10-Q 1 0001.txt THIRD QUARTER 2000 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q ----------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 0-28118 ----------- UnionBanCal Corporation State of Incorporation: I.R.S. Employer Identification No. California 94-1234979 400 California Street San Francisco, California 94104-1476 Registrant's telephone number (415) 765-2969 ----------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Number of shares of Common Stock outstanding at October 31, 2000: 159,927,344
UNIONBANCAL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PAGE NUMBER ------ PART I FINANCIAL INFORMATION Consolidated Financial Highlights.................................................... 2 Item 1. Financial Statements: Condensed Consolidated Statements of Income....................................... 4 Condensed Consolidated Balance Sheets............................................. 5 Condensed Consolidated Statements of Changes in Shareholders' Equity.............. 6 Condensed Consolidated Statements of Cash Flows................................... 7 Notes to Condensed Consolidated Financial Statements.............................. 8 Item 2. Management's Discussion and Analysis: Introduction...................................................................... 14 Summary........................................................................... 14 Mission Excel..................................................................... 17 Business Segments................................................................. 18 Net Interest Income............................................................... 26 Noninterest Income................................................................ 29 Noninterest Expense............................................................... 31 Income Tax Expense................................................................ 32 Loans............................................................................. 32 Cross-Border Outstandings......................................................... 33 Provision for Credit Losses....................................................... 34 Allowance for Credit Losses....................................................... 34 Nonperforming Assets.............................................................. 39 Loans 90 Days or More Past Due and Still Accruing................................. 39 Asset Quality Trends.............................................................. 39 Liquidity......................................................................... 40 Regulatory Capital................................................................ 40 Forward-looking Statements........................................................ 41 Item 3. Market Risk.................................................................. 45 PART II OTHER INFORMATION Item 4. Other Information............................................................ 46 Item 5. Exhibits and Reports on Form 8-K............................................. 46 Signatures........................................................................... 47
UnionBanCal Corporation and Subsidiaries Consolidated Financial Highlights (Unaudited) PERCENT CHANGE TO AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 FROM: ------------------------------------------- ------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SEPTEMBER 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, ---------------------------------- 1999 2000 2000 1999 2000 SHARE DATA) ------------- ----------- ------------- ------------- -------- ---------------------------------- RESULTS OF OPERATIONS: Net interest income(1)......... $ 360,760 $ 396,929 $ 404,626 12.16% 1.94% Provision for credit losses.... 20,000 70,000 80,000 300.00 14.29 Noninterest income............. 148,349 173,070 168,928 13.87 (2.39) Noninterest expense, excluding restructuring charge (credit) 299,298 290,319 291,378 (2.65) 0.36 Restructuring charge (credit).. 85,000 (8,000) - nm nm ----------- ----------- ----------- Income before income taxes(1).. 104,811 217,680 202,176 92.90 (7.12) Taxable-equivalent adjustment.. 747 637 641 (14.19) 0.63 Income tax expense............. 32,483 75,628 69,959 115.37 (7.50) ----------- ----------- ----------- Net income..................... $ 71,581 $ 141,415 $ 131,576 83.81% (6.96)% =========== =========== =========== PER COMMON SHARE: Net income-basic............... $ 0.43 $ 0.87 $ 0.82 90.70% (5.75)% Net income-diluted............. 0.43 0.87 0.82 90.70 (5.75) Dividends(2)................... 0.19 0.25 0.25 31.58 - Book value (end of period)..... 17.72 19.42 20.13 13.60 3.66 Common shares outstanding (end 164,624,258 161,604,417 160,112,869 (2.74) (0.92) of period).................. Weighted average common shares 164,616,369 162,231,696 160,759,916 (2.34) (0.91) outstanding-basic........... Weighted average common shares 165,472,346 162,660,994 161,014,901 (2.69) (1.01) outstanding-diluted......... BALANCE SHEET (END OF PERIOD): Total assets................... $ 32,518,035 $ 33,895,037 $ 33,745,489 3.77% (0.44)% Total loans.................... 25,185,682 26,373,044 26,157,939 3.86 (0.82) Nonaccrual loans............... 154,900 203,201 282,999 82.70 39.27 Nonperforming assets........... 158,257 228,981 299,795 89.44 30.93 Total deposits................. 25,175,921 25,733,981 25,894,059 2.85 0.62 Trust preferred securities..... 350,000 350,000 350,000 - - Common equity.................. 2,917,583 3,138,690 3,222,770 10.46 2.68 BALANCE SHEET (PERIOD AVERAGE): Total assets................... $ 32,038,792 $ 33,846,445 $ 33,690,070 5.15% (0.46)% Total loans.................... 25,152,550 26,441,412 26,454,975 5.18 0.05 Earning assets................. 29,007,215 30,575,062 30,399,146 4.80 (0.58) Total deposits................. 23,926,472 25,476,764 25,402,036 6.17 (0.29) Common equity.................. 2,929,140 3,085,227 3,185,167 8.74 3.24 FINANCIAL RATIOS: Return on average assets(3).... 0.89% 1.68% 1.55% Return on average common equity(3)................... 9.70 18.44 16.43 Efficiency ratio(4)............ 75.62 49.52 50.80 Net interest margin(1)......... 4.93 5.21 5.30 Dividend payout ratio.......... 44.19 28.74 30.49 Tangible equity ratio.......... 8.78 9.13 9.41 Tier 1 risk-based capital ratio 9.94 10.23 10.52 Total risk-based capital ratio. 11.81 12.05 12.35 Leverage ratio................. 10.06 10.26 10.47 Allowance for credit losses to total loans................. 1.82 1.90 2.01 Allowance for credit losses to nonaccrual loans............ 295.31 246.42 185.83 Net loans charged off to average total loans]................ 0.21 0.80 0.82 Nonperforming assets to total loans, foreclosed assets, and distressed loans held for sale 0.63 0.87 1.15 Nonperforming assets to total assets...................... 0.49 0.68 0.89 ----------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense (income) was $(0.7) million in the third quarter of 1999, and none in the second and third quarters of 2000. nm = not meaningful
2
UnionBanCal Corporation and Subsidiaries Consolidated Financial Highlights (Continued) (Unaudited) SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 CHANGE -------------------------------------------------------------------------- ------------ ------------ -------- RESULTS OF OPERATIONS: Net interest income(1).................................................... $ 1,049,485 $ 1,187,732 13.17% Provision for credit losses............................................... 35,000 190,000 442.86 Noninterest income........................................................ 432,455 494,008 14.23 Noninterest expense, excluding restructuring charge (credit).............. 905,690 848,735 (6.29) Restructuring charge (credit)............................................. 85,000 (19,000) nm ------------ ------------ Income before income taxes(1)............................................. 456,250 662,005 45.10 Taxable-equivalent adjustment............................................. 2,488 1,933 (22.31) Income tax expense........................................................ 148,959 228,610 53.47 ------------ ------------ Net income................................................................ $ 304,803 $ 431,462 41.55% ============ ============ PER COMMON SHARE: Net income-basic.......................................................... $ 1.83 $ 2.66 45.36% Net income-diluted........................................................ 1.82 2.65 45.60 Dividends(2).............................................................. 0.57 0.75 31.58 Book value (end of period)................................................ 17.72 20.13 13.60 Common shares outstanding (end of period)................................. 164,624,258 160,112,869 (2.74) Weighted average common shares outstanding-basic.......................... 166,983,654 162,259,396 (2.83) Weighted average common shares outstanding-diluted........................ 167,698,656 162,674,610 (3.00) BALANCE SHEET (END OF PERIOD): Total assets.............................................................. $ 32,518,035 $ 33,745,489 3.77% Total loans............................................................... 25,185,682 26,157,939 3.86 Nonaccrual loans.......................................................... 154,900 282,999 82.70 Nonperforming assets...................................................... 158,257 299,795 89.44 Total deposits............................................................ 25,175,921 25,894,059 2.85 Trust preferred securities................................................ 350,000 350,000 - Common equity............................................................. 2,917,583 3,222,770 10.46 BALANCE SHEET (PERIOD AVERAGE): Total assets.............................................................. $ 31,910,097 $ 33,520,179 5.05% Total loans............................................................... 24,765,902 26,303,921 6.21 Earning assets............................................................ 28,832,723 30,267,580 4.98 Total deposits............................................................ 23,529,262 25,320,107 7.61 Common equity............................................................. 2,931,922 3,095,375 5.57 FINANCIAL RATIOS: Return on average assets]................................................. 1.28% 1.72% Return on average common equity].......................................... 13.90 18.62 Efficiency ratio]......................................................... 66.94 49.34 Net interest margin]...................................................... 4.86 5.23 Dividend payout ratio..................................................... 31.15 28.20 Tangible equity ratio..................................................... 8.78 9.41 Tier 1 risk-based capital ratio........................................... 9.94 10.52 Total risk-based capital ratio............................................ 11.81 12.35 Leverage ratio............................................................ 10.06 10.47 Allowance for credit losses to total loans................................ 1.82 2.01 Allowance for credit losses to nonaccrual loans........................... 295.31 185.83 Net loans charged off to average total loans]............................. 0.20 0.68 Nonperforming assets to total loans, foreclosed assets, and distressed 0.63 1.15 loans held for sale.................................................... Nonperforming assets to total assets...................................... 0.49 0.89 ----------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense (income) was $(1.3) million in the first nine months of 1999 and none for the first nine months of 2000. nm = not meaningful
3 ITEM 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- -------------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 1999 2000 -------------------------------------------------------------------- --------- -------- ---------- ---------- INTEREST INCOME Loans............................................................... $491,239 $576,567 $1,416,805 $1,675,900 Securities.......................................................... 50,820 55,706 161,851 162,689 Interest bearing deposits in banks.................................. 2,786 2,775 9,042 7,522 Federal funds sold and securities purchased under resale agreements. 2,345 1,263 5,237 6,364 Trading account assets.............................................. 3,087 4,170 9,489 12,205 --------- -------- ---------- ---------- Total interest income............................................ 550,277 640,481 1,602,424 1,864,680 --------- -------- ---------- ---------- INTEREST EXPENSE Domestic deposits................................................... 114,345 144,406 331,227 410,625 Foreign deposits.................................................... 18,233 25,506 52,046 76,872 Federal funds purchased and securities sold under repurchase agreements....................................................... 16,493 26,994 57,368 72,383 Commercial paper.................................................... 19,572 26,072 56,766 71,004 Subordinated capital notes.......................................... 4,240 4,060 12,385 13,997 UnionBanCal Corporation - obligated mandatorily redeemable preferred securities of subsidiary grantor trust........................... 7,093 6,414 17,476 19,788 Other borrowed funds................................................ 10,288 3,044 28,159 14,212 --------- -------- ---------- ---------- Total interest expense......................................... 190,264 236,496 555,427 678,881 --------- -------- ---------- ---------- NET INTEREST INCOME................................................. 360,013 403,985 1,046,997 1,185,799 Provision for credit losses......................................... 20,000 80,000 35,000 190,000 --------- -------- ---------- ---------- Net interest income after provision for credit losses.......... 340,013 323,985 1,011,997 995,799 --------- -------- ---------- ---------- NONINTEREST INCOME Service charges on deposit accounts................................. 45,401 53,779 127,981 153,987 Trust and investment management fees................................ 36,353 39,975 102,607 116,163 Merchant transaction processing fees................................ 18,598 19,354 51,256 54,887 International commissions and fees.................................. 17,475 18,012 53,186 53,463 Merchant banking fees............................................... 10,946 15,353 27,561 40,681 Brokerage commissions and fees...................................... 7,148 8,616 18,825 27,309 Securities gains, net............................................... 2,004 3,104 3,899 8,804 Other............................................................... 10,424 10,735 47,140 38,714 --------- -------- ---------- ---------- Total noninterest income....................................... 148,349 168,928 432,455 494,008 --------- -------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits...................................... 165,458 152,227 500,140 444,483 Net occupancy....................................................... 22,895 24,664 67,273 69,358 Equipment........................................................... 19,389 15,702 49,405 47,706 Merchant transaction processing..................................... 12,905 12,784 37,773 37,144 Communications...................................................... 10,666 11,736 31,217 33,048 Professional services............................................... 8,440 10,760 29,426 29,278 Data processing..................................................... 7,797 8,577 23,459 26,199 Foreclosed asset expense (income)................................... (703) (14) (1,256) 7 Restructuring charge (credit)....................................... 85,000 - 85,000 (19,000) Other............................................................... 52,451 54,942 168,253 161,512 --------- -------- ---------- ---------- Total noninterest expense...................................... 384,298 291,378 990,690 829,735 --------- -------- ---------- ---------- Income before income taxes.......................................... 104,064 201,535 453,762 660,072 Income tax expense.................................................. 32,483 69,959 148,959 228,610 --------- -------- ---------- ---------- NET INCOME.......................................................... $ 71,581 $131,576 $ 304,803 $ 431,462 ========= ======== ========== ========== NET INCOME PER COMMON SHARE-BASIC................................... $ 0.43 $ 0.82 $ 1.83 $ 2.66 ========= ======== ========== ========== NET INCOME PER COMMON SHARE-DILUTED................................. $ 0.43 $ 0.82 $ 1.82 $ 2.65 ========= ======== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-BASIC.................... 164,616 160,760 166,984 162,259 ========= ======== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-DILUTED.................. 165,472 161,015 167,699 162,675 ========= ======== ========== ========== See accompanying notes to condensed consolidated financial statements.
4
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1999 1999 2000 -------------------------------------------------------------------- ----------- ----------- ----------- ASSETS Cash and due from banks............................................. $ 2,209,694 $ 2,141,964 $ 2,133,958 Interest bearing deposits in banks.................................. 194,535 182,719 142,106 Federal funds sold and securities purchased under resale agreements. 371,523 833,450 236,600 ----------- ----------- ----------- Total cash and cash equivalents.................................. 2,775,752 3,158,133 2,512,664 Trading account assets.............................................. 245,762 179,935 224,063 Securities available for sale....................................... 3,096,494 3,210,099 3,588,360 Securities held to maturity (market value: September 30, 1999, $86,611; December 31, 1999, $45,376; September 30, 2000, $23,469) 87,221 46,526 24,173 Loans (net of allowance for credit losses: September 30, 1999, $457,429; December 31, 1999, $470,378; September 30, 2000, $525,896)........................................................ 24,728,253 25,442,580 25,632,043 Due from customers on acceptances................................... 272,009 259,340 255,325 Premises and equipment, net......................................... 437,083 425,021 426,166 Other assets........................................................ 875,461 963,142 1,082,695 ----------- ----------- ----------- Total assets..................................................... $32,518,035 $33,684,776 $33,745,489 =========== =========== =========== LIABILITIES Domestic deposits: Noninterest bearing................................................. $ 9,484,156 $ 9,395,925 $ 9,971,158 Interest bearing.................................................... 13,667,733 14,274,310 13,723,799 Foreign deposits: Noninterest bearing................................................. 270,765 325,415 288,612 Interest bearing.................................................... 1,753,267 2,260,957 1,910,490 ----------- ----------- ----------- Total deposits................................................... 25,175,921 26,256,607 25,894,059 Federal funds purchased and securities sold under repurchase agreements....................................................... 651,170 1,156,799 1,234,541 Commercial paper.................................................... 1,479,939 1,108,258 1,471,815 Other borrowed funds................................................ 629,891 540,496 274,348 Acceptances outstanding............................................. 272,009 259,340 255,325 Other liabilities................................................... 743,522 727,808 842,631 Subordinated capital notes.......................................... 298,000 298,000 200,000 UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust........................... 350,000 350,000 350,000 ----------- ----------- ----------- Total liabilities................................................ 29,600,452 30,697,308 30,522,719 ----------- ----------- ----------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares, no shares issued or outstanding as of September 30, 1999, December 31, 1999, and September 30, 2000.... - - - Common stock-no stated value: Authorized 300,000,000 shares, issued 164,624,258 shares as of September 30, 1999, 164,282,622 shares as of December 31, 1999, and 160,112,869 shares as of September 30, 2000.................. 1,416,680 1,404,155 1,294,893 Retained earnings................................................... 1,528,546 1,625,263 1,936,827 Accumulated other comprehensive income (loss)....................... (27,643) (41,950) (8,950) ----------- ----------- ----------- Total shareholders' equity....................................... 2,917,583 2,987,468 3,222,770 ----------- ----------- ----------- Total liabilities and shareholders' equity....................... $32,518,035 $33,684,776 $33,745,489 =========== =========== =========== See accompanying notes to condensed consolidated financial statements.
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------- (DOLLARS IN THOUSANDS) 1999 2000 ----------------------------------------------------------------- -------------------------- ----------------------- COMMON STOCK Balance, beginning of period..................................... $1,725,619 $1,404,155 Dividend reinvestment plan....................................... 39 39 Deferred compensation-restricted stock awards.................... (78) 247 Stock options exercised.......................................... 2,638 1,652 Common stock repurchased......................................... (311,538) (111,200) ---------- ---------- Balance, end of period........................................... $1,416,680 $1,294,893 ---------- ---------- RETAINED EARNINGS Balance, beginning of period..................................... $1,314,915 $1,625,263 Net income....................................................... 304,803 $304,803 431,462 $431,462 Dividends on common stock(1)..................................... (93,820) (121,402) Deferred compensation - restricted stock awards.................. 2,648 1,504 ---------- ---------- Balance, end of period........................................... $1,528,546 $1,936,827 ---------- ---------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of period..................................... $ 17,710 $ (41,950) Unrealized holding (losses) gains arising during the period on securities available for sale, net of tax (benefit) expense of $(26,878) and $23,587 in the first nine months of 1999 and 2000, respectively............................................ (43,391) 38,078 Less: reclassification adjustment for gains on securities available for sale included in net income, net of tax expense of $1,491 and $3,368 in the first nine months of 1999 and 2000, respectively (2,408) (5,436) -------- -------- Net unrealized (losses) gains on securities available for sale... (45,799) 32,642 Foreign currency translation adjustment, net of tax benefit (expense) of $138 and $(222) in the first nine months of 1999 and 2000, respectively........................................ (223) 358 Minimum pension liability adjustment, net of tax expense of $373 in the first nine months of 1999.............................. 669 - -------- -------- Other comprehensive (loss) income................................ (45,353) (45,353) 33,000 33,000 ---------- -------- ---------- -------- Total comprehensive income....................................... $259,450 $464,462 ======== ======== Balance, end of period........................................... $ (27,643) $ (8,950) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY.................................... $2,917,583 $3,222,770 ========== ========== ----------- (1) Dividends per share were $0.57 and $0.75 for the first nine months of 1999 and 2000, respectively. Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date. See accompanying notes to condensed consolidated financial statements.
6
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------- (DOLLARS IN THOUSANDS) 1999 2000 --------------------------------------------------------------------------------------------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................................... $ 304,803 $ 431,462 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses............................................................... 35,000 190,000 Depreciation, amortization and accretion.................................................. 58,424 53,862 Provision for deferred income taxes....................................................... (17,555) (28,431) Gain on sales of securities available for sale............................................ (3,899) (8,804) Utilization (in excess of) less than restructuring charge/credit.......................... 82,577 (46,772) Net decrease (increase) in trading account assets......................................... 21,956 (44,128) Other, net................................................................................ (203,053) 56,786 ----------- ------------ Total adjustments....................................................................... (26,550) 172,513 ----------- ------------ Net cash provided by operating activities.................................................... 278,253 603,975 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale......................................... 203,084 393,869 Proceeds from matured and called securities available for sale............................... 636,916 725,459 Purchases of securities available for sale................................................... (364,440) (1,434,439) Proceeds from matured and called securities held to maturity................................. 73,475 22,359 Net increase in loans........................................................................ (956,464) (390,627) Other, net................................................................................... (67,867) (46,486) ----------- ------------ Net cash used in investing activities................................................... (475,296) (729,865) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits.......................................................... 668,042 (362,548) Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements................................................................................ (656,574) 77,742 Net increase in commercial paper and other borrowed funds.................................... 333,920 97,409 Common stock repurchased..................................................................... (311,538) (111,200) Proceeds from issuance of trust preferred securities......................................... 350,000 - Repayment of subordinated debt............................................................... - (98,000) Payments of cash dividends................................................................... (95,840) (122,556) Other, net................................................................................... 2,454 2,049 ----------- ------------ Net cash provided by (used in) financing activities..................................... 290,464 (517,104) ----------- ------------ Net increase (decrease) in cash and cash equivalents......................................... 93,421 (642,994) Cash and cash equivalents at beginning of period............................................. 2,678,478 3,158,133 Effect of exchange rate changes on cash and cash equivalents................................. 3,853 (2,475) ----------- ------------ Cash and cash equivalents at end of period................................................... $ 2,775,752 $ 2,512,664 =========== ============ CASH PAID DURING THE PERIOD FOR: Interest..................................................................................... $ 508,921 $ 667,649 Income taxes................................................................................. 75,180 179,581 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to foreclosed assets (OREO) and distressed loans held for sale............. $ 5,039 $ 21,875 Dividends declared but unpaid................................................................ 31,279 40,018 See accompanying notes to condensed consolidated financial statements.
7 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) NOTE 1-BASIS OF PRESENTATION AND NATURE OF OPERATIONS The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission. However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. The results of operations for the period ended September 30, 2000 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 1999. The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. On March 3, 1999, the Company completed a secondary offering of 28.75 million shares of its Common Stock owned by The Bank of Tokyo-Mitsubishi, Ltd. (BTM). The Company received no proceeds from this transaction. Concurrent with the secondary offering, the Company repurchased 8.6 million shares of its outstanding Common Stock from BTM and 2.1 million shares owned by Meiji Life Insurance Company with $311 million of the net proceeds from the issuance of $350 million of 7 3/8 percent redeemable preferred securities that occurred on February 19, 1999. The Company completed the repurchase of $100 million in common stock between December 1999 and July 2000, under a stock repurchase plan authorized in November 1999. In July 2000, the Company announced an additional $100 million stock repurchase plan. The amount purchased under the new plan as of September 30, 2000 was $32.5 million. 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. Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. NOTE 2-RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. SFAS No. 133 requires that derivative instruments used to hedge be identified specifically to assets, liabilities, firm commitments or anticipated transactions and measured as to effectiveness and ineffectiveness when hedging changes in fair value or cash flows. Derivative instruments that do not qualify as either a fair value or cash flow hedge will be valued at fair value with the resultant gain or loss recognized in current earnings. Changes in the effective portion of fair value hedges will be recognized in current earnings along with the change in fair value of the hedged item. Changes in the effective portion of the fair 8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) NOTE 2-RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) value of cash flow hedges will be recognized in other comprehensive income until realization of the cash flows of the hedged item through current earnings. Any ineffective portion of hedges will be recognized in current earnings. In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133", to defer for one year the effective date of implementation of SFAS No. 133. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activity. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years beginning after June 15, 2000, with earlier application encouraged. The Company's hedging strategies are primarily related to hedges of cash flows from variable rate loans. The impact on net income and other comprehensive income is not expected to be material. The Company may also be impacted by the outcome of several issues, which have not yet been resolved by the FASB. However, management does not believe that the resolution of these issues will have a material impact on the Company's financial position or its net income. The Company will adopt SFAS No. 133 on January 1, 2001. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125. The Statement revises the standards for accounting for the securitization and other transfers of financial assets and collateral, and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral this Statement is effective for fiscal years ending after December 15, 2000. SFAS No. 140 must be applied prospectively. Management believes that adopting SFAS No. 140 will not have a material impact on the Company's financial position or results of operation. NOTE 3-EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options are a common stock equivalent. The following table presents a reconciliation of basic and diluted EPS for the three months and nine months ended September 30, 1999 and 2000:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- ------------------------------------------------ (AMOUNTS IN THOUSANDS, 1999 2000 1999 2000 ----------------------- ---------------------- ---------------------- ---------------------- --------------------- EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED ----------------------- -------- -------- -------- -------- -------- -------- -------- -------- Net Income............ $ 71,581 $ 71,581 $131,576 $131,576 $304,803 $304,803 $431,462 $431,462 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding........ 164,616 164,616 160,760 160,760 166,984 166,984 162,259 162,259 Additional shares due to: Assumed conversion of dilutive stock options... - 856 - 255 - 715 - 415 -------- -------- -------- -------- -------- -------- -------- -------- Adjusted weighted average common shares outstanding. 164,616 165,472 160,760 161,015 166,984 167,699 162,259 162,675 ======== ======== ======== ======== ======== ======== ======== ======== Net income per share.. $ 0.43 $ 0.43 $ 0.82 $ 0.82 $ 1.83 $ 1.82 $ 2.66 $ 2.65 ======== ======== ======== ======== ======== ======== ======== ========
9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) NOTE 4-COMPREHENSIVE INCOME The following table presents a summary of the components of accumulated other comprehensive income (loss):
NET UNREALIZED MINIMUM ACCUMULATED GAINS (LOSSES) ON FOREIGN PENSION OTHER SECURITIES AVAILABLE CURRENCY LIABILITY COMPREHENSIVE FOR SALE TRANSLATION ADJUSTMENT INCOME --------------------- ------------------- ------------------ --------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1999 2000 1999 2000 1999 2000 1999 2000 ------------------------------ -------- -------- ------- ------- ------- ------- -------- -------- Beginning balance............. $ 29,109 $(32,548) $(9,651) $(8,713) $(1,748) $(689) $ 17,710 $(41,950) Change during the period...... (45,799) 32,642 (223) 358 669 - (45,353) 33,000 -------- -------- ------- ------- ------- ----- -------- -------- Ending balance................ $(16,690) $ 94 $(9,874) $(8,355) $(1,079) $(689) $(27,643) $ (8,950) ======== ======== ======= ======= ======= ===== ======== ========
NOTE 5-BUSINESS SEGMENTS The Company is organized based on the products and services that it offers and operates in four principal areas: o The Community Banking and Investment Services Group offers a full range of banking services, primarily to individuals and small businesses, delivered through a tri-state network of branches and ATM's. These services include commercial loans, mortgages and home equity lines of credit, consumer loans, deposit services and cash management as well as fiduciary, private banking, investment and asset management services for individuals and institutions. o The Commercial Financial Services Group primarily provides tailored credit and cash management services to large corporate and middle market companies. Services include commercial loans, asset based lending, commercial real estate lending, leasing and a comprehensive product array of deposit and cash management services. o The International Banking Group provides trade-finance products to banks, and extends primarily short-term credit to corporations engaged in international business. The group's revenue predominately relates to foreign customers. o The Global Markets Group manages the Company's securities portfolio, trading operations, wholesale funding needs, and interest rate and liquidity risk. The information set forth in the following table reflects selected income statement items and a selected balance sheet item by business unit. The information presented does not necessarily represent the business units' financial condition and results of operations as if they were independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. The information in this table is derived from the internal management reporting system used by management to measure the performance of the segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds 10 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) NOTE 5-BUSINESS SEGMENTS (CONTINUED) transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to a segment are assigned to that business, other than restructuring charges (credits). Indirect costs, such as overhead, operations, and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Under the Company's risk-adjusted return on capital (RAROC) methodology, credit expense is charged to businesses based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks. "Other" is comprised of goodwill, certain parent company non-bank subsidiaries, the elimination of the fully taxable-equivalent amounts, the allowance and related provision for credit losses in excess of that ascribed through the Company's RAROC methodology, the net impact of transfer pricing, the earnings associated with the unallocated equity capital, and the residual costs of support groups, as well as certain other non-recurring items such as restructuring charges (credits) and merger and integration expenses. In addition, it includes two units, the Credit Management Group, which manages nonperforming assets, and the Pacific Rim Group, which offers financial products to Japanese-owned subsidiaries located in the U.S. On an individual basis, none of the business units in "Other" are significant to the Company's business.
COMMUNITY BANKING AND COMMERCIAL INVESTMENT FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP ---------------------- ------------------------ --------------------- AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 --------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)................................... $273,472 $295,226 $186,500 $226,896 $ 23,812 $ 22,637 Net income......................................... $ 42,317 $ 63,069 $ 57,296 $ 77,394 $ 4,681 $ 4,217 Total assets at period end (dollars in millions)... $ 9,350 $ 9,118 $ 16,612 $ 18,444 $ 1,516 $ 1,369 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ---------------------- ------------------------ --------------------- AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 --------- --------- --------- --------- --------- --------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)................................. $ 16,520 $ 15,107 $ 8,058 $ 13,047 $508,362 $572,913 Net income....................................... $ 7,179 $ 6,924 $(39,892) $(20,028) $ 71,581 $131,576 Total assets at period end (dollars in millions). $ 3,447 $ 3,960 $ 1,593 $ 854 $ 32,518 $ 33,745 ----------- (1) Total revenue is comprised of net interest income and noninterest income
11 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) NOTE 5-BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING COMMERCIAL AND INVESTMENT FINANCIAL INTERNATIONAL SERVICES SERVICES BANKING GROUP GROUP GROUP -------------------- ---------------------- ----------------------- AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- --------- ---------- ---------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)................................... $783,456 $863,254 $532,331 $674,663 $ 76,046 $ 70,916 Net income......................................... $106,896 $180,051 $155,576 $234,213 $ 15,315 $ 14,375 Total assets at period end (dollars in millions)... $ 9,350 $ 9,118 $ 16,612 $ 18,444 $ 1,516 $ 1,369 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION -------------------- ---------------------- ----------------------- AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- --------- ---------- ---------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)................................. $59,220 $24,545 $ 28,399 $ 46,429 $1,479,452 $1,679,807 Net income....................................... $26,107 $ 7,897 $ 909 $ (5,074) $ 304,803 $ 431,462 Total assets at period end (dollars in millions). $ 3,447 $ 3,960 $ 1,593 $ 854 $ 32,518 $ 33,745 ----------- (1) Total revenue is comprised of net interest income and noninterest income
NOTE 6-RESTRUCTURING CHARGE (CREDIT) A restructuring charge of $85 million was recorded in the third quarter of 1999. The restructuring charge was incurred in connection with a company-wide project referred to as "Mission Excel". Mission Excel is an initiative to slow the growth rate of expenses, increase sustainable growth in revenues, and increase productivity through elimination of unnecessary or duplicate functions. The restructuring charge included only direct and incremental costs associated with the program. The total cumulative reduction to the restructuring charge is $19.0 million, the same as reported at June 30, 2000. The reductions made in the prior quarters were primarily related to the severance portion of the reserve, reflecting continuing changes in attrition assumptions. Management believes that the current strength of the California economy resulted in markedly higher attrition rates than the Company had anticipated. At the end of the third quarter of 2000, the number of employees remaining to be severed under the plan is not expected to significantly change. 12 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 (UNAUDITED) NOTE 6-RESTRUCTURING CHARGE (CREDIT) (CONTINUED) The table below provides details of the restructuring related liability.
OCCUPANCY (DOLLARS IN THOUSANDS) PERSONNEL AND OTHER TOTAL ----------------------------------------------------------------- --------- --------- -------- Balances at December 31, 1999.................................... $59,525 $9,834 $69,359 Less: Cash............................................................. 21,646 6,114 27,760 Noncash.......................................................... - 11 11 -------- ------- -------- Total utilization............................................. 21,646 6,125 27,771 Restructuring credit............................................. 18,000 1,000 19,000 -------- ------- -------- Balances at September 30, 2000................................... $19,879 $2,709 $22,588 ======== ======= ========
Personnel expense consists of severance and related benefits to be paid under the Company's enhanced severance plan. The Company expects to sever approximately 800 employees under the plan of which 663 employees have been terminated as of September 30, 2000. Occupancy and other consists of lease termination costs and the cost of professional services incurred during the assessment phase of the project. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED. FOR A DISCUSSION OF FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER, PLEASE SEE THE DISCUSSION CONTAINED HEREIN ON PAGE 41 AND IN OUR PUBLICLY AVAILABLE SECURITIES AND EXCHANGE COMMISSION FILINGS AND PRESS RELEASES. INTRODUCTION We are a California-based commercial bank holding company with consolidated assets of $33.7 billion at September 30, 2000. Our wholly-owned subsidiary, Union Bank of California, N.A., is the third largest commercial bank in California, based on total assets and total deposits in California, and one of the 30 largest commercial banks in the United States. At September 30, 2000, we operated 242 banking offices in California, 6 banking offices in Oregon and Washington, and 18 overseas facilities. At September 30, 2000, we were 66 percent owned by The Bank of Tokyo-Mitsubishi, Ltd. and 34 percent owned by other shareholders. Our interim financial information should be read in conjunction with our Form 10-K for the year ended December 31, 1999. Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. SUMMARY To facilitate the discussion of the results of operations, the following table includes certain pro forma earnings disclosures and ratios. These presentations supplement the Condensed Consolidated Statements of Income on page 4, which are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), primarily with respect to the treatment of the restructuring charge recorded in the third quarter of 1999 and the restructuring credits, which were recorded in the first and second quarters of 2000, as well as reflecting the taxable equivalent adjustment. Management believes that it is meaningful to understand the operating results and trends excluding these credits and, therefore, has included information in this table and in management's discussion and analysis (MD&A) which follows, that presents income excluding these items and related pro forma ratio and per share calculations. 14 These pro forma earnings have not been adjusted for any other non-recurring items that may impact our ratios or trends.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ----------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 1999 2000 --------------------------------------------- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES............................................ $ 104,811 $ 202,176 $ 456,250 $ 662,005 Restructuring charge/credits....................................... 85,000 - 85,000 (19,000) Taxable equivalent adjustment...................................... (747) (641) (2,488) (1,933) Income tax expense(1).............................................. (62,298) (69,959) (178,774) (221,452) --------- --------- ---------- ---------- PRO FORMA EARNINGS.................................................... $ 126,766 $ 131,576 $ 359,988 $ 419,620 ========= ========= ========== ========== PER COMMON SHARE, EXCLUDING RESTRUCTURING CHARGE/CREDITS Pro forma earnings (basic)......................................... $ 0.77 $ 0.82 $ 2.16 $ 2.59 Pro forma earnings (diluted)....................................... 0.77 0.82 2.15 2.58 SELECTED FINANCIAL RATIOS, EXCLUDING RESTRUCTURING CHARGE/CREDITS Pro forma return on average assets................................. 1.57% 1.55% 1.51% 1.67% Pro forma return on average common equity.......................... 17.17 16.43 16.42 18.11 Pro forma efficiency ratio(2)...................................... 58.93 50.80 61.20 50.47 Pro forma dividend payout ratio.................................... 24.68 30.49 26.39 28.96 ----------- (1) Excludes an income tax benefit of $29.815 million in the three and nine months ending September 30, 1999 related to the restructuring charge recorded in the third quarter of 1999 and an income tax expense of $7.159 million for the nine months ending September 30, 2000 related to restructuring reserve credits recorded in the first and second quarters of the year 2000. (2) The pro forma efficiency ratio is noninterest expense, excluding foreclosed asset income and restructuring charge/credits, as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense/(income) was $(0.703) million and $(0.014) million for the third quarter of 1999 and 2000, respectively, and ($1.256) million and $0.007 million for the first nine months of 1999 and 2000, respectively.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 Reported net income was $131.6 million, or $0.82 per diluted common share, in the third quarter of 2000 compared with $71.6 million, or $0.43 per diluted common share, in the third quarter of 1999. Return on average assets was 1.55 percent for the quarter ending September 30, 2000, compared with 0.89 percent for the same period in 1999, and return on average common equity was 16.43 percent for the quarter ending September 30, 2000, compared with 9.70 percent for the same period in 1999. Pro forma earnings were $131.6 million or $0.82 per diluted common share in the third quarter of 2000 compared to $126.8 million or $0.77 per diluted common share in the same period of 1999, excluding a restructuring charge of $85.0 ($55.2 million, net of tax) million recognized in the third quarter of 1999. In the third quarter of 2000, our pro forma return on average assets decreased to 1.55 percent from 1.57 percent a year earlier, and our pro forma return on average common equity decreased to 16.43 percent from 17.17 percent a year earlier. Major factors affecting the pro forma earnings trend were: o Total interest income during the third quarter of 2000, on a taxable-equivalent basis, was $404.6 million or 12.2 percent higher than the same period in 1999. Increased average earning asset balances and the increasing interest rate environment were the main contributors to the higher net interest income. o Net interest margin for the third quarter of 2000 was 37 basis points or 7.5 percent higher than the same period in 1999. Increased yields on earning assets partially offset by higher cost of funds on interest bearing liabilities, both resulting from the increasing interest rate environment, and higher noninterest bearing deposit balances, were the main contributors to a higher net interest margin. 15 o Growth in several fee revenue businesses was strong with service charges on deposit accounts up $8.4 million or 18.5 percent, trust and investment management fees up $3.6 million or 10.0 percent, merchant banking fees up $4.4 million or 40.3 percent, brokerage fees and commission up $1.5 million or 20.5 percent, and net securities gains of $1.1 million or 54.9 percent. Overall noninterest income grew $19.5 million or 13.3 percent, excluding net securities gains in both years. o The provision for loan losses increased to $80.0 million in the third quarter of 2000 from $20.0 million in the same period in 1999. The change is attributed to an increase in our criticized credits and in our impairment allowance. o Pro forma noninterest expenses decreased $7.9 million or 2.6 percent from the same period in 1999. The decrease is mainly attributed to lower direct expenses realized through our Mission Excel expense reduction efforts and higher prior year expenses related to the Year 2000 conversion. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 Reported net income was $431.5 million or $2.65 per diluted common share, for the first nine months of 2000 compared with $304.8 million or $1.82 per diluted common share, for the first nine months of 1999. Return on average assets was 1.72 percent for the nine months ending September 30, 2000, compared with 1.28 percent for the same period in 1999, and return on average common equity was 18.62 percent for the nine months ending September 30, 2000, compared with 13.90 percent for the same period in 1999. Pro forma earnings were $419.6 million or $2.58 per diluted common share for the first nine months of 2000, compared to $360.0 million or $2.08 per diluted common share for the first nine months of 1999. For the first nine months of 2000, our pro forma return on average assets increased to 1.67 percent from 1.46 percent a year earlier, and our pro forma return on average common equity increased to 18.11 percent from 16.42 percent a year earlier. Major factors affecting the pro forma earnings trend were: o Total interest income during the first nine months of 2000, on a taxable-equivalent basis, was $138.2 million or 13.2 percent higher than the same period in 1999. Increased average earning asset balances and the increasing interest rate environment were the main contributors to the higher total interest income. o Net interest margin for the first nine months of 2000 was 37 basis points, or 7.1 percent higher than the same period in 1999. Increased yields on earning assets, partially offset by higher cost of funds on interest bearing liabilities, both resulting from the increasing interest rate environment, and higher noninterest bearing deposits were the main contributors to a higher net interest margin. o Growth in several fee revenue businesses continued with service charges on deposit accounts up $26.0 million or 20.3 percent, trust and investment management fees up $13.6 million or 13.2 percent, merchant banking fees up $13.1 million or 47.6 percent, brokerage fees and commission up $8.5 million or 45.0 percent, and foreign exchange profits up $8.5 million or 41.6 percent, partially offset by an $8.4 million or 17.9 percent decrease in other income. Overall noninterest income grew $56.6 million or 13.2 percent, excluding net securities gains in both years. o The provision for loan losses increased to $190.0 million in the first nine months of 2000 from $35.0 million in the same period in 1999. The change is attributed to an increase in our criticized credits and in our impairment allowance. 16 o Pro forma noninterest expenses decreased $57.0 million or 6.3 percent. The decrease is mainly attributed to lower direct expenses realized through our Mission Excel expense reduction efforts and higher prior year expenses related to the Year 2000 conversion. o Nonperforming assets increased $141.5 million, or 89 percent, from September 30, 1999 to $299.8 million at September 30, 2000. Nonperforming assets as a percentage of total assets increased to 0.89 percent at September 30, 2000, compared with 0.49 percent one year earlier. Total nonaccrual loans were $154.9 million at September 30, 1999, compared with $283.0 million at September 30, 2000, resulting in an increase in the ratio of nonaccrual loans to total loans from 0.62 percent at September 30, 1999 to 1.08 percent at September 30, 2000. o Our Tier 1 and total risk-based capital ratios were 9.94 percent and 11.81 percent, respectively, at September 30, 1999, compared with 10.52 percent and 12.35 percent, respectively, at September 30, 2000. Our leverage ratio was 10.06 percent at September 30, 1999 compared with 10.47 percent at September 30, 2000 MISSION EXCEL Mission Excel, a project begun in the second quarter 1999, is a company-wide initiative to slow the rate of growth of our expenses, increase sustainable growth in our revenues, and increase productivity through elimination of unnecessary or duplicate functions. The goal of this project was to help us achieve or exceed an efficiency ratio of 54 percent to 56 percent by the fourth quarter 2000. This goal was achieved both on a reported basis, as well as on a pro forma earnings basis by June 30, 2000. In connection with Mission Excel, we incurred an $85 million restructuring charge in the third quarter of 1999. The charge consisted of $70 million in personnel expense for approximately 1,400 employees to be terminated under the plan. The remaining $15 million related to lease termination costs for 8 facilities that were to be vacated and professional service costs incurred in connection with Mission Excel. During the third quarter 2000, we evaluated the restructuring reserve and concluded that the remaining reserve amount is adequate and that no significant change is expected at this time. The total cumulative reduction made in the prior quarters was $19.0 million, the same as reported at June 30, 2000. The reductions in the prior quarters arose primarily in the severance portion of our reserve due to a change in the attrition assumptions. The recent strength of the California economy, coupled with a tight labor market, resulted in a markedly higher attrition rate than we had anticipated. As we continue to evaluate the impact of the attrition assumptions utilized in estimating the severance reserve, further adjustments may be necessary. At the completion of the plan, we currently expect to sever approximately 800 employees who are not concentrated in any one group or class of staff. Of the total, 663 employees have been severed as of September 30, 2000 and the remaining 137 employees are expected to be severed in the next two quarters. The following table presents the restructuring reserve for the period, the utilization and reduction of the reserve, and the resulting balance as of September 30, 2000.
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED (DOLLARS IN THOUSANDS) SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ------------------------------------------------- ------------------ ------------------ Balance, beginning of period...................... $ 30,024 $ 69,359 Restructuring credit.............................. - (19,000) Utilization....................................... (7,436) (27,771) --------- --------- Balance, end of period............................ $ 22,588 $ 22,588 ========= =========
17 BUSINESS SEGMENTS We segregate our operations into four primary business units for the purpose of management reporting, as shown in the table on the following pages. The results show the financial performance of our major business units. During the second quarter of 1999, we introduced a new method for measuring the contribution provided by each of our business units. The Risk-Adjusted Return on Capital (RAROC) methodology seeks to attribute economic capital to business units consistent with the level of risk they assume. These risks are primarily credit risk, market risk and operational risk. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and volatilities. Operational risk is the potential loss due to failures in internal control, system failures, or external events. The following table reflects the condensed income statements, selected average balance sheet items and selected financial ratios for each of our primary business units. The information presented does not necessarily represent the business units' financial condition and results of operations as if they were independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. The RAROC measurement methodology recognizes credit expense for expected losses arising from credit risk and attributes economic capital related to unexpected losses arising from credit, market and operational risks. Credit expense related to expected losses can differ significantly from the current period provision for credit losses. However, over an economic cycle, the two amounts should be substantially the same. Business unit results are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal Corporation as a whole. The management reporting system identifies balance sheet and income statement items to each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing system, which assigns a cost of funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. 18 We have restated the business units' results for the prior periods to reflect any reorganizational changes that have occurred.
COMMUNITY BANKING AND INVESTMENT COMMERCIAL INTERNATIONAL GROUP SERVICES GROUP GROUP ----------------------- ----------------------- ------------------- AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- --------- --------- --------- -------- -------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income............................... $175,756 $184,753 $152,739 $185,717 $10,522 $ 9,129 Noninterest income................................ 97,716 110,473 33,761 41,179 13,290 13,508 --------- --------- --------- --------- -------- -------- Total revenue..................................... 273,472 295,226 186,500 226,896 23,812 22,637 Noninterest expense(1)............................ 190,506 181,038 69,560 74,048 12,823 14,320 Credit expense (income)........................... 13,633 12,052 26,615 31,829 3,338 1,488 --------- --------- --------- --------- -------- -------- Income before income tax expense (benefit)........ 69,333 102,136 90,325 121,019 7,651 6,829 Income tax expense (benefit)...................... 27,016 39,067 33,029 43,625 2,970 2,612 --------- --------- --------- --------- -------- -------- Net income........................................ $ 42,317 $ 63,069 $ 57,296 $ 77,394 $ 4,681 $ 4,217 ========= ========= ========= ========= ======== ======== AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans....................................... $ 8,330 $ 8,057 $ 14,988 $ 17,054 $ 1,017 $ 928 Total assets...................................... 9,328 8,952 16,421 18,909 1,540 1,426 Total deposits.................................... 14,309 13,957 5,870 6,485 840 1,070 FINANCIAL RATIOS: Return on risk adjusted capital].................. 28% 42% 18% 19% 16% 19% Return on average assets]......................... 1.80 2.80 1.38 1.63 1.21 1.18 Efficiency ratio]................................. 69.66 61.32 37.30 32.64 53.85 63.26 GLOBAL MARKETS UNIONBANCAL GROUP OTHER CORPORATION ----------------------- ----------------------- ------------------- AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- --------- --------- --------- -------- -------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income........................... $ 12,545 $ 12,242 $ 8,451 $ 12,144 $360,013 $403,985 Noninterest income............................ 3,975 2,865 (393) 903 148,349 168,928 -------- --------- -------- -------- -------- -------- Total revenue................................. 16,520 15,107 8,058 13,048 508,362 572,913 Noninterest expense].......................... 4,777 3,894 106,632 18,079 384,298 291,378 Credit expense (income)....................... - - (23,586) 34,631 20,000 80,000 -------- --------- -------- -------- -------- -------- Income before income tax expense (benefit).... 11,743 11,213 (74,988) (39,662) 104,064 201,535 Income tax expense (benefit).................. 4,564 4,289 (35,096) (19,634) 32,483 69,959 -------- --------- -------- -------- -------- -------- Net income.................................... $ 7,179 $ 6,924 $(39,892) $(20,028) $ 71,581 $131,576 ======== ========= ======== ======== ======== ======== AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans................................... $ - $ - $ 818 $ 416 $ 25,153 $ 26,455 Total assets.................................. 3,615 3,593 1,135 810 32,039 33,690 Total deposits................................ 2,823 3,099 84 791 23,926 25,402 FINANCIAL RATIOS: Return on risk adjusted capital].............. 20% 17% na na na na Return on average assets]..................... 0.79 0.77 na na 0.89% 1.55% Efficiency ratio]............................. 28.92 25.78 na na 75.60 50.86 ----------- (1) "Other" includes a third quarter 1999 restructuring charge of $85.0 million ($55.2 million, net of tax). (2) Annualized. (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable- equivalent) and noninterest income. Foreclosed asset expense (income) was $(0.7) million in the third quarter of 1999, and none in the second and third quarters of 2000. na = not applicable
19
COMMUNITY BANKING COMMERCIAL INTERNATIONAL AND INVESTMENT FINANCIAL BANKING SERVICES GROUP SERVICES GROUP GROUP --------------------- ---------------------- ------------------- AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- -------- ------- ------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income............................. $509,742 $544,784 $436,562 $540,649 $33,388 $25,901 Noninterest income.............................. 273,714 318,470 95,769 134,014 42,658 45,015 -------- -------- -------- -------- ------- ------- Total revenue................................... 783,456 863,254 532,331 674,663 76,046 70,916 Noninterest expense]............................ 569,981 535,218 213,325 218,955 41,919 41,427 Credit expense (income)......................... 39,554 36,456 71,459 89,510 9,215 6,210 -------- -------- -------- -------- ------- ------- Income before income tax expense (benefit)...... 173,921 291,580 247,547 366,198 24,912 23,279 Income tax expense (benefit).................... 67,025 111,529 91,971 131,985 9,597 8,904 -------- -------- -------- -------- ------- ------- Net income...................................... $106,896 $180,051 $155,576 $234,213 $15,315 $14,375 ======== ======== ======== ======== ======= ======= AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans..................................... $ 8,322 $ 8,013 $ 14,435 $ 16,858 $ 1,066 $ 953 Total assets.................................... 9,303 8,935 15,812 18,650 1,633 1,511 Total deposits.................................. 14,037 14,163 5,811 6,248 803 946 FINANCIAL RATIOS: Return on risk adjusted capital]................ 24% 43% 18% 21% 17% 19% Return on average assets]....................... 1.54 2.69 1.32 1.68 1.25 1.27 Efficiency ratio]............................... 72.75 62.00 40.07 32.45 55.12 58.42 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION --------------------- ---------------------- ------------------- AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- -------- ---------- ---------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income........................... $ 46,842 $ 34,334 $ 20,463 $ 40,131 $1,046,997 $1,185,799 Noninterest income............................ 12,378 (9,789) 7,936 6,298 432,455 494,008 -------- -------- -------- --------- ---------- ---------- Total revenue................................. 59,220 24,545 28,399 46,429 1,479,452 1,679,807 Noninterest expense].......................... 16,752 11,756 148,713 22,379 990,690 829,735 Credit expense (income)....................... - - (85,228) 57,824 35,000 190,000 -------- -------- -------- --------- ---------- ---------- Income before income tax expense (benefit).... 42,469 12,789 (35,086) (33,774) 453,762 660,072 Income tax expense (benefit).................. 16,361 4,892 (35,995) (28,700) 148,959 228,610 -------- -------- -------- --------- ---------- ---------- Net income ................................... $ 26,107 $ 7,897 $ 909 $ (5,074) $ 304,803 $ 431,462 ======== ======== ======== ========= ========== ========== AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans................................... $ - $ - $ 943 $ 480 $ 24,766 $ 26,304 Total assets.................................. 3,839 3,604 1,323 820 31,910 33,520 Total deposits................................ 2,820 3,306 58 657 23,529 25,320 FINANCIAL RATIOS: Return on risk adjusted capital].............. 21% 6% na na na na Return on average assets]..................... 0.91 0.29 na na 1.28% 1.72% Efficiency ratio]............................. 28.29 47.90 na na 66.96 49.39 ----------- (1) "Other" includes restructuring credits of $19.0 million ($11.8 million, net of tax) in 2000 and a restructuring charge of $85.0 million ($55.2 million, net of tax). (2) Annualized. (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable- equivalent) and noninterest income. Foreclosed asset expense (income) was $(1.3) million in the first nine months of 1999 and none for the first nine months of 2000. na = not applicable
20 COMMUNITY BANKING AND INVESTMENT SERVICES GROUP The Community Banking and Investment Services Group strives to provide the best possible financial products to individuals and small businesses including a broad set of credit, deposit and trust products delivered through branches, relationship managers, private bankers and trust administrators. The Community Banking and Investment Services Group provides its customers with high quality customer service executed through a number of responsive and efficient delivery channels. In addition to our traditional network channels, the Community Banking and Investment Services Group announced earlier this year the establishment of an alliance with NIX Check Cashing and Operation Hope designed to bring convenient banking services to a broader community. This alliance will allow our small business and consumer clients access to a unique blend of financial services combining the NIX Check Cashing services, Union Bank of California Banking Services and Operation Hope small business education services. Checking and savings account services are available today through selected NIX locations with future services planned to include applications for consumer loans, credit cards, new and used car loans, home equity loans and residential mortgages. The NIX alliance complements our current network of 15 cash and save outlets located throughout Southern and Central California. Operating expenses decreased in the Community Banking and Investment Services Group by $9.5 million, due to a combination of the continued implementation of Mission Excel cost reduction efforts and the introduction of technology improvements in back office operations and call centers. Continued success in these strategies has resulted in increased revenues, reduced costs, improved efficiency ratios and higher returns on capital. In the third quarter of 2000, net income increased $20.8 million, an increase of over 49 percent compared to third quarter 1999. Total revenue increased $21.8 million compared to a year ago with the majority of that increase coming from a $12.8 million increase in noninterest income. Noninterest income increases arose from a strategic repricing effort initiated through Mission Excel, and from the purchase of trust assets of the Imperial Trust Company, which occurred in mid-1999. Net interest income increased $9.0 million over the prior year due to a combination of higher earning asset volume and a higher rate environment. With the completion of organizational changes resulting from Mission Excel, the Community Banking and Investment Services Group is comprised of three major divisions: Community Banking, Wealth Management, and Institutional Services and Asset Management. COMMUNITY BANKING serves over one million consumer households and businesses through its 242 full-service branches in California, 6 full-service branches in Oregon and Washington, 3 full-service branches in Guam and Saipan and its network of over 425 proprietary ATMs. Customers may also access our services 24 hours a day by telephone or through our Bank@Home product at www.UBOC.com. In addition, the division offers automated teller and point-of-sale debit services through our founding membership in the Star System(R), the largest shared ATM network in the Western United States. This division is organized by service delivery method, by markets and by geography. We serve our customers in the following ways: o through community banking branches, which serve consumers and businesses with checking and deposit services, as well as various types of indirect and direct financing, including auto leasing and residential real estate lending; o through on-line access our internet banking services augment our physical delivery channels by providing a wide array of customer transaction, bill payment and loan payment services; o through business banking centers, which serve businesses with sales up to $5 million; and o through in-store branches, which also serve consumers and businesses. 21 WEALTH MANAGEMENT provides private banking services to our affluent clientele as well as brokerage products and services. o The Private Bank focuses primarily on delivering integrated and customized financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms. Specific products and services include trust and estate services, investment account management services, offshore trust services and customized deposit and credit products. The Private Bank's strategy is to expand its business by leveraging existing Bank client relationships, increasing its geographic market coverage and the breadth of its products and services. Through its 8 locations, the Private Bank relationship managers offer all of the Bank's available products and services. o Our brokerage products and services are provided through UBOC Investment Services, Inc., a registered broker/dealer offering a full line of investment products to individuals and institutional clients. Its primary strategy is to further penetrate our existing client base. INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment management and administration services for a broad range of individuals and institutions. o HighMark Capital Management, Inc., a registered investment adviser, provides investment advisory services to affiliated domestic and offshore mutual funds, including the HighMark Funds. It also provides advisory services to UBOC trust clients, including corporations, pension funds and individuals. HighMark Capital Management also provides mutual fund support services. HighMark Capital Management's strategy is to increase assets under management by broadening its client base and helping to expand the distribution of shares of its mutual fund clients. o Business Trust provides businesses, government agencies, unions and non-profit organizations with trustee services, investment management and 401(k) valuation and recordkeeping services. Business Trust's strategy is to expand its third-party distribution network to include insurance companies, investment managers, brokers and mutual funds. o Securities Services is engaged in domestic and global securities custody, safekeeping, mutual fund accounting, securities lending, and corporate trust services. Its client base includes financial institutions, businesses, government agencies, unions, investment managers and non-profit organizations. Securities Services is the only West Coast based provider of a full range of institutional financial services. Through alliances with other financial institutions, the group offers additional products and services, such as credit cards, leasing, and asset-based and leveraged financing. The group competes with larger banks by providing service quality superior to that of its major competitors. We are recognized as among the highest rated banks in California for customer service quality and satisfaction. The group's primary means of competing with community banks include its large and convenient branch network and its reputation for innovative use of technology to deliver banking services. We have the fifth largest branch network among depository institutions in California. We also offer convenient banking hours to consumers through our drive-through banking locations and selected branches that are open seven days a week. The group competes with a number of commercial banks, internet banks, savings associations and credit unions, as well as more specialized financial service providers such as investment brokerage companies, consumer finance companies, and residential real estate lenders. The group's primary competitors are other major depository institutions such as Bank of America, California Federal, Washington Mutual and Wells Fargo, as well as smaller community banks in the markets in which we operate. 22 COMMERCIAL FINANCIAL SERVICES GROUP The Commercial Financial Services Group offers customized financing and cash management services to middle market and large corporate businesses primarily headquartered in the western United States. The Commercial Financial Services Group has continued to produce strong earnings growth by focusing on customer segmentation, allowing the group to provide specialized financing expertise to specific geographic markets and industry segments such as Communications, Energy, Entertainment, and Retailers. Relationship managers and credit executives in the Commercial Financial Services Group provide credit services including commercial loans, accounts receivables and inventory financing, project financing, lease financing, trade financing and real estate financing. In addition to credit services, the group offers its customers access to high quality cash management services delivered through specialized deposit managers with extensive experience in cash management solutions for businesses. The group's continued success in their focused approach to the wholesale market has led to third quarter 2000 net income growth of $20.1 million over a year ago. Revenues increased by $40.4 million primarily due to strong loan growth, higher interest rates and improved noninterest income. Operating expenses increased $4.5 million over the third quarter last year due to higher expenses to support increased deposit volume. Despite this increase, the group continues to improve efficiency with revenue growth significantly outpacing expense growth. Credit expenses increased $5.2 million in response to the loan growth over the prior year, and deterioration in the syndicated loan portfolio. The Commercial Financial Services Group is organized in the following business units: o the Commercial Banking Division, which serves California middle-market companies; o the Corporate Deposit Services Division, which provides deposit and cash management expertise to clients in the middle market, large corporate market and specialized industries; o the Institutional and Deposit Services Division, which provides deposit and cash management expertise to clients in specific deposit intensive industries; o the Corporate Capital Markets Division, which provides merchant and investment banking related products and services. In addition to a product and service focus, the Corporate Capital Markets Division is responsible for credit services to a variety of specialized industries including retailers, finance companies and insurance companies; o the Real Estate Industries Division, which is responsible for providing real estate lending products such as construction loans, commercial mortgages and bridge financing; o the Energy Capital Services Division, which provides custom financing and project financing to power and utility companies, as well as oil and gas companies, in California and Texas; o the Communications and Media Division, which provides custom financing to middle market and large corporate clients in the communications, entertainment and media industries; and o the Commercial Finance and National Banking Division, which provides asset based and selected leveraged financing to middle market companies. The National Division focuses on select large corporate clients headquartered outside California. In addition, the Commercial Customer Service Unit supports the business units described above by providing centralized customer service support. The group competes with other banks primarily on the basis of its reputation as a "business bank," the quality of its relationship managers, and the delivery of superior customer service. We are recognized in California as having a superior "business banking" reputation relative to other large banks. We are also highly rated among financial institutions for our cash management services and systems. 23 The group's main strategy is to target industries and companies for which the group can reasonably expect to be one of a customer's primary banks. Consistent with its strategy, the group attempts to serve a large part of its targeted customers' credit and depository needs. The group competes with a variety of other financial services companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies, and insurance companies. INTERNATIONAL BANKING GROUP The International Banking Group mainly provides correspondent banking and trade finance-related products and services to international financial institutions worldwide, primarily in Asia. This includes providing products and services that facilitate trade finance transactions, including payments, collection and the extension of short-term credit. The group also serves selected foreign firms and U.S. corporate clients in selected countries worldwide, particularly in Asia. In the U.S., the group serves subsidiaries and affiliates of non-Japanese Asian companies and U.S. branches and agencies of foreign banks. The group also provides international services to domestic corporate clients along the West Coast. The group's revenue predominately relates to foreign customers. In the first nine months of 2000, net income decreased by $0.9 million compared to the same period last year primarily due to the continued economic recovery in Asia and a related increase in liquidity which have put pressure on spreads in the region. Partially offsetting these narrower spreads, the group benefited from a lower portfolio exposure which has resulted in lower credit expenses of $3.0 million and lower operating expenses of $0.5 million as Mission Excel initiatives continue to be implemented. The group has a long and stable history of providing correspondent and trade-related services to international financial institutions. We believe that we have achieved a leading market position and strong customer loyalty in the Asia/Pacific correspondent banking market because we provide high quality, customized products, and services at competitive prices. The group maintains branches in Tokyo, Taipei, Seoul, Manila and Hong Kong, representative offices in other parts of Asia and Latin America, and an international banking subsidiary in New York. One of the group's primary services is international trade finance. Trade finance is typically short-term, which means it generally has a lower credit risk. GLOBAL MARKETS GROUP The Global Markets Group conducts business activities primarily to support the previously described business groups and their customers. This group offers a broad range of risk management products, such as foreign exchange and interest rate swaps, caps and floors. Additionally, it places debt securities, including Union Bank of California, N.A.'s own liabilities, with institutional investors and trades debt instruments in the secondary market. At the same time, this group manages our market-related risks as part of its responsibilities for asset/liability management including wholesale funding, liquidity, securities portfolio, and off-balance sheet interest rate risk hedges. In the third quarter of 2000, net income decreased $0.3 million compared to the third quarter of 1999. Total revenue in the third quarter of 2000 decreased $1.4 million primarily due to a higher distribution of foreign exchange revenue to other business segments of the bank compared to the third quarter of 1999. In addition, noninterest income for the first nine months of 2000, decreased $22.2 million compared to the first nine months of 1999 mainly due to the sale of securities in our portfolio in order to replace low yielding with higher yielding securities. Noninterest expense in the third quarter of 2000 decreased $0.9 million largely due to personnel expense reductions compared to the third quarter of 1999. 24 OTHER "Other" includes the following items: o corporate activities that are not directly attributable to one of the four major business units. Included in this category are goodwill and certain other non-recurring items such as restructuring charges (credits), merger and integration expense, certain parent company non-bank subsidiaries, and the elimination of the fully taxable-equivalent amounts; o the adjustment between the credit expense under RAROC and the provision for credit losses under US GAAP, the net impact of transfer pricing, and earnings associated with unallocated equity capital; o the Credit Management Group, which includes $158.3 million and $299.8 million of average nonperforming assets for the first nine months of September 30, 1999 and 2000, respectively; o the Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies in the U.S., which are affiliated with companies headquartered outside the U.S., mostly in Japan; and o the residual costs of support groups. 25 NET INTEREST INCOME The table below shows the major components of net interest income and net interest margin.
FOR THE THREE MONTHS ENDED ---------------------------------------------------------------------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 ------------------------------------------ ----------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) ----------------------------------- ----------- ---------- ------- ----------- ---------- ------- ASSETS Loans:(2) Domestic........................ $24,073,361 $474,460 7.82% $25,440,873 $559,071 8.74% Foreign(3)...................... 1,079,189 16,886 6.21 1,014,102 17,568 6.89 Securities-taxable................. 3,142,864 49,554 6.31 3,349,476 54,602 6.52 Securities-tax-exempt.............. 75,489 1,880 9.96 67,962 1,643 9.68 Interest bearing deposits in banks. 207,291 2,786 5.33 174,526 2,775 6.32 Federal funds sold and securities purchased under resale agreements 178,509 2,345 5.21 74,158 1,263 6.77 Trading account assets............. 250,512 3,113 4.93 278,049 4,200 6.01 ----------- -------- ----------- -------- Total earning assets......... 29,007,215 551,024 7.55 30,399,146 641,122 8.40 -------- -------- Allowance for credit losses........ (448,924) (521,989) Cash and due from banks............ 1,944,556 2,109,093 Premises and equipment, net........ 439,067 428,854 Other assets....................... 1,096,878 1,274,966 ----------- ----------- Total assets................. $32,038,792 $33,690,070 =========== =========== LIABILITIES Domestic deposits: Interest bearing................ $ 5,782,867 36,292 2.49 $ 5,977,345 41,506 2.76 Savings and consumer time....... 3,382,731 26,681 3.13 3,381,638 30,969 3.64 Large time...................... 4,109,821 51,372 4.96 4,602,394 71,931 6.22 Foreign deposits(3)................ 1,552,769 18,233 4.66 1,764,375 25,506 5.75 ----------- -------- ----------- -------- Total interest bearing deposits 14,828,188 132,578 3.55 15,725,752 169,912 4.30 ----------- -------- ----------- -------- Federal funds purchased and securities sold under repurchase agreements...................... 1,319,426 16,493 4.96 1,644,888 26,994 6.53 Commercial paper................... 1,514,326 19,572 5.13 1,595,462 26,072 6.50 Other borrowed funds............... 774,975 10,288 5.27 243,854 3,044 4.97 Subordinated capital notes......... 298,000 4,240 5.64 226,630 4,060 7.13 UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust........................... 350,000 7,093 7.92 350,000 6,414 7.32 ----------- -------- ----------- -------- Total borrowed funds......... 4,256,727 57,686 5.38 4,060,834 66,584 6.53 ----------- -------- ----------- -------- Total interest bearing liabilities................ 19,084,915 190,264 3.96 19,786,586 236,496 4.76 -------- -------- Noninterest bearing deposits....... 9,098,284 9,676,284 Other liabilities.................. 926,453 1,042,033 ----------- ----------- Total liabilities............ 29,109,652 30,504,903 SHAREHOLDERS' EQUITY Common equity...................... 2,929,140 3,185,167 ----------- ----------- Total shareholders' equity... 2,929,140 3,185,167 ----------- ----------- Total liabilities and shareholders' equity....... $32,038,792 $33,690,070 =========== =========== Net interest income/margin (taxable- equivalent basis)...... 360,760 4.93% 404,626 5.30% Less: taxable-equivalent adjustment 747 641 -------- -------- Net interest income.......... $360,013 $403,985 ======== ======== ----------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
26
FOR THE NINE MONTHS ENDED ---------------------------------------------------------------------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 ------------------------------------------ ----------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) ----------------------------------- ----------- ---------- ------- ----------- ---------- ------- ASSETS Loans:(2) Domestic........................ $23,674,469 $1,365,493 7.64% $25,248,387 $1,622,722 8.59% Foreign(3)...................... 1,091,433 51,700 6.33 1,055,534 53,386 6.76 Securities-taxable................. 3,352,827 157,739 6.27 3,290,918 159,204 6.45 Securities-tax-exempt.............. 80,216 6,086 10.11 69,078 5,134 9.91 Interest bearing deposits in banks. 209,184 9,042 5.78 193,050 7,522 5.20 Federal funds sold and securities purchased under resale agreements 138,396 5,237 5.06 137,987 6,364 6.16 Trading account assets............. 286,198 9,615 4.49 272,626 12,281 6.02 ----------- ---------- ----------- ---------- Total earning assets......... 28,832,723 1,604,912 7.44 30,267,580 1,866,613 8.23 ---------- ---------- Allowance for credit losses........ (450,295) (500,137) Cash and due from banks............ 1,972,792 2,111,443 Premises and equipment, net........ 433,750 425,880 Other assets....................... 1,121,127 1,215,413 ----------- ----------- Total assets................. $31,910,097 $33,520,179 =========== =========== LIABILITIES Domestic deposits: Interest bearing................ $ 5,645,828 106,064 2.51 $ 5,942,695 117,648 2.64 Savings and consumer time....... 3,356,224 80,365 3.20 3,395,513 89,318 3.51 Large time...................... 3,963,288 144,798 4.46 4,581,849 203,659 5.94 Foreign deposits(3)................ 1,554,221 52,046 4.48 1,869,177 76,872 5.49 ----------- ---------- ----------- ---------- Total interest bearing deposits 14,519,561 383,273 3.53 15,789,234 487,497 4.12 ----------- ---------- ----------- ---------- Federal funds purchased and securities sold under repurchase agreements...................... 1,609,826 57,368 4.76 1,573,315 72,383 6.15 Commercial paper................... 1,541,151 56,766 4.92 1,539,749 71,004 6.16 Other borrowed funds............... 740,933 28,159 5.08 366,568 14,212 5.18 Subordinated capital notes......... 298,000 12,385 5.56 274,036 13,997 6.82 UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust........................... 287,179 17,476 8.03 350,000 19,788 7.53 ----------- ---------- ----------- ---------- Total borrowed funds......... 4,477,089 172,154 5.14 4,103,668 191,384 6.23 ----------- ---------- ----------- ---------- Total interest bearing liabilities................ 18,996,650 555,427 3.91 19,892,902 678,881 4.56 ---------- ---------- Noninterest bearing deposits....... 9,009,701 9,530,873 Other liabilities.................. 971,824 1,001,029 ----------- ----------- Total liabilities............ 28,978,175 30,424,804 SHAREHOLDERS' EQUITY Common equity...................... 2,931,922 3,095,375 ----------- ----------- Total shareholders' equity... 2,931,922 3,095,375 ----------- ----------- Total liabilities and shareholders' equity....... $31,910,097 $33,520,179 =========== =========== Net interest income/margin (taxable- equivalent basis)...... 1,049,485 4.86% 1,187,732 5.23% Less: taxable-equivalent adjustment 2,488 1,933 ---------- ---------- Net interest income.......... $1,046,997 $1,185,799 ========== ========== ----------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and average interest bearing liabilities. 27 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 Net interest income, on a taxable-equivalent basis, was $360.8 million in the third quarter of 1999, compared with $404.6 million in the third quarter of 2000. This increase of $43.8 million, or 12 percent, was attributable primarily to a $1.4 billion, or 5 percent, increase in average earning assets, partially funded by a $578.0 million, or 6 percent, increase in average noninterest bearing deposits. In addition, the net interest margin was favorably impacted by the interest rate environment that contributed to higher yields on loans and other interest bearing assets, partially offset by higher rates on deposits and other average interest bearing liabilities, as well as a lower effective cost of funding the increased assets. The net interest margin increased 37 basis points to 5.30 percent. Average earning assets were $29.0 billion in the third quarter of 1999, compared with $30.4 billion in the third quarter of 2000. This growth was attributable to a $1.3 billion, or 5 percent, increase in average loans. The growth in average loans was mostly due to the increase in average commercial, financial and industrial loans of $782.5 million, real estate construction loans of $303.6 million, real estate residential mortgage loans of $206.6 million, real estate commercial mortgage loans of $188.1 million, and partially offset by lower average consumer loans of $179.5 million. The higher interest rate environment resulted in higher yields on average earning assets of 85 basis points, partially offset by higher rates paid on average interest bearing liabilities of 80 basis points. The decision to maintain an asset sensitive balance sheet contributed to the higher yields. The $0.7 billion, or 4 percent, increase in average interest bearing liabilities over the third quarter of 1999 was due to an increase in average interest bearing deposits of $0.9 billion, primarily large time deposits. Average noninterest bearing deposits increased $578.0 million, or 6 percent, over the third quarter of 1999. This large base of interest-free funding continues to benefit our lower cost of funds. NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 Net interest income, on a taxable-equivalent basis, was $1,049 million in the first nine months of 1999, compared with $1,188 million in the first nine months of 2000. This increase of $138.2 million, or 13 percent, was attributable primarily to a $1.4 billion, or 5 percent, increase in average earning assets, partially funded by a $521.2 million, or 6 percent, increase in average noninterest bearing deposits. In addition, the net interest margin was favorably impacted by the interest rate environment that contributed to higher yields on loans and other interest bearing assets, partially offset by higher rates on deposits and other average interest bearing liabilities, as well as a lower effective cost of funding the increased assets. The net interest margin increased 37 basis points to 5.23 percent. Average earning assets were $28.8 billion in the first nine months of 1999, compared with $30.3 billion in the first nine months of 2000. This growth was attributable to a $1.5 billion, or 6 percent, increase in average loans, partially offset by $73.0 million, or 2 percent decrease in average securities. The growth in average loans was mostly due to the increase in average commercial, financial and industrial loans of $908.8 million, real estate commercial mortgage loans of $375.1 million, real estate construction loans of $268.7 million, and real estate residential mortgage loans of $104.5 million, partially offset by lower average consumer loans of $164.8 million. The decrease in average securities, which comprised primarily of fixed rate available for sale securities, reflected liquidity and interest rate risk management actions. The higher interest rate environment resulted in higher yields on average earning assets of 79 basis points, partially offset by higher rates paid on average interest bearing liabilities of 65 basis points. The decision to maintain an asset sensitive balance sheet contributed to the higher yields. The $896.3 million, or 5 percent, increase in average interest bearing liabilities over the first nine months of 1999 was due to an increase in average interest bearing deposits of $1.3 billion, or 9 percent, primarily large time deposits. Average noninterest bearing deposits increased $521.2 million, or 6 percent, over the first nine months of 1999. This large base of interest-free funding continues to benefit our lower cost of funds. 28 NONINTEREST INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------------------- ------------------------------------- SEPTEMBER 30, SEPTEMBER 30, PERCENT SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS) 1999 2000 CHANGE 1999 2000 CHANGE ----------------------------- -------- -------- ------ -------- -------- ------ Service charges on deposit accounts..... $ 45,401 $ 53,779 18.45% $127,981 $153,987 20.32% Trust and investment management fees...... 36,353 39,975 9.96 102,607 116,163 13.21 Merchant transaction processing fees...... 18,598 19,354 4.06 51,256 54,887 7.08 International commissions and fees............. 17,475 18,012 3.07 53,186 53,463 0.52 Merchant banking fees... 10,946 15,353 40.26 27,561 40,681 47.60 Brokerage commissions and fees................. 7,148 8,616 20.54 18,825 27,309 45.07 Foreign exchange trading gains, net........... 5,267 6,143 16.63 14,873 21,054 41.56 Securities gains, net... 2,004 3,104 54.89 3,899 8,804 125.80 Other................... 5,157 4,592 (10.96) 32,267 17,660 (45.27) -------- -------- ------ -------- -------- ------ Total noninterest income............ $148,349 $168,928 13.87% $432,455 $494,008 14.23% ======== ======== ====== ======== ======== ====== -----------
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 In the third quarter of 2000, noninterest income was $168.9 million, an increase of $20.6 million, or 14 percent, over the same period in 1999. This increase was attributed to growth in deposit- related income, merchant banking fees, trust and investment fees, brokerage revenues and securities gains, net. Service charges on deposit accounts revenue was $53.8 million, an increase of $8.4 million or 18 percent over the third quarter of 1999. The increase was primarily attributable to a 6 percent increase in average deposits, higher overdraft fees due to a change in fee structure, and the expansion of several products and services. Merchant banking fees were $15.4 million, an increase of $4.4 million or 40 percent over the third quarter of 1999. The increase was primarily related to increased syndication fees. Trust and investment management fees were $40.0 million for the quarter, an increase of $3.6 million or 10 percent over the same period in 1999. The increase was mainly attributed to asset growth under management. Managed assets have grown by 12 percent over the prior year, rising to $21.9 billion, while total assets have increased 8 percent to $132.5 billion. Brokerage commissions and fees were $8.6 million, an increase of $1.5 million or 21 percent over the third quarter of 1999. The increase was primarily related to brokerage commissions on sales of non-proprietary mutual funds, annuities, and insurance products and growth in corporate sweep products. Securities gains, net were $3.1 million, an increase of $1.1 million over the third quarter of 1999. This increase was primarily related to the sale of venture capital securities investments during the period. Other noninterest income was $4.6 million, a decrease of $0.6 million or 11 percent from the same period in 1999. The decrease was primarily attributed to a $4.5 million loss on distressed loans held for sale, partially offset by higher rate swap fee income of $3.1 million. Included in other noninterest income are auto lease residual write-downs of $5.0 million in third quarter 2000 and $6.3 million in the same quarter 1999. NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 In the first nine months of 2000, noninterest income was $494.0 million, an increase of $61.6 million, or 14 percent, over the same period in 1999. This increase was primarily attributed to growth in deposit-related income, trust and investment fees, merchant banking fees, brokerage revenues, foreign exchange trading gains, net gains from securities sales, and partially offset by other income. 29 Service charges on deposit accounts revenue was $154.0 million, an increase of $26.0 million or 20 percent over the first nine months of 1999. The increase was primarily attributable to a 8 percent increase in average deposits, higher overdraft fees due to a change in fee structure, and the expansion of several products and services. Trust and investment management fees were $116.2 million, an increase of $13.6 million or 13 percent over the first nine months of 1999. The acquisition of Imperial Trust Company accounted for just over 25 percent of the increase with the rest attributable to growth in institutional trust business, institutional asset management accounts, and a 10 percent increase in retail HighMark Fund balances. Merchant banking fees were $40.7 million, an increase of $13.1 million or 48 percent over the first nine months of 1999. The increase was primarily related to higher syndication fees. Brokerage commissions and fees were $27.3 million, an increase of $8.5 million or 45 percent over the first nine months of 1999. The increase was primarily related to brokerage commissions on sales of non-proprietary mutual funds, annuities, and insurance products and growth in corporate sweep products. Foreign exchange trading gains, net were $21.1 million, an increase of $6.2 million or 42 percent over the first nine months of 1999. The increase was attributed to an increase in exporters' cross border transactions, reflecting the gradual recovery of the Asian and European economies and a strong US$ which resulted in an increase in overseas direct investments and capital market securities' investments. Securities gains, net were $8.8 million, an increase of $4.9 million or 126 percent over the first nine months of 1999. This increase was primarily related to the sale of venture capital securities investments, partially offset by the sale of certain lower yielding securities in our portfolio where the proceeds were used to purchase higher yielding securities. Other noninterest income was $17.7 million, a decrease of $14.6 million or 45 percent over the first nine months of 1999. The decrease was mainly attributed to higher losses on the valuation of auto lease residuals of $11.2 million, a $4.5 million loss on the sale of distressed loans held for sale, and the write down of venture capital equity investments of $1.8 million, partially offset by a $4.1 million gain on the sale of a property. 30 NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------------------- -------------------------------------- SEPTEMBER 30, SEPTEMBER 30, PERCENT SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS) 1999 2000 CHANGE 1999 2000 CHANGE ------------------------- -------- -------- ------ -------- -------- ------ Salaries and other $135,697 $130,085 (4.14)% $401,973 $387,411 (3.62)% compensation....... Employee benefits..... 29,761 22,142 (25.60) 98,167 57,072 (41.86) -------- -------- ------ -------- -------- ------ Personnel-related expense......... 165,458 152,227 (8.00) 500,140 444,483 (11.13) Net occupancy......... 22,895 24,664 7.73 67,273 69,358 3.10 Equipment............. 19,389 15,702 (19.02) 49,405 47,706 (3.44) Merchant transaction processing......... 12,905 12,784 (0.94) 37,773 37,144 (1.67) Communications........ 10,666 11,736 10.03 31,217 33,048 5.87 Professional services. 8,440 10,760 27.49 29,426 29,278 (0.50) Data processing....... 7,797 8,577 10.00 23,459 26,199 11.68 Advertising and public relations.......... 7,845 8,042 2.51 23,341 20,546 (11.97) Software.............. 6,113 5,850 (4.30) 18,790 16,831 (10.43) Printing and office supplies........... 5,103 5,055 (0.94) 17,800 14,945 (16.04) Travel................ 4,335 3,900 (10.03) 14,236 12,020 (15.57) Intangible asset amortization....... 3,509 3,338 (4.87) 10,527 10,014 (4.87) Armored car........... 3,180 3,153 (0.85) 9,648 9,437 (2.19) Foreclosed asset expense (income)... (703) (14) (98.01) (1,256) 7 nm Restructuring charge (credit)........... 85,000 - nm 85,000 (19,000) nm Other................. 22,366 25,604 14.48 73,911 77,719 5.15 -------- -------- -------- -------- Total noninterest expense......... $384,298 $291,378 (24.18) $990,690 $829,735 (16.25) ======== ======== ======== ======== ----------- nm = not meaninful
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 In the third quarter of 2000, noninterest expense was $291.4 million, a decrease of $7.9 million, or 3 percent, over the same period in 1999, excluding the $85.0 million restructuring reserve recorded in the third quarter of 1999. This decrease was mainly attributed to lower direct expenses realized through our Mission Excel expense reduction efforts and higher expenses in the prior year related to the Year 2000 conversion, partially offset by higher professional service fees resulting from increased projects in the current year. o Personnel-related expense was $152.2 million, a decrease of $13.2 million or 8 percent over the third quarter of 1999. This decrease was attributed to lower staff expense due to personnel reductions achieved through Mission Excel and changes to our pension plan assumptions. o Equipment expense was $15.7 million, a decrease $3.7 million or 19 percent over the third quarter of 1999. This decrease was primarily related to the write-off of unused personal computer equipment replaced in a corporate upgrade in the prior year. o Professional services expense was $10.8 million, an increase of $2.3 million or 27 percent over the third quarter of 1999. This increase was attributed to a higher level of projects being conducted in the current year. NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000 In the first nine months of 2000, noninterest expense, excluding the restructuring reserve of $85.0 million recorded in the third quarter of 1999 and the restructuring credits of $19.0 million recorded in the first and second quarters of 2000, was $848.7 million, a decrease of $57.0 million, or 6 percent, over the same 31 period in 1999. This decrease was attributed to lower direct expenses realized through our Mission Excel expense reduction efforts, higher expenses in the prior year related to the Year 2000 conversion, and a one-time credit related to an accounting change. o Personnel-related expense was $444.5 million, a decrease of $55.7 million or 11 percent over the first nine months of 1999. This decrease was attributed to a one-time credit for an accounting methodology change in recognizing pension expense of $16.0 million, personnel reductions achieved through Mission Excel, and changes to our pension plan assumptions. INCOME TAX EXPENSE The effective tax rate for each of the third quarters of 1999 and 2000 were 30 percent and 35 percent, respectively. During the third quarter of 1999, we recognized a net tax benefit of $4.4 million as the result of a California Franchise Tax Board audit settlement for the years 1989 through 1993. Excluding this tax benefit, our effective tax rate would have been 35 percent and 35 percent for the three months ended September 30, 1999 and September 30, 2000, respectively. The effective tax rate for the first nine months of 1999 and 2000 were 32 percent and 35 percent, respectively. During the first nine months of 1999, we recognized tax benefits as the result of an IRS settlement of $6.3 million for refund claims we filed for the years 1992 through 1994 and a California Franchise Tax Board audit settlement of $4.4 million for the years 1989 through 1993. Excluding these tax benefits, our effective tax rate would have been 34 percent and 35 percent for the first nine months ended September 30, 1999 and September 30, 2000, respectively. LOANS The following table shows loans outstanding by loan type.
PERCENT CHANGE TO SEPTEMBER 30, 2000 FROM: -------------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, (DOLLARS IN THOUSANDS) 1999 1999 2000 1999 1999 ------------------------------- ----------- ----------- ----------- ------ ------ Domestic: Commercial, financial and industrial............... $13,774,886 $14,176,630 $14,207,319 3.14 % 0.22 % Construction................ 644,980 648,478 944,263 46.40 45.61 Mortgage: Residential.............. 2,579,526 2,581,141 2,984,627 15.70 15.63 Commercial............... 3,242,516 3,572,347 3,373,801 4.05 (5.56) ----------- ----------- ----------- Total mortgage......... 5,822,042 6,153,488 6,358,428 9.21 3.33 Consumer: Installment.............. 1,969,518 1,922,158 1,752,292 (11.03) (8.84) Home equity.............. 714,189 727,776 736,835 3.17 1.24 ----------- ----------- ----------- Total consumer......... 2,683,707 2,649,934 2,489,127 (7.25) (6.07) Lease financing............. 1,155,415 1,148,542 1,148,314 (0.61) (0.02) ----------- ----------- ----------- Total loans in domestic offices............. 24,081,030 24,777,072 25,147,451 4.43 1.49 Loans originated in foreign branches.................... 1,104,652 1,135,886 1,010,488 (8.52) (11.04) ----------- ----------- ----------- Total loans............ $25,185,682 $25,912,958 $26,157,939 3.86 % 0.95 % =========== =========== ===========
32 Our lending activities are predominantly domestic, with such loans comprising 96 percent of the total loan portfolio at September 30, 2000. Total loans at September 30, 2000 were $26.2 billion, an increase of $1.0 billion, or 4 percent, over September 30, 1999. The increase was attributable to growth in the commercial, financial and industrial loan portfolio, which increased $432.4 million, the residential mortgage loan portfolio, which increased $405.1 million, the construction loan portfolio, which increased $299.3 million, the commercial mortgage loan portfolio, which increased $131.3 million, partially offset by, the consumer loan portfolio, which decreased $194.6 million. Commercial, financial and industrial loans represent the largest category in the loan portfolio. These loans are extended principally to corporations, middle market businesses, and small businesses, with no industry concentration exceeding 10 percent of total commercial, financial and industrial loans. At September 30, 1999 and 2000, the commercial, financial and industrial loan portfolio was $13.8 billion, or 55 percent of total loans, and $14.2 billion, or 54 percent of total loans, respectively. The increase of $432.4 million, or 3 percent, from September 30, 1999 was primarily attributable to loans extended to businesses with revenues exceeding $20 million. The construction loan portfolio totaled $645.0 million, or 3 percent of total loans, at September 30, 1999, compared with $944.3 million, or 4 percent of total loans, at September 30, 2000. This growth of $299.3 million, or 46 percent, from September 30, 1999 was primarily attributable to the continuing favorable California real estate market coupled with a strong West Coast economy. Mortgage loans were $5.8 billion, or 23 percent of total loans, at September 30, 1999, compared with $6.4 billion, or 24 percent of total loans, at September 30, 2000. The mortgage loan portfolio consists of loans on commercial and industrial projects and residential loans, secured by one-to-four family residential properties, primarily in California. The increase in commercial mortgage loans of $131.3 million, or 4 percent and in residential mortgage loans of $405.1 million, or 16 percent, from September 30, 1999, reflected both the favorable California real estate market and a strong West Coast economy. In addition, higher residential mortgage loan balances were impacted by the purchase of $109.0 million in adjustable rate mortgages primarily originated in California, Oregon and Washington. Consumer loans totaled $2.7 billion, or 11 percent of total loans, at September 30, 1999, compared with $2.5 billion, or 10 percent of total loans, at September 30, 2000. The decrease of $194.6 million, or 7 percent, was primarily attributable to automobile dealer loans. Origination's were lower due to increased competition in the business and the maturing of loans originated during peak years. In a press release dated September 14, 2000, the bank announced it is exiting the indirect automobile lending business. CROSS-BORDER OUTSTANDINGS Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of September 30, 1999, December 31, 1999, and September 30, 2000 for each country where such outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding for each country 33 exclude local currency outstandings. For those individual countries shown in the table below, most of our local currency outstandings are hedged or are funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL (DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS ------------------------------------------------------------ ------------ -------- ------------ ------------ September 30, 1999 Japan....................................................... $127 $- $361 $488 Korea....................................................... 459 1 57 517 December 31, 1999 Japan....................................................... 82 - 339 421 Korea....................................................... 422 - 53 475 September 30, 2000 Korea....................................................... 332 - 34 366
PROVISION FOR CREDIT LOSSES We recorded a $20 million provision for credit losses in the third quarter of 1999, compared with an $80 million provision for credit losses in the third quarter of 2000 and a $70 million provision in the second quarter 2000. The provision for credit losses for the nine months ended September 30, 2000 was $190 million compared to $35 million for the nine months ended September 30, 1999. Provisions for credit losses are charged to income to bring our allowance for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowance for Credit Losses" below. Our provision for credit losses in the third quarter of 2000, compared with the second quarter 2000 provision was affected by the following factors: o The continuing application of strict standards to the definitions of potential and well-defined weaknesses in our loan portfolio, resulting in higher levels of criticized assets and downward migration within the criticized grades, o The higher impairment allowance on nonaccrual loans due to both increased impairment and higher volume of loans placed on nonaccrual during the period, o The establishment of a separate loss factor for foreign loans based on historical losses in our foreign loan portfolio, which reduced our provision requirement, and o The refinement of our reserve methodology, which eliminated the portion of the unallocated allowance related to model and estimation risk. ALLOWANCE FOR CREDIT LOSSES We maintain an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio, and to a lesser extent, unused commitments to provide financing. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans, pools of loans, leases and commitments. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for 34 significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Loss factors are developed in the following ways: o Problem graded loan loss factors are derived from a migration model that tracks historical loss experience over a six-year period, which we believe captures the appropriate default losses on our loan portfolio, o Pass graded loan loss factors are based on the average annual net charge-off rate over a period of 10 years, which we believe is reflective of a full business cycle, o Pooled loan loss factors (not individually graded loans) are based on expected net charge-offs for one year. Pooled loans are loans that are homogeneous in nature, such as consumer installment and residential mortgage loans and automobile leases. We believe that a business cycle is a period in which both upturns and downturns in the economy have been reflected. The most recent economic expansion has required us to extend our historical perspective to capture the highs and lows of a typical economic cycle. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred. This amount may be determined either by a method prescribed by Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", or by a method which identifies certain qualitative factors. The unallocated allowance contains amounts that are based on management's evaluation of conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following, which existed at the balance sheet date: o General economic and business conditions affecting our key lending areas, o Credit quality trends (including trends in nonperforming loans expected to result from existing conditions), o Collateral values, o Loan volumes and concentrations, o Seasoning of the loan portfolio, o Specific industry conditions within portfolio segments, o Recent loss experience in particular segments of the portfolio, o Duration of the current business cycle, o Bank regulatory examination results, and o Findings of our internal credit examiners. Executive management reviews these conditions quarterly in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the probable loss related to such condition is reflected in the unallocated allowance. 35 The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio. The amount actually observed for these losses can vary from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The loss migration model that is used to establish the loan loss factors for problem graded loans is designed to be self-correcting by taking into account our loss experience over prescribed periods. Similarly, by basing the pass graded loan loss factors over a period reflective of a business cycle, the methodology is designed to take our recent loss experience into account. Pooled loan loss factors are adjusted quarterly based upon the level of net charge-offs expected by management in the next twelve months. Furthermore, our methodology permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management's judgment, significant factors, which affect the collectibility of the portfolio as of the evaluation date, are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information that has become available. COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES FROM DECEMBER 31, 1999 At December 31, 1999, our allowance for credit losses was $470 million, or 1.82 percent of total loans, and 281 percent of total nonaccrual loans, compared with an allowance for credit losses at September 30, 2000 of $526 million, or 2.01 percent of total loans, and 186 percent of total nonaccrual loans. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114 and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. At December 31, 1999, total impaired loans were $167.4 million and the associated impairment allowance was $42.4 million, compared with $283.0 million and $91.1 million, respectively, at September 30, 2000. Historically, our credit policy prescribed that our unallocated allowance include a component in respect of model and estimation risk equal to 20% to 25% of the allocated allowance. The primary reason for this component of the unallocated allowance was the dissimilarity of the loss histories of our predecessor institutions, Union Bank and Bank of California, prior to their combination in 1996. As part of our ongoing effort to improve our allowance methodology, we conducted a review of model imprecision for our pass and problem graded loans, which was completed during the third quarter of 2000. The review indicated the following: o In light of the expansion to a ten year loss history for our pass graded loans and our analysis of our loss experience for the 10-year period, we have concluded that it is not necessary to provide an amount for model risk with respect to this portion of the formula allowance. o Our loss migration model, upon which we calculate default losses on our problem graded credits, now indicates that losses have remained relatively unchanged over the past six years, which is the maximum number of years that may be included in our model. As a result, we have concluded that it is not necessary to provide for model risk with respect to this portion of the formula allowance. o In addition, we have concluded that our impaired loans, which are remeasured on a monthly basis, have no significant, evidenced estimation risk within our specific allowance. We made no other changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the allowance for credit losses. Changes in assumptions regarding the effects of economic and business conditions on borrowers and other factors, which are described below, have affected the assessment of the unallocated allowance. Estimation risk, which continues to be present in the allowance for credit losses, will now be included as part of our attributed factors within the unallocated allowance for credit losses. 36 CHANGES IN THE FORMULA, SPECIFIC AND UNALLOCATED ALLOWANCES FROM DECEMBER 31, 1999 At September 30, 2000, the formula allowance was $320 million, compared to $257 million at December 31, 1999, an increase of $63 million. This was primarily due to increases in criticized credits and downward migration within the criticized grades, offset by a reduction of $12 million related to improvement in the risk factors on foreign loans. At September 30, 2000, the specific allowance was $107 million compared to $51 million at December 31, 1999, an increase of $56 million. This was primarily caused by both higher impairment allowances on our nonaccrual loans and higher levels of nonaccrual loans. At September 30, 2000, the unallocated allowance was $99 million compared to $162 million at December 31, 1999, a decrease of $63 million. As discussed previously, during the quarter we refined our reserve methodology to eliminate the prescribed component of the unallocated allowance in respect of model and estimation risk. In light of the elimination of this mandatory component of the unallocated reserve, we have increased the remaining component of the unallocated allowance to reflect the estimation risk that management believes exists in the formula and specific allowances, primarily in respect of the anticipated downward regradings of loans in certain sectors of our portfolio. Management believes that other inherent losses related to certain conditions considered in its evaluation of the unallocated allowance have been recognized in the formula allowance during the nine months ended September 30, 2000. At September 30, 2000, we had a $99 million unallocated allowance in our allowance for credit losses. In evaluating the appropriateness of the unallocated allowance, we considered the following factors as well as more general factors such as the interest rate environment and the impact of economic downturn on those borrowers who have a more leveraged financial profile: o the need to provide for model and estimation risk, as previously required by our credit policy was eliminated, o the need to provide for probable losses related to certain Asian countries on borrowers was eliminated, as we reduced our exposures and completed the regradings of those exposures, o the adverse effects of rising fuel prices and governmental regulation on borrowers in the utilities industry, which could be in the range of $22 million to $35 million, o the adverse effects of changes in the economic, regulatory, and technology environments on borrowers in the communications/media industry, which could be in the range of $21 million to $31 million, o the adverse effects of the recent slowing trends in same-store sales and softening consumer confidence on borrowers in the retailing industry, which could be in the range of $8 million to $14 million, o the adverse effects of export market conditions and cyclical overcapacity on borrowers in the technology industry, which could be in the range of $4 million to $8 million, and o the adverse effects on borrowers in the healthcare industry from reduced reimbursements from government medical insurance programs, which have been reduced either through loan sales or as a result of their incorporation into our formula allowance, which could be in the range of $3 million to $6 million. 37 There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth above. See forward-looking statements on page 41.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------------------------- (DOLLARS IN THOUSANDS) 1999 2000 1999 2000 ----------------------------------------------------------------------- --------- --------- --------- --------- Balance, beginning of period........................................... $450,403 $500,731 $459,328 $470,378 Loans charged off: Commercial, financial and industrial................................ 15,080 55,855 27,570 140,629 Mortgage............................................................ 84 18 724 133 Consumer............................................................ 2,978 2,867 10,790 8,861 Lease financing..................................................... 785 827 2,559 2,158 Foreign]............................................................ - - 14,127 - --------- --------- --------- --------- Total loans charged off.......................................... 18,927 59,567 55,770 151,781 Recoveries of loans previously charged off: Commercial, financial and industrial................................ 3,909 3,123 11,479 11,766 Mortgage............................................................ 49 30 452 156 Consumer............................................................ 1,605 1,534 6,242 5,047 Lease financing..................................................... 238 128 581 455 --------- --------- --------- --------- Total recoveries of loans previously charged off................. 5,801 4,815 18,754 17,424 --------- --------- --------- --------- Net loans charged off.......................................... 13,126 54,752 37,016 134,357 Provision for credit losses............................................ 20,000 80,000 35,000 190,000 Foreign translation adjustment and other net additions (deductions).... 152 (83) 117 (125) --------- --------- --------- --------- Balance, end of period................................................. $457,429 $525,896 $457,429 $525,896 ========= ========= ========= ========= Allowance for credit losses to total loans............................. 1.82% 2.01% 1.82% 2.01% Provision for credit losses to net loans charged off................... 152.37 146.11 94.55 141.41 Net loans charged off to average loans outstanding for the period(2)... 0.21 0.82 0.20 0.68 ----------- (1) Foreign loans are those loans originated in foreign branches. (2) Annualized.
Total loans charged off in the third quarter of 2000 increased by $40.6 million from the third quarter of 1999, of which $9.5 million was related to distressed loan sales. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through provisions for credit losses. The third quarter's recoveries of loans previously charged off decreased by $1.0 million from the same period in 1999. The percentage of net loans charged off to average loans increased by 61 percent, from the same period in 1999. At September 30, 2000, the allowance for credit losses exceeded the net loans charged off during the third quarter of 2000, reflecting management's belief, based on the foregoing analysis, that there are additional losses inherent in the portfolio. Historical net charge-offs are not necessarily indicative of the amount of net charge-offs that we will realize in the future. 38 NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1999 1999 2000 ----------------------------------------------------------------------- ------------- ------------ ------------- Commercial, financial and industrial................................... $146,521 $159,479 $262,169 Construction........................................................... 4,334 4,286 3,967 Commercial mortgage.................................................... 4,045 3,629 11,509 Foreign................................................................ - - 5,354 --------- --------- --------- Total nonaccrual loans........................................... 154,900 167,394 282,999 Foreclosed assets...................................................... 3,357 2,386 2,014 Distressed loans held for sale......................................... - - 14,782 --------- --------- --------- Total nonperforming assets....................................... $158,257 $169,780 $299,795 ========= ========= ========= Allowance for credit losses............................................ $457,429 $470,378 $525,896 ========= ========= ========= Nonaccrual loans to total loans........................................ 0.62% 0.65% 1.08% Allowance for credit losses to nonaccrual loans........................ 295.31 281.00 185.83 Nonperforming assets to total loans, foreclosed assets and distressed loans held for sale................................................. 0.63 0.66 1.15 Nonperforming assets to total assets................................... 0.49 0.50 0.89
At September 30, 2000, nonperforming assets totaled $299.8 million, an increase of $141.5 million, or 89 percent, from a year earlier. The increase was mainly in commercial and industrial loans to medium-to-large corporate borrowers in different industry sectors. Included in nonperforming assets are $14.8 million in distressed loans that are being held for accelerated disposition. During the third quarter of 2000, we sold $56.0 million of distressed loans under this accelerated disposition program. Nonaccrual loans as a percentage of total loans were 1.08 percent at September 30, 2000, compared with 0.62 percent at September 30, 1999. Nonperforming assets as a percentage of total loans, foreclosed assets, and distressed loans held for sale increased to 1.15 percent at September 30, 2000 from 0.63 percent at September 30, 1999. LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1999 1999 2000 ----------------------------------------------------------------------- ------------- ------------ ------------- Commercial, financial and industrial................................... $ 1,211 $ 2,729 $ 5,758 Construction........................................................... - - 638 Mortgage: Residential......................................................... 4,728 5,830 2,835 Commercial.......................................................... 386 442 - ------- ------- ------- Total mortgage................................................... 5,114 6,272 2,835 Consumer and other..................................................... 4,397 2,932 3,405 ------- ------- ------- Total loans 90 days or more past due and still accruing............. $10,722 $11,933 $12,636 ======= ======= =======
ASSET QUALITY TRENDS During the past year, we have experienced deteriorating asset quality with increasing levels of nonperforming assets, charge-offs, and provision expense. Based on this trend, we expect that nonperforming assets, charge-offs and provision expense may continue to rise as our borrowers become adversely impacted by the slowing economy and other factors. 39 LIQUIDITY Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust our future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The ALM Policy approved by the Board requires quarterly reviews of our liquidity by the ALCO, which is composed of bank senior executives. Our liquidity management draws upon the strengths of our extensive retail and commercial market business franchise, coupled with the ability to obtain funds for various terms in a variety of domestic and international money markets. Liquidity is managed through the funding and investment functions of the Global Markets Group. Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our average core deposits, which include demand deposits, money market demand accounts, and savings and consumer time deposits, combined with average common shareholders' equity, funded 66 percent of average total assets of $33.7 billion for the third quarter ended September 30, 2000. Most of the remaining funding was provided by short-term borrowings in the form of negotiable certificates of deposit, foreign deposits, federal funds purchased and securities sold under repurchase agreements, commercial paper and other borrowings. Liquidity may also be provided by the sale or maturity of assets. Such assets include interest-bearing deposits in banks, federal funds sold and securities purchased under resale agreements, and trading account securities. The aggregate of these assets averaged $0.5 billion during the third quarter of 2000. Additional liquidity may be provided by investment securities available for sale that amounted to $3.6 billion at September 30, 2000, and by loan maturities. REGULATORY CAPITAL The following table summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION MINIMUM "WELL-CAPITALIZED" SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY REGULATORY (DOLLARS IN THOUSANDS) 1999 1999 2000 REQUIREMENT REQUIREMENT ------------------------ ----------- ----------- ----------- ------------------- ------------------ CAPITAL COMPONENTS Tier 1 capital $ 3,216,976 $ 3,308,912 $ 3,520,717 Tier 2 capital 605,381 616,772 613,777 ----------- ----------- ----------- Total risk-based capital $ 3,822,357 $ 3,925,684 $ 4,134,494 =========== =========== =========== Risk-weighted assets... $32,378,472 $33,288,167 $33,476,055 =========== =========== =========== Quarterly average assets $31,969,687 $32,765,347 $33,637,908 =========== =========== =========== AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO CAPITAL RATIOS ----------- ------ ----------- ------ ----------- ----- ----------- ----- Total capital (to risk-weighted assets) $ 3,822,357 11.81% $ 3,925,684 11.79% $ 4,134,494 12.35% > $ 2,678,084 8.0% na - Tier 1 capital (to risk-weighted assets) 3,216,976 9.94 3,308,912 9.94 3,520,717 10.52 > 1,339,042 4.0 na - Leverage ratio(1) 3,216,976 10.06 3,308,912 10.10 3,520,717 10.47 > 1,345,516 4.0 na - ----------- (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
UNION BANK OF CALIFORNIA, N.A. MINIMUM "WELL-CAPITALIZED" SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY REGULATORY (DOLLARS IN THOUSANDS) 1999 1999 2000 REQUIREMENT REQUIREMENT ------------------------ ----------- ----------- ----------- ------------------- ------------------ CAPITAL COMPONENTS Tier 1 capital $ 3,103,665 $ 3,103,324 $ 3,295,828 Tier 2 capital 500,178 511,327 506,616 ----------- ----------- ----------- Total risk-based capital $ 3,603,843 $ 3,614,651 $ 3,802,444 =========== =========== =========== Risk-weighted assets $31,960,695 $32,850,575 $32,900,514 =========== =========== =========== Quarterly average assets $31,696,685 $32,507,079 $33,942,940 =========== =========== =========== AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO CAPITAL RATIOS ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- Total capital (to risk-weighted assets) $ 3,603,843 11.28% $ 3,614,651 11.00% $ 3,802,444 11.56% > $ 2,632,041 8.0% > $ 3,290,051 10.0 - - Tier 1 capital (to risk-weighted assets) 3,103,665 9.71 3,103,324 9.45 3,295,828 10.02 > 1,316,021 4.0 > 1,974,031 6.0 - - Leverage ratio(1) 3,103,665 9.79 3,103,324 9.55 3,295,828 9.71 > 1,357,718 4.0 > 1,697,147 5.0 - - ----------- (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
40 We and Union Bank of California, N.A. are subject to various regulations issued by federal banking agencies, including minimum capital requirements. We and Union Bank of California, N.A. are required to maintain minimum ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the leverage ratio). Compared with December 31, 1999, our Tier 1 risk-based capital ratio at September 30, 2000 increased 58 basis points to 10.52 percent, our total risk-based capital ratio increased 54 basis points to 12.35 percent, and our leverage ratio increased 41 basis points to 10.47 percent. The increases in the capital ratios were primarily attributable to a higher growth rate in Tier 1 capital attributed to higher growth in net income. As of September 30, 2000, management believes the capital ratios of Union Bank of California, N.A. met all regulatory minimums of a "well-capitalized" institution. FORWARD-LOOKING STATEMENTS Our management frequently makes forward-looking statements in Securities and Exchange Commission filings, such as this one, press releases, news articles, conference calls with Wall Street analysts and when we are speaking on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by looking at the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." The forward-looking statements we make are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future. There are numerous factors that could and will cause actual results to differ from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our stock price, financial position, or results of operations. Some, but not all, of these factors are discussed below. All forward-looking statements included in this document are based on information available as of its date, and we assume no obligation to update any forward-looking statement. ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS A substantial majority of our assets and deposits are generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. In the early 1990's, the California economy experienced an economic recession that resulted in increases in the level of delinquencies and losses for us and many of the state's other financial institutions. If California were to experience another recession, it is expected that our level of problem assets would increase accordingly. ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD HAVE AN ADVERSE EFFECT ON OUR CUSTOMERS AND THEIR ABILITY TO MAKE PAYMENTS TO US We are also subject to certain industry-specific economic factors. For example, a portion of our total loan portfolio is related to real estate obligations, and a portion of our recent growth has been fueled by the general real estate recovery in California. Accordingly, a downturn in the real estate industry in California could have an adverse effect on our operations. Similarly, a portion of our total loan portfolio is to borrowers in the agricultural industry. Adverse weather conditions, combined with low commodity prices, may adversely affect the agricultural industry and, consequently, may impact our business negatively. Similarly, portions of our total loan portfolio are to borrowers in the industries referred to in "Allowance for Credit Losses" above, which could be adversely affected by the factors referred to in that section. 41 FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, a decrease in interest rates could result in an acceleration in the prepayment of loans. In addition, changes in market interest rates, or changes in the relationships between short-term and long-term market interest rates, or changes in the relationships between different interest rate indices, could affect the interest rates charged on interest earning assets differently than the interest rates paid on interest bearing liabilities. This difference could result in an increase in interest expense relative to interest income. An increase in market interest rates also could adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs, which could adversely affect our business. SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD. A majority of our directors are not officers or employees of UnionBanCal Corporation or any of our affiliates, including The Bank of Tokyo- Mitsubishi, Ltd. However, because of The Bank of Tokyo-Mitsubishi, Ltd.'s control over the election of our directors, The Bank of Tokyo- Mitsubishi, Ltd. could change the composition of our Board of Directors so that the Board would not have a majority of outside directors. The Bank of Tokyo- Mitsubishi, Ltd. owns a majority of the outstanding shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi, Ltd. can elect all of our directors and as a result can control the vote on all matters, including determinations such as: approval of mergers or other business combinations; sales of all or substantially all of our assets; any matters submitted to a vote of our shareholders; issuance of any additional common stock or other equity securities; incurrence of debt other than in the ordinary course of business; the selection and tenure of our Chief Executive Officer; payment of dividends with respect to common stock or other equity securities; and matters that might be favorable to The Bank of Tokyo-Mitsubishi, Ltd. The Bank of Tokyo-Mitsubishi, Ltd.'s ability to prevent an unsolicited bid for us or any other change in control could have an adverse effect on the market price for our common stock. THE BANK OF TOKYO-MITSUBISHI, LTD.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS Although we fund our operations independently of The Bank of Tokyo-Mitsubishi, Ltd. and believe our business is not necessarily closely related to The Bank of Tokyo-Mitsubishi, Ltd.'s business or outlook, The Bank of Tokyo-Mitsubishi, Ltd.'s credit ratings may affect our credit ratings. The Bank of Tokyo-Mitsubishi, Ltd.'s credit ratings were downgraded in October 1998 by Standard and Poor's Corporation and are currently on Moody's Investors Service, Inc.'s credit watch with negative implications. Any future downgrading of The Bank of Tokyo-Mitsubishi, Ltd.'s credit rating could adversely affect our credit ratings. Therefore, as long as The Bank of Tokyo-Mitsubishi, Ltd. maintains a majority interest in us, deterioration in The Bank of Tokyo- Mitsubishi, Ltd.'s financial condition could result in an increase in our borrowing costs and could impair our access to the public and private capital markets. The Bank of Tokyo-Mitsubishi, Ltd. is also subject to regulatory oversight and review. Our business operations and expansion plans could be negatively affected by regulatory concerns related to the Japanese financial system and The Bank of Tokyo-Mitsubishi, Ltd. POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT US As part of The Bank of Tokyo-Mitsubishi, Ltd.'s normal risk management processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit exposures and concentrations on an aggregate basis, including us. Therefore, at certain levels, our ability to approve certain credits and categories of customers is subject to concurrence by The Bank of Tokyo-Mitsubishi, Ltd.. We may wish to extend credit to the same customer as The Bank of Tokyo- Mitsubishi, Ltd. Our ability to do so may be limited for various reasons, including The Bank of Tokyo-Mitsubishi, Ltd's aggregate credit exposure and marketing policies. Certain 42 directors' and officers' ownership interests in The Bank of Tokyo-Mitsubishi, Ltd.'s common stock or service as a director or officer or other employee of both us and The Bank of Tokyo-Mitsubishi, Ltd. could create or appear to create potential conflicts of interest, especially since both of us compete in the United States banking industry. SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY AFFECT US Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions and major foreign-affiliated or foreign banks, as well as many financial and non-financial firms that offer services similar to those offered by us. Some of our competitors are community banks that have strong local market positions. Other competitors include large financial institutions (such as Bank of America, California Federal, Washington Mutual, and Wells Fargo) that have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS PAYABLE TO US A substantial portion of our cash flow typically comes from dividends our bank and nonbank subsidiaries pay to us. Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any of our subsidiaries liquidates, that subsidiary's creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. If, however, we are a creditor of the subsidiary with recognized claims against it, we would be in the same position. ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULA- TIONS COULD ADVERSELY AFFECT US We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by any future changes in laws, regulations, policies or interpretations. Additionally, our international activities may be subject to the laws and regulations of the jurisdiction where business is being conducted. International laws, regulations and policies affecting us and our subsidiaries may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi, Ltd.'s controlling ownership of us, laws, regulations and policies adopted or enforced by the Government of Japan may adversely affect our activities and investments and those of our subsidiaries in the future. Under long-standing policy of the Board of Governors of the Federal Reserve System, a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK Although The Bank of Tokyo-Mitsubishi, Ltd. has announced its intention to maintain its majority ownership in us, The Bank of Tokyo- Mitsubishi, Ltd. may sell shares of our common stock in compliance with the federal securities laws. By virtue of The Bank of Tokyo-Mitsubishi, Ltd.'s current control of us, The Bank of Tokyo-Mitsubishi, Ltd. could sell large amounts of shares of our common stock by causing us to file a registration statement that would allow them to sell shares more easily. In addition, The Bank of 43 Tokyo-Mitsubishi, Ltd. could sell shares of our common stock without registration pursuant to Rule 144 under the Securities Act. Although we can make no prediction as to the effect, if any, that such sales would have on the market price of our common stock, sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect our market price. If The Bank of Tokyo-Mitsubishi, Ltd. sells or transfers shares of our common stock as a block, another person or entity could become our controlling shareholder. STRATEGIES In connection with our strategic repositioning, we have developed long-term financial performance goals, which we expect to result from successful implementation of our operating strategies. We cannot assure you that we will be successful in achieving these long-term goals or that our operating strategies will be successful. Achieving success in these areas is dependent on a number of factors, many of which are beyond our direct control. Factors that may adversely affect our ability to attain our long-term financial performance goals include: o deterioration of our asset quality, o our inability to reduce noninterest expenses, o our inability to increase noninterest income, o our inability to decrease reliance on asset revenues, o our ability to sustain loan growth, o regulatory and other impediments associated with making acquisitions, o deterioration in general economic conditions, especially in our core markets, o decreases in net interest margins, o increases in competition, o adverse regulatory or legislative developments, o unexpected increases in costs related to potential acquisitions, and o unexpected increased costs associated with implementation of our efficiency improvement project. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR RESTRUCTURING We may acquire or invest in companies, technologies, services or products that complement our business. In addition, we continue to evaluate performance of all of our businesses and business lines and may sell a business or business lines. Any acquisitions, divestitures or restructuring may result in potentially dilutive issuance of equity securities, significant write-offs, the amortization of expenses related to goodwill and other intangible assets and/or the incurrence of debt, any of which could have a material adverse effect on our business, financial condition and results of operations. Acquisitions, divestitures or restructuring could involve numerous additional risks including difficulties in the assimilation or separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of our business, and the potential loss of key employees. There can be no assurance that we would be successful in overcoming these or any other significant risks encountered. 44 WE MIGHT BE UNABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD SLOW THE DEVELOPMENT OF OUR BUSINESS. Our performance is substantially dependent on the performance of our key managerial, marketing and technical personnel. We are dependent both on our ability to retain and motivate our key personnel and to attract new personnel. However, the labor markets in California are extremely tight and we cannot be sure that we will be able to attract, motivate and retain such personnel. Competition for qualified personnel in California is intense both within our industry and other industry sectors, including high technology. Competitors and others, including high technology companies, have in the past and may in the future attempt to recruit our employees. Inability to attract, retain and motivate the personnel necessary to support the growth of our business could have a material adverse effect upon our business, results of operations, and financial condition. ITEM 3. MARKET RISK. Information concerning our exposure to market risk, which has remained relatively unchanged from December 31, 1999, is incorporated by reference from the text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in the Form 10-K for the year ended December 31, 1999. 45 PART II. OTHER INFORMATION ITEM 4. OTHER INFORMATION SHAREHOLDER PROPOSALS: Shareholders who expect to present a proposal at the 2001 Annual Meeting of Shareholders should notify the Secretary of the Company at 400 California Street, Mail Code 1-001-18, San Francisco, CA 94104 by December 1, 2000. Without such notice, proxy holders appointed by the Board of Directors of the Company will be entitled to exercise their discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the proposal in the proxy statement. Note that the December 31, 2000 deadline for submitting shareholder proposals for presentation at the 2001 Annual Meeting of Shareholders, for publication in the Company's proxy statement and action on the proxy form or otherwise, as stated on page 23 of the Company's Proxy Statement dated March 31, 2000, is incorrect. The correct deadline is December 1, 2000. ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: NO. DESCRIPTION ----- ------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation of the Registrant, as amended(1) 3.2 By-laws of the Registrant, as amended January 27, 1999(2) 10.1 Management Stock Plan. (As restated effective June 1, 1997)*(3) 10.2 Union Bank of California Deferred Compensation Plan. (January 1, 1997, Restatement, as amended November 21, 1996)*(4) 10.3 Union Bank of California Senior Management Bonus Plan. (Effective January 1, 2000)*(5) 10.4 Richard C. Hartnack Employment Agreement. (Effective January 1, 1998)*(6) 10.5 Robert M. Walker Employment Agreement. (Effective January 1, 1998)*(6) 10.6 Union Bank of California Supplemental Executive Retirement Plan. (Effec- tive January 1, 1988) (Amended and restated as of January 1, 1997)*(3) 10.7 Union Bank Financial Services Reimbursement Program. (As restated effec- tive January 1, 2000)*(7) 10.8 Performance Share Plan. (Effective January 1, 1997)*(3) 10.9 Service Agreement Between Union Bank of California and The Bank of Tokyo- Mitsubishi Ltd. (Effective October 1, 1997)*(3) 10.10 Management Stock Plan. (As restated effective January 1, 2000)*(8) 10.11 Union Bank of California, N.A. Supplemental Retirement Plan for Policy Making Officers (effective November 1, 1999)*(5) 27.1 Financial Data Schedule(9) ----------- (1) Incorporated by reference to Form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to Form 10-Q for the quarter ended March 31, 1999. (3) Incorporated by reference to Form 10-K for the year ended December 31, 1997. (4) Incorporated by reference to Form 10-K for the year ended December 31, 1996. (5) Incorporated by reference to Form 10-Q for the quarter ended June 30, 2000. (6) Incorporated by reference to Form 10-Q for the quarter ended September 30, 1998. (7) Incorporated by reference to Form 8-K dated April 1, 1996 (filed as exhibit 10.14). (8) Incorporated by reference to Form 10-Q for the quarter ended June 30, 1999. (9) Filed herewith. * Management contract or compensatory plan, contract or arrangement. (b) Reports on Form 8-K: None 46 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIONBANCAL CORPORATION (Registrant) By /s/ DAVID I. MATSON ---------------------------------------- David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER By /s/ DAVID A. ANDERSON ---------------------------------------- David A. Anderson SENIOR VICE PRESIDENT AND CONTROLLER Dated: November 13, 2000 47