in the process of collection" if collection is proceeding in due course either through legal action or other actions that are reasonably expected to result in the prompt repayment of the debt or in its restoration to current status. F-52 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed against current period operating results. All subsequent payments received are first applied to unpaid principal and then to uncollected interest. Interest income is accrued at such time as the loan is brought fully current as to both principal and interest, and, in management's judgment, such loans are considered to be fully collectible. However, Company policy also allows management to continue the recognition of interest income on certain loans designated as nonaccrual. This portion of the nonaccrual portfolio is referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans that are well secured and in management's judgment are considered to be fully collectible. Although the accrual of interest is suspended, any payments received may be applied to the loan according to its contractual terms and interest income recognized when cash is received. Loans are considered impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. Excluded from the impairment analysis are large groups of smaller balance homogeneous loans such as consumer and residential mortgage loans, and automobile leases. The Company offers primarily two types of leases to customers: 1) direct financing leases where the assets leased are acquired without additional financing from other sources, and 2) leveraged leases where a substantial portion of the financing is provided by debt with no recourse to the Company. Direct financing leases are carried net of unearned income, unamortized nonrefundable fees and related direct costs associated with the origination or purchase of leases. Leveraged leases are carried net of nonrecourse debt. ALLOWANCE FOR CREDIT LOSSES The Company maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated losses inherent in the loan portfolio, and to a lesser extent, unused commitments to provide financing. The allowance is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, the specific allowance and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and unused commitments. Loss factors are based on the Company's historical loss experience and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date. The Company derives the loss factors for all commercial loans from a loss migration model and for pooled loans by using expected net charge-offs for one year. Pooled loans are homogeneous in nature and include consumer and residential mortgage loans, and automobile leases. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance. F-54 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) The unallocated allowance is composed of attribution factors, which are based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions evaluated in connection with the unallocated allowance may include existing general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, bank regulatory examination results and findings of the Company's internal credit examiners. The allowance also incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is considered impaired when management determines that it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impairment is measured by the difference between the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount) and the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. Additionally, some impaired loans with commitments of less than $1 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. In addition, the impairment allowance may include amounts related to certain qualitative factors that have yet to manifest themselves in the other measurements. Impairment is recognized by adjusting an allocation of the existing allowance for credit losses. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of each asset. Lives of premises range from ten to forty years; lives of furniture, fixtures and equipment range from three to eight years. Leasehold improvements are amortized over the term of the respective lease or ten years, whichever is shorter. Long-lived assets that are held or that are to be disposed of and certain intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment is calculated as the difference between the expected undiscounted future cash flows of a long-lived asset, if lower, and its carrying value. In the event of an impairment, the Company recognizes a loss for the difference between the carrying amount and the estimated value of the asset as measured using a quoted market price or, in the absence of a quoted market price, a discounted cash flow analysis. The impairment loss is reflected in noninterest expense. OTHER ASSETS As of January 1, 2002 with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized, but instead tested for impairment at least annually. Prior to January 1, 2002, goodwill was amortized using the straight-line method over its estimated period of benefit, generally fifteen years. F-54 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) Intangible assets are amortized either using the straight-line method or a method that patterns the manner in which the economic benefit is consumed. Intangible assets are amortized over their estimated period of benefit ranging from six to fifteen years. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. As of December 31, 2002, intangible assets are subject to amortization. Other real estate owned (OREO) represents the collateral acquired through foreclosure in full or partial satisfaction of the related loan. OREO is recorded at the lower of the loan's unpaid principal balance or its fair value as established by a current appraisal, adjusted for disposition costs. Any write-down at the date of transfer is charged to the allowance for credit losses. OREO values, recorded in other assets, are reviewed on an ongoing basis and any decline in value is recognized as foreclosed asset expense in the current period. The net operating results from these assets are included in the current period in noninterest expense as foreclosed asset expense (income). Distressed loans held for sale are included in other assets in the consolidated financial statements and represent loans that the Company has identified as available for accelerated disposition. These are loans that would otherwise be included in nonaccrual loans. Distressed loans are recorded at the lower of the loans' unpaid principal balance or their fair value. Any write-down at the date of transfer is charged to the allowance for credit losses. Distressed loans' values, recorded in other assets, are reviewed on a quarterly basis and any decline in value is recognized in other noninterest income during the period in which the decline occurs. DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION The Company enters into a variety of interest rate derivative contracts, primarily swaps and options, and foreign exchange contracts, either for trading purposes, based on management's intent at inception, or as an accommodation to customers. Derivatives held or issued for trading or customer accommodation are carried at fair value, with realized and unrealized changes in fair values on contracts included in noninterest income in the period in which the changes occur. Unrealized gains and losses are reported gross and included in trading account assets and other liabilities, respectively. Cash flows are reported net as operating activities. DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into a variety of derivative contracts as a means of reducing the Company's interest rate and foreign exchange exposures. At inception these contracts, i.e., hedging instruments, are evaluated in order to determine if they qualify for hedge accounting. With the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001, the hedging instrument must be highly effective in achieving offsetting changes in the hedge instrument and hedged item attributable to the risk being hedged. Any ineffectiveness, which arises during the hedging relationship, is recognized in noninterest expense in the period in which it arises. All qualifying hedges are valued at fair value and included in other assets or other liabilities. For fair value hedges of interest bearing assets or liabilities, the change in the fair value of the hedged item and the hedging instrument to the extent effective is recognized in net interest income. For all other fair value hedges, the changes in the fair value of the hedged item and changes in fair value of the derivative are recognized in noninterest income. For cash flow hedges, the unrealized changes in fair value to the extent effective are recognized in other comprehensive income. Amounts realized on cash flow F-55 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) hedges related to variable rate loans are recognized in net interest income in the period when the cash flow from the hedged item is realized. The fair value of cash flow hedges related to forecasted transactions is recognized in noninterest expense in the period when the forecasted transaction occurs. FOREIGN CURRENCY TRANSLATION Assets, liabilities and results of operations for foreign branches are recorded based on the functional currency of each branch. Since the functional currency of the branches is the local currency, the net assets are remeasured into U.S. dollars using a combination of current and historical exchange rates. The resulting gains or losses are included in shareholders' equity, as a component of accumulated other comprehensive income (loss), on a net of tax basis. INCOME TAXES The Company files consolidated federal and combined state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. Under this method, the computation of the net deferred tax liability or asset gives current recognition to changes in the tax laws. NET INCOME PER COMMON SHARE Basic earnings per share (EPS) is computed by dividing net income 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. See discussion under "Stock-Based Compensation-Transition and Disclosure," which follows below and Note 19. STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements under this Statement are effective for financial statements issued after December 15, 2002. As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, the Company has chosen to continue to recognize compensation expense using the intrinsic value-based method of valuing stock options prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. Under the intrinsic value-based method, compensation cost is measured as the amount by which the quoted market price of the Company's stock at the date of grant exceeds the stock option exercise price. F-56 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) At December 31, 2002, the Company has two stock-based employee compensation plans, which are described more fully in Note 14. Only restricted stock awards have been reflected in compensation expense,while all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
YEAR ENDED DECEMBER 31, ___________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 ________________________________________________________________ ________ ________ ________ As reported net income.......................................... $439,900 $481,428 $527,903 Stock-based employee compensation expense (determined under fair value based method for all awards, net of taxes)..................................................... (10,170) (16,678) (23,844) ________ ________ ________ Pro forma net income, after stock-based employee compensation expense..................... $429,730 $464,750 $504,059 ======== ======== ======== Earnings per share--basic As reported $2.72 $3.05 $3.41 Pro forma $2.66 $2.94 $3.26 Earnings per share--diluted As reported $2.72 $3.04 $3.38 Pro forma $2.65 $2.93 $3.22
Compensation cost associated with the Company's unvested restricted stock issued under the management stock plan is measured based on the market price of the stock at the grant date and is expensed over the vesting period. Compensation expense related to restricted stock awards for the years ended December 31, 2000, 2001, and 2002 was not significant. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS The Company provides a variety of benefit and incentive compensation plans for eligible employees and retirees. Provisions for the costs of these employee benefit and incentive plans and postretirement benefit plans are accrued and charged to expense when the benefit is earned. On January 1, 2000, the Company changed the method it uses to calculate the market-related value of its pension plan assets. This change increased the value of plan assets on which the expected returns are based and, therefore, results in lower net periodic pension cost. This change in methodology resulted in a one-time credit to salaries and benefits of $16.0 million. The impact on future years is not considered significant. SEGMENT REPORTING Business unit results are based on an internal management reporting system used by management to measure the performance of the units and the Company as a whole. The management reporting system identifies balance sheet and income statement items to each business unit based on internal management accounting policies. Net interest income is determined using the Company's internal funds transfer pricing system, which assigns a cost of funds to assets or a credit for funds to liabilities and capital based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a F-57 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) business unit are assigned to that business. Economic capital is attributed to each business unit using a Risk Adjusted Return on Capital (RAROC) methodology, which seeks to allocate capital to each business unit consistent with the level of risk they assume. These risks are primarily credit risk, market risk and operational risk. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and volatilities. Operational risk is the potential loss due to failures in internal controls, system failures, or external events. RESALE AND REPURCHASE AGREEMENTS Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the same or substantially the same securities before maturity at a fixed or determinable price. The Company's policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged when appropriate. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST Company-obligated mandatorily redeemable preferred securities of subsidiary grantor trust (trust preferred securities) are accounted for as a liability on the balance sheet. Dividends (or distributions) on trust preferred securities are treated as interest expense on an accrual basis. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for by a single method--the purchase method. This Statement eliminates the pooling-of-interests method but carries forward without reconsideration of the guidance in Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises," related to the application of the purchase method of accounting. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. Goodwill and intangible assets acquired in transactions completed after June 30, 2001 are accounted for in accordance with the amortization and nonamortization provisions of SFAS No. 142. SFAS No. 142 significantly changes the accounting for goodwill and other intangible assets subsequent to their initial recognition. This Statement requires that goodwill and some intangible assets no longer be amortized, but tested for impairment at least annually by comparing the fair value of those assets with their recorded amounts. Note 4 includes a summary of the Company's goodwill and other intangible assets as well as the impact of the adoption of SFAS No. 142. F-58 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) 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 adoption of this Statement will not have a material impact on the Company's financial position or results of operations. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This Statement carries over the framework established in SFAS No. 121, and was adopted by the Company on January 1, 2002. The adoption of this Statement had no material impact on the Company's financial position or results of operations. RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.13 In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." 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. The adoption of this Statement did 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 F-59 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) (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. ACCOUNTING FOR ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." This Statement amended SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and Interpretation No. 9, "Applying APB Opinion No. 16 and 17, "When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method." The requirement in paragraph 5 of Statement 72 to recognize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. The acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with SFAS No. 141, "Business Combinations." In addition, this Statement amends SFAS No. 144, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower-relationship intangible assets and credit cardholder intangible assets. As a result, those intangible assets are now subject to the impairment test in accordance with the provisions in SFAS No. 144. The provisions of this Statement that relate to the application of the purchase method of accounting apply to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. This Statement was effective October 1, 2002 and had no material impact on the Company's financial position or results of operations. ACCOUNTING FOR GUARANTORS AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The Interpretation expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. The Interpretation elaborates on the existing disclosure requirements for most guarantees and requires that guarantors recognize a liability for the fair value of guarantees at inception. The disclosure requirements of this Interpretation are effective for financial statements periods ending after December 15, 2002. The initial recognition and measurement provisions of this Interpretation are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. Significant guarantees that have been entered into by the Company are disclosed in Note 21. Management believes that adopting the measurement provisions of this Interpretation will not have a material impact on the Company's financial position or results of operations. CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." The purpose of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a F-60 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (CONTINUED) company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate that entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, if they occur. New disclosure requirements are also prescribed by FIN 46. FIN 46 became effective upon its issuance. As of December 31, 2002, the Company does not believe it has any VIE's for which this interpretation would be applicable. NOTE 2--SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below. At January 1, 2001, all of our securities held to maturity were transferred to securities available for sale in conjunction with the adoption of SFAS No. 133, and therefore, no information is provided for December 31, 2001 or December 31, 2002 in the securities held to maturity table.
SECURITIES AVAILABLE FOR SALE DECEMBER 31, _____________________________________________________________________________________________ 2001 2002 _____________________________________________ _____________________________________________ GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE __________________________________ __________ ________ _______ __________ __________ ________ _______ __________ U.S. Treasury..................... $ 214,249 $ 7,957 $ -- $ 222,206 $ 332,169 $ 12,220 $ -- $ 344,389 Other U.S. government............. 1,902,001 91,315 303 1,993,013 2,560,420 126,886 -- 2,687,306 Mortgage-backed securities........ 3,293,857 48,138 14,127 3,327,868 3,902,879 115,738 80 4,018,537 State and municipal............... 40,116 5,897 80 45,933 42,917 6,182 8 49,091 Corporate debt securities......... 129,314 -- 4,152 125,162 181,345 19 25,565 155,799 Equity securities................. 78,810 133 -- 78,943 73,559 3,598 241 76,916 Foreign securities................ 5,883 92 18 5,957 6,425 94 57 6,462 __________ ________ _______ __________ __________ ________ _______ __________ Total securities available for sale.......................... $5,664,230 $153,532 $18,680 $5,799,082 $7,099,714 $264,737 $25,951 $7,338,500 ========== ======== ======= ========== ========== ======== ======= ==========
The amortized cost and fair value of securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. F-61 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 2--SECURITIES (CONTINUED) MATURITY SCHEDULE OF SECURITIES SECURITIES AVAILABLE FOR SALE(1) __________________________ DECEMBER 31, 2002 __________________________ AMORTIZED FAIR (DOLLARS IN THOUSANDS) COST VALUE _________________________________________________ __________ __________ Due in one year or less.......................... $ 538,306 $ 543,794 Due after one year through five years............ 2,762,947 2,900,345 Due after five years through ten years........... 295,601 286,489 Due after ten years.............................. 3,429,301 3,530,956 Equity securities(2)............................. 73,559 76,916 __________ __________ Total securities............................... $7,099,714 $7,338,500 ========== ========== __________ (1) The remaining contractual maturities of mortgage-backed securities are classified without regard to prepayments. The contractual maturity of these securities is not a reliable indicator of their expected life since borrowers have the right to repay their obligations at any time. (2) Equity securities do not have a stated maturity. In 2000, proceeds from sales of securities available for sale were $423 million with gross realized gains of $27 million and $18 million of gross realized losses. In 2001, proceeds from sales of securities available for sale were $931 million with gross realized gains of $31 million and gross realized losses of $22 million. In 2002, proceeds from sales of securities available for sale were $188 million with gross realized gains of $9 million and gross realized losses of $13 million. COLLATERAL The Company reports securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. These securities have been separately identified. If the secured party cannot resell or repledge the securities of the Company, those securities are not separately identified. As of December 31, 2001 and 2002, the Company had no pledged collateral to secured parties who are not permitted to resell or repledge those securities. As of December 31, 2001 and 2002, the Company had not accepted any collateral that it is permitted by contract to sell or repledge. F-62 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES A summary of loans, net of unearned interest and fees of $56 million and $45 million, at December 31, 2001 and 2002, respectively, is as follows: DECEMBER 31, _____________________________ (DOLLARS IN THOUSANDS) 2001 2002 ___________________________________________ ___________ ___________ Domestic: Commercial, financial and industrial..... $11,476,361 $10,338,508 Construction............................. 1,059,847 1,285,204 Mortgage: Residential............................ 4,788,219 6,382,227 Commercial............................. 3,590,318 4,150,178 ___________ ___________ Total mortgage....................... 8,378,537 10,532,405 Consumer: Installment............................ 1,200,047 909,787 Revolving lines of credit.............. 859,021 1,102,771 ___________ ___________ Total consumer....................... 2,059,068 2,012,558 Lease financing.......................... 979,242 812,918 ___________ ___________ Total loans in domestic offices...... 23,953,055 24,981,593 Loans originated in foreign branches....... 1,040,975 1,456,490 ___________ ___________ Total loans.......................... 24,994,030 26,438,083 Allowance for credit losses.......... 634,509 609,190 ___________ ___________ Loans, net........................... $24,359,521 $25,828,893 =========== =========== Changes in the allowance for credit losses were as follows:
YEARS ENDED DECEMBER 31, ____________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 _______________________________________________________ _________ _________ _________ Balance, beginning of year............................. $ 470,378 $ 613,902 $ 634,509 Loans charged off...................................... (322,363) (322,469) (245,342) Recoveries of loans previously charged off............. 26,297 58,370 39,546 _________ _________ _________ Total net loans charged off........................ (296,066) (264,099) (205,796) Provision for credit losses............................ 440,000 285,000 175,000 Foreign translation adjustment and other net additions (deductions)............................... (410) (294) 5,477 _________ _________ _________ Balance, end of year................................... $ 613,902 $ 634,509 $ 609,190 ========= ========= =========
Nonaccrual loans totaled $492 million and $337 million at December 31, 2001 and 2002, respectively. There were no renegotiated loans at December 31, 2001 and 2002. F-63 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED) LOAN IMPAIRMENT Impaired loans of the Company include commercial, financial and industrial, construction and commercial mortgage loans designated as nonaccrual. When the value of an impaired loan is less than the recorded investment in the loan, a portion of the Company's allowance for credit losses is allocated as an impairment allowance. The Company's policy for recognition of interest income, charge-offs of loans, and application of payments on impaired loans is the same as the policy applied to nonaccrual loans. The following table sets forth information about the Company's impaired loans.
DECEMBER 31, ___________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 _____________________________________________________________ ________ ________ ________ Impaired loans with an allowance............................. $318,418 $383,967 $306,693 Impaired loans without an allowance(1)....................... 81,581 107,918 29,996 ________ ________ ________ Total impaired loans(2).................................. $399,999 $491,885 $336,689 ======== ======== ======== Allowance for impaired loans................................. $118,378 $97,651 $120,682 Average balance of impaired loans during the year............ $257,650 $455,168 $399,703 Interest income recognized during the year on nonaccrual loans at December 31....................................... $ 1,221 $ 5,442 $ 10,842 __________ (1) These loans do not require an allowance for credit losses under SFAS No. 114 since the fair values of the impaired loans equal or exceed the recorded investments in the loans. (2) This amount was evaluated for impairment using three measurement methods as follows: $361 million, $452 million, and $300 million was evaluated using the present value of the expected future cash flows at December 31, 2000, 2001 and 2002, respectively; $13 million, $15 million, and $22 million was evaluated using the fair value of the collateral at December 31, 2000, 2001 and 2002, respectively; and $26 million, $25 million, and $15 million was evaluated using historical loss factors at December 31, 2000, 2001 and 2002, respectively.
RELATED PARTY LOANS In some cases, the Company makes loans to related parties including its directors, executive officers, and their affiliated companies. At December 31, 2001, related party loans outstanding to individuals who served as directors or executive officers at anytime during the year totaled $33 million, as compared to $28 million at December 31, 2002. In the opinion of management, these related party loans were made on substantially the same terms, including interest rates and collateral requirements, as those terms prevailing at the date these loans were made. During 2001 and 2002, there were no loans to related parties that were charged off. Additionally, at December 31, 2001 and 2002, there were no loans to related parties that were nonperforming. NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS Upon adoption of SFAS No. 142 on January 1, 2002, the amortization of existing goodwill ceased and the carrying amount of goodwill was allocated to the applicable reporting units. The allocation was based on the sources of previously recognized goodwill as well as the reporting units to which the related acquired net assets F-64 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) were assigned. Management's expectations of which reporting units had benefited from the synergies of acquired businesses were considered in the allocation process. The Company performed a transitional impairment test during May 2002, measured as of the date of adoption. The fair market value of the reporting units tested for impairment exceeded its carrying value, including goodwill; therefore, no impairment loss was recognized. As of December 31, 2002, goodwill was $151 million. Net income and earnings per share for the year ending December 31, 2000 and 2001, were adjusted, on a pro forma basis, to exclude $14 million in goodwill amortization expense (net of taxes of $0.6 million) and $15 million in goodwill amortization expense (net of taxes of $0.6 million) for the years ended December 31, 2000 and 2001, respectively, as follows:
FOR THE YEARS ENDED DECEMBER 31, ___________________________________ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002 __________________________________________________ ________ ________ ________ NET INCOME: As reported....................................... $439,900 $481,428 $527,903 Goodwill amortization, net of income tax.......... 13,723 14,788 -- As adjusted....................................... $453,623 $496,216 $527,903 BASIC EARNINGS PER SHARE: As reported....................................... $2.72 $3.05 $3.41 Goodwill amortization............................. .09 .09 -- As adjusted....................................... $2.81 $3.14 $3.41 DILUTED EARNINGS PER SHARE: As reported....................................... $2.72 $3.04 $3.38 Goodwill amortization............................. .08 .09 -- As adjusted....................................... $2.80 $3.13 $3.38
On May 13, 2002, the Company completed its acquisition of First Western Bank and recorded approximately $24 million of goodwill and $11 million of core deposit intangible. The core deposit intangible is being amortized on an accelerated basis over an estimated life of 12.5 years. On November 1, 2002, the Company completed its acquisition of Valencia Bank & Trust and recorded approximately $37 million of goodwill and $9 million of core deposit intangible. The core deposit intangible is being amortized on an accelerated basis over an estimated life of 6 years. On December 18, 2002, the Company completed its acquisition of John Burnham & Company, and recorded approximately $18 million of goodwill and $8 million of rights-to-expiration. The rights-to-expiration will be amortized on an accelerated basis over its useful economic life. F-65 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 4--GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) INTANGIBLE ASSETS SUBJECT TO AMORTIZATION Intangible assets amortization expense for 2002, was $5 million. No residual value is expected for these intangible assets. The components of intangible assets were as follows:
DECEMBER 31, 2002 ______________________________________________ GROSS CARRYING ACCUMULATED NET CARRYING (DOLLARS IN MILLIONS) AMOUNT AMORTIZATION AMOUNT __________________________________________ _______________ ____________ ____________ Rights-to-expiration...................... $22.9 $ 3.1 $19.8 Core deposit intangible................... 28.2 9.5 18.7 _____ _____ _____ Total identifiable intangible assets...... $51.1 $12.6 $38.5 ===== ===== =====
Amortization expense for the net carrying amount of all identifiable intangible assets with definite lives for the years ending December 31, 2003 through 2007 is approximately $9 million, $8 million, $6 million, $4 million, and $3 million, respectively. NOTE 5--PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization. As of December 31, 2001 and 2002, the amounts were:
DECEMBER 31, _________________________________________________________________________________ 2001 2002 _______________________________________ _____________________________________ ACCUMULATED ACCUMULATED DEPRECIATION AND NET BOOK DEPRECIATION AND NET BOOK (DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE ______________________ __________ ________________ _________ __________ ________________ ________ Land.................. $ 65,834 $ -- $ 65,834 $ 67,050 $ -- $ 67,050 Premises.............. 328,366 115,485 212,881 353,213 131,820 221,393 Leasehold improvements 189,438 123,241 66,197 204,980 140,992 63,988 Furniture, fixtures and equipment....... 541,187 391,565 149,622 583,225 430,990 152,235 __________ ________ ________ __________ ________ ________ Total............. $1,124,825 $630,291 $494,534 $1,208,468 $703,802 $504,666 ========== ======== ======== ========== ======== ========
Rental and depreciation and amortization expenses were as follows:
YEARS ENDED DECEMBER 31, _______________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 ____________________________________________________________ ________ _______ _______ Rental expense of premises.................................. $52,085 $48,482 $53,595 Less: rental income......................................... 15,464 19,343 18,505 _______ _______ _______ Net rental expense...................................... $36,621 $29,139 $35,090 ======= ======= ======= Other net rental income, primarily for equipment............ $(1,300) $(1,570) $(1,576) ======= ======= ======= Depreciation and amortization of premises and equipment..... $66,503 $74,786 $77,426 ======= ======= =======
F-66 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 5--PREMISES AND EQUIPMENT (CONTINUED) Future minimum lease payments are as follows: (DOLLARS IN THOUSANDS) DECEMBER 31, 2002 _______________________________________________ _________________ Years ending December 31, 2003......................................... $ 53,908 2004......................................... 46,795 2005......................................... 40,648 2006......................................... 34,877 2007......................................... 25,166 Later years.................................. 88,214 ________ Total minimum operating lease payments......... $289,608 ======== Minimum rental income due in the future under noncancellable subleases..................... $58,068 ======== A majority of the leases provide for the payment of taxes, maintenance, insurance, and certain other expenses applicable to the leased premises. Many of the leases contain extension provisions, and escalation clauses. NOTE 6--DEPOSITS At December 31, 2002, the Company had $215 million in domestic interest bearing time deposits with a remaining term of greater than one year, of which $110 million exceeded $100,000. Maturity information for all domestic interest bearing time deposits with a remaining term of greater than one year is summarized below. (DOLLARS IN THOUSANDS) DECEMBER 31, 2002 __________________________________________________ _________________ Due after one year through two years.............. $142,153 Due after two years through three years........... 43,680 Due after three years through four years.......... 18,791 Due after four years through five years........... 9,345 Due after five years.............................. 713 ________ Total.......................................... $214,682 ======== All of the foreign interest bearing time deposits exceeding $100,000 mature in less than one year. NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS RETIREMENT PLANS The Company maintains the Union Bank of California, N.A. Retirement Plan (the Plan), which is a noncontributory defined benefit plan covering substantially all of the employees of the Company. The Plan provides retirement benefits based on years of credited service and the final average compensation amount, as defined in the Plan. Employees become eligible for this plan after one year of service and become fully vested after five years of service. The Company's funding policy is to make contributions between the minimum required and the maximum deductible amount as allowed by the Internal Revenue Code. Contributions are F-67 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. Plan assets are invested in U.S. government securities, corporate bonds, securities and mutual funds. The Plan contains no Company stock. OTHER POSTRETIREMENT BENEFITS The Company provides certain health care benefits for its retired employees and life insurance benefits for those employees who retired prior to January 1, 2001. The health care cost is shared between the Company and the retiree. The life insurance plan is noncontributory. The accounting for the health care plan anticipates future cost-sharing changes that are consistent with the Company's intent to maintain a level of cost-sharing at approximately 25 to 50 percent, depending on age and service with the Company. Assets set aside to cover such obligations are primarily invested in mutual funds. The following table sets forth the funded status of the Company's defined benefit pension plan and its other postretirement benefit plans.
PENSION BENEFITS OTHER BENEFITS YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, ________________________ ________________________ (DOLLARS IN THOUSANDS) 2001 2002 2001 2002 __________________________________________________ _________ _________ __________ _________ CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of year............. $509,016 $595,736 $94,108 $123,720 Service cost...................................... 21,889 25,810 3,844 5,262 Interest cost..................................... 38,931 43,316 7,267 9,546 Plan participants' contributions.................. -- -- 1,386 1,615 Amendments(1)..................................... -- -- -- (8,544) Actuarial (gain) loss............................. 45,393 82,720 25,249 36,896 Benefits paid..................................... (19,493) (21,483) (8,134) (10,538) ________ ________ ________ ________ Benefit obligation, end of year................... 595,736 726,099 123,720 157,957 ________ ________ ________ ________ CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of year...... 588,469 596,470 50,296 52,489 Actual return on plan assets...................... (35,273) (54,847) (2,518) (10,850) Employer contribution............................. 62,767 140,000 11,459 48,820 Plan participants' contributions.................. -- -- 1,386 1,615 Benefits paid..................................... (19,493) (21,483) (8,134) (10,538) ________ ________ ________ ________ Fair value of plan assets, end of year............ 596,470 660,140 52,489 81,536 ________ ________ ________ ________ Funded status..................................... 734 (65,959) (71,231) (76,422) Unrecognized transition amount.................... -- -- 37,432 25,486 Unrecognized net actuarial gain................... 92,570 290,750 25,083 77,120 Unrecognized prior service cost................... 5,591 4,524 (1,441) (1,345) ________ ________ ________ ________ Prepaid (accrued) benefit cost.................... $ 98,895 $229,315 $(10,157) $ 24,839 ======== ======== ======== ======== __________ (1) In 2002, the Company changed its postretirement medical benefit plan to increase the required contributions as a percentage of total cost paid by some future retirees.
F-68 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The following tables summarize the assumptions used in computing the present value of the projected benefit obligations and the net periodic cost.
PENSION BENEFITS OTHER BENEFITS ______________________ _____________________ YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ______________________ _____________________ 2000 2001 2002 2000 2001 2002 ______ _____ _____ _____ _____ _____ Discount rate in determining expense.................... 7.75% 7.50% 7.25% 7.75% 7.50% 7.25% Discount rate in determining benefit obligations at year end.............................................. 7.50 7.25 6.75 7.50 7.25 6.75 Rate of increase in future compensation levels for determining expense................................... 5.00 5.00 5.00 -- -- -- Rate of increase in future compensation levels for determining benefit obligations at year end........... 5.00 5.00 5.00 -- -- -- Expected return on plan assets.......................... 8.25 8.25 8.25 8.00 8.00 8.00
PENSION BENEFITS OTHER BENEFITS ________________________________ ______________________________ YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, ________________________________ ______________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 2000 2001 2002 __________________________________________ _______ _______ _______ _______ _______ _______ COMPONENTS OF NET PERIODIC BENEFIT COST Service cost.............................. $20,688 $21,889 $25,810 $ 3,024 $ 3,844 $ 5,262 Interest cost............................. 34,429 38,930 43,316 6,708 7,267 9,546 Expected return on plan assets............ (45,357) (51,144) (60,613) (3,893) (4,177) (6,591) Amortization of prior service cost........ 1,067 1,067 1,067 -- (96) (96) Amortization of transition amount......... -- -- -- 3,455 3,216 3,403 Recognized net actuarial (gain) loss...... (1,077) -- -- (858) 12 2,299 _______ _______ _______ _______ _______ _______ Net periodic benefit cost............... 9,750 10,742 9,580 8,436 10,066 13,823 Loss (gain) due to curtailment............ -- -- -- 2,868 (1,828) -- _______ _______ _______ _______ _______ _______ Total net periodic benefit cost......... $ 9,750 $10,742 $ 9,580 $11,304 $ 8,238 $13,823 ======= ======= ======= ======= ======= =======
For 2000, the Company assumed a 10 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and an 8 percent annual rate of increase for the HMO plan. For future periods, the rate for the indemnity plan was expected to gradually decrease from 10 percent to 5 percent in 2007 and will remain at that level thereafter. The rate for the HMO plan was expected to gradually decrease from 8 percent to 5 percent in 2007 and remain at that level thereafter. F-69 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 7--EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) For 2001, the Company assumed a 9 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 7.5 percent annual rate of increase for the HMO plan. For future periods, the rate for the indemnity plan was expected to gradually decrease from 9 percent to 5 percent in 2007 and will remain at that level thereafter. The rate for the HMO plan was expected to gradually decrease from 7.5 percent to 5 percent in 2007 and remain at that level thereafter. For 2002, the Company assumed an 10 percent annual rate of increase in the per capita cost of postretirement medical benefits for the indemnity plan and a 12 percent annual rate of increase for the HMO plan. For future periods, the rate for the indemnity plan was expected to gradually decrease from 10 percent to 5 percent in 2008 and will remain at that level thereafter. The rate for the HMO plan was expected to gradually decrease from 12 percent to 5 percent in 2008 and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects.
1-PERCENTAGE- 1-PERCENTAGE- (DOLLARS IN THOUSANDS) POINT INCREASE POINT DECREASE _______________________________________________________ ______________ ______________ Effect on total of service and interest components..... $2,150 $ (1,785) Effect on postretirement benefit obligation............ 14,789 (12,574)
EXECUTIVE SUPPLEMENTAL BENEFIT PLANS The Company has several Executive Supplemental Benefit Plans (ESBP), which provide eligible employees with supplemental retirement benefits. The plans are unfunded. The accrued liability for ESBP's included in other liabilities in the Consolidated Balance Sheets was $28 million at December 31, 2001 and $33 million at December 31, 2002. The Company's expense relating to the ESBP's was $2 million for the year ended December 31, 2000, and $3 million for each of the years ended December 31, 2001 and 2002. SECTION 401(K) SAVINGS PLANS The Company has a defined contribution plan authorized under Section 401(k) of the Internal Revenue Code. All benefits-eligible employees are eligible to participate in the plan. Employees may contribute up to 25 percent of their pre-tax covered compensation or up to 10 percent of their after-tax covered compensation through salary deductions. The Company contributes 50 percent of every pre-tax dollar an employee contributes up to the first 6 percent of the employee's pre-tax covered compensation. Employees are fully vested in the employer's contributions immediately. In addition, the Company may make a discretionary annual profit-sharing contribution up to 2.5 percent of an employee's pay. This profit-sharing contribution is for all eligible employees, regardless of whether an employee is participating in the 401(k) plan, and depends on the Company's annual financial performance. All employer contributions are tax deductible by the Company. The Company's combined matching contribution expense was $6 million, $13 million, and $17 million for the years ended December 31, 2000, 2001 and 2002, respectively. F-70 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 8--OTHER NONINTEREST EXPENSE The detail of other noninterest expense is as follows: YEARS ENDED DECEMBER 31, ___________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 __________________________________________ ________ ________ ________ Software.................................. $ 24,037 $ 31,766 $ 42,850 Advertising and public relations.......... 29,125 37,710 37,510 Intangible asset amortization............. 15,061 16,012 5,485 Other..................................... 154,525 157,910 171,168 ________ ________ ________ Total other noninterest expenses.......... $222,748 $243,398 $257,013 ======== ======== ======== NOTE 9--INCOME TAXES The components of income tax expense were as follows: YEARS ENDED DECEMBER 31, ___________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 __________________________________________ ________ ________ ________ Taxes currently payable: Federal................................. $202,427 $172,898 $173,310 State................................... 3,595 326 31,622 Foreign................................. 1,804 1,965 3,996 ________ ________ ________ Total currently payable............... 207,826 175,189 208,928 ________ ________ ________ Taxes deferred: Federal................................. 9,300 49,163 58,586 State................................... 3,998 9,905 (20,807) Foreign................................. 411 (413) 669 ________ ________ ________ Total deferred........................ 13,709 58,655 38,448 ________ ________ ________ Total income tax expense.............. $221,535 $233,844 $247,376 ======== ======== ======== F-71 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 9--INCOME TAXES (CONTINUED) The components of the net deferred tax balances of the Company were as follows: DECEMBER 31, (DOLLARS IN THOUSANDS) 2001 2002 _______________________________________________________ ________ ________ Deferred tax assets: Allowance for credit losses.......................... $239,110 $231,657 Accrued income and expense........................... 45,224 62,190 Tax credit carryforwards............................. -- 13,590 Other................................................ 13,144 6,353 ________ ________ Total deferred tax assets.......................... 297,478 313,790 Deferred tax liabilities: Leasing.............................................. 425,169 462,525 Unrealized gain on securities available for sale..... 51,581 91,335 Pension liabilities.................................. 40,813 69,541 Unrealized net gains on cash flow hedges............. 38,925 64,649 ________ ________ Total deferred tax liabilities..................... 556,488 688,050 ________ ________ Net deferred tax liability....................... $259,010 $374,260 ======== ======== It is management's opinion that no valuation allowance is necessary because the tax benefits from the Company's deferred tax assets are expected to be utilized in future tax returns. The following table is an analysis of the effective tax rate: YEARS ENDED DECEMBER 31, ________________________ 2000 2001 2002 ____ ____ ____ Federal income tax rate.............................. 35% 35% 35% Net tax effects of: State income taxes, net of federal income tax benefit.......................................... 1 1 1 Tax credits........................................ (2) (2) (4) Other.............................................. (1) (1) -- __ __ __ Effective tax rate............................... 33% 33% 32% == == == The Company has filed its 2000 and 2001, and intends to file its 2002, California franchise tax returns on a worldwide unitary basis, incorporating the financial results of BTM and its worldwide affiliates. During 2002, the Company recognized a tax credit adjustment of $9.8 million related to the standardization of our accounting for low-income housing credit (LIHC) investments and a $3.3 million net reduction in income tax expense resulting from a change in California state tax law concerning loan loss reserves. F-72 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 10--BORROWED FUNDS The following is a summary of the major categories of borrowed funds:
DECEMBER 31, __________________________ (DOLLARS IN THOUSANDS) 2001 2002 ________________________________________________________________ __________ __________ Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 1.41% and 0.88% at December 31, 2001 and 2002, respectively......... $ 418,814 $ 334,379 Commercial paper, with weighted average interest rates of 1.89% and 1.21% at December 31, 2001 and 2002, respectively... 830,657 1,038,982 Other borrowed funds, with weighted average interest rates of 2.96% and 2.25% at December 31, 2001 and 2002, respectively... 700,403 267,047 __________ __________ Total borrowed funds.......................................... $1,949,874 $1,640,408 ========== ========== Federal funds purchased and securities sold under repurchase agreements: Maximum outstanding at any month end.......................... $1,575,938 $ 428,808 Average balance during the year............................... 1,243,933 427,610 Weighted average interest rate during the year................ 4.19% 1.41% Commercial paper: Maximum outstanding at any month end.......................... $1,572,029 $1,107,578 Average balance during the year............................... 1,287,603 997,543 Weighted average interest rate during the year................ 4.07% 1.67% Other borrowed funds: Maximum outstanding at any month end.......................... $ 702,511 $ 942,627 Average balance during the year............................... 464,033 469,877 Weighted average interest rate during the year................ 4.35% 2.15%
Included in other borrowed funds in 2001 and 2002 are assumed mortgage notes related to the purchase of the Company's administrative facility at Monterey Park, California. The notes consist of 20 zero coupon notes with varying maturity dates through 2011. Maturities of these notes for the next five years are as follows: $6.5 million in each of 2003 and 2004, $5.3 million in 2005, $5.0 million in each of 2006 and 2007, and $24.4 million thereafter. NOTE 11--MEDIUM AND LONG-TERM DEBT The following is a summary of our medium-term senior debt and long-term subordinated debt. DECEMBER 31, _____________________ (DOLLARS IN THOUSANDS) 2001 2002 ______________________________________________________ ________ ________ Medium-term debt, fixed rate 5.75% senior notes due December 2006....................................... $199,931 $218,584 Long-term subordinated debt, floating rate notes due June 2007. These notes bear interest at 0.325% above 3-month London Interbank Offered Rate (LIBOR) and are payable to BTM.............................. 199,726 199,776 ________ ________ Total medium and long-term debt....................... $399,657 $418,360 ======== ======== F-73 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 11--MEDIUM AND LONG-TERM DEBT (CONTINUED) On November 30, 2001, the Company issued $200 million of medium-term notes. At December 31, 2002, the weighted average interest rate of the medium-term notes including the impact of the deferred issuance costs was 5.90 percent. The notes do not qualify as Tier 2 risk-based capital under the Federal Reserve guidelines for assessing regulatory capital and are not redeemable prior to the stated maturity. The notes are senior obligations and are ranked equally with all existing or future unsecured senior debt. The Company has converted its 5.75 percent fixed rate to a floating rate of interest utilizing a $200 million notional interest rate swap, which qualified as a fair value hedge at December 31, 2002. This transaction meets the qualifications for utilizing the shortcut method for measuring effectiveness under SFAS No. 133. The market value adjustment to the medium-term debt was an unrealized loss of $19 million, and the fair value of the hedge was an unrealized gain of $19 million. The weighted average interest rate, including the impact of the hedge and deferred issuance costs was 2.49 percent. The long-term subordinated debt qualifies as Tier 2 risk-based capital under the Federal Reserve guidelines for assessing regulatory capital. For the total risk-based capital ratio, the amount of notes that qualify as capital is reduced as the notes approach maturity. At December 31, 2001 and 2002, the $200 million of notes qualified as risk-based capital. The weighted average interest rate of the notes as of December 31, 2002 was 2.19 percent. Provisions of the subordinated notes restrict the use of the Company's property as security for borrowings, and place limitations on leases, indebtedness, distributions to shareholders, mergers, sales of certain assets, transactions with affiliates, and changes in majority stock ownership of the Company. NOTE 12--UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST In February 1999, UnionBanCal Finance Trust I issued $350 million preferred securities to the public and $10,824,750 common securities to the Company. The proceeds of such issuances were invested by UnionBanCal Finance Trust I in $360,824,750 aggregate principal amount of the Company's 7 3/8 percent debt securities due May 15, 2029 (the Trust Notes). The Trust Notes represent the sole asset of UnionBanCal Finance Trust I. The Trust Notes mature on May 15, 2029, bear interest at the rate of 7 3/8 percent, payable quarterly, and are redeemable by the Company beginning on or after February 19, 2004, at 100 percent of the principal amount thereof, plus any accrued and unpaid interest to the redemption date. Holders of the preferred securities and common securities are entitled to cumulative cash distributions at an annual rate of 7 3/8 percent of the liquidation amount of $25 per security. The preferred securities are subject to mandatory redemption upon repayment of the Trust Notes and are callable by the Company at 100 percent of the liquidation amount beginning on or after February 19, 2004. The Trust exists for the sole purpose of issuing the preferred securities and investing the proceeds in the Trust Notes issued by the Company. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities (the Guarantee). The Guarantee, when taken together with the Company's obligations under the Trust Notes and in the indenture pursuant to which the Trust Notes were issued and the Company's obligations under the Amended and Restated Declaration of Trust governing the subsidiary trust, provide a full and unconditional guarantee of amounts due on the Trust Preferred securities. The Company has converted a portion of its 7 3/8 percent fixed rate to a floating rate of interest by utilizing a $200 million notional interest rate swap, which qualified as a fair value hedge at December 31, 2002. The F-74 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 12--UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST (CONTINUED) market value adjustment to the preferred securities was an unrealized loss of $15.7 million while the fair value of the hedge was an unrealized gain of $14.0 million. The weighted average interest rate, including the impact of the hedge and deferred issuance costs, was 4.44 percent for the year ended December 31, 2002. The grantor trust is a wholly owned subsidiary of UnionBanCal Corporation. The Trust Notes and related trust investment in the Trust Notes have been eliminated in consolidation and the preferred securities are reflected as a liability in the accompanying consolidated financial statements. NOTE 13--DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Company has a dividend reinvestment and stock purchase plan for shareholders. Participating shareholders have the option of purchasing additional shares at the full market price with cash payments of $25 to $3,000 per quarter. The Company obtains shares required for reinvestment through open market purchases or through the issuance of new shares from its authorized but unissued stock. During 2000, 2001, and 2002, 449,064, 383,765, and 367,713 shares, respectively, were required for dividend reinvestment purposes, of which 24,666, 20,402, and 19,881 shares were considered new issuances during 2000, 2001, and 2002, respectively. BTM did not participate in the plan in 2000, 2001 or 2002. NOTE 14--MANAGEMENT STOCK PLAN The Company has two management stock plans. The Year 2000 UnionBanCal Corporation Stock Plan, effective January 1, 2000 (the 2000 Stock Plan), and the UnionBanCal Corporation Management Stock Plan, restated effective June 1, 1997 (the 1997 Stock Plan), have 16.0 million and 6.6 million shares, respectively, of the Company's common stock authorized to be awarded to key employees and outside directors of the Company at the discretion of the Executive Compensation and Benefits Committee of the Board of Directors (the Committee). Employees on rotational assignment from BTM are not eligible for stock awards. The Committee determines the term of each stock option grant, up to a maximum of ten years from the date of grant. The exercise price of the options issued under the Stock Plan shall not be less than the fair market value on the date the option is granted. Unvested restricted stock issued under the Stock Plan is shown as a reduction to retained earnings. The value of the restricted shares at the date of grant is amortized to compensation expense over its vesting period. All cancelled or forfeited options and restricted stock become available for future grants. In 2000, 2001 and 2002, the Company granted options to non-employee directors and various key employees, including policy-making officers under the 1997 and 2000 Stock Plans. Under both Stock Plans, options granted to employees vest pro-rata on each anniversary of the grant date and become fully exercisable three years from the grant date, provided that the employee has completed the specified continuous service requirement. The options vest earlier if the employee dies, is permanently disabled, or retires under certain grant, age, and service conditions. Options granted to non-employee directors are fully vested on the grant date and exercisable 33 1/3 percent on each anniversary under the 1997 Stock Plan, and fully vested and exercisable on the grant date under the 2000 Stock Plan. The following is a summary of stock option transactions under the Stock Plans. F-75 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED)
YEARS ENDED DECEMBER 31, ______________________________________________________________________________________ 2000 2001 2002 ___________________________ ___________________________ ___________________________ NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE _________ ________________ _________ ________________ _________ ________________ Options outstanding, beginning of year............................ 3,281,273 $28.46 5,191,899 $28.47 7,939,271 $29.79 Granted......................... 2,126,506 27.99 3,448,242 30.03 2,911,652 43.49 Exercised....................... (98,004) 13.18 (557,597) 19.02 (2,187,170) 28.57 Forfeited....................... (117,876) 32.04 (143,273) 29.91 (148,284) 34.05 _________ ______ _________ ______ __________ ______ Options outstanding, end of year.. 5,191,899 $28.47 7,939,271 $29.79 8,515,469 $34.71 ========= ====== ========= ====== ========== ====== Options exercisable, end of year.. 2,135,228 $25.90 3,009,555 $29.53 3,031,478 $31.08 ========= ====== ========= ====== ========== ======
The weighted-average fair value of options granted was $10.21 during 2000, $10.38 during 2001, and $16.67 during 2002. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants made in 2000, 2001 and 2002; risk-free interest rates of 6.4 percent in 2000, 4.9 percent in 2001, and 4.9 percent in 2002; expected volatility of 44 percent in 2000, 45 percent in 2001, and 46 percent in 2002; expected lives of 5 years for 2000, 2001, and 2002; and expected dividend yields of 3.5 percent in 2000, 3.4 percent in 2001, and 2.3 percent in 2002. The following table summarizes information about stock options outstanding.
OPTIONS EXERCISABLE AT OPTIONS OUTSTANDING AT DECEMBER 31, 2002 DECEMBER 31, 2002 ____________________________________________________ _______________________________ WEIGHTED-AVERAGE RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ______________________ ___________ ________________ ________________ ___________ ________________ $11.25 - 11.25........ 33,000 2.3 years $11.25 33,000 $11.25 18.29 - 25.00........ 314,392 4.5 22.23 275,285 22.07 27.56 - 38.04........ 5,290,575 7.1 30.81 2,648,693 31.84 42.69 - 48.51........ 2,877,502 9.2 43.53 74,500 45.91 _________ _________ 8,515,469 3,031,478 ========= =========
In 2000, 2001, and 2002, the Company also granted 13,500, 6,000 and 6,000 shares, respectively, of restricted stock to key officers, including policy-making officers, under the Stock Plan. The awards of restricted stock vest pro-rata on each anniversary of the grant date and become fully vested four years from the grant date, provided that the employee has completed the specified continuous service requirement. They vest earlier if the employee dies, is permanently and totally disabled, or retires under certain grant, age, and service conditions. Restricted shareholders have the right to vote their restricted shares and receive dividends. F-76 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED) The following is a summary of restricted stock transactions under the Stock Plan.
YEARS ENDED DECEMBER 31, _____________________________________________________________________________________ 2000 2001 2002 ___________________________ ___________________________ __________________________ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE _________ ________________ _________ ________________ _________ ________________ Restricted stock awards outstanding, beginning of year.. 1,496,106 $14.05 1,506,162 $14.11 1,511,526 $14.19 Granted......................... 13,500 25.00 6,000 37.10 6,000 45.00 Cancelled....................... (3,444) 31.66 (636) 37.47 (459 32.61 _________ _________ _________ Restricted stock awards outstanding, end of year........ 1,506,162 $14.11 1,511,526 $14.19 1,517,067 $14.31 ========= ========= ========= Restricted stock awards vested, end of year..................... 1,408,696 $13.00 1,469,354 $13.66 1,503,305 $14.09 ========= ========= =========
At December 31, 2000, 2001 and 2002, 8,969,424, 5,659,091 and 2,890,182 shares, respectively, were available for future grants as either stock options or restricted stock under the Stock Plan. The number of shares available for future grants at December 31, 2002 does not include six million shares authorized, but not registered, during 2002. Effective January 1, 1997, the Company established a Performance Share Plan. Eligible participants may earn performance share awards to be redeemed in cash three years after the date of grant. Performance shares are linked to shareholder value in two ways: (1) the market price of the Company's common stock; and (2) return on equity, a performance measure closely linked to value creation. Eligible participants generally receive grants of performance shares annually. The total number of performance shares granted under the plan cannot exceed 600,000. The Company granted 31,500 shares in 2000, 68,000 shares in 2001, and 61,500 shares in 2002. No performance shares were forfeited in 2000 or 2002. In 2001, 9,000 performance shares were forfeited. The value of a performance share is equal to the market price of the Company's common stock. All cancelled or forfeited performance shares become available for future grants. NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. All of the fair values presented below are as of their respective period ends and have been made under this definition of fair value unless otherwise disclosed. It is management's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of December 31, 2001 and 2002, as more fully described below. It should be noted that the operations of the Company are managed on a going concern basis and not on a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. F-77 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Additionally, a substantial portion of an institution's inherent value is its capitalization and franchise value. Neither of these components has been given consideration in the presentation of fair values that follow. The table below presents the carrying value and fair value of the specified assets, liabilities, and off-balance sheet instruments held by the Company.
DECEMBER 31, ________________________________________________________________ 2001 2002 _____________________________ _____________________________ CARRYING FAIR CARRYING FAIR (DOLLARS IN THOUSANDS) VALUE VALUE VALUE VALUE ____________________________________________________________ ___________ ___________ ___________ ___________ ASSETS Cash and cash equivalents................................. $ 3,664,954 $ 3,664,954 $ 4,442,122 $ 4,442,122 Trading account assets.................................... 229,697 229,697 276,021 276,021 Securities available for sale: Securities pledged as collateral........................ 137,922 137,922 157,823 157,823 Held in portfolio....................................... 5,661,160 5,661,160 7,180,677 7,180,677 Loans, net of allowance for credit losses (1)............. 23,392,279 23,774,330 25,044,665 25,007,245 LIABILITIES Deposits: Noninterest bearing..................................... 12,718,858 12,718,858 16,121,742 16,121,742 Interest bearing........................................ 15,837,341 15,869,729 16,719,073 16,800,871 ___________ ___________ ___________ ___________ Total deposits............................................ 28,556,199 28,588,587 32,840,815 32,922,613 Borrowed funds............................................ 1,949,874 1,967,333 1,640,408 1,639,100 Medium and long-term debt................................. 399,657 398,051 418,360 415,333 UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust.......... 363,928 348,600 365,696 354,060 OFF-BALANCE SHEET INSTRUMENTS Commitments to extend credit.............................. 50,813 50,813 55,760 55,760 Standby letters of credit................................. 8,239 8,239 10,552 10,552 __________ (1) Excludes lease financing, net of allowance.
The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value. CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is considered a reasonable estimate of fair value. TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and valued at market based on quoted market prices or dealer quotes. If a quoted market price is not available, the recorded amounts are estimated using quoted market prices for similar securities. Thus, carrying value is considered a reasonable estimate of fair value for these financial instruments. F-78 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) SECURITIES: The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Securities available for sale are carried at their aggregate fair value, while securities held to maturity are carried at amortized cost. LOANS: The fair value for performing fixed and non-reference rate loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities and, where available, discount rates were based on current market rates. Loans that are on nonaccrual status were not included in the loan valuation methods discussed previously. The fair value of these assets was estimated assuming these loans were sold at their carrying value less their impairment allowance. The fair value of performing mortgage loans was based on quoted market prices for loans with similar credit and interest rate risk characteristics. The fair value of credit lines is assumed to approximate their book value. NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing deposits is the amount payable on demand at the reporting date. The fair value of the demand deposit intangible has not been estimated. INTEREST BEARING DEPOSITS: The fair value of savings accounts and certain money market accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit was estimated using rates currently being offered on certificates with similar maturities. BORROWED FUNDS: The book values of federal funds purchased and securities sold under repurchase agreements and other short-term borrowed funds are assumed to approximate their fair value due to their limited duration characteristics. The fair value for commercial paper and term federal funds purchased was estimated using market quotes. MEDIUM AND LONG-TERM DEBT: The fair value of the fixed-rate senior notes was estimated using market quotes. The book value for variable-rate subordinated capital notes is assumed to approximate fair market value. TRUST PREFERRED SECURITIES: The fair value of fixed-rate trust preferred securities was based upon market quotes for those traded securities. This amount differs from the fair value of those securities under hedge accounting since a hypothetical value based on the present value of cash flows has been used for that purpose. It should be noted that the trust preferred securities are not callable until February 2004 and, therefore, cannot be settled for that price at this time. OFF-BALANCE SHEET INSTRUMENTS: The carrying value of off-balance sheet instruments represents the unamortized fee income assessed based on the credit quality and other covenants imposed on the borrower. Since the amount assessed represents the market rate that would be charged for similar agreements, the Company believes that the fair value approximates the carrying value of these instruments. F-79 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 16--DERIVATIVE INSTRUMENTS The Company is a party to certain derivative and other financial instruments that are used for trading activities of the Company, to meet the needs of customers, and to change the impact on the Company's operating results due to market fluctuations in currency or interest rates. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting agreements in order to reduce its exposure to credit risk. Master netting agreements mitigate credit risk by permitting the offset of amounts due from and to individual counterparties in the event of default. Market risk is the possibility that future changes in market conditions may make the financial instrument less valuable. TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS Derivative instruments used for trading purposes are carried at fair value. The following table reflects the Company's positions relating to trading activities in derivative instruments. Trading activities include both activities for the Company's own account and as an accommodation for customers. At December 31, 2001 and 2002, the majority of the Company's derivative transactions for customers were essentially offset by contracts with other counterparties. F-80 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED) The following is a summary of derivative instruments held or written for trading purposes and customer accommodations.
DECEMBER 31, ____________________________________________________________________________________________ 2001 2002 _________________________________________ __________________________________________ UNREALIZED UNREALIZED ESTIMATED UNREALIZED UNREALIZED ESTIMATED (DOLLARS IN THOUSANDS) GAINS LOSSES FAIR VALUE LOSSES LOSSES FAIR VALUE ________________________________ ________ _________ ________ ________ ________ ________ HELD OR WRITTEN FOR TRADING PURPOSES AND CUSTOMER ACCOMMODATIONS Foreign exchange forward contracts: Commitments to purchase....... $ 2,521 $ (28,955) $(26,434) $ 36,508 $ (2,182) $ 34,326 Commitments to sell........... 33,476 (2,071) 31,405 1,655 (37,221) (35,566) Foreign exchange OTC options: Options purchased............. -- (224) (224) -- (863) (863) Options written............... 224 -- 224 863 -- 863 Currency swap agreements: Commitments to pay............ 5,311 -- 5,311 1,581 -- 1,581 Commitments to receive........ -- (5,257) (5,257) -- (1,548) (1,548) Interest rate contracts: Caps purchased................ 4,567 -- 4,567 5,514 -- 5,514 Floors purchased.............. 20,027 -- 20,027 4,459 -- 4,459 Caps written.................. -- (4,567) (4,567) -- (5,514) (5,514) Floors written................ -- (20,027) (20,027) -- (4,459) (4,459) Swap contracts: Pay fixed/receive variable.. 4,843 (91,054) (86,211) -- (118,181) (118,181) Pay variable/receive fixed.. 96,764 (4,084) 92,680 126,058 -- 126,058 ________ ________ 167,733 176,638 Effect of master netting agreements.................... (48,762) (92,803) ________ ________ Total credit exposure........... $118,971 $83,835 ======== ========
DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. All derivatives, whether designated as a hedge, or not, are required to be recorded on the balance sheet at fair value. SFAS No. 133 requires that derivative instruments used to hedge be identified specifically to assets, liabilities, firm commitments or anticipated transactions and be expected to be effective throughout the life of the hedge. Derivative instruments that do not qualify as either a fair value or cash flow hedge are valued at fair value and classified as trading account assets with the resultant gain or loss recognized in current earnings. At adoption of SFAS No. 133, the Company recognized a loss of $6 million ($4 million, net of tax), which is included in noninterest F-81 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED) expense. Additionally, the adoption of SFAS No. 133 resulted in a cumulative effect of a change in accounting principle on accumulated other comprehensive income, net of tax, of $22 million in unrealized gain. Derivative positions are integral components of the Company's designated asset and liability management activities. The Company uses interest rate derivatives to manage the sensitivity of the Company's net interest income to changes in interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily LIBOR-based commercial loans, certificates of deposit, trust preferred securities and medium-term notes. CASH FLOW HEDGES HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT The Company engages in several types of cash flow hedging strategies for which the hedged transactions are forecasted future loan interest payments, and the hedged risk is the variability in those payments due to changes in the designated benchmark rate, e.g., US dollar LIBOR. In these strategies, the hedging instruments are matched with groups of variable rate loans such that the tenor of the variable rate loans and that of the hedging instrument is identical. Cash flow hedging strategies include the utilization of purchased floor, cap, corridor options and interest rate swaps. The maximum length of time over which the Company is hedging these exposures is 6.75 years. The Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments received under the floor contract offset the decline in loan interest income caused by the relevant LIBOR index falling below the floor's strike rate. The Company uses interest rate floor corridors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the floor corridor contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the corridor's upper strike rate, but only to the extent the index falls to the lower strike rate. The corridor will not provide protection from declines in the relevant LIBOR index to the extent it falls below the corridor's lower strike rate. The Company uses interest rate collars to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the collar contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the collar's strike rate while net payments to be paid will reduce the increase in loan interest income caused by the LIBOR index rising above the collar's cap strike rate. The Company uses interest rate swaps to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments to be received (or paid) under the swap contracts will offset the fluctuations in loan interest income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans' interest income caused by changes in the relevant LIBOR index. The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with the forecasted issuance and rollover of short-term, fixed rate negotiable certificates of deposit (CDs). In these hedging relationships, the Company hedges the LIBOR component of the CD rates, which is either 3-month LIBOR or 6-month LIBOR, based on the 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. F-82 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED) Hedging transactions are structured at inception so that the notional amounts of the hedge are matched with an equal principal amount of loans or CDs, the index and repricing frequencies of the hedge matches those of the loans or CDs, and the period in which the designated hedged cash flows occurs is equal to the term of the hedge. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedge versus those of the loans or CDs. In 2002, the Company recognized a net gain of $0.4 million due to ineffectiveness, which is recognized in noninterest expense, compared to a net gain of $0.5 million in 2001. For cash flow hedges, based upon amounts included in accumulated other comprehensive income at December 31, 2002, the Company expects to recognize a gross increase of $126.2 million in net interest income during 2003. This amount could differ from amounts actually realized due to changes in interest rates and the addition of other hedges subsequent to December 31, 2002. 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 2002 was a net gain of $0.6 million, compared to a net loss of $0.1 million in 2001. HEDGING STRATEGY FOR MEDIUM-TERM NOTES The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specified interest bearing liability, UnionBanCal Corporation's five-year, medium-term debt issuance, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, US dollar LIBOR. The fair value hedging transaction for the medium-term notes was structured at inception to mirror all of the provisions of the medium-term notes, which allows the Company to assume that no ineffectiveness exists. OTHER The Company uses foreign currency forward contracts as a means of managing foreign exchange rate risk associated with assets and/or liabilities denominated in foreign currencies. The Company values the forward contracts, the assets and/or the liabilities at fair value, with the resultant gain or loss recognized in noninterest income. F-83 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 16--DERIVATIVE INSTRUMENTS (CONTINUED) The Company uses To-Be-Announced (TBA) contracts to fix the price and yield of anticipated purchases or sales of mortgage-backed securities that will be delivered at an agreed upon date. This strategy hedges the risk of variability in the cash flows to be paid or received upon settlement of the TBA contract. The following table reflects summary information on our derivative contracts used to hedge or modify the Company's risk as of December 31, 2001 and 2002.
DECEMBER 31, 2001 DECEMBER 31, 2002 ________________________________________ ________________________________________ UNREALIZED UNREALIZED ESTIMATED UNREALIZED UNREALIZED ESTIMATED GAINS LOSSES FAIR VALUE GAINS LOSSES FAIR VALUE __________ __________ __________ __________ __________ __________ HELD FOR ASSET AND LIABILITY MANAGEMENT PURPOSES Fair Value Hedges and Hedged Items: Interest rate swap contracts: Pay variable/receive fixed.... $ 11,632 $ -- $ 11,632 $ 14,041 $ -- $ 14,041 Trust preferred securities.... -- (13,928) (13,928) -- (15,697) (15,697) Medium-term debt interest rate swap.......................... -- -- -- 18,639 -- 18,639 Medium-term note.............. -- -- -- -- (18,639) (18,639) Currency swap agreements: Commitments to pay.......... 2,179 -- 2,179 508 -- 508 Foreign currency loan......... -- (2,184) (2,184) -- (507) (507) Cash Flow Hedges: Interest rate option contracts: Caps purchased................ 3,904 -- 3,904 89 -- 89 Floors purchased.............. 59,296 -- 59,296 -- (443) (443) Floors written................ -- (14,987) (14,987) 36,369 -- 36,369 Interest rate swap contracts: Pay variable/receive fixed.... 62,210 (5,350) 56,860 133,915 -- 133,915 Other Hedges: Foreign exchange forward contracts Commitments to purchase....... 195 (1,728) (1,533) 2,862 (11) 2,851 Commitments to sell......... 126 (84) 42 6 (173) (167)
NOTE 17--RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND DIVIDENDS Federal Reserve Board regulations require the Bank to maintain reserve balances based on the types and amounts of deposits received. Average reserve balances were approximately $240 million and $195 million for the years ended December 31, 2001 and 2002, respectively. As of December 31, 2001 and 2002, securities carried at $1.5 billion and $2.2 billion and loans of $6.5 billion and $6.4 billion, respectively, were pledged as collateral for borrowings, to secure public and trust department deposits, and for repurchase agreements as required by contract or law. The Federal Reserve Act restricts the extension of credit by the Bank to BTM and affiliates and to the Company and its non-bank subsidiaries and requires that such loans be secured by certain types of collateral. At December 31, 2002, $89.9 million remained outstanding on twelve Bankers Commercial Corporation notes payable to the Bank. The respective notes were fully collateralized with equipment leases pledged by Bankers Commercial Corporation. F-84 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 17--RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND DIVIDENDS (CONTINUED) The payment of dividends by the Bank to the Company is subject to the approval of the Office of the Comptroller of the Currency (OCC) if the total of all dividends declared in any calendar year exceeds certain calculated amounts. The payment of dividends is also limited by minimum capital requirements imposed on national banks by the OCC. At December 31, 2002, the Bank could have declared dividends aggregating $603 million without prior regulatory approval. NOTE 18--REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank's prompt corrective action classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to Bank Holding Companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to quarterly average assets (as defined). Management believes, as of December 31, 2001 and 2002, that the Company and the Bank met all capital adequacy requirements to which they are subject. On February 19, 1999, the Company issued $350 million of trust preferred securities, which qualify as Tier 1 capital. See Note 12 for a complete description of these securities. As of December 31, 2001 and 2002, the most recent notification from the OCC categorized the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized," the Bank must maintain a minimum total risk-based capital ratio of 10 percent, a Tier 1 risk-based capital ratio of 6 percent, and a Tier 1 leverage ratio of 5 percent. There are no conditions or events since that notification that management believes have changed the Bank's category. F-85 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 18--REGULATORY CAPITAL REQUIREMENTS (CONTINUED) The Company's and the Bank's capital amounts and ratios are presented in the following tables:
FOR CAPITAL ACTUAL ADEQUACY PURPOSES ____________________ __________________ (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO ____________________________________________________________________ __________ ______ __________ _____ CAPITAL RATIOS FOR THE COMPANY: As of December 31, 2001: Total capital (to risk-weighted assets)............................. $4,260,043 13.35% > $2,552,515 > 8.0% - - Tier 1 capital (to risk-weighted assets)............................ 3,661,231 11.47 > 1,276,258 > 4.0 - - Tier 1 capital (to quarterly average assets)(1)..................... 3,661,231 10.53 > 1,390,408 > 4.0 - - As of December 31, 2002: Total capital (to risk-weighted assets)............................. $4,241,095 12.93% > $2,624,915 > 8.0% - - Tier 1 capital (to risk-weighted assets)............................ 3,667,237 11.18 > 1,312,458 > 4.0 - - Tier 1 capital (to quarterly average assets)(1)..................... 3,667,237 9.75 > 1,503,800 > 4.0 - - __________ (1) Excludes certain intangible assets.
TO BE WELL-CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ______________________ _______________________ ______________________ (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO __________________________________________ __________ _____ __________ _____ _________ ______ CAPITAL RATIOS FOR THE BANK: As of December 31, 2001: Total capital (to risk-weighted assets)... $3,810,736 12.19% > $2,501,701 > 8.0% > $3,127,127 > 10.0% - - - - Tier 1 capital (to risk-weighted assets).. 3,323,096 10.63 > 1,250,851 > 4.0 > 1,876,276 > 6.0 - - - - Tier 1 capital (to quarterly average assets)(1).............................. 3,323,096 9.69 > 1,371,305 > 4.0 > 1,714,131 > 5.0 - - - - As of December 31, 2002: Total capital (to risk-weighted assets)... $3,818,782 11.87% > $2,572,884 > 8.0% > $3,216,105 > 10.0% - - - - Tier 1 capital (to risk-weighted assets).. 3,334,720 10.37 > 1,286,442 > 4.0 > 1,929,663 > 6.0 - - - - Tier 1 capital (to quarterly average assets)(1).............................. 3,334,720 9.01 > 1,480,773 > 4.0 > 1,850,966 > 5.0 - - - - __________ (1) Excludes certain intangible assets.
NOTE 19--EARNINGS PER SHARE Basic EPS is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding during the period. For all periods presented, there were no dividends on preferred stock. Diluted EPS is computed based on the weighted average number of common shares outstanding F-86 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 19--EARNINGS PER SHARE adjusted for common stock equivalents, which include stock options. The following table presents a reconciliation of basic and diluted EPS for the years ended December 31, 2000, 2001 and 2002:
DECEMBER 31, ______________________________________________________________________ 2000 2001 2002 ______________________ ______________________ _____________________ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED ___________________________________________________ ________ ________ ________ ________ ________ ________ Net income....................................... $439,900 $439,900 $481,428 $481,428 $527,903 $527,903 Weighted average common shares outstanding....... 161,605 161,605 157,845 157,845 154,758 154,758 Additional shares due to: Assumed conversion of dilutive stock options..... -- 384 -- 778 -- 1,657 ________ ________ ________ ________ ________ ________ Adjusted weighted average common shares outstanding 161,605 161,989 157,845 158,623 154,758 156,415 ________ ________ ________ ________ ________ ________ Net income per share............................. $ 2.72 $ 2.72 $ 3.05 $ 3.04 $ 3.41 $ 3.38 ======== ======== ======== ======== ======== ========
Options to purchase 4,040,244 shares of common stock with the range from $27.56 to $44.56 per share were outstanding but not included in the computation of diluted EPS in 2000. Options to purchase 2,234,080 shares of common stock with the range from $32.63 to $44.56 per share were outstanding but not included in the computation of diluted EPS in 2001. Options to purchase 2,869,052 shares of common stock with the range from $43.25 to $48.51 per share were outstanding but not included in the computation of diluted EPS in 2002.These options to purchase shares were not included in the computation of diluted EPS in each of the years 2000, 2001, and 2002 because they were anti-dilutive. F-87 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 20--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following is a summary of the components of accumulated other comprehensive income (loss):
NET UNREALIZED GAINS ON NET UNREALIZED GAINS (LOSSES) ON FOREIGN CASH FLOW HEDGES SECURITIES AVAILABLE FOR SALE CURRENCY TRANSLATION ___________________________ ______________________________ _______________________________ YEARS ENDED YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, __________________________ ______________________________ _______________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 2000 2001 2002 2000 2001 2002 __________________________________ _____ _______ ________ _______ _______ ________ _________ _________ _________ Beginning balance................. $ -- $ -- $ 62,840 $(32,548) $41,879 $83,271 $(8,713) $(11,191) $(12,205) Cumulative effect of accounting change, net of tax.............. -- 22,205 -- -- -- -- -- -- -- Change during the year............ -- 40,635 41,528 74,427 41,392 64,179 (2,478) (1,014) 1,556 _____ _______ ________ ________ _______ ________ _________ _________ _________ Ending balance.................... $ -- $62,840 $104,368 $ 41,879 $83,271 $147,450 $(11,191) $(12,205) $(10,649) ===== ======= ======== ======== ======= ======== ========= ========= =========
MINIMUM PENSION LIABILITY ACCUMULATED OTHER ADJUSTMENT COMPREHENSIVE INCOME (LOSS) ________________________________ ____________________________________ YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ________________________________ ____________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 2000 2001 2002 _____________________________________________________ ______ ______ _______ _________ ________ ________ Beginning balance.................................... $(689) $(803) $ (973) $(41,950) $ 29,885 $132,933 Cumulative effect of accounting change, net of tax... -- -- -- -- 22,205 -- Change during the year............................... (114) (170) (102) 71,835 80,843 107,161 ______ ______ ________ ________ ________ ________ Ending balance....................................... $(803) $(973) $(1,075) $ 29,885 $132,933 $240,094 ====== ====== ======== ======== ======== ========
NOTE 21--COMMITMENTS, CONTINGENCIES AND GUARANTEES The following table summarizes our significant commitments: DECEMBER 31, __________________________ (DOLLARS IN THOUSANDS) 2001 2002 _______________________________________________ ___________ ___________ Commitments to extend credit................... $13,038,761 $12,872,063 Standby letters of credit...................... 2,410,535 2,483,871 Commercial letters of credit................... 271,083 279,653 Commitments to fund principal investments...... 54,598 58,556 Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash-flow requirements. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transaction. The majority of these types of commitments have terms of one year or less. F-88 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 21--COMMITMENTS, CONTINGENCIES AND GUARANTEES (CONTINUED) The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on management's credit assessment of the customer. Principal investments include direct investments in private and public companies and indirect investments in private equity funds. The Company issues commitments to provide equity and mezzanine capital financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately-held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate. The Company has contingent consideration agreements that guarantee additional payments to acquired insurance agencies' shareholders based on the agencies future performance in excess of established revenue and/or earnings before interest, taxes, depreciation and amortization (EBITDA) thresholds. If the insurance agencies' future performance exceeds these thresholds during a three-year period, the Company will be liable to make payments to former shareholders. As of December 31, 2002, the Company has a maximum exposure of $14.7 million for these agreements, which expire December 2005. The Company is fund manager for limited liability corporations issuing low-income housing investments. Low-income housing investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these investments, the Company guarantees the timely completion of projects and delivery of tax benefits throughout the investment term. Guarantees may include a minimum rate of return, the availability of tax credits, and operating deficit thresholds over a ten-year average period. Additionally, the Company receives project completion and tax credit guarantees from the limited liability corporations issuing the investments that reduce the Company's ultimate exposure to loss. As of December 31, 2002, the Company's maximum exposure to loss under these guarantees is limited to a return of investor's capital and minimum investment yield, or $77 million. The Company maintains a reserve of $2.6 million for these guarantees. The Company has rental commitments under long-term operating lease agreements. For detail of these commitments see Note 5. The Company conducts securities lending transactions for institutional customers as a fully disclosed agent, and, at times, indemnifies its customers against counterparty default. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnification was $1,513 million and $1,521 million at December 31, 2001 and 2002, respectively. The market value of the associated collateral was $1,552 million and $1,558 million at December 31, 2001 and 2002, respectively. The Company is subject to various pending and threatened legal actions that arise in the normal course of business. The Company maintains reserves for losses from legal actions that are both probable and estimable. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Company's financial position or results of operations. F-89 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 22--TRANSACTIONS WITH AFFILIATES The Company had, and expects to have in the future, banking transactions and other transactions in the ordinary course of business with BTM and with its affiliates. During 2000, 2001 and 2002, such transactions included, but were not limited to, origination, participation, servicing and remarketing of loans and leases, purchase and sale of acceptances, interest rate derivatives and foreign exchange transactions, funds transfers, custodianships, electronic data processing, investment advice and management, deposits and credit examination, and trust services. In the opinion of management, such transactions were made at prevailing rates, terms, and conditions and do not involve more than the normal risk of collectibility or present other unfavorable features. In addition, some compensation for services rendered to the Company is paid to the expatriate officers from BTM, and reimbursed by the Company to BTM under a service agreement. The Company has guarantees that obligate it to perform if its affiliates are unable to discharge their obligations. These obligations include guarantee of trust preferred securities (see Note 12), commercial paper obligations and leveraged lease transactions. Guarantees issued by the Bank for an affiliate's commercial paper program are done in order to facilitate their sale. As of December 31, 2002, the Bank had a maximum exposure to loss under these guarantees of $1.0 billion, which have an average term of less than one year. The Bank's guarantee is fully collateralized by a pledged deposit. UnionBanCal Corporation guarantees its subsidiaries leveraged lease transactions, which have terms ranging from 15 to 30 years. Following the original funding of the leveraged lease transactions, UnionBanCal Corporation has no material obligation to be satisfied. As of December 31, 2002, UnionBanCal Corporation had a maximum exposure to loss of $33.0 million for these agreements. NOTE 23--BUSINESS SEGMENTS The Company is organized based on the products and services that it offers and operates in four principal areas: o The Community Banking and Investment Services Group offers a range of banking services, primarily to individuals and small businesses, delivered generally through a tri-state network of branches and ATM's. These services include commercial loans, mortgages, home equity lines of credit, consumer loans, deposit services and cash management as well as fiduciary, private banking, investment and asset management services for individuals and institutions, and risk management and insurance products for businesses and individuals. o The Commercial Financial Services Group provides credit and cash management services to large corporate and middle-market companies. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services and selected capital markets products. o The International Banking Group 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. F-90 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 23--BUSINESS SEGMENTS (CONTINUED) The information, set forth in the table on the following page, reflects selected income statement and balance sheet items by business unit. The information presented does not necessarily represent the business units' financial condition and results of operations were they independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to 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 December 31, 2002. Prior to January 1, 2002, most of the goodwill was reflected at the corporate level in "Other." The information in this table is derived from the internal management reporting system used by management to measure the performance of the business segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each business segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to a business segment are assigned to that business. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the business segments based on a predetermined percentage of usage. Under the Company's risk-adjusted return on capital (RAROC) methodology, credit expense is charged to business segments based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks. "Other" is comprised of goodwill amortization for periods prior to January 1, 2002, certain parent company non-bank subsidiaries, the elimination of the fully taxable-equivalent basis amount, the amount of the provision for credit losses (over)/under the RAROC expected loss for the period, the earnings associated with the unallocated equity capital and allowance for credit losses, and the residual costs of support groups. In addition, it includes two units, the Credit Management Group, which manages nonperforming assets, and the Pacific Rim Corporate Group, which offers financial products to Japanese-owned subsidiaries located in the US. On an individual basis, none of the items in "Other" are significant to the Company's business. The business units' results for the prior periods have been restated to reflect changes in the transfer pricing methodology and any reorganization changes that may have occurred. F-91 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 23--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL AND INVESTMENT SERVICES GROUP SERVICES GROUP BANKING GROUP __________________________________ ____________________________ _________________________ YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, __________________________________ ____________________________ _________________________ 2000 2001 2002 2000 2001 2002 2000 2001 2002 __________ __________ __________ ________ ________ ________ _______ _______ ________ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income............... $ 738,709 $ 704,258 $ 797,592 $764,370 $697,533 $656,902 $34,987 $39,498 $ 38,196 Noninterest income................ 412,199 432,012 445,569 173,140 158,459 195,546 60,114 59,022 68,049 __________ __________ __________ ________ ________ ________ _______ _______ ________ Total revenue..................... 1,150,908 1,136,270 1,243,161 937,510 855,992 852,448 95,101 98,520 106,245 Noninterest expense(1)............ 722,525 750,908 790,508 303,210 316,890 347,148 54,299 57,364 63,005 Credit expense (income)........... 48,655 41,725 33,692 120,670 149,522 190,337 7,008 4,424 1,904 __________ __________ __________ ________ ________ ________ _______ _______ ________ Income (loss) before income tax expense (benefit)............... 379,728 343,637 418,961 513,630 389,580 314,963 33,794 36,732 41,336 Income tax expense (benefit)...... 145,246 131,441 160,253 184,172 131,565 101,304 12,926 14,050 15,811 __________ __________ __________ ________ ________ ________ _______ _______ ________ Net income (loss)................. $ 234,482 $ 212,196 $ 258,708 $329,458 $258,015 $213,659 $20,868 $22,682 $ 25,525 ========== ========== ========== ======== ======== ======== ======= ======= ======== Total assets (dollars in millions): $ 9,463 $ 10,376 $ 12,125 $ 18,237 $ 16,342 $ 15,761 $ 1,568 $ 1,365 $ 1,985 ========== ========== ========== ======== ======== ======== ======= ======= ========
GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ____________________________ ____________________________ _________________________________ YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, ____________________________ ____________________________ _________________________________ 2000 2001 2002 2000 2001 2002 2000 2001 2002 ________ _______ ________ _________ ________ ________ __________ __________ __________ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income............... $ (8,850) $16,505 $(18,478) $ 55,224 $ 66,248 $ 87,757 $1,584,440 $1,524,042 $1,561,969 Noninterest income................ (7,083) 19,633 10,104 8,810 47,278 16,708 647,180 716,404 735,976 ________ _______ ________ _________ ________ ________ __________ __________ __________ Total revenue..................... (15,933) 36,138 (8,374) 64,034 113,526 104,465 2,231,620 2,240,446 2,297,945 Noninterest expense(1)............ 15,757 24,064 15,548 34,394 90,948 131,457 1,130,185 1,240,174 1,347,666 Credit expense (income)........... -- 200 200 263,667 89,129 (51,133) 440,000 285,000 175,000 ________ _______ ________ _________ ________ ________ __________ __________ __________ Income (loss) before income tax expense (benefit)............... (31,690) 11,874 (24,122) (234,027) (66,551 24,141 661,435 715,272 775,279 Income tax expense (benefit)...... (12,122) 4,542 (9,227) (108,687) (47,754 (20,765) 221,535 233,844 247,376 ________ _______ ________ _________ ________ ________ __________ __________ __________ Net income (loss)................. $(19,568) $ 7,332 $(14,895) $(125,340) $(18,797 $ 44,906 $ 439,900 $ 481,428 $ 527,903 ======== ======= ======== ========= ======== ======== ========== ========== ========== Total assets (dollars in millions): $ 4,662 $ 6,983 $ 9,086 $ 1,232 $ 973 $ 1,213 $ 35,162 $ 36,039 $ 40,170 ======== ======= ======== ========= ======== ======== ========== ========== ========== __________ (1) "Other" includes restructuring credits of $19.0 million ($11.8 million, net of taxes) for the year ending December 31, 2000.
F-92 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS
DECEMBER 31, __________________________ (DOLLARS IN THOUSANDS) 2001 2002 _________________________________________________________________ __________ __________ ASSETS Cash and cash equivalents...................................... $ 435,513 $ 477,825 Investment in and advances to subsidiaries..................... 3,999,509 4,184,208 Loans.......................................................... 3,556 2,940 Other assets................................................... 25,617 40,080 __________ __________ Total assets................................................. $4,464,195 $4,705,053 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper............................................... $ 99,086 $ 98,507 Other liabilities.............................................. 44,457 53,476 Medium and long-term debt...................................... 399,657 418,360 Junior subordinated debt payable to subsidiary grantor trust................................................ 374,753 376,521 __________ __________ Total liabilities............................................ 917,953 946,864 Shareholders' equity........................................... 3,546,242 3,758,189 __________ __________ Total liabilities and shareholders' equity................... $4,464,195 $4,705,053 ========== ==========
F-93 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ___________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 _______________________________________________________________________________ ________ ________ ________ INCOME: Dividends from bank subsidiary............................................... $283,471 $379,110 $486,300 Dividends from nonbank subsidiaries.......................................... 10,000 7,500 24,399 Interest income on advances to subsidiaries and deposits in bank............. 18,850 17,700 11,909 Other income................................................................. 458 882 188 ________ ________ ________ Total income............................................................... 312,779 405,192 522,796 ________ ________ ________ EXPENSE: Interest expense............................................................. 47,172 35,890 27,443 Other expense, net........................................................... 3,313 4,683 620 ________ ________ ________ Total expense................................................................ 50,485 40,573 28,063 ________ ________ ________ Income before income taxes and equity in undistributed net income of subsidiaries............................................................... 262,294 364,619 494,733 Provision for credit losses.................................................. (25) 6 (1) Income tax benefit........................................................... (11,935) (8,409) (6,108) ________ ________ ________ Income before equity in undistributed net income of subsidiaries............. 274,204 373,034 500,840 Equity in undistributed net income of subsidiaries: Bank subsidiary.............................................................. 138,105 100,361 61,164 Nonbank subsidiaries......................................................... 27,591 8,033 (34,101) ________ ________ ________ NET INCOME..................................................................... $439,900 $481,428 $527,903 ======== ======== ========
F-94 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ____________________________________ (DOLLARS IN THOUSANDS) 2000 2001 2002 ________________________________________________________________________ _________ _________ _________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $ 439,900 $ 481,428 $ 527,903 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries.................. (165,696) (108,394) (27,063) Provision for credit losses......................................... 25 (6) 1 Other, net.......................................................... 7,953 11,357 86,723 _________ _________ _________ Net cash provided by operating activities........................... 282,182 384,385 587,564 _________ _________ _________ CASH FLOWS FROM INVESTING ACTIVITIES: Advances to subsidiaries.............................................. (43,704) (23,967) (23,733) Repayment of advances to subsidiaries................................. 11,903 16,965 29,460 _________ _________ _________ Net cash (used in) provided by investing activities................... (31,801) (7,002) 5,727 _________ _________ _________ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short term borrowings...................... 1,984 (883) (579) Proceeds from issuance of medium-term debt............................ -- 200,000 -- Payments of cash dividends............................................ (162,575) (158,406) (164,440) Repurchase of common stock............................................ (130,642) (107,629) (385,960) Other, net............................................................ 52 (1,323) -- _________ _________ _________ Net cash used in financing activities................................... (291,181) (68,241) (550,979) _________ _________ _________ Net increase (decrease) in cash and due from banks...................... (40,800) 309,142 42,312 Cash and due from banks at beginning of year............................ 167,171 126,371 435,513 _________ _________ _________ Cash and due from banks at end of year.................................. $ 126,371 $ 435,513 $ 477,825 ========= ========= ========= CASH PAID DURING THE YEAR FOR: Interest.............................................................. $ 44,327 $ 33,910 $ 27,665 Income taxes.......................................................... 26,704 (271) 5,901
F-95 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 (CONTINUED) NOTE 25--SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Unaudited quarterly results are summarized as follows:
2001 QUARTERS ENDED __________________________________________________________ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ____________________________________________________________ ________ ________ ________ ________ Interest income............................................. $608,692 $563,121 $536,001 $487,497 Interest expense............................................ 221,431 184,398 157,910 107,530 ________ ________ ________ ________ Net interest income......................................... 387,261 378,723 378,091 379,967 Provision for credit losses................................. 100,000 65,000 50,000 70,000 Noninterest income.......................................... 180,807 168,391 173,405 193,801 Noninterest expense......................................... 307,485 307,452 317,042 308,195 ________ ________ ________ ________ Income before income taxes.................................. 160,583 174,662 184,454 195,573 Income tax expense.......................................... 53,296 57,512 59,325 63,711 ________ ________ ________ ________ Net income.................................................. $107,287 $117,150 $125,129 $131,862 ======== ======== ======== ======== Net income per common share--basic.......................... $ 0.68 $ 0.74 $ 0.79 $ 0.84 ======== ======== ======== ======== Net income per common share--diluted........................ $ 0.67 $ 0.74 $ 0.79 $ 0.84 ======== ======== ======== ======== Dividends per share......................................... $ 0.25 $ 0.25 $ 0.25 $ 0.25 ======== ======== ======== ======== 2002 QUARTERS ENDED __________________________________________________________ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ____________________________________________________________ ________ ________ ________ ________ Interest income............................................. $462,380 $463,203 $463,113 $467,276 Interest expense............................................ 81,940 77,442 71,011 63,610 ________ ________ ________ ________ Net interest income......................................... 380,440 385,761 392,102 403,666 Provision for credit losses................................. 55,000 50,000 40,000 30,000 Noninterest income.......................................... 171,451 188,774 182,426 193,325 Noninterest expense......................................... 323,363 329,791 331,134 363,378 ________ ________ ________ ________ Income before income taxes.................................. 173,528 194,744 203,394 203,613 Income tax expense.......................................... 58,751 64,802 65,163 58,660 ________ ________ ________ ________ Net income.................................................. $114,777 $129,942 $138,231 $144,953 ======== ======== ======== ======== Net income per common share--basic.......................... $ 0.73 $ 0.83 $ 0.89 $ 0.96 ======== ======== ======== ======== Net income per common share--diluted........................ $ 0.73 $ 0.81 $ 0.88 $ 0.95 ======== ======== ======== ======== Dividends per share......................................... $ 0.25 $ 0.28 $ 0.28 $ 0.28 ======== ======== ======== ======== __________ (1) Dividends per share reflect dividends declared on the Company's common stock outstanding as of the declaration date.
F-96 UNIONBANCAL CORPORATION AND SUBSIDIARIES MANAGEMENT STATEMENT The management of UnionBanCal Corporation is responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and, as such, include amounts based on informed judgments and estimates made by management. We maintain a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with US GAAP. Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances. However, management believes that the internal control system provides reasonable assurance that errors or irregularities that could be material to the financial statements would be prevented or detected on a timely basis and corrected through the normal course of business. As of December 31, 2002, management believes that the internal controls are in place and operating effectively. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of our management; it includes members with banking or related financial management expertise and who are not large customers of Union Bank of California, N.A. The Audit Committee has access to outside counsel. The Audit Committee is responsible for recommending to the Board of Directors the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to provide a reasonable basis for concluding that the Audit Committee is carrying out its responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring our financial, accounting, and auditing procedures in addition to reviewing our financial reports. The independent auditors and internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal controls for financial reporting and any other matters which they believe should be brought to the attention of the Audit Committee. The financial statements have been audited by Deloitte & Touche LLP, independent auditors, who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the Board of Directors and committees of the Board. Management believes that all representations made to the independent auditors during their audit were valid and appropriate. The independent auditors' report is presented on the following page. /s/NORIMICHI KANARI _____________________________________ Norimichi Kanari PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/TAKAHARU SAEGUSA _____________________________________ Takaharu Saegusa DEPUTY CHAIRMAN OF THE BOARD /s/DAVID I. MATSON _____________________________________ David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER /s/DAVID A. ANDERSON _____________________________________ David A. Anderson SENIOR VICE PRESIDENT AND CONTROLLER F-97 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of UnionBanCal Corporation: We have audited the accompanying consolidated balance sheets of UnionBanCal Corporation and subsidiaries (the Company) as of December 31, 2001 and 2002, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of UnionBanCal Corporation and subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002 the Company changed its method of accounting for previously recognized goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/DELOITTE & TOUCHE LLP Deloitte & Touche LLP San Francisco, California January 15, 2003 F-98 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, UnionBanCal Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIONBANCAL CORPORATION (Registrant) By: /s/DAVID I. MATSON _____________________________________ David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) Date: July 10, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of UnionBanCal Corporation and in the capacities and on the date indicated below. SIGNATURE TITLE --------- ----- _____________________________________ Director David R. Andrews * _____________________________________ Director L. Dale Crandall * _____________________________________ Director Richard D. Farman II-1 SIGNATURE TITLE --------- ----- * _____________________________________ Director Stanley F. Farrar * _____________________________________ Director Michael J. Gillfillan * _____________________________________ Director Richard C. Hartnack * _____________________________________ Director Kaoru Hayama * _____________________________________ Director Norimichi Kanari _____________________________________ Director Satori Kishi * _____________________________________ Director Monica C. Lozano * _____________________________________ Director Mary S. Metz * _____________________________________ Director Raymond E. Miles * _____________________________________ Director J. Fernando Niebla * _____________________________________ Director Charles R. Rinehart _____________________________________ Director Carl W. Robertson * _____________________________________ Director Takaharu Saegusa II-2 SIGNATURE TITLE --------- ----- * _____________________________________ Director Robert M. Walker _____________________________________ Director Kenji Yoshizawa *By: /s/JOHN H. MCGUCKIN, JR. ____________________________________ John H. McGuckin, Jr. ATTORNEY-IN-FACT Dated: July 10, 2003 II-3 CERTIFICATIONS I, Norimichi Kanari, certify that: 1. I have reviewed this amended annual report on Form 10-K/A (the "annual report") of UnionBanCal Corporation (the Registrant); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ NORIMICHI KANARI _____________________________________ Norimichi Kanari PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: July 10, 2003 (Principal Executive Officer) II-4 I, David I. Matson, certify that: 1. I have reviewed this amended annual report on Form 10-K/A (the "annual report") of UnionBanCal Corporation (the Registrant); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ DAVID I. MATSON _____________________________________ David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Date: July 10, 2003 (Principal Financial Officer) II-5