-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O4N0lMWnz0J7VrhqmKVh9pi21HCeuxp+ANYdKpEdaXE9yiDTDfdWw3NG6Abnuz0j f3+i6Dp/PaX6z6+RLfw90Q== 0001092306-02-000350.txt : 20021113 0001092306-02-000350.hdr.sgml : 20021113 20021113133330 ACCESSION NUMBER: 0001092306-02-000350 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCAL CORP CENTRAL INDEX KEY: 0001011659 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 941234979 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15081 FILM NUMBER: 02819281 BUSINESS ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 BUSINESS PHONE: 4157652969 MAIL ADDRESS: STREET 1: 400 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104-1476 10-Q 1 form10q093002.txt FORM 10-Q DATED 09-30-02 ________________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 Commission file number 1-15081 UnionBanCal Corporation State of Incorporation: I.R.S. Employer Identification No. CALIFORNIA 94-1234979 400 California Street San Francisco, California 94104-1302 Registrant's telephone number (415) 765-2969 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ___ Number of shares of Common Stock outstanding at October 31, 2002: 150,285,197 ________________________________________________________________________________ UNIONBANCAL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PAGE NUMBER PART I FINANCIAL INFORMATION Consolidated Financial Highlights 2 Item 1. Financial Statements: Condensed Consolidated Statements of Income 4 Condensed Consolidated Balance Sheets 5 Condensed Consolidated Statements of Changes in Shareholders' Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis: Introduction 18 Summary 19 Business Segments 20 Net Interest Income 30 Noninterest Income 33 Noninterest Expense 35 Income Tax Expense 37 Loans 37 Cross-Border Outstandings 38 Provision for Credit Losses 39 Allowance for Credit Losses 39 Nonperforming Assets 43 Loans 90 Days or More Past Due and Still Accruing 43 Quantitative and Qualitative Disclosure about Interest Rate Risk Management 44 Liquidity 46 Regulatory Capital 46 Certain Business Risk Factors 47 Written Statements Under Section 906 of the Sarbanes- Oxley Act of 2002 52 Item 3. Market Risk 52 Item 4. Controls and Procedures 52 PART II OTHER INFORMATION Item 1. Legal Proceedings 53 Item 5. Other Information 53 Item 6. Exhibits and Reports on Form 8-K 53 Signatures 55 Certifications 56
PART I. FINANCIAL INFORMATION UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED) AS OF AND FOR THE THREE MONTHS ENDED ____________________________________________ SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 CHANGE ___________________________________________________________ ______________ _____________ ________ RESULTS OF OPERATIONS: Net interest income(1) $ 378,517 $ 392,636 3.73% Provision for credit losses 50,000 40,000 (20.00) Noninterest income 173,405 182,426 5.20 Noninterest expense 317,042 331,134 4.44 _____________ _____________ Income before income taxes(1) 184,880 203,928 10.30 Taxable-equivalent adjustment 426 534 25.35 Income tax expense 59,325 65,163 9.84 _____________ _____________ Net income $ 125,129 $ 138,231 10.47% ============= ============= PER COMMON SHARE: Net income--basic $ 0.79 $ 0.89 12.66% Net income--diluted 0.79 0.88 11.39 Dividends(2) 0.25 0.28 12.00 Book value (end of period) 22.49 24.22 7.69 Common shares outstanding (end of period) 157,181,483 150,220,119 (4.43) Weighted average common shares outstanding--basic 157,584,675 154,889,552 (1.71) Weighted average common shares outstanding--diluted 159,028,898 156,709,715 (1.46) BALANCE SHEET (END OF PERIOD): Total assets $ 35,238,937 $ 37,608,001 6.72% Total loans 25,594,289 25,962,159 1.44 Nonaccrual loans 444,519 395,212 (11.09) Nonperforming assets 450,246 395,521 (12.15) Total deposits 27,065,423 30,588,080 13.02 Medium and long-term debt 199,713 418,369 109.49 Trust preferred securities 369,441 370,286 0.23 Common equity 3,534,533 3,637,945 2.93 BALANCE SHEET (PERIOD AVERAGE): Total assets $ 34,616,940 $ 35,803,475 3.43% Total loans 25,917,100 25,971,483 0.21 Earning assets 31,343,059 32,757,523 4.51 Total deposits 26,391,293 28,455,452 7.82 Common equity 3,497,664 3,814,927 9.07 FINANCIAL RATIOS: Return on average assets(3) 1.43% 1.53% Return on average common equity(3) 14.19 14.38 Efficiency ratio(4) 57.45 57.58 Net interest margin(1) 4.81 4.77 Dividend payout ratio 31.65 31.46 Tangible equity ratio 9.91 9.38 Tier 1 risk-based capital ratio 11.18 11.14 Total risk-based capital ratio 13.05 12.89 Leverage ratio 10.50 10.13 Allowance for credit losses to total loans 2.46 2.40 Allowance for credit losses to nonaccrual loans 141.65 157.66 Net loans charged off to average total loans(3) 0.72 0.64 Nonperforming assets to total loans, distressed loans held for sale, and foreclosed assets 1.76 1.52 Nonperforming assets to total assets 1.28 1.05 ___________ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent basis) and noninterest income. Foreclosed asset expense (income) was $(0.1) million in the third quarter of 2001, and immaterial in the third quarter of 2002.
2
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) (UNAUDITED) AS OF AND FOR THE THREE MONTHS ENDED ____________________________________________ SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 CHANGE ___________________________________________________________ _______________ _____________ _______ RESULTS OF OPERATIONS: Net interest income(1) $ 1,145,713 $ 1,159,907 1.24% Provision for credit losses 215,000 145,000 (32.56) Noninterest income 522,603 542,651 3.84 Noninterest expense 931,979 984,288 5.61 _____________ _____________ Income before income taxes(1) 521,337 573,270 9.96 Taxable-equivalent adjustment 1,638 1,604 (2.08) Income tax expense 170,133 188,716 10.92 _____________ _____________ Net income $ 349,566 $ 382,950 9.55% ============= ============= PER COMMON SHARE: Net income--basic $ 2.21 $ 2.45 10.86% Net income--diluted 2.20 2.43 10.45 Dividends(2) 0.75 0.81 8.00 Book value (end of period) 22.49 24.22 7.69 Common shares outstanding (end of period) 157,181,483 150,220,119 (4.43) Weighted average common shares outstanding--basic 158,214,813 156,139,173 (1.31) Weighted average common shares outstanding--diluted 158,916,432 157,892,168 (0.64) BALANCE SHEET (END OF PERIOD): Total assets $ 35,238,937 $ 37,608,001 6.72% Total loans 25,594,289 25,962,159 1.44 Nonaccrual loans 444,519 395,212 (11.09) Nonperforming assets 450,246 395,521 (12.15) Total deposits 27,065,423 30,588,080 13.02 Medium and long-term debt 199,713 418,369 109.49 Trust preferred securities 369,441 370,286 0.23 Common equity 3,534,533 3,637,945 2.93 BALANCE SHEET (PERIOD AVERAGE): Total assets $ 34,545,443 $ 35,541,802 2.88% Total loans 26,147,872 25,562,452 (2.24) Earning assets 31,229,078 32,472,409 3.98 Total deposits 26,269,050 28,085,461 6.91 Common equity 3,414,561 3,730,273 9.25 FINANCIAL RATIOS: Return on average assets(3) 1.35% 1.44% Return on average common equity(3) 13.69 13.73 Efficiency ratio(4) 55.86 57.80 Net interest margin(1) 4.90 4.77 Dividend payout ratio 33.94 33.06 Tangible equity ratio 9.91 9.38 Tier 1 risk-based capital ratio 11.18 11.14 Total risk-based capital ratio 13.05 12.89 Leverage ratio 10.50 10.13 Allowance for credit losses to total loans 2.46 2.40 Allowance for credit losses to nonaccrual loans 141.65 157.66 Net loans charged off to average total loans(3) 1.02 0.83 Nonperforming assets to total loans, distressed loans held for sale, and foreclosed assets 1.76 1.52 Nonperforming assets to total assets 1.28 1.05 ___________ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable- equivalent basis) and noninterest income. Foreclosed asset expense (income) was immaterial for the first nine months of 2001, and $0.1 million for the first nine months of 2002.
3 ITEM 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ______________________ __________________________ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2001 2002 ______________________________________________________ ___________ ________ __________ __________ INTEREST INCOME Loans $455,477 $381,989 $1,478,894 $1,136,359 Securities 76,852 77,518 215,370 237,098 Interest bearing deposits in banks 622 773 2,249 1,898 Federal funds sold and securities purchased under resale agreements 1,398 1,467 4,585 10,354 Trading account assets 1,652 1,366 6,716 2,987 ________ ________ __________ __________ Total interest income 536,001 463,113 1,707,814 1,388,696 ________ ________ __________ __________ INTEREST EXPENSE Domestic deposits 105,851 52,049 366,394 167,395 Foreign deposits 15,954 4,727 60,944 17,096 Federal funds purchased and securities sold under repurchase agreements 12,265 1,789 48,687 5,134 Commercial paper 11,844 4,488 46,882 12,998 Medium and long-term debt 2,142 2,375 7,873 7,198 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust 4,940 3,921 16,329 11,832 Other borrowed funds 4,914 1,662 16,630 8,740 ________ ________ __________ __________ Total interest expense 157,910 71,011 563,739 230,393 ________ ________ __________ __________ NET INTEREST INCOME 378,091 392,102 1,144,075 1,158,303 Provision for credit losses 50,000 40,000 215,000 145,000 ________ ________ __________ __________ Net interest income after provision for credit losses 328,091 352,102 929,075 1,013,303 ________ ________ __________ __________ NONINTEREST INCOME Service charges on deposit accounts 62,742 68,629 181,614 204,641 Trust and investment management fees 37,965 35,368 116,880 109,680 Merchant transaction processing fees 21,315 22,860 60,814 65,982 International commissions and fees 18,053 20,131 53,288 57,593 Brokerage commissions and fees 8,786 9,183 26,764 28,090 Merchant banking fees 7,742 6,819 26,671 22,845 Securities gains (losses), net (1,699) 550 4,318 (3,313) Other 18,501 18,886 52,254 57,133 ________ ________ __________ __________ Total noninterest income 173,405 182,426 522,603 542,651 ________ ________ __________ __________ NONINTEREST EXPENSE Salaries and employee benefits 171,172 182,275 500,243 547,251 Net occupancy 23,779 27,340 70,375 75,750 Equipment 16,985 16,343 48,252 48,650 Merchant transaction processing 13,324 14,644 39,687 41,993 Communications 13,074 13,186 36,582 39,695 Professional services 9,982 10,350 29,155 30,789 Data processing 8,885 7,944 26,935 24,475 Foreclosed asset expense (income) (60) 18 1 130 Other 59,901 59,034 180,749 175,555 ________ ________ __________ __________ Total noninterest expense 317,042 331,134 931,979 984,288 ________ ________ __________ __________ Income before income taxes 184,454 203,394 519,699 571,666 Income tax expense 59,325 65,163 170,133 188,716 ________ ________ __________ __________ NET INCOME $125,129 $138,231 $ 349,566 $ 382,950 ======== ======== ========== ========== NET INCOME PER COMMON SHARE--BASIC $ 0.79 $ 0.89 $ 2.21 $ 2.45 ======== ======== ========== ========== NET INCOME PER COMMON SHARE--DILUTED $ 0.79 $ 0.88 $ 2.20 $ 2.43 ======== ======== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC 157,585 154,890 158,215 156,139 ======== ======== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED 159,029 156,710 158,916 157,892 ======== ======== ========== ==========
See accompanying notes to condensed consolidated financial statements. 4
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2001 2001 2002 _____________________________________________________________________ ____________ ____________ _____________ ASSETS Cash and due from banks $ 2,577,510 $ 2,682,392 $ 2,184,714 Interest bearing deposits in banks 73,394 64,162 139,323 Federal funds sold and securities purchased under resale agreements 514,600 918,400 1,137,550 ___________ ___________ ___________ Total cash and cash equivalents 3,165,504 3,664,954 3,461,587 Trading account assets 335,617 229,697 383,749 Securities available for sale: Securities pledged as collateral 135,355 137,922 132,974 Held in portfolio 4,719,724 5,661,160 6,137,325 Loans (net of allowance for credit losses: September 30, 2001, 24,964,606 24,359,521 25,339,081 $629,683; December 31, 2001, $634,509; September 30, 2002, $623,078) Due from customers on acceptances 188,020 182,440 68,605 Premises and equipment, net 489,176 494,534 492,687 Intangible assets 2,447 16,176 23,119 Goodwill 52,772 68,623 93,279 Other assets 1,185,716 1,223,719 1,475,595 ___________ ___________ ___________ Total assets $35,238,937 $36,038,746 $37,608,001 =========== =========== =========== LIABILITIES Domestic deposits: Noninterest bearing $11,256,740 $12,314,150 $14,125,497 Interest bearing 13,536,139 14,160,113 14,701,824 Foreign deposits: Noninterest bearing 342,189 404,708 401,202 Interest bearing 1,930,355 1,677,228 1,359,557 ___________ ___________ ___________ Total deposits 27,065,423 28,556,199 30,588,080 Federal funds purchased and securities sold under repurchase agreements 1,286,730 418,814 303,307 Commercial paper 1,114,527 830,657 880,170 Other borrowed funds 535,976 700,403 218,282 Acceptances outstanding 188,020 182,440 68,605 Other liabilities 944,574 1,040,406 1,122,957 Medium and long-term debt 199,713 399,657 418,369 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust 369,441 363,928 370,286 ___________ ___________ ___________ Total liabilities 31,704,404 32,492,504 33,970,056 ___________ ___________ ___________ Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares, no shares issued or outstanding as of September 30, 2001, December 31, 2001, and September 30, 2002 -- -- -- Common stock--no stated value: Authorized 300,000,000 shares, issued 157,181,483 shares as of September 30, 2001, 156,483,511 shares as of December 31, 2001, and 150,220,119 shares as of September 30, 2002 1,207,312 1,181,925 907,088 Retained earnings 2,137,956 2,231,384 2,488,873 Accumulated other comprehensive income 189,265 132,933 241,984 ___________ ___________ ___________ Total shareholders' equity 3,534,533 3,546,242 3,637,945 ___________ ___________ ___________ Total liabilities and shareholders' equity $35,238,937 $36,038,746 $37,608,001 =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 5
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, __________________________________________________ (DOLLARS IN THOUSANDS) 2001 2002 ___________________________________________________________ ________________________ _______________________ COMMON STOCK Balance, beginning of period $1,275,587 $1,181,925 Dividend reinvestment plan 32 85 Deferred compensation--restricted stock awards 196 255 Stock options exercised 9,363 72,953 Stock issued in acquisition of First Western Bank -- 23,852 Common stock repurchased(1) (77,866) (371,982) __________ __________ Balance, end of period $1,207,312 $907,088 __________ __________ RETAINED EARNINGS Balance, beginning of period $1,906,093 $2,231,384 Net income 349,566 $349,566 382,950 $382,950 Dividends on common stock(2) (118,593) (125,345) Deferred compensation--restricted stock awards 890 (116) __________ __________ Balance, end of period $2,137,956 $2,488,873 __________ __________ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period $ 29,885 $ 132,933 Cumulative effect of accounting change (SFAS No.133),(3) net of tax expense of $13,754 in 2001 22,205 -- Unrealized net gains on cash flow hedges, net of tax expense of $45,793 and $61,525 in the first nine months of 2001 and 2002, respectively 73,928 99,325 Less: reclassification adjustment for net gains on cash flow hedges included in net income, net of tax expense of $10,751 and $31,920 in the first nine months of 2001 and 2002, respectively (17,356) (51,532) ________ ________ Net unrealized gains on cash flow hedges 56,572 47,793 Unrealized holding gains arising during the period on securities available for sale, net of tax expense of $51,996 and $35,950 in the first nine months of 2001 and 2002, respectively 83,941 58,037 Less: reclassification adjustment for losses (gains) on securities available for sale included in net income, net of tax expense (benefit) of $1,652 and $(1,267) in the first nine months of 2001 and 2002, respectively (2,666) 2,046 ________ ________ Net unrealized gains on securities available for sale 81,275 60,083 Foreign currency translation adjustment, net of tax expense (benefit) of $(416) and $728 in the first nine months of 2001 and 2002, respectively (672) 1,175 ________ ________ Other comprehensive income 159,380 159,380 109,051 109,051 __________ ________ __________ ________ Total comprehensive income $508,946 $492,001 ======== ======== Balance, end of period $ 189,265 $ 241,984 __________ __________ TOTAL SHAREHOLDERS' EQUITY $3,534,533 $3,637,945 ========== ========== ___________ (1) Common stock repurchased includes commission costs. (2) Dividends per share were $0.75 and $0.81 for the first nine months of 2001 and 2002, respectively. Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date. (3) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
See accompanying notes to condensed consolidated financial statements. 6
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUdited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ___________________________ (DOLLARS IN THOUSANDS) 2001 2002 ________________________________________________________________________________ ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 349,566 $ 382,950 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 215,000 145,000 Depreciation, amortization and accretion 60,471 62,563 Provision for deferred income taxes 34,479 42,941 Loss (gain) on securities available for sale (4,318) 3,313 Net (increase) decrease in trading account assets 4,078 (154,052) Other, net of acquisition 81,559 60,776 ___________ ___________ Total adjustments 391,269 160,541 ___________ ___________ Net cash provided by operating activities 740,835 543,491 ___________ ___________ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale 657,703 183,063 Proceeds from matured and called securities available for sale 636,208 856,160 Purchases of securities available for sale (1,858,667) (1,425,404) Net decrease (increase) in loans, net of acquisition 224,002 (1,243,849) Net cash received in acquisition -- 64,689 Purchases of premises and equipment (70,353) (55,256) Other, net 2,606 7,153 ___________ ___________ Net cash used in investing activities (408,501) (1,613,444) ___________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits, net of acquisition (217,760) 1,827,256 Net decrease in federal funds purchased and securities sold under repurchase agreements (100,937) (115,507) Net increase (decrease) in commercial paper and other borrowed funds 15,263 (432,608) Common stock repurchased (77,866) (371,982) Payments of cash dividends (119,005) (122,228) Stock options exercised 9,363 72,953 Other, net 18,801 1,260 ___________ ___________ Net cash provided by (used in) financing activities (472,141) 859,144 ___________ ___________ Net decrease in cash and cash equivalents (139,807) (210,809) Cash and cash equivalents at beginning of period 3,322,979 3,664,954 Effect of exchange rate changes on cash and cash equivalents (17,668) 7,442 ___________ ___________ Cash and cash equivalents at end of period $ 3,165,504 $ 3,461,587 =========== =========== CASH PAID DURING THE PERIOD FOR: Interest $ 618,076 $ 237,723 Income taxes 96,274 110,253 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of First Western Bank: Fair value of assets acquired -- $ 256,276 Purchase price: Cash -- (20,940) Stock issued -- (23,852) ___________ ___________ Liabilities assumed $ -- $ 211,484 =========== =========== Loans transferred to foreclosed assets (OREO) and/or distressed loans held for sale $ 6,611 $ 376 Securities transferred from held to maturity to available for sale at the adoption of SFAS No. 133 23,529 --
See accompanying notes to condensed consolidated financial statements. 7 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission. However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. The results of operations for the period ended September 30, 2002 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 2001. The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Since November 1999, the Company has announced stock repurchase plans totaling $400 million. The Company repurchased $35 million, $19 million and $18 million of common stock in the first, second, and third quarters of 2002, respectively, and $22 million, $25 million, and $31 million of common stock in the first, second, and third quarters of 2001, respectively, as part of these repurchase plans. As of September 30, 2002, $73 million of common stock is authorized for repurchase. In addition, on August 27, 2002, the Company announced that it purchased $300 million of its common stock from its majority owner, The Bank of Tokyo-Mitsubishi (BTM), which is a wholly-owned subsidiary of Mitsubishi Tokyo Financial Group. At September 30, 2002, BTM owned approximately 65 percent of the outstanding common stock of UnionBanCal Corporation. Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for by a single method--the purchase method. This Statement eliminates the pooling-of-interests method but carries forward without reconsideration of the guidance in Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises," related to the application of the purchase method of accounting. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. Goodwill and intangible assets acquired in transactions completed after June 30, 2001 are accounted for in accordance with the amortization and nonamortization provisions of SFAS No. 142. SFAS No. 142 significantly changes the accounting for goodwill and other intangible assets subsequent to their initial recognition. This Statement requires that goodwill and some intangible assets no longer be amortized, but tested for impairment at least annually by comparing the fair value of those assets with their recorded 8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) amounts. Upon adoption of SFAS No. 142 on January 1, 2002, the amortization of existing goodwill ceased and the carrying amount of goodwill was allocated to the applicable reporting units. The allocation was based on the sources of previously recognized goodwill as well as the reporting units to which the related acquired net assets were assigned. Management's expectations of which reporting units had benefited from the synergies of acquired businesses were considered in the allocation process. The Company performed a transitional impairment test during May 2002, measured as of the date of adoption. The fair market value of the goodwill tested for impairment exceeded its carrying value; therefore, no impairment loss was recognized. As of September 30, 2002, goodwill was $93 million. Net income and earnings per share for the three and nine months ended September 30, 2001 were adjusted, on a pro forma basis, to exclude $3.7 million in goodwill amortization expense (net of taxes of $0.1 million) for the third quarter of 2001 and $11.1 million in goodwill amortization expense (net of taxes of $0.4 million) for the nine months ended September 30, 2001 as follows:
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ______________________ ______________________ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2001 2002 _____________________________________________________________________ ________ ________ ________ ________ NET INCOME: As reported $125,129 $138,231 $349,566 $382,950 Goodwill amortization, net of income tax 3,721 -- 11,066 -- As adjusted $128,850 $138,231 $360,627 $382,950 BASIC EARNINGS PER SHARE: As reported $ 0.79 $ 0.89 $ 2.21 $ 2.45 Goodwill amortization 0.02 -- 0.07 -- As adjusted $ 0.81 $ 0.89 $ 2.28 $ 2.45 DILUTED EARNINGS PER SHARE: As reported $ 0.79 $ 0.88 $ 2.20 $ 2.43 Goodwill amortization 0.02 -- 0.07 -- As adjusted $ 0.81 $ 0.88 $ 2.27 $ 2.43
On May 13, 2002, the Company completed its acquisition of First Western Bank and recorded approximately $23.9 million of goodwill and $10.6 million of core deposit intangible. The core deposit intangible is being amortized on an accelerated basis over an estimated life of 12 years. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset. A legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. This Statement 9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) is effective for fiscal years beginning after June 15, 2002. Management believes adoption of this Statement will not have a material impact on the Company's financial position or results of operations. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This Statement carries over the framework established in SFAS No. 121, and was adopted by the Company on January 1, 2002. The adoption of this Statement had no material impact on the Company's financial position or results of operations. RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO.13 In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement requires that capital leases that are modified so that the resulting lease agreement is classified as an operating lease be accounted for under the sale-leaseback provisions of SFAS No. 98, "Accounting for Leases." This Statement also amends other existing authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of this Statement are effective for financial statements issued on or after May 15, 2002, with early application encouraged. Management believes adoption of this Statement will not have a material impact on the Company's financial position or results of operations. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement replaces the accounting and reporting provisions of Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." It requires that costs associated with an exit or disposal activity be recognized when a liability is incurred rather than at the date an entity commits to an exit plan. This Statement is effective after December 31, 2002. Management 10 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) believes that adopting this Statement will not have a material impact on the Company's financial position or results of operations. ACCOUNTING FOR ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." This Statement amended SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and Interpretation No. 9, "Applying APB Opinion No. 16 and 17, "When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method." The requirement in paragraph 5 of Statement 72 to recognize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. The acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with SFAS No. 141, "Business Combinations." In addition, this Statement amends SFAS No. 144, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower-relationship intangible assets and credit cardholder intangible assets. As a result, those intangible assets are now subject to the impairment test in accordance with the provisions in SFAS No. 144. The provisions of this Statement that relate to the application of the purchase method of accounting apply to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. This Statement was effective October 1, 2002 and had no material impact on the Company's financial position or results of operations. NOTE 3--EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options are a common stock equivalent. The following table presents a reconciliation of basic and diluted EPS for the three months and nine months ended September 30, 2001 and 2002. 11 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, _________________________________________________ _________________________________________________ 2001 2002 2001 2002 ______________________ ______________________ ______________________ _____________________ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED __________________________ ________ ________ ________ ________ ________ ________ ________ ________ Net Income $125,129 $125,129 $138,231 $138,231 $349,566 $349,566 $382,950 $382,950 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding 157,585 157,585 154,890 154,890 158,215 158,215 156,139 156,139 Additional shares due to: Assumed conversion of dilutive stock options -- 1,444 -- 1,820 -- 701 -- 1,753 ________ _______ _______ _______ _______ _______ _______ _______ Adjusted weighted average common shares outstanding 157,585 159,029 154,890 156,710 158,215 158,916 156,139 157,892 ======== ======== ======== ======== ======== ======== ======== ======== Net income per share $0.79 $0.79 $0.89 $0.88 $2.21 $2.20 $2.45 $2.43 ======== ======== ======== ======== ======== ======== ======== ========
NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME The following table presents a summary of the components of accumulated other comprehensive income.
NET UNREALIZED GAINS ON NET UNREALIZED GAINS FOREIGN CURRENCY CASH FLOW HEDGES ON SECURITIES TRANSLATION ADJUSTMENT AVAILABLE FOR SALE _________________________ _____________________ ________________________ FOR THE NINE MONTHS ENDED SEPTEMBER 30, __________________________________________________________________________________ (DOLLARS IN THOUSANDS) 2001 2002 2001 2002 2001 2002 ______________________________________________ ________ _______ ________ ________ _________ _________ Beginning balance $ -- $ 62,840 $ 41,879 $ 83,271 $(11,191) $(12,205) Cumulative effect of accounting change, net of 22,205 -- -- -- -- -- tax Change during the period 56,572 47,793 81,275 60,083 (672) 1,175 _______ ________ ________ ________ _________ _________ Ending balance $78,777 $110,633 $123,154 $143,354 $(11,863) $(11,030) ======= ======== ======== ======== ========= =========
MINIMUM PENSION ACCUMULATED OTHER LIABILITY ADJUSTMENT COMPREHENSIVE INCOME __________________ _______________________ FOR THE NINE MONTHS ENDED SEPTEMBER 30, _____________________________________________ (DOLLARS IN THOUSANDS) 2001 2002 2001 2002 __________________________________________________ _______ ______ ________ ________ Beginning balance $(803) $(973) $29,885 $132,933 Cumulative effect of accounting change, net of tax -- -- 22,205 -- Change during the period -- -- 137,175 109,051 _______ ______ ________ ________ Ending balance $(803) $(973) $189,265 $241,984 ======= ====== ======== ========
12 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 5--BUSINESS SEGMENTS The Company is organized based on the products and services that it offers and operates in four principal areas: o The Community Banking and Investment Services Group offers a range of banking services, primarily to individuals and small businesses, delivered generally through a tri-state network of branches and ATM's. These services include commercial loans, mortgages, home equity lines of credit, consumer loans, deposit services and cash management as well as fiduciary, private banking, investment and asset management services for individuals and institutions, and risk management and insurance products for businesses and individuals. o The Commercial Financial Services Group provides credit and cash management services to large corporate and middle market companies. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, cash management services and selected capital markets products. o The International Banking Group provides correspondent banking and trade-finance products and services to financial institutions, and extends primarily short-term credit to corporations engaged in international business. The group's revenue predominately relates to foreign customers. o The Global Markets Group manages the Company's wholesale funding needs, securities portfolio, and interest rate and liquidity risks. The group also offers a broad range of risk management and trading products to institutional and business clients of the Company through the businesses described above. The information, set forth in the tables on the following page, reflects selected income statement and balance sheet items by business unit. The information presented does not necessarily represent the business units' financial condition and results of operations were they independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. Included in the tables are the amounts of goodwill for each reporting unit as of September 30, 2002. Prior to January 1, 2002, most of the goodwill was reflected at the corporate level in "Other." The information in these tables is derived from the internal management reporting system used by management to measure the performance of the business segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each business segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to a business segment are assigned to that business. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the business segments based on a predetermined percentage of usage. Under the Company's risk-adjusted return on capital (RAROC) methodology, credit expense is charged to business segments based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks. 13 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 5--BUSINESS SEGMENTS (CONTINUED) "Other" is comprised of goodwill amortization for periods prior to January 1, 2002, certain parent company non-bank subsidiaries, the elimination of the fully taxable-equivalent basis amount, the amount of the provision for credit losses (over)/under the RAROC expected loss for the period, the earnings associated with the unallocated equity capital and allowance for credit losses, and the residual costs of support groups. In addition, it includes two units, the Credit Management Group, which manages nonperforming assets, and the Pacific Rim Corporate Group, which offers financial products to Asian-owned subsidiaries located in the US. On an individual basis, none of the items in "Other" are significant to the Company's business. The business units' results for the prior periods have been restated to reflect changes in the transfer pricing methodology and any reorganization changes that may have occurred.
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL AND INVESTMENT SERVICES GROUP BANKING GROUP SERVICES GROUP _____________________ ______________________ ____________________ AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, _________________________________________________________________________ 2001 2002 2001 2002 2001 2002 _________________________________________________ ________ ________ ________ ________ ________ ________ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS): Total revenue $285,117 $317,892 $206,898 $212,021 $ 22,755 $ 26,421 Net income $ 51,467 $ 72,211 $ 60,743 $ 52,054 $ 4,684 $ 6,299 Goodwill at period end $ -- $ 79 $ -- $ 14 $ -- $ -- Total assets at period end $ 10,136 $ 11,158 $ 16,937 $ 15,965 $ 1,406 $ 1,680 GLOBAL OTHER UNIONBANCAL MARKETS GROUP CORPORATION _____________________ ______________________ ____________________ AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, _________________________________________________________________________ 2001 2002 2001 2002 2001 2002 _________________________________________________ ________ ________ ________ ________ ________ ________ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS): Total revenue $ 17,757 $(7,574) $ 18,969 $ 25,768 $551,496 $574,528 Net income (loss) $ 8,354 $(7,027) $ (119) $ 14,694 $125,129 $138,231 Goodwill at period end $ -- $ -- $ 53 $ -- $ 53 $ 93 Total assets at period end $ 5,767 $ 7,863 $ 993 $ 942 $ 35,239 $ 37,608 ___________ (1) Total revenue is comprised of net interest income and noninterest income
14 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 5--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL AND INVESTMENT SERVICES GROUP BANKING GROUP SERVICES GROUP _____________________ ______________________ _____________________ AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, __________________________________________________________________________ 2001 2002 2001 2002 2001 2002 _________________________________________________ ________ ________ ________ ________ _________ __________ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS): Total revenue $838,124 $915,063 $646,729 $625,050 $ 70,569 $ 78,012 Net income $153,127 $193,195 $205,071 $152,627 $ 15,624 $ 18,790 Goodwill at period end $ -- $ 79 $ -- $ 14 $ -- $ -- Total assets at period end $ 10,136 $ 11,158 $ 16,937 $ 15,965 $ 1,406 $ 1,680 GLOBAL OTHER UNIONBANCAL MARKETS GROUP CORPORATION _____________________ ______________________ _____________________ AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, __________________________________________________________________________ 2001 2002 2001 2002 2001 2002 _________________________________________________ ________ ________ ________ ________ _________ __________ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) AND ASSETS (DOLLARS IN MILLIONS): Total revenue $ 26,722 $ 5,903 $ 84,534 $ 76,926 $1,666,678 $1,700,954 Net income (loss) $ 4,960 $ (3,658) $(29,216) $ 21,996 $ 349,566 $ 382,950 Goodwill at period end $ -- $ -- $ 53 $ -- $ 53 $ 93 Total assets at period end $ 5,767 $ 7,863 $ 993 $ 942 $ 35,239 $ 37,608 ___________ (1) Total revenue is comprised of net interest income and noninterest income
NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING Derivative positions are integral components of the Company's designated asset and liability management activities. The Company uses interest rate derivatives to manage the sensitivity of the Company's net interest income to changes in interest rates. These instruments are used to manage interest rate risk relating to specified groups of assets and liabilities, primarily LIBOR-based commercial loans, certificates of deposit, trust preferred securities and medium-term notes. CASH FLOW HEDGES HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT The Company engages in several types of cash flow hedging strategies for which the hedged transactions are forecasted future loan interest payments, and the hedged risk is the variability in those payments due to changes in the designated benchmark rate, e.g., US dollar LIBOR. In these strategies, the hedging instruments are matched with groups of variable rate loans such that the tenor of the variable rate loans and that of the hedging instrument is identical. Cash flow hedging strategies include the utilization of purchased floor, cap, corridor options and interest rate swaps. The Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments received under the floor contract offset the decline in loan interest income caused by the relevant LIBOR index falling below the floor's strike rate. 15 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (CONTINUED) The Company uses interest rate floor corridors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the floor corridor contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the corridor's upper strike rate, but only to the extent the index falls to the lower strike rate. The corridor will not provide protection from declines in the relevant LIBOR index to the extent it falls below the corridor's lower strike rate. The Company uses interest rate collars to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received (or paid) under the collar contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the collar's strike rate and the increase in interest income caused by the LIBOR index rising above the collar's cap strike rate. The Company uses interest rate swaps to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments to be received (or paid) under the swap contracts will offset the fluctuations in loan interest income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans' interest income caused by changes in the relevant LIBOR index. The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with the forecasted issuance and rollover of short-term, fixed rate negotiable certificates of deposit (CDs). In these hedging relationships, the Company hedges the LIBOR component of the CD rates, which is either 3-month LIBOR or 6-month LIBOR, based on the CD's original term to maturity, which reflects their repricing frequency. Net payments to be received under the cap contract offset the increase in interest expense caused by the relevant LIBOR index rising above the cap's strike rate. Hedging transactions are structured at inception so that the notional amounts of the hedge are matched with an equal principal amount of loans or CDs, the index and repricing frequencies of the hedge matches those of the loans or CDs, and the period in which the designated hedged cash flows occurs is equal to the term of the hedge. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedge versus those of the loans or CDs. During the third quarter of 2002, the Company recognized a net gain of $0.2 million due to ineffectiveness, which is recognized in noninterest expense, compared to a net loss of less than $0.1 million in the third quarter of 2001. FAIR VALUE HEDGES HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST (TRUST PREFERRED SECURITIES) The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specific interest bearing liability, UnionBanCal Corporation's Trust Preferred Securities, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, US dollar LIBOR. 16 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (CONTINUED) Fair value hedging transactions are structured at inception so that the notional amounts of the swap match an associated principal amount of the Trust Preferred Securities. The interest payment dates, the expiration date, and the embedded call option of the swap match those of the Trust Preferred Securities. The ineffectiveness on the fair value hedges during the third quarter of 2002 was a net loss of less than $0.1 million, compared to a net loss of $0.4 million in the third quarter of 2001. HEDGING STRATEGY FOR MEDIUM-TERM NOTES The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specified interest bearing liability, UnionBanCal Corporation's five-year, medium-term debt issuance, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, US dollar LIBOR. The fair value hedging transaction for the medium-term notes was structured at inception to mirror all of the provisions of the medium-term notes, which allows the Company to assume that no ineffectiveness exists. OTHER The Company uses foreign currency forward contracts as a means of managing foreign exchange rate risk associated with assets and/or liabilities denominated in foreign currencies. The Company values the forward contracts, the assets and/or the liabilities at fair value, with the resultant gain or loss recognized in noninterest income. The Company uses To-Be-Announced (TBA) contracts to fix the price and yield of anticipated purchases or sales of mortgage-backed securities that will be delivered at an agreed upon date. This strategy hedges the risk of variability in the cash flows to be paid or received upon settlement of the TBA contract. NOTE 7--SUBSEQUENT EVENTS On October 23, 2002, the Board of Directors declared a quarterly cash dividend of $0.28 per share of common stock. The dividend will be paid on January 3, 2003 to shareholders of record as of December 6, 2002. On October 31, 2002, the Company completed its acquisition of Valencia Bank and Trust, a commercial bank with $266 million in assets and five branches. The Company will pay approximately $31.5 million in cash and will issue approximately $31.0 million in its common stock to Valencia Bank and Trust shareholders. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION, WHICH IS SUBJECT TO THE "SAFE HARBOR" CREATED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OUR MANAGEMENT MAY MAKE FORWARD-LOOKING STATEMENTS IN OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH SECURITIES ANALYSTS AND SHAREHOLDERS AND WHEN WE ARE SPEAKING ON BEHALF OF UNIONBANCAL CORPORATION. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. OFTEN, THEY INCLUDE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," OR "MAY." THESE FORWARD-LOOKING STATEMENTS ARE INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL INFORMATION WITH WHICH THEY MAY ASSESS OUR FUTURE POTENTIAL. ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ASSUMPTIONS ABOUT AN UNCERTAIN FUTURE AND ARE BASED ON INFORMATION AVAILABLE AT THE DATE SUCH STATEMENTS ARE ISSUED. THERE ARE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD AND WILL CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE DISCUSSED IN OUR FORWARD-LOOKING STATEMENTS. MANY OF THESE FACTORS ARE BEYOND OUR ABILITY TO CONTROL OR PREDICT AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR STOCK PRICE, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA AND THROUGHOUT THE COUNTRY, GLOBAL POLITICAL AND GENERAL ECONOMIC CONDITIONS RELATED TO THE TERRORIST ATTACKS ON SEPTEMBER 11, 2001 AND THEIR AFTERMATH, FUTURE ACTS OR THREATS OF TERRORISM AND POSSIBLE MILITARY ACTION, ADVERSE ECONOMIC CONDITIONS AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN INTEREST RATES, THE CONTROLLING INTEREST IN US BY THE BANK OF TOKYO-MITSUBISHI, LTD., WHICH IS A WHOLLY-OWNED SUBSIDIARY OF MITSUBISHI TOKYO FINANCIAL GROUP, INC., COMPETITION IN THE BANKING INDUSTRY, RESTRICTIONS ON DIVIDENDS, ADVERSE EFFECTS OF CURRENT AND FUTURE BANKING AND OTHER RULES, REGULATIONS AND LEGISLATION, AND RISKS ASSOCIATED WITH VARIOUS STRATEGIES WE MAY PURSUE, INCLUDING POTENTIAL ACQUISITIONS, DIVESTITURES AND RESTRUCTURINGS. SEE ALSO THE SECTION ENTITLED "CERTAIN BUSINESS RISK FACTORS" LOCATED NEAR THE END OF THIS SECTION, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." INTRODUCTION We are a California-based, commercial bank holding company with consolidated assets of $37.6 billion at September 30, 2002. At September 30, 2002, Union Bank of California, N.A. was the third largest commercial bank in California, based on total assets and total deposits in California. UnionBanCal Corporation and its banking subsidiary, Union Bank of California, N.A., were created on April 1, 1996 by the combination of Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The Bank of California, N.A. The combination was accounted for as a reorganization of entities under common control, similar to a pooling of interests. Since November 1999, we announced stock repurchase plans totaling $400 million. We repurchased $35 million, $19 million, and $18 million of common stock in the first, second, and third quarters of 2002, respectively, and $22 million, $25 million, and $31 million of common stock in the first, second, and quarters of 2001, respectively, as part of these repurchase plans. As of September 30, 2002, $73 million of common stock is authorized for repurchase. On August 27, 2002, we announced that we purchased $300 million of our common stock from our majority owner, The Bank of Tokyo-Mitsubishi (BTM), which is a wholly-owned subsidiary of Mitsubishi Tokyo Financial Group. At September 30, 2002, BTM owned approximately 65 percent of our outstanding common stock. 18 SUMMARY COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 Net income was $138.2 million, or $0.88 per diluted common share, in the third quarter of 2002, compared with $125.1 million, or $0.79 per diluted common share, in the third quarter of 2001. This increase in diluted earnings per share of $0.09, or 11 percent, above the third quarter of 2001 was due to a $14.1 million, or 4 percent, increase in net interest income (on a taxable-equivalent basis), a $10.0 million, or 20 percent, decrease in provision for credit losses, and a $9.0 million, or 5 percent, increase in noninterest income, partly offset by a $14.1 million, or 4 percent, increase in noninterest expense. Other highlights of the third quarter of 2002 include: o Net interest income, on a taxable-equivalent basis, was $392.6 million in the third quarter of 2002, an increase of $14.1 million, or 4 percent, over the third quarter of 2001. Net interest margin in the third quarter of 2002 was 4.77 percent, a decrease of 4 basis points from the third quarter of 2001. o A provision for credit losses of $40.0 million was recorded in the third quarter of 2002 compared with $50.0 million in the third quarter of 2001. This resulted from management's regular assessment of overall credit quality, loan portfolio composition, and business and economic conditions in relation to the level of the allowance for credit losses. The allowance for credit losses was $623.1 million, or 158 percent of total nonaccrual loans, at September 30, 2002, compared with $629.7 million, or 142 percent of total nonaccrual loans, at September 30, 2001. o Noninterest income was $182.4 million in the third quarter of 2002, an increase of $9.0 million, or 5 percent, from the third quarter of 2001. This growth included a $5.9 million increase in service charges on deposit accounts and $6.1 million in revenues associated with our November 30, 2001 acquisition of Armstrong/Robitaille Business and Insurance Services ("Armstrong/Robitaille"), partly offset by a $2.6 million decrease in trust and investment management fees. o Noninterest expense was $331.1 million in the third quarter of 2002, an increase of $14.1 million, or 4 percent, over the third quarter of 2001. Salaries and employee benefits increased $11.1 million, or 7 percent, primarily attributable to higher incentives of $3.2 million and higher salaries of $8.7 million. o Income tax expense in the third quarter of 2002 was $65.2 million, a 32 percent effective income tax rate, which included a $3.3 million net reduction in income tax expense resulting from a change in a tax law in the State of California concerning the tax treatment of loan loss reserves. For the third quarter of 2001, the effective income tax rate was also 32 percent. o Return on average assets increased to 1.53 percent in the third quarter of 2002 compared to 1.43 percent in the third quarter of 2001. Our return on average common equity increased to 14.38 percent in the third quarter of 2002 compared to 14.19 percent in the third quarter of 2001. o Total loans at September 30, 2002 were $26.0 billion, an increase of $367.9 million, or 1.4 percent, from September 30, 2001. o Nonperforming assets were $395.5 million at September 30, 2002, a decrease of $54.7 million, or 12 percent, from September 30, 2001. Nonperforming assets, as a percentage of total assets, decreased to 1.05 percent at September 30, 2002, compared with 1.28 percent at September 30, 2001. Total nonaccrual loans were $395.2 million at September 30, 2002, compared with $444.5 million at September 30, 2001, resulting in a decrease in the ratio of nonaccrual loans to total loans of 1.52 percent at September 30, 2002 from 1.74 percent at September 30, 2001. o Our Tier 1 and total risk-based capital ratios were 11.14 percent and 12.89 percent, respectively, at September 30, 2002, compared with 11.18 percent and 13.05 percent, respectively, at September 30, 19 2001. Our leverage ratio was 10.13 percent at September 30, 2002 compared with 10.50 percent at September 30, 2001. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 Net income was $383.0 million, or $2.43 per diluted common share, in the first nine months of 2002 compared with $349.6 million, or $2.20 per diluted common share, in the first nine months of 2001. This increase in diluted earnings per share of $0.23, or 11 percent above the first nine months of 2001 was due to a $70.0 million, or 33 percent, decrease in provision for credit losses, a $20.0 million, or 4 percent, increase in noninterest income, and a $14.2 million, or 1 percent, increase in net interest income (on a taxable-equivalent basis), partly offset by a $52.3 million, or 6 percent, increase in noninterest expense. Other highlights of the first nine months of 2002 include: o Net interest income, on a taxable-equivalent basis, was $1,159.9 million in the first nine months of 2002, an increase of $14.2 million over the first nine months of 2001. Net interest margin in the first nine months of 2002 was 4.77 percent, a decrease of 13 basis points from the first nine months of 2001. o A provision for credit losses of $145.0 million was recorded in the first nine months of 2002, compared with $215.0 million in the first nine months of 2001. o Noninterest income was $542.7 million in the first nine months of 2002, an increase of $20.0 million, or 4 percent, from the first nine months of 2001. Noninterest income, excluding a $20.7 million gain recognized on the exchange of our STAR System stock in the prior year, increased $40.7 million, or 8 percent. This growth was mainly attributable to a $23.0 million increase in service charges on deposit accounts and $19.5 million in revenues associated with our acquisition of Armstrong/Robitaille, partly offset by a $7.2 million decrease in trust and investment management fees. In addition, we had residual value writedowns in our auto lease portfolio of $9.0 million in the first nine months of 2002 compared with $28.3 million in the first nine months of 2001. o Noninterest expense was $984.3 million in the first nine months of 2002, an increase of $52.3 million, or 6 percent, over the first nine months of 2001. Salaries and employee benefits increased $47.0 million, or 9 percent, primarily attributable to higher incentives of $17.6 million, higher salaries of $22.6 million, and higher employee benefits of $6.7 million. o Income tax expense in the first nine months of 2002 was $188.7 million, a 33 percent effective income tax rate, which included a $3.3 million net reduction in income tax expense resulting from a change in a tax law in the State of California concerning the tax treatment of loan loss reserves. For the first nine months of 2001, the effective income tax rate was also 33 percent. o Return on average assets increased to 1.44 percent in the first nine months of 2002 compared to 1.35 percent in the first nine months of 2001. Our return on average common equity increased to 13.73 percent in the first nine months of 2002 compared to 13.69 percent in the first nine months of 2001. BUSINESS SEGMENTS We segregate our operations into four primary business units for the purpose of management reporting, as shown in the tables on the following pages. The results show the financial performance of our major business units. The risk-adjusted return on capital (RAROC) methodology used seeks to attribute economic capital to business units consistent with the level of risk they assume. These risks are primarily credit risk, market risk and operational risk. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Market risk is the potential loss in fair value due to changes in interest 20 rates, currency rates and volatilities. Operational risk is the potential loss due to failures in internal control, system failures, or external events. The following tables reflect the condensed income statements, selected average balance sheet items and selected financial ratios for each of our primary business units. The information presented does not necessarily represent the business units' financial condition and results of operations as if they were independent entities. Also, the tables have been expanded to include performance center earnings. A performance center is a special unit of the bank whose income generating activities, unlike typical profit centers, are based on other business segment units' customer base. A performance center has direct interactions with customers, and its purpose is to foster cross selling with a total profitability view of the product and services it manages. For example, the Global Trading and Sales unit, within the Global Markets Group, is a performance center that manages the foreign exchange, derivatives, and fixed income securities activities within the Global Markets organization. However the revenues generated and expenses incurred for those transactions entered into to accommodate our customers are allocated to other business segments where the customer relationships reside. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. The RAROC measurement methodology recognizes credit expense for expected losses arising from credit risk and attributes economic capital related to unexpected losses arising from credit, market and operational risks. As a result of the methodology used by the RAROC model to calculate expected losses, differences between the provision for credit losses and credit expense in any one period could be significant. However, over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same. Business unit results are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal Corporation as a whole. Our management reporting system identifies balance sheet and income statement items to each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing system, which assigns a cost of funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. The business units are assigned the costs of products and services directly attributable to their business activity through standard unit cost accounting based on volume of usage. All other corporate expenses (overhead) are assigned to the business units based on a predetermined percentage of usage. 21 We have restated the business units' results for the prior periods to reflect changes in the transfer pricing methodology and any reorganization changes that may have occurred.
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL AND INVESTMENT SERVICES GROUP BANKING GROUP SERVICES GROUP ______________________ ______________________ _____________________ AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ ________ ________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $174,830 $203,687 $171,791 $167,919 $ 8,736 $ 9,153 Noninterest income 110,287 114,205 35,107 44,102 14,019 17,268 ________ ________ ________ ________ ________ ________ Total revenue 285,117 317,892 206,898 212,021 22,755 26,421 Noninterest expense 192,291 193,588 82,677 88,532 14,006 15,746 Credit expense (income) 9,479 7,363 32,851 47,380 1,164 474 ________ ________ ________ ________ ________ ________ Income before income tax expense (benefit) 83,347 116,941 91,370 76,109 7,585 10,201 Income tax expense (benefit) 31,880 44,730 30,627 24,055 2,901 3,902 ________ ________ ________ ________ ________ ________ Net income $ 51,467 $ 72,211 $ 60,743 $ 52,054 $ 4,684 $ 6,299 ======== ======== ======== ======== ======== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $ 517 $ 808 $ 6,330 $ 11,075 $ -- $ -- Noninterest income (3,056) (10,494) 9,052 15,009 121 1,098 Noninterest expense (1,051) (8,030) 5,603 11,118 48 860 Total loans (dollars in millions) 100 97 846 1,055 -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1) $ 9,145 $ 10,170 $ 15,386 $ 14,191 $ 1,004 $ 1,219 Total assets 10,076 11,034 17,237 15,898 1,317 1,547 Total deposits(1) 14,240 15,947 7,095 8,662 1,448 1,358 FINANCIAL RATIOS: Return on risk adjusted capital(2) 35% 49% 13% 13% 23% 37% Return on average assets(2) 2.03 2.60 1.40 1.30 1.41 1.62 Efficiency ratio(3) 67.45 60.90 39.97 41.76 61.55 59.60 GLOBAL OTHER UNIONBANCAL MARKETS GROUP CORPORATION ______________________ ______________________ _____________________ AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ ________ ________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $ 5,855 $(10,135) $ 16,879 $21,478 $378,091 $392,102 Noninterest income 11,902 2,561 2,090 4,290 173,405 182,426 ________ ________ ________ ________ ________ ________ Total revenue 17,757 (7,574) 18,969 25,768 551,496 574,528 Noninterest expense 4,079 3,756 23,989 29,512 317,042 331,134 Credit expense (income) 150 50 6,356 (15,267) 50,000 40,000 ________ ________ ________ ________ ________ ________ Income before income tax expense 13,528 (11,380) (11,376) 11,523 184,454 203,394 (benefit) Income tax expense (benefit) 5,174 (4,353) (11,257) (3,171) 59,325 65,163 ________ ________ ________ ________ ________ ________ Net income (loss) $ 8,354 $ (7,027) $ (119) $ 14,694 $125,129 $138,231 ======== ======== ======== ======== ======== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $ -- $ -- $ (6,847) $(11,883) $ -- $ -- Noninterest income (7,131) (8,578) 1,014 2,965 -- -- Noninterest expense (1,280) (1,534) (3,320) (2,414) -- -- Total loans (dollars in millions) -- -- (946) (1,152) -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1) $ 80 $ 103 $ 302 $ 288 $ 25,917 $ 25,971 Total assets 5,295 6,562 692 762 34,617 35,803 Total deposits(1) 2,900 1,496 708 992 26,391 28,455 FINANCIAL RATIOS: Return on risk adjusted capital(2) 8% (4)% na na na na Return on average assets(2) 0.63 (0.42) na na 1.43% 1.53% Efficiency ratio(3) 22.97 (49.59) na na 57.45 57.58 ___________ (1) Represents loans and deposits for each business segment after allocation between the segments of loans and deposits originated in one segment but managed by another segment. (2) Annualized (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent basis) and noninterest income. Foreclosed asset expense was immaterial in the first nine months of 2001 and $0.1 million in the first nine months of 2002. na = not applicable
22
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL AND INVESTMENT SERVICES GROUP BANKING GROUP SERVICES GROUP ______________________ ______________________ _____________________ AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ ________ ________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $526,948 $584,910 $534,326 $483,592 $ 27,371 $ 28,024 Noninterest income 311,176 330,153 112,403 141,458 43,198 49,988 ________ ________ ________ ________ __________ __________ Total revenue 838,124 915,063 646,729 625,050 70,569 78,012 Noninterest expense 557,204 576,735 235,034 259,583 41,737 46,155 Credit expense (income) 32,942 25,462 99,203 141,693 3,530 1,428 ________ ________ ________ ________ __________ __________ Income before income tax expense (benefit) 247,978 312,866 312,492 223,774 25,302 30,429 Income tax expense (benefit) 94,851 119,671 107,421 71,147 9,678 11,639 ________ ________ ________ ________ __________ __________ Net income $153,127 $193,195 $205,071 $152,627 $ 15,624 $ 18,790 ======== ======== ======== ======== ========== ========== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $ 2,623 $ 1,900 $ 14,555 $ 29,141 $ -- $ -- Noninterest income (5,351) (32,329) 20,154 42,330 270 3,139 Noninterest expense (3,208) (24,048) 14,968 32,104 377 2,487 Total loans (dollars in millions) 92 111 767 1,048 -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1) $ 8,803 $ 9,904 $ 15,941 $ 14,152 $ 980 $ 1,095 Total assets 9,758 10,776 17,775 15,808 1,346 1,421 Total deposits(1) 14,134 15,433 6,979 8,232 1,403 1,493 FINANCIAL RATIOS: Return on risk adjusted capital(2) 35% 45% 15% 13% 24% 38% Return on average assets(2) 2.10 2.40 1.54 1.29 1.55 1.77 Efficiency ratio(3) 66.48 63.03 36.34 41.53 59.14 59.16 GLOBAL OTHER UNIONBANCAL MARKETS GROUP CORPORATION ______________________ ______________________ _____________________ AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, ____________________________________________________________________________ 2001 2002 2001 2002 2001 2002 ________ ________ ________ ________ ________ ________ RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $ 8,524 $ (2,885) $ 46,906 $ 64,662 $1,144,075 $1,158,303 Noninterest income 18,198 8,788 37,628 12,264 522,603 542,651 ________ ________ ________ ________ __________ __________ Total revenue 26,722 5,903 84,534 76,926 1,666,678 1,700,954 Noninterest expense 18,540 11,677 79,464 90,138 931,979 984,288 Credit expense (income) 150 150 79,175 (23,733) 215,000 145,000 ________ ________ ________ ________ __________ __________ Income before income tax expense (benefit) 8,032 (5,924) (74,105) 10,521 519,699 571,666 Income tax expense (benefit) 3,072 (2,266) (44,889) (11,475) 170,133 188,716 ________ ________ ________ ________ __________ __________ Net income (loss) $ 4,960 $ (3,658) $(29,216) $ 21,996 $ 349,566 $ 382,950 ======== ======== ======== ======== ========== ========== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income $ -- $ -- $(17,178) $(31,041) $ -- $ -- Noninterest income (18,117) (22,146) 3,044 9,006 -- -- Noninterest expense (3,275) (3,766) (8,862) (6,777) -- -- Total loans (dollars in millions) -- -- (859) (1,159) -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1) $ 64 $ 91 $ 360 $ 320 $ 26,148 $ 25,562 Total assets 4,932 6,729 734 808 34,545 35,542 Total deposits(1) 3,023 1,991 730 936 26,269 28,085 FINANCIAL RATIOS: Return on risk adjusted capital(2) 2% (1)% na na na na Return on average assets(2) 0.13 (0.07) na na 1.35% 1.44% Efficiency ratio(3) 69.38 197.80 na na 55.86 57.80 ___________ (1) Represents loans and deposits for each business segment after allocation between the segments of loans and deposits originated in one segment but managed by another segment. (2) Annualized (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable- equivalent basis) and noninterest income. Foreclosed asset expense was immaterial in the first nine months of 2001 and $0.1 million in the first nine months of 2002. na = not applicable
23 COMMUNITY BANKING AND INVESTMENT SERVICES GROUP The Community Banking and Investment Services Group provides financial products to individuals and small businesses including a set of credit, deposit, trust, risk management, and insurance products delivered through branches, relationship managers, private bankers, trust administrators, and insurance agents. In the third quarter of 2002, net income increased $20.7 million, or 40 percent, compared to the third quarter of 2001. Total revenue increased $32.8 million, or 12 percent, compared to a year earlier. Increased asset and deposit volumes offset the effect of a significantly lower interest rate environment leading to an increase of $28.9 million, or 17 percent, in net interest income over the prior year quarter. Noninterest income was $3.9 million, or 4 percent, higher than the prior year quarter primarily due to our acquisition of Armstrong/Robitaille. Noninterest expense increased $1.4 million, or 1 percent, compared to a year earlier with the majority of that increase being attributable to higher salaries and employee benefits mainly related to deposit gathering, small business growth, acquisitions and residential loan growth over the third quarter of 2001. In 2002, the Community Banking and Investment Services Group has been emphasizing growth in the consumer asset portfolio, expanding wealth management services, extending the small business franchise, expanding the branch network, and expanding cross selling activities throughout the bank. The strategy for growing the consumer asset portfolio primarily focuses on mortgage and home equity products that may be originated through the branch network, as well as through channels such as wholesalers, correspondents, and whole loan purchases. As of September 30, 2002, residential loans have grown by $1.3 billion, or 29 percent, from the same period last year. The Wealth Management division is focused on becoming a growing provider of banking and investment products for affluent individuals in geographic areas already served by us. We seek to provide quality service superior to that of our competitors, offering an attractive product suite. Core elements of the initiative to extend our small business franchise include improving our sales force, increasing marketing activities, adding new locations, and developing online capabilities to complement physical distribution. Expansion of the distribution network will be achieved through acquisitions and de novo branching. On October 31, 2002, the Company completed its acquisition of Valencia Bank and Trust, a commercial bank with $266 million in assets and five branches. The Community Banking and Investment Services Group is comprised of six major divisions: Community Banking, Wealth Management, Institutional Services and Asset Management, Consumer Asset Management, Government and Not-For-Profit Markets, and Insurance Services. COMMUNITY BANKING serves its customers through 254 full-service branches in California, 6 full-service branches in Oregon and Washington, and a network of 512 proprietary ATMs. Customers may also access our services 24 hours a day by telephone or through our BANK@HOME product at www.UBOC.com. In addition, the division offers automated teller and point-of-sale merchant services. This division is organized by service delivery method, by markets and by geography. We serve our customers in the following ways: o through community banking branches, which serve consumers and businesses with checking and deposit services, as well as various types of consumer financing; o through on-line access to our internet banking services, which augment our physical delivery channels by providing an array of customer transaction, bill payment and loan payment services; o through branches and business banking centers, which serve businesses with annual sales up to $5 million; and o through in-store branches, which also serve consumers and businesses. 24 WEALTH MANAGEMENT provides private banking services to our affluent clientele as well as brokerage products and services. o The Private Bank focuses primarily on delivering financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms. Specific products and services include trust and estate services, investment account management services, and deposit and credit products. A key strategy of the Private Bank is to expand its business by leveraging existing Bank client relationships. Through 13 existing locations, the Private Bank relationship managers offer all of our available products and services. o Our brokerage products and services are provided through UBOC Investment Services, Inc., a registered broker/dealer offering investment products to individuals and institutional clients. Its primary strategy is to further penetrate our existing client base. INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment management and administration services for a broad range of individuals and institutions. o HighMark Capital Management, Inc., a registered investment advisor, provides investment advisory services to affiliated domestic and offshore mutual funds, including the HighMark Funds. It also provides advisory services to Union Bank of California trust clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc. also provides mutual fund support services. HighMark Capital Management Inc.'s strategy is to increase assets under management by broadening its client base and helping to expand the distribution of shares of its mutual fund clients. o Institutional Services provides custody, corporate trust, and retirement plan services. Custody Services provides both domestic and international safekeeping/settlement services in addition to securities lending. Corporate Trust acts as trustee for corporate and municipal debt issues. Retirement Services provides a full range of defined benefit and defined contribution administrative services, including trustee services, administration, investment management, and 401(k) valuation services. The client base of Institutional Services includes financial institutions, corporations, government agencies, unions, insurance companies, mutual funds, investment managers, and non-profit organizations. Institutional Services' strategy is to continue to leverage and expand our position in our target markets. As we announced on April 30, 2002, we acquired a substantial portion of the trust and institutional custody business of a bank located in Southern California. CONSUMER ASSET MANAGEMENT is the centralized underwriting, processing, servicing, collection and administration for consumer assets including residential loans and merchant bank cards. o Consumer Asset Management is centralized in two sites, one in San Diego and one in Brea, and o provides customer and credit management services for consumer loan products. GOVERNMENT AND NOT-FOR-PROFIT MARKETS provides a full range of treasury management, investment, and trust services to government entities and not-for-profit organizations. o The division, which primarily focuses on local, state, and federal agencies, includes an expanding product offering to the Native American government market. Niche markets have been developed that service colleges, universities, trade associations, cultural institutions, and religious non-profit organizations. The division's strategy is to expand its market presence by continued delivery of cash management products, internet based technology solutions, and expanding its tax-exempt lending capabilities to meet existing clients' needs. 25 INSURANCE SERVICES provides a range of risk management services and insurance products to business and retail customers. o The group, which includes our fourth quarter 2001 acquisition of Armstrong/Robitaille, a regional insurance broker, offers its risk management and insurance products through offices in California and Oregon. Through alliances with other financial institutions, the Community Banking and Investment Services Group offers additional products and services, such as credit cards, leasing, and asset-based and leveraged financing. The group competes with larger banks by attempting to provide service quality superior to that of its major competitors. The group's primary means of competing with community banks include its branch network and its technology to deliver banking services. We also offer convenient banking hours to consumers through our drive-through banking locations and selected branches that are open seven days a week. The group competes with a number of commercial banks, internet banks, savings associations and credit unions, as well as more specialized financial service providers such as investment brokerage companies, consumer finance companies, and residential real estate lenders. The group's primary competitors are other major depository institutions such as Bank of America, California Federal, Washington Mutual and Wells Fargo, as well as smaller community banks in the markets in which we operate. COMMERCIAL FINANCIAL SERVICES GROUP The Commercial Financial Services Group offers financing and cash management services to middle market and large corporate businesses primarily headquartered in the western United States. The Commercial Financial Services Group has continued to focus specialized financing expertise to specific geographic markets and industry segments such as Energy, Entertainment, and Real Estate. Relationship managers in the Commercial Financial Services Group provide credit services including commercial loans, accounts receivable and inventory financing, project financing, lease financing, trade financing and real estate financing. In addition to credit services, the group offers its customers access to cash management services delivered through deposit managers with experience in cash management solutions for businesses. In the third quarter of 2002, net income decreased $8.7 million, or 14 percent, compared to the third quarter of 2001. Net interest income decreased $3.9 million, or 2 percent, primarily attributable to the lower interest rate environment, wherein our wholesale liabilities are closely tied to the effects of the lower treasury bill rates. The impact on earnings of decreasing earning asset balances was mitigated by a significantly lower cost of funds resulting from this lower interest rate environment. Noninterest income increased $9.0 million, or 26 percent, mainly due to net losses of only $2.8 million in the private equity portfolio in the third quarter of 2002 compared with net losses of $9.9 million in the third quarter of 2001. Excluding these private equity portfolio losses, noninterest income increased by 4 percent over the third quarter of 2001, which was primarily due to higher deposit-related service fees. Noninterest expense increased $5.9 million, or 7 percent, compared to a year earlier due to higher expenses to support increased product sales and deposit volume. Credit expense increased $14.5 million due to a refinement in the RAROC credit metrics that were implemented in late 2001 and not reflected in our third quarter 2001 results. The group's initiatives during 2002 included expanding wholesale deposit activities and increasing domestic trade financing. Loan growth strategies included originating, underwriting and syndicating loans in core competency markets, such as the California middle market, commercial real estate, energy, entertainment, equipment leasing and commercial finance. The Commercial Financial Services Group 26 provides strong processing services, including services such as check processing, front-end item processing, cash vault services and digital imaging. The Commercial Financial Services Group is comprised of the following business units: o the Commercial Banking Division, which serves California middle-market and large corporate companies with commercial lending, trade financing, and asset-based loans; o the Corporate Deposit Services Division, which provides deposit and cash management expertise to clients in the middle market, large corporate market and specialized industries; o the Institutional and Deposit Services Division, which provides deposit and cash management expertise to clients in specific deposit-intensive industries; o the Corporate Capital Markets Division, which provides limited merchant and investment banking related products and services; o the Real Estate Industries Division, which provides real estate lending products such as construction loans, commercial mortgages and bridge financing; o the Energy Capital Services Division, which provides custom financing and project financing to oil and gas companies, as well as power and utility companies, nationwide; and o the National Banking Division, which provides custom financing to middle market and large corporate clients in their defined industries and geographic markets. The group competes with other banks primarily on the basis of the quality of its relationship managers, the delivery of quality customer service, and its reputation as a "business bank." The group's main strategy is to target industries and companies for which the group can reasonably expect to be one of a customer's primary banks. Consistent with its strategy, the group attempts to serve a large part of its targeted customers' credit and depository needs. The group competes with a variety of other financial services companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies, and insurance companies. INTERNATIONAL BANKING GROUP The International Banking Group focuses on providing correspondent banking and trade finance related products and services to international financial institutions worldwide, primarily in Asia. This focus includes products and services such as letters of credit, international payments, collections and financing of mostly short-term transactions. The group also serves certain foreign firms and US corporate clients in selected countries where we have branches, including Hong Kong, Japan, Korea, the Philippines and Taiwan. In the US, the group serves subsidiaries and affiliates of non-Japanese Asian companies and US branches/agencies of foreign banks. The majority of the revenue generated by the International Banking Group is from customers domiciled outside of the US. In the third quarter of 2002, net income increased $1.6 million, or 35 percent, compared to the third quarter of 2001. Total revenue in the third quarter of 2002 increased $3.7 million, or 16 percent, compared to the third quarter of 2001. Net interest income increased $0.4 million, or 5 percent, over the third quarter of 2001, mainly due to higher loan volumes. Noninterest income was $3.2 million, or 23 percent, higher than the third quarter of 2001, mainly attributable to higher foreign remittance and collection commissions, reflecting a strategic focus on this business, and merchant card activity in the current quarter. Noninterest expense increased $1.7 million, or 12 percent, compared to the third quarter of 2001, with the majority of that increase attributable to merchant card activity. Also contributing to the group's overall increase in net income was a reduction in credit expense of $0.7 million, or 59 percent, compared to the 27 third quarter of 2001. International Banking Group's business revolves around short-term, trade financing, mostly to banks, which we believe tends to result in significantly lower credit risk when compared to other lending activities and service-related income. The group has a long and stable history of providing correspondent banking and trade-related products and services to international financial institutions. We believe the group continues to be a market leader, achieving strong customer loyalty in the correspondent banking market. The International Banking Group, headquartered in San Francisco, also maintains representative offices in Asia and Latin America and an international banking subsidiary in New York. GLOBAL MARKETS GROUP The Global Markets Group conducts business activities primarily to support the previously described business groups and their customers. This group offers a broad range of risk management products, such as foreign exchange contracts and interest rate swaps and options. It trades money market, government, agency, and other securities to meet investment needs of institutional and business clients of UnionBanCal Corporation. Another primary area of the group is treasury management for UnionBanCal Corporation, which encompasses wholesale funding, liquidity management, interest rate risk management, including securities portfolio management, and hedging activities. In the third quarter of 2002, net loss was $7.0 million compared to net income of $8.4 million in the third quarter of 2001. Total revenue in the third quarter of 2002 decreased $25.3 million, or 143 percent, compared to the third quarter of 2001, resulting from a $16.0 million decrease in net interest income and a $9.3 million decrease in noninterest income. The decrease in net interest income from the third quarter of 2001 was mainly attributed to a declining interest rate environment, offset in part by reduced volume and costs of wholesale funding and increased income from hedged positions. The noninterest income decrease, compared to the third quarter of 2001, was mainly attributable to higher net gains on the sale of securities in our investment securities portfolio in the third quarter of 2001 and to higher distribution of performance center earnings to other business segments of the bank in the current quarter. Noninterest expense increased $0.3 million, or 8 percent, compared to the third quarter of 2001. OTHER "Other" includes the following items: o corporate activities that are not directly attributable to one of the four major business units. Included in this category are goodwill amortization for periods prior to January 1, 2002 and certain other nonrecurring items such as merger and integration expense, certain parent company non-bank subsidiaries, and the elimination of the fully taxable-equivalent basis amount; o the adjustment between the credit expense under RAROC and the provision for credit losses under US GAAP and earnings associated with unallocated equity capital; o the Credit Management Group, containing the Special Assets Division, which includes $450 million and $396 million of nonperforming assets as of September 30, 2001 and 2002, respectively; o the Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies in the US, which are affiliated with companies headquartered outside the US, mostly in Japan; and o the residual costs of support groups. 28 Net income for "Other" in the third quarter of 2002 was $14.7 million. The results were impacted by the following factors: o credit expense (income) of ($15.3) million was due to the difference between the $40.0 million in provision for credit losses calculated under our US GAAP methodology and the $55.3 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; o net interest income of $21.5 million, which resulted from the differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal Corporation, and a credit for demand deposits in the Pacific Rim Corporate Group; o noninterest income of $4.3 million; and o noninterest expense of $29.5 million. Net loss for "Other" in the third quarter of 2001 was $0.1 million. The results were impacted by the following factors: o credit expense of $6.4 million due to the difference between the $50.0 million in provision for credit losses calculated under our US GAAP methodology and the $43.6 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; offset by o net interest income of $16.9 million, which resulted from the differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal Corporation, and a credit for demand deposits in the Pacific Rim Corporate Group; o noninterest income of $2.1 million, and o noninterest expense of $24.0 million. 29 NET INTEREST INCOME The following tables show the major components of net interest income and net interest margin.
FOR THE THREE MONTHS ENDED ______________________________________________________________________________________ SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 _________________________________________ _________________________________________ AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE BALANCE INCOME/ YIELD/ BALANCE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) EXPENSE(1) RATE(1) EXPENSE(1) RATE(1) _____________________________________ ___________ ________ _______ ___________ ________ _______ ASSETS Loans:(2) Domestic $24,825,234 $442,062 7.08% $24,770,565 $374,043 6.00% Foreign(3) 1,091,866 13,451 4.89 1,200,918 8,134 2.69 Securities--taxable 4,853,629 75,728 6.24 5,907,792 76,825 5.20 Securities--tax-exempt 42,501 1,475 13.88 35,761 990 11.08 Interest bearing deposits in banks 61,074 622 4.04 135,952 773 2.26 Federal funds sold and securities 164,876 1,398 3.36 327,820 1,467 1.78 purchased under resale agreements Trading account assets 303,879 1,691 2.21 378,715 1,415 1.48 ___________ ________ ___________ ________ Total earning assets 31,343,059 536,427 6.81 32,757,523 463,647 5.63 ________ ________ Allowance for credit losses (639,736) (631,581) Cash and due from banks 2,191,527 1,860,183 Premises and equipment, net 489,181 497,542 Other assets 1,232,909 1,319,808 ___________ ___________ Total assets $34,616,940 $35,803,475 =========== =========== LIABILITIES Domestic deposits: Interest bearing $ 5,941,131 33,509 2.24 $ 8,292,080 22,855 1.09 Savings and consumer time 3,481,091 26,605 3.03 3,614,192 14,593 1.60 Large time 4,346,272 45,737 4.18 2,679,594 14,601 2.16 Foreign deposits(3) 1,986,119 15,954 3.19 1,369,123 4,727 1.37 ___________ ________ ___________ ________ Total interest bearing deposits 15,754,613 121,805 3.07 15,954,989 56,776 1.41 ___________ ________ ___________ ________ Federal funds purchased and securities sold under repurchase agreements 1,413,866 12,265 3.44 487,201 1,789 1.46 Commercial paper 1,330,949 11,844 3.53 1,043,111 4,488 1.71 Other borrowed funds 404,629 4,914 4.82 270,795 1,662 2.44 Medium and long-term debt 200,000 2,142 4.25 399,697 2,375 2.36 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust 352,363 4,940 5.62 351,879 3,921 4.48 ___________ ________ ___________ ________ Total borrowed funds 3,701,807 36,105 3.87 2,552,683 14,235 2.22 ___________ ________ ___________ ________ Total interest bearing liabilities 19,456,420 157,910 3.22 18,507,672 71,011 1.52 ________ ________ Noninterest bearing deposits 10,636,680 12,500,463 Other liabilities 1,026,176 980,413 ___________ ___________ Total liabilities 31,119,276 31,988,548 SHAREHOLDERS' EQUITY Common equity 3,497,664 3,814,927 ___________ ___________ Total shareholders' equity 3,497,664 3,814,927 ___________ ___________ Total liabilities and shareholders' equity $34,616,940 $35,803,475 =========== =========== Net interest income/margin (taxable-equivalent basis) 378,517 4.81% 392,636 4.77% Less: taxable-equivalent adjustment 426 534 ________ ________ Net interest income $378,091 $392,102 ======== ======== __________ (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
30
FOR THE NINE MONTHS ENDED ______________________________________________________________________________________ SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 _________________________________________ _________________________________________ AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE BALANCE INCOME/ YIELD/ BALANCE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) EXPENSE(1) RATE(1) EXPENSE(1) RATE(1) _____________________________________ ___________ ________ _______ ___________ ________ _______ ASSETS Loans:(2) Domestic $25,093,475 $1,433,167 7.63% $24,468,284 $1,113,279 6.08% Foreign(3) 1,054,397 45,873 5.82 1,094,168 23,642 2.89 Securities--taxable 4,477,761 212,030 6.31 5,678,095 235,041 5.52 Securities--tax-exempt 57,943 4,731 10.89 36,971 2,979 10.75 Interest bearing deposits in banks 68,631 2,249 4.38 113,779 1,898 2.23 Federal funds sold and securities purchased under resale agreements 142,965 4,585 4.29 782,607 10,354 1.77 Trading account assets 333,906 6,817 2.73 298,505 3,107 1.39 ___________ __________ ___________ __________ Total earning assets 31,229,078 1,709,452 7.31 32,472,409 1,390,300 5.72 __________ __________ Allowance for credit losses (635,230) (635,313) Cash and due from banks 2,204,603 1,878,616 Premises and equipment, net 484,682 497,503 Other assets 1,262,310 1,328,587 ___________ ___________ Total assets $34,545,443 $35,541,802 =========== =========== LIABILITIES Domestic deposits: Interest bearing $ 5,999,738 110,321 2.46 $ 7,881,352 68,564 1.16 Savings and consumer time 3,394,569 84,878 3.34 3,587,824 46,830 1.75 Large time 4,600,627 171,195 4.98 3,125,003 52,001 2.22 Foreign deposits(3) 1,985,523 60,944 4.10 1,576,176 17,096 1.45 ___________ __________ ___________ __________ Total interest bearing deposits 15,980,457 427,338 3.58 16,170,355 184,491 1.53 ___________ __________ ___________ __________ Federal funds purchased and securities sold under repurchase agreements 1,419,912 48,687 4.58 463,067 5,134 1.48 Commercial paper 1,383,999 46,882 4.53 999,030 12,998 1.74 Other borrowed funds 456,195 16,630 4.87 543,796 8,740 2.15 Medium and long-term debt 200,000 7,873 5.26 399,788 7,198 2.41 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust 352,215 16,329 6.18 352,183 11,832 4.47 ___________ __________ ___________ __________ Total borrowed funds 3,812,321 136,401 4.78 2,757,864 45,902 2.22 ___________ __________ ___________ __________ Total interest bearing liabilities 19,792,778 563,739 3.81 18,928,219 230,393 1.63 __________ __________ Noninterest bearing deposits 10,288,593 11,915,106 Other liabilities 1,049,511 968,204 ___________ ___________ Total liabilities 31,130,882 31,811,529 SHAREHOLDERS' EQUITY Common equity 3,414,561 3,730,273 ___________ ___________ Total shareholders' equity 3,414,561 3,730,273 ___________ ___________ Total liabilities and shareholders' equity $34,545,443 $35,541,802 =========== =========== Net interest income/margin (taxable-equivalent basis) 1,145,713 4.90% 1,159,907 4.77% Less: taxable-equivalent adjustment 1,638 1,604 __________ __________ Net interest income $1,144,075 $1,158,303 ========== ========== __________ (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
31 Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and average interest bearing liabilities. THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 Net interest income, on a taxable-equivalent basis, was $392.6 million in the third quarter of 2002, compared with $378.5 million in the third quarter of 2001. This increase of $14.1 million, or 4 percent, was attributable primarily to the impact of the decreasing interest rate environment throughout the prior year on interest bearing liabilities, increasing average noninterest bearing deposits, and higher earning assets, partly offset by significantly lower yields on our earning assets. Decreasing market rates resulted in a lower average yield of 118 basis points, which was favorably impacted by higher interest rate derivatives income of $12.5 million, on average earning assets of $32.8 billion. This lower average yield on earning assets was partly offset by lower rates on our interest bearing liabilities of 170 basis points on average balances of $18.5 billion. Mitigating the impact of the lower interest rate environment on our net interest margin was an increase in average earning assets of $1.4 billion, primarily in securities, funded by a $1.9 billion, or 18 percent, increase in average noninterest bearing deposits. The resulting impact of these changes on our net interest margin was a decrease of 4 basis points to 4.77 percent. Average earning assets were $32.8 billion in the third quarter of 2002, compared with $31.3 billion in the third quarter of 2001. This growth was attributable to a $1.1 billion, or 21 percent, increase in average securities. The increase in average securities, which were comprised primarily of fixed rate securities, reflected liquidity and interest rate risk management actions. While average loans increased $54.4 million, or less than 1 percent, over the prior year, our loan mix has substantially changed. Average commercial loans decreased by $1.5 billion mainly attributable to slower loan growth due to economic conditions, loan sales, and a reduction in our exposure to nonrelationship syndicated loans while average residential mortgages increased by $1.3 billion, which was a result of a strategic portfolio shift from more volatile commercial loans. Other loan categories included an increase in average commercial mortgages of $451.3 million and a decrease in average consumer loans and lease financing of $208.4 million and $145.0 million, respectively. NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 Net interest income, on a taxable-equivalent basis, was $1.2 billion in the first nine months of 2002, compared with $1.1 billion in the first nine months of 2001. This increase of $14.2 million, or 1 percent, was attributable primarily to the impact of decreasing interest rate environment throughout the prior year on interest bearing liabilities, increasing average noninterest bearing deposits, and higher earning assets, partly offset by significantly lower yields on our earning assets. Decreasing market rates resulted in a lower average yield of 159 basis points, which was favorably impacted by higher interest rate derivatives income of $55.3 million, on average earning assets of $32.5 billion. This lower average yield on earning assets was partly offset by lower rates on our interest bearing liabilities of 218 basis points on average balances of $18.9 billion. Mitigating the impact of the lower interest rate environment on our net interest margin was an increase in average earning assets of $1.2 billion, primarily in securities, funded by a $1.6 billion, or 16 percent, increase in average noninterest bearing deposits. The resulting impact of these changes on our net interest margin was a decrease of 13 basis points to 4.77 percent. Average earning assets were $32.5 billion in the first nine months of 2002, compared with $31.2 billion in the first nine months of 2001. This growth was attributable to a $1.2 billion, or 26 percent, increase in average securities, partly offset by a $585.4 million, or 2 percent, decrease in average loans. The increase in average securities, which were comprised primarily of fixed rate securities, reflected liquidity and interest rate risk management actions. The decline in average loans was mostly due to a $2.2 billion decrease in average commercial loans mainly attributable to slower loan growth due to economic conditions, loan sales, and a reduction in our exposure to nonrelationship syndicated loans. The decrease in commercial 32 loans was partly offset by an increase in average residential mortgages of $1.6 billion, which was a result of a strategic portfolio shift from more volatile commercial loans. Other loan categories included an increase in average commercial mortgages of $388.8 million and a decrease in average consumer loans and lease financing of $273.9 million and $152.8 million, respectively.
NONINTEREST INCOME FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED _________________________________________ __________________________________________ SEPTEMBER 30, SEPTEMBER 30, PERCENT SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS) 2001 2002 CHANGE 2001 2002 CHANGE ______________________ ________ ________ _______ ________ ________ ________ Service charges on deposit accounts $ 62,742 $ 68,629 9.38% $181,614 $204,641 12.68% Trust and investment management fees 37,965 35,368 (6.84) 116,880 109,680 (6.16) Merchant transaction processing fees 21,315 22,860 7.25 60,814 65,982 8.50 International commissions and fees 18,053 20,131 11.51 53,288 57,593 8.08 Brokerage commissions and fees 8,786 9,183 4.52 26,764 28,090 4.95 Merchant banking fees 7,742 6,819 (11.92) 26,671 22,845 (14.35) Gain on exchange of STAR System stock -- -- -- 20,700 -- (100.00) Foreign exchange trading gains, net 6,351 8,193 29.00 19,472 21,653 11.20 Insurance commissions -- 6,120 nm -- 19,525 nm Securities gains (losses), net (1,699) 550 nm 4,318 (3,313) nm Other 12,150 4,573 (62.36) 12,082 15,955 32.06 ________ ________ _______ ________ ________ ________ Total noninterest income $173,405 $182,426 5.20% $522,603 $542,651 3.84% ======== ======== ======= ======== ======== ======== ___________ nm = not meaningful
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 In the third quarter of 2002, noninterest income was $182.4 million, an increase of $9.0 million, or 5 percent, over the third quarter of 2001. This increase was mainly attributable to incremental insurance commissions of $6.1 million related to the acquisition of Armstrong/Robitaille, a $5.9 million increase in service charges on deposit accounts, a $2.1 million increase in international commissions and fees, and a $1.5 million increase in merchant transaction processing fees, partly offset by a $2.6 million decrease in trust and investment management fees and a $0.9 million decrease in merchant banking fees. In addition, securities gains, net, were $0.6 million in the third quarter of 2002 compared to securities losses, net, of $1.7 million in the third quarter of 2001. Revenue from service charges on deposit accounts was $68.6 million, an increase of 9 percent over the third quarter of 2001. This increase was primarily attributable to an 18 percent increase in quarterly average demand deposits and reductions in the earnings credit rates, caused by the lower interest rate environment on analyzed deposit accounts, which resulted in customers paying fees for services rather than increasing required deposit balances. Trust and investment management fees were $35.4 million, a decrease of 7 percent over the third quarter of 2001. This decrease is primarily attributable to declining market conditions and their impact on transaction and asset-based fees. Total assets under administration of $129.7 billion at September 30, 2002 decreased by $5.8 billion, or 4 percent, from September 30, 2001. Merchant transaction processing fees were $22.9 million, an increase of 7 percent over the third quarter of 2001. This increase was primarily attributable to an increase in the volume of credit card drafts deposited by merchants and increased consumer usage of our enhanced Gold and Platinum version of our standard MasterMoney Card (debit card) aimed at stimulating consumer usage for higher dollar purchases. Insurance commissions were $6.1 million reflecting the incremental revenues associated with our acquisition of Armstrong/Robitaille. 33 Securities gains, net, were $0.6 million compared to securities losses, net, of $1.7 million in the prior year. In the current quarter, we realized gains of $1.9 million on the sale of securities, offset by permanent writedowns on private capital securities of $1.4 million. In the third quarter of 2001, we realized net gains of $7.8 million on the sale of securities, offset by permanent writedowns on private capital securities of $9.5 million. Other noninterest income was $4.6 million, a decrease of $7.6 million from the third quarter of 2001. This decrease was mainly attributable to $5.6 million in higher valuation reserves for commercial loans held for sale and $3.4 million in unrealized losses on other non-publicly traded securities compared to an unrealized loss of $0.6 million in the third quarter of 2001. NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 In the first nine months of 2002, noninterest income was $542.7 million, an increase of $20.0 million, or 4 percent, over the first nine months of 2001. In the prior year, we recognized a $20.7 million gain when our stock holding in STAR System was exchanged for Concord EFS stock. Excluding the gain on the exchange of our STAR System holdings, noninterest income increased $40.7 million, or 8 percent. This increase was mainly attributable to lower residual value writedowns in our auto lease portfolio of $19.3 million, a $23.0 million increase in service charges on deposit accounts, incremental insurance commissions of $19.5 million related to our acquisition of Armstrong/Robitaille, a $5.2 million increase in merchant transaction processing fees, and a $4.3 million increase in international commissions and fees, partly offset by a $7.2 million decrease in trust and investment management fees, and a $3.8 million decrease in merchant banking fees. In addition, securities losses, net, were $3.3 million in the first nine months of 2002 compared to securities gains, net, of $4.3 million in the first nine months of 2001. Revenue from service charges on deposit accounts was $204.6 million, an increase of 13 percent over the first nine months of 2001. This increase was primarily attributable to a 16 percent increase in average demand deposits and reductions in the earnings credit rates, caused by the lower interest rate environment on analyzed deposit accounts, which resulted in customers paying fees for services rather than increasing required deposit balances. Trust and investment management fees were $109.7 million, a decrease of 6 percent over the first nine months of 2001. This decrease is attributable to declining market conditions and their impact on transaction and asset-based fees. Merchant transaction processing fees were $66.0 million, an increase of 9 percent over the first nine months of 2001. This increase was primarily attributable to an increase in the volume of credit card drafts deposited by merchants and increased consumer usage of our enhanced Gold and Platinum version of our standard MasterMoney Card (debit card) aimed at stimulating consumer usage for higher dollar purchases. Merchant banking fees were $22.8 million, a decrease of 14 percent from the first nine months of 2001. This decrease was primarily attributable to fewer and smaller syndication and investment banking transactions as a result of current market conditions. Insurance commissions were $19.5 million reflecting the incremental revenues associated with our acquisition of Armstrong/Robitaille. Securities losses, net, were $3.3 million compared to securities gains, net, of $4.3 million in the prior year. In the first nine months of 2002, we had permanent writedowns on private capital securities of $10.3 million, partly offset by realized gains of $7.0 million on the sale of securities. In the first nine months of 2001, we realized net gains of $23.9 million on the sale of securities, including a $9.5 million gain on the sale of Concord EFS shares, partly offset by permanent writedowns on private capital securities of $19.6 million. Other noninterest income was $16.0 million, an increase of $3.9 million over the first nine months of 2001. The increase was mainly attributable to lower residual value writedowns in our auto lease portfolio of 34 $9.0 million in the first nine months of 2002 compared to $28.3 million in the first nine months of 2001. This increase was partly offset by higher unrealized losses on other non-publicly traded securities of $7.2 million in the current year compared to an unrealized loss of $1.7 million in the first nine months of 2001, $5.6 million in higher valuation reserve for loans held for sale in the current year, and a $3.1 million gain on the sale of leased equipment in the prior year.
NONINTEREST EXPENSE FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED _________________________________________ __________________________________________ SEPTEMBER 30, SEPTEMBER 30, PERCENT SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS) 2001 2002 CHANGE 2001 2002 CHANGE _____________________ ________ ________ _______ ________ ________ ________ Salaries and other compensation $140,147 $152,057 8.50% $408,413 $448,690 9.86% Employee benefits 31,025 30,218 (2.60) 91,830 98,561 7.33 ________ ________ _______ ________ ________ ________ Salaries and employee benefits 171,172 182,275 6.49 500,243 547,251 9.40 Net occupancy 23,779 27,340 14.98 70,375 75,750 7.64 Equipment 16,985 16,343 (3.78) 48,252 48,650 0.82 Merchant transaction processing 13,324 14,644 9.91 39,687 41,993 5.81 Communications 13,074 13,186 0.86 36,582 39,695 8.51 Software 8,250 10,061 21.95 22,614 31,610 39.78 Professional services 9,982 10,350 3.69 29,155 30,789 5.60 Advertising and public relations 10,084 9,145 (9.31) 28,134 27,774 (1.28) Data processing 8,885 7,944 (10.59) 26,935 24,475 (9.13) Intangible asset amortization 3,635 1,497 (58.82) 10,806 3,661 (66.12) Foreclosed asset expense (income) (60) 18 nm 1 130 nm Other 37,932 38,331 1.05 119,195 112,510 (5.61) ________ ________ _______ ________ ________ ________ Total noninterest expense $317,042 $331,134 4.44% $931,979 $984,288 5.61% ======== ======== ======= ======== ======== ======== _____________ nm = not meaningful
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 In the third quarter of 2002, noninterest expense was $331.1 million, an increase of $14.1 million, or 4 percent, over the third quarter of 2001. This increase was primarily due to a $11.1 million increase in salaries and employee benefits, a $3.6 million increase in net occupancy expense, a $1.8 million increase in software expense, and a $1.3 million increase in merchant transaction processing expense. These increases were partly offset by a $2.1 million decrease in intangible asset expense mostly attributable to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," in the first quarter of 2002, which eliminated the amortization of goodwill. Salaries and employee benefits were $182.3 million, an increase of 7 percent over the third quarter of 2001. This increase was primarily attributable to salary expense increases necessary to achieve our strategic goals to expand key businesses, to annual merit increases, to higher incentive expense, partially offset by lower benefit expenses primarily due to higher COLI (company-owned life insurance) income. Excluding higher COLI income, benefit expenses, including higher medical costs, would have been $2.9 million higher. Net occupancy expense was $27.3 million, an increase of 15 percent over the third quarter of 2001. This increase was primarily attributable to higher building rent, depreciation, leasehold amortization and maintenance expenses mainly associated with the opening of new branches and the Armstrong/Robitaille and First Western Bank acquisitions. 35 Software expense was $10.1 million, an increase of 22 percent over the third quarter of 2001. This increase was primarily attributable to increased software purchases and development to support strategic technology initiatives. Merchant transaction processing expense was $14.6 million, an increase of 10 percent over the third quarter of 2001. This increase was primarily attributable to an increase in the volume of credit card drafts deposited by merchants. Intangible asset amortization expense was $1.5 million, a decrease of 59 percent from the third quarter of 2001. This decrease was primarily attributable to lower goodwill amortization related to the adoption of SFAS No. 142 in the first quarter of 2002. NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 In the first nine months of 2002, noninterest expense was $984.3 million, an increase of $52.3 million, or 6 percent, over the same period in 2001. This increase was primarily due to a $47.0 million increase in salaries and employee benefits, a $9.0 million increase in software expense, and a $3.1 million increase in communications expense. These increases were partly offset by a $7.1 million decrease in intangible asset expense mostly attributable to the adoption of SFAS No. 142 in the first quarter of 2002, which eliminated the amortization of goodwill, a $2.5 million decrease in data processing expense, and a $6.7 million decrease in other noninterest expense. Salaries and employee benefits were $547.3 million, an increase of 9 percent over the first nine months of 2001. This increase was primarily attributable to increases in staff necessary to achieve our strategic goals to expand key businesses, to annual merit increases, to higher incentive expense, and to higher other benefit expenses including higher pension and medical costs. Software expense was $31.6 million, an increase of 40 percent over the first nine months of 2001. This increase was primarily attributable to increased software purchases and development to support strategic technology initiatives. Net occupancy expense was $75.8 million, an increase of 8 percent over the third quarter of 2001. This increase was primarily attributable to higher building rent, depreciation, leasehold amortization and maintenance expenses mainly associated with the opening of new branches and the Armstrong/Robitaille and First Western Bank acquisitions. Communications expense was $39.7 million, an increase of 9 percent over the first nine months of 2001. This increase was primarily attributable to higher costs associated with increased rates and usage for data and voice communication. Merchant transaction processing expense was $42.0 million, an increase of 6 percent over the third quarter of 2001. This increase was primarily attributable to an increase in the volume of credit card drafts deposited by merchants. Professional services expense was $30.8 million, an increase of 6 percent over the first nine months of 2001. This increase was primarily attributable to higher consulting expenses related to process improvement projects and higher legal expenses. Data processing expense was $24.5 million, a decrease of 9 percent over the first nine months of 2001. This decrease was primarily attributable to the impact of reductions in the earnings credit rates, caused by the lower interest rate environment, on analyzed deposit accounts used to offset vendor expenses. Intangible asset amortization expense was $3.7 million, a decrease of 66 percent from the third quarter of 2001. This decrease reflects the adoption of SFAS No. 142 in the first quarter of 2002. Other noninterest expense was $112.5 million, a decrease of 6 percent from the first nine months of 2001. This decrease was mainly due to the recognition of a $6.2 million loss at the adoption of SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities," and higher derivative-related 36 expenses of $3.6 million due to changes in the value of a portion of the interest rate options that were excluded from hedge accounting under SFAS No. 133, both of which occurred in the prior year. INCOME TAX EXPENSE Income tax expense in the third quarter of 2002 was $65.2 million, a 32 percent effective income tax rate, which included a $3.3 million net reduction in income tax expense resulting from a change in a tax law in the State of California concerning the tax treatment of loan loss reserves. For the third quarter of 2001, the effective income tax rate was also 32 percent. Income tax expense in the first nine months of 2002 was $188.7 million, a 33 percent effective income tax rate, which included a $3.3 million net reduction in income tax expense resulting from a change in a tax law in the State of California concerning the tax treatment of loan loss reserves. For the first nine months of 2001, the effective income tax rate was also 33 percent. LOANS The following table shows loans outstanding by loan type.
PERCENT CHANGE TO SEPTEMBER 30, 2002 FROM: ______________________________ SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, (DOLLARS IN THOUSANDS) 2001 2001 2002 2001 2001 ______________________________________ ___________ ___________ ____________ _____________ ____________ Domestic: Commercial, financial and industrial $12,227,368 $11,476,361 $10,759,876 (12.00)% (6.24)% Construction 1,119,854 1,059,847 1,259,435 12.46 18.83 Mortgage: Residential 4,537,854 4,788,219 5,852,932 28.98 22.24 Commercial 3,434,037 3,590,318 3,950,568 15.04 10.03 ___________ ___________ ___________ _____________ ____________ Total mortgage 7,971,891 8,378,537 9,803,500 22.98 17.01 Consumer: Installment 1,326,056 1,200,047 899,263 (32.19) (25.06) Revolving lines of credit 810,188 859,021 1,057,245 30.49 23.08 ___________ ___________ ___________ _____________ ____________ Total consumer 2,136,244 2,059,068 1,956,508 (8.41) (4.98) Lease financing 981,290 979,242 836,688 (14.74) (14.56) ___________ ___________ ___________ _____________ ____________ Total loans in domestic offices 24,436,647 23,953,055 24,616,007 0.73 2.77 Loans originated in foreign branches 1,157,642 1,040,975 1,346,152 16.28 29.32 ___________ ___________ ___________ _____________ ____________ Total loans $25,594,289 $24,994,030 $25,962,159 1.44% 3.87% =========== =========== ============ ============= ============
Our lending activities are predominantly domestic, with such loans comprising 95 percent of the total loan portfolio at September 30, 2002. Total loans at September 30, 2002 were $26.0 billion, an increase of 1 percent, from September 30, 2001. The increase was mainly attributable to an increase in the residential mortgage portfolio of $1.3 billion and an increase in the commercial mortgage portfolio of $516.5 million, partly offset by a decline in the commercial, financial and industrial loan portfolio of $1.5 billion and a decline in the consumer loan portfolio of $179.7 million. Commercial, financial and industrial loans continue to be a significant portion of our loan portfolio. These loans are extended principally to corporations, middle market businesses, and small businesses, with no industry concentration exceeding 10 percent of total loans. The commercial, financial and industrial 37 loan portfolio was $10.8 billion, or 41 percent of total loans, at September 30, 2002, compared with $12.2 billion, or 48 percent of total loans, at September 30, 2001. The decrease of $1.5 billion, or 12 percent, from the prior year was primarily attributable to current economic conditions, loan sales, and reductions in our exposure in nonrelationship syndicated loans. The reduction in commercial, financial, and industrial loans is consistent with our strategy to reduce our exposure in more volatile commercial loans and increase the percentage of more stable consumer loans. The construction loan portfolio totaled $1.3 billion, or 5 percent of total loans, at September 30, 2002, compared with $1.1 billion, or 4 percent of total loans, at September 30, 2001. This growth of $139.6 million, or 12 percent, from the prior year was primarily attributable to a reasonably stable Southern California housing market during 2001 and 2002, despite the slowdown in the economy. Commercial mortgages were $4.0 billion, or 15 percent of total loans, at September 30, 2002, compared with $3.4 billion, or 13 percent of total loans, at September 30, 2001. The mortgage loan portfolio consists of loans on commercial and industrial projects primarily in California. The increase in commercial mortgages of $516.5 million, or 15 percent, from September 30, 2001, was primarily due to demand in the Southern California real estate market. Residential mortgages were $5.9 billion, or 23 percent of total loans, at September 30, 2002, compared with $4.5 billion, or 18 percent of total loans, at September 30, 2001. The residential mortgage portfolio consists of residential loans secured by one-to-four family residential properties primarily in California. The increase in residential mortgages of $1.3 billion, or 29 percent, from September 30, 2001, continues to be influenced by our strategic decision to increase our residential mortgage portfolio through increased in-house production and additional wholesale and correspondent channels. Consumer loans totaled $2.0 billion, or 8 percent of total loans, at September 30, 2002, compared with $2.1 billion, or 8 percent of total loans, at September 30, 2001. The decrease of $179.7 million, or 8 percent, was attributable to the impact of our decision to exit the indirect auto lending business in the third quarter of 2000, partly offset by an increase in home equity loans. Lease financing totaled $836.7 million, or 3 percent of total loans, at September 30, 2002, compared with $981.3 million, or 4 percent of total loans, at September 30, 2001. As we previously announced, effective April 20, 2001, we discontinued our auto leasing activity. Loans originated in foreign branches totaled $1.3 billion, or 5 percent of total loans, at September 30, 2002, compared with $1.2 billion, or 5 percent, at September 30, 2001. The increase in loans originated in foreign branches of $188.5 million, or 16 percent, from September 30, 2001, was attributable to an increase in trade related short-term loans and funded acceptances. CROSS-BORDER OUTSTANDINGS Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of September 30, 2001, December 31, 2001 and September 30, 2002 for any country where such outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding exclude local 38 currency outstandings. For any country shown in the table below, we do not have significant local currency outstandings that are not hedged or are not funded by local currency borrowings.
FINANCIAL PUBLIC CORPORATIONS TOTAL INSTITUTIONS SECTOR AND OTHER OUTSTANDINGS (DOLLARS IN MILLIONS) ENTITIES BORROWERS __________________________________________ ____________ _________ ____________ ____________ September 30, 2001 Korea $425 $-- $50 $475 December 31, 2001 Korea $468 $-- $46 $514 September 30, 2002 Korea $580 $-- $55 $635
PROVISION FOR CREDIT LOSSES We recorded a $40 million provision for credit losses in the third quarter of 2002, compared with a $50 million provision for credit losses for the same period in the prior year. The provision for credit losses in the first nine months of 2002 was $145 million, compared with a $215 million provision for credit losses for the same period in the prior year. Provisions for credit losses are charged to income to bring our allowance for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowance for Credit Losses" below. ALLOWANCE FOR CREDIT LOSSES We maintain an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio, and to a lesser extent, unused commitments to provide financing. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, specific allowances for identified problem loans and portfolio segments, and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans, leases and commitments. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Loss factors are developed in the following ways: o pass graded, for commercial, financial, and industrial loans, as well as all problem graded loan loss factors are derived from a migration model that tracks historical losses over a period, which we believe captures the inherent losses in our loan portfolio; o pass graded loan loss factors for commercial real estate loans and construction loans are based on the average annual net charge-off rate over a period reflective of a full economic cycle; and o pooled loan loss factors (not individually graded loans) are based on expected net charge-offs for one year. Pooled loans are loans that are homogeneous in nature, such as consumer installment, home equity, residential mortgage loans and automobile leases. We believe that an economic cycle is a period in which both upturns and downturns in the economy have been reflected. We calculate loss factors over a time interval that spans what we believe constitutes a complete and representative economic cycle. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred. This amount may be determined either by a method prescribed by SFAS No. 114, "Accounting by 39 Creditors for Impairment of a Loan," or methods that include a range of probable outcomes based upon certain qualitative factors. The unallocated allowance contains amounts that are based on management's evaluation of conditions that are not directly reflected in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following, which existed at the balance sheet date: o general economic and business conditions affecting our key lending areas; o credit quality trends (including trends in nonperforming loans expected to result from existing conditions); o collateral values; o loan volumes and concentrations; o seasoning of the loan portfolio; o specific industry conditions within portfolio segments; o recent loss experience in particular segments of the portfolio; o duration of the current economic cycle; o bank regulatory examination results; and o findings of our internal credit examiners. Executive management reviews these conditions quarterly in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such conditions may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the probable loss related to such condition is reflected in the unallocated allowance. The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio. The actual losses can vary from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The loss migration model that is used to establish the loan loss factors for problem graded loans and pass graded commercial, financial, and industrial loans is designed to be self-correcting by taking into account our loss experience over prescribed periods. Similarly, by basing the pass graded loan loss factors over a period reflective of an economic cycle, the methodology is designed to take our recent loss experience for commercial real estate mortgages and construction loans into account. Pooled loan loss factors are adjusted quarterly based upon the level of net charge-offs expected by management in the next twelve months. Furthermore, based on management's judgement, our methodology permits adjustments to any loss factor used in the computation of the formula allowance for significant factors, which affect the collectibility of the portfolio as of the evaluation date, but are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information that has become available. COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES FROM DECEMBER 31, 2001 During the third quarter of 2002, there were no changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the formula and specific allowances for credit losses. Changes in estimates and assumptions regarding the effects of economic and business conditions on borrowers and other factors, which are described below, affected the assessment of the unallocated allowance. 40 At December 31, 2001, our total allowance for credit losses was $635 million or 2.54 percent of the total loan portfolio and 129 percent of total nonaccrual loans. At September 30, 2002, our total allowance for credit losses was $623 million or 2.40 percent of the total loan portfolio and 158 percent of total nonaccrual loans. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114 and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. At December 31, 2001, total impaired loans were $492 million and the associated impairment allowance was $98 million compared with $395 million and $87 million, respectively, at September 30, 2002. The impairment allowance at September 30, 2002 reflects a refinement of methodology for estimating losses for impaired loans. The December 31, 2001 impairment allowance has not been restated. We recorded a $40 million provision in the third quarter of 2002 as a result of management's assessment of factors, including the continued slow US economy, uncertainty in the communication/media, power, real estate, airlines, and other sectors in domestic markets in which we operate, and growth and changes in the composition of the loan portfolio. Losses inherent in large commercial loans are more difficult to assess because historically these have been more volatile than losses from other credits. CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES At September 30, 2002, the formula allowance remained relatively unchanged at $321 million, compared to $325 million at December 31, 2001, a decrease of $4 million. At September 30, 2002, the specific allowance was $124 million compared to $138 million at December 31, 2001, a net decrease of $14 million. The specific allowance includes $15 million related to aircraft leases. The net decline was primarily due to charge-offs recognized year-to-date as well as a refinement in our estimated losses for impaired loans and a decline in nonaccrual loans. CHANGES IN THE UNALLOCATED ALLOWANCE At September 30, 2002, the unallocated allowance was $178 million, compared to $172 million at December 31, 2001, an increase of $6 million. In evaluating the appropriateness of the unallocated allowance, we considered the following factors as well as more general factors such as the interest rate environment and the impact of the economic downturn on those borrowers who have a more leveraged financial profile: o the adverse effects of declining wholesale power prices, continued accounting concerns, and uncertainties regarding the course of deregulation on borrowers in the power industry, which could be in the range of $25 million to $50 million; o the adverse effects of changes in the economic, regulatory, and technology environments on borrowers in the communications/media industry, which could be in the range of $18 million to $40 million; o the adverse effects of the general weakening in commercial real estate markets reflecting weak demand, as well as the specific deterioration in Northern California, which could be in the range of $16 million to $32 million; o the adverse effects of the continued weak economic conditions in certain Asia/Pacific Rim countries and the reduced strength of the Japanese corporate parents of our Pacific Rim borrowers, which could be in the range of $7 million to $13 million; and o the adverse effects of continued soft consumer confidence on borrowers in the retailing industry, which could be in the range of $6 million to $12 million. 41 There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth above. See "Certain Business Risks Factors." CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES The following table sets forth a reconciliation of changes in our allowance for credit losses.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ______________________ _____________________ (DOLLARS IN THOUSANDS) 2001 2002 2001 2002 ____________________________________________________________ ________ ________ ________ ________ Balance, beginning of period $626,537 $624,948 $613,902 $634,509 Loans charged off: Commercial, financial and industrial 65,974 48,284 230,680 178,462 Construction 567 -- 567 -- Mortgage 37 2,097 95 2,525 Consumer 3,299 1,845 9,534 6,672 Lease financing 807 479 2,595 1,986 ________ ________ ________ ________ Total loans charged off 70,684 52,705 243,471 189,645 Recoveries of loans previously charged off: Commercial, financial and industrial 22,467 8,769 40,477 26,108 Construction -- -- -- 40 Mortgage -- 75 24 214 Consumer 1,027 2,012 3,279 3,793 Lease financing 282 115 601 497 Foreign(1) -- -- 14 -- ________ ________ ________ ________ Total recoveries of loans previously charged off 23,776 10,971 44,395 30,652 ________ ________ ________ ________ Net loans charged off 46,908 41,734 199,076 158,993 Provision for credit losses 50,000 40,000 215,000 145,000 Foreign translation adjustment and other net additions (deductions)(2) 54 (136) (143) 2,562 ________ ________ ________ ________ Balance, end of period $629,683 $623,078 $629,683 $623,078 ======== ======== ======== ======== Allowance for credit losses to total loans 2.46% 2.40% 2.46% 2.40% Provision for credit losses to net loans charged off 106.59 95.85 108.00 91.20 Net loans charged off to average loans outstanding for the period(3) 0.72 0.64 1.02 0.83 ____________ (1) Foreign loans are those loans originated in foreign branches. (2) Includes a second quarter 2002 addition of $2.4 million related to the First Western Bank acquisition. (3) Annualized.
Total loans charged off in the third quarter of 2002 decreased by $18.0 million from the third quarter of 2001, primarily due to a $17.7 million decrease in commercial, financial and industrial loans charged off. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through provisions for credit losses. Third quarter 2002 recoveries of loans previously charged off decreased by $12.8 million from the third quarter of 2001. The percentage of net loans charged off to average loans outstanding for the third quarter of 2002 decreased by 8 basis points from the same period in 2001. At September 30, 2002, the allowance for credit losses exceeded the annualized net loans charged off during the third quarter of 2002, 42 reflecting management's belief, based on the foregoing analysis, that there are additional losses inherent in the portfolio. Historical net charge-offs are not necessarily indicative of the amount of net charge-offs that we will realize in the future.
NONPERFORMING ASSETS SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2001 2001 2002 _____________________________________________________ ____________ ___________ ____________ Commercial, financial and industrial $ 419,544 $ 471,509 $ 367,888 Construction -- -- 1,096 Commercial mortgage 24,975 17,430 24,133 Lease financing -- 2,946 2,095 ____________ ___________ ____________ Total nonaccrual loans 444,519 491,885 395,212 Foreclosed assets 378 597 309 Distressed loans held for sale 5,349 -- -- ____________ ___________ ____________ Total nonperforming assets $ 450,246 $ 492,482 $ 395,521 ============ =========== ============ Allowance for credit losses $ 629,683 $ 634,509 $ 623,078 ============ =========== ============ Nonaccrual loans to total loans 1.74% 1.97% 1.52% Allowance for credit losses to nonaccrual loans 141.65 129.00 157.66 Nonperforming assets to total loans, distressed loans held for sale and foreclosed assets 1.76 1.97 1.52 Nonperforming assets to total assets 1.28 1.37 1.05
At September 30, 2002, nonperforming assets totaled $395.5 million, a decrease of $54.7 million, or 12 percent, from September 30, 2001. The decrease was primarily due to moderate inflows of nonaccrual loans, coupled with continuing higher levels of pay-downs and charge-offs. Nonaccrual loans as a percentage of total loans were 1.52 percent at September 30, 2002, compared with 1.74 percent at September 30, 2001. Nonperforming assets as a percentage of total loans, distressed loans held for sale, and foreclosed assets were 1.52 percent at September 30, 2002, compared to 1.76 percent at September 30, 2001.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2001 2001 2002 _____________________________________________________ ____________ ___________ ____________ Commercial, financial and industrial $ 5,993 $ 26,571 $ 565 Mortgage: Residential 5,063 4,854 4,127 Commercial 710 2,356 -- ____________ ___________ ____________ Total mortgage 5,773 7,210 4,127 Consumer and other 2,459 2,579 2,121 ____________ ___________ ____________ Total loans 90 days or more past due and still accruing $ 14,225 $ 36,360 $ 6,813 ============ =========== ============
43 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) THE FOLLOWING INFORMATION ON MARKET RISK ASSOCIATED WITH INTEREST RATE RISK IS BEING PROVIDED IN ORDER TO EXPAND THE INFORMATION ON THE ASSUMPTIONS USED IN OUR SIMULATION MODELS, WHICH QUANTIFY OUR SENSITIVITY TO CHANGES IN INTEREST RATES. SEE ALSO PART I, ITEM 3 OF THIS DOCUMENT, TITLED "MARKET RISK." We engage in asset and liability management activities with the primary purposes of managing the sensitivity of net interest income (NII) to changes in interest rates within limits established by the Board of Directors (Board) and maintaining a risk profile that is consistent with management's strategic objectives. The Asset & Liability Management (ALM) policy approved by the Board requires monthly monitoring of interest rate risk by the Asset & Liability Management Committee (ALCO), which is composed of UnionBanCal Corporation executives. As part of the management of our interest rate risk, ALCO may direct changes in the composition of the balance sheet and the extent to which we utilize investment securities and derivative instruments such as interest rate swaps, floors, and caps to hedge the our interest rate exposures. Traditionally, we have entered into swaps and floors to offset the adverse impact that declining interest rates would have on the interest income generated by our variable rate commercial loans. For a further discussion of derivative instruments see Note 6--"Derivative Instruments and Other Financial Instruments Used For Hedging" of the Notes to Condensed Consolidated Financial Statements. We use two types of simulation models to quantify the sensitivity of NII to changes in interest rates: a shock simulation model and a Monte Carlo simulation model. In both approaches, NII is adjusted to incorporate the effect of certain noninterest expense items related to demand deposit accounts that are nevertheless sensitive to changes in interest rates. Our primary simulation tool involves a shock analysis in which we estimate the impact that immediate and sustained parallel shifts in the yield curve would have on NII over a 12-month horizon. Under policy limits established by the Board, the negative change in simulated NII in either the up or down 200 basis point shock scenarios may not exceed 8 percent of NII as measured in the flat rate, or no change, scenario. The following table sets forth the shock sensitivity results in both the up and down 200 basis point scenarios as of June 30, 2002 and September 30, 2002. JUNE 30, SEPTEMBER 30, (DOLLARS IN MILLIONS) 2002 2002 _____________________________________ ___________ _____________ +200 basis points $ 48.3 $ 38.3 as a percentage of flat rate scenario NII 3.24% 2.64% - -200 basis points $ (66.5) $ (7.2) as a percentage of flat rate scenario NII 4.47% 0.50% Asset sensitivity in the minus 200 basis point shock simulation decreased significantly in the third quarter of 2002, primarily as a result of the execution of interest rate hedges in July and August, which included $1 billion in "zero cost" collars and $1 billion in receive-fixed swaps. Both types of hedges will generate income in a declining interest rate environment, thereby offsetting the reduction in interest income from our LIBOR-based commercial loans. However, the collars, which involve the simultaneous purchase of at-the-money floors and sale of out-of-the-money caps, have less of a negative impact on interest income than swaps when interest rates rise, as evidenced by the decrease of $10 million in the plus 200 basis point shock, compared to the $59.3 million reduction in risk in the down scenario. Overall, the flattening of the yield curve in the third quarter and the associated increase in mortgage asset prepayment activity had a negative effect on our NII. However, we believe our NII sensitivity profile indicates that our exposure to further acceleration of prepayment speeds has diminished. With Treasury yields nearing all-time lows in late September, the prepayment levels projected by our model do not increase significantly from current levels, even if interest rates decline further. Consequently, the assumed loss of income from reinvesting prepaid 44 cash flows at lower rates decreased. However, in formulating our interest rate risk management strategy we will continue to closely monitor prepayment activity in our investment and residential mortgage portfolios and test our model assumptions against actual data. With federal funds and LIBOR rates at the end of the third quarter of 2002 already below two percent, a downward shock scenario of 200 basis points would result in short-term rate levels below zero percent. As a result, we believe that a downward shock scenario of 100 basis points provides a more reasonable measure of asset sensitivity in a falling interest rate environment. As of September 30, 2002, the difference between flat rate Adjusted NII and Adjusted NII after a 100 basis point downward shock was plus $15.6 million, or 1.08% percent of a flat rate NII. This represents a favorable change of $38.1 million from the second quarter, when the difference was ($22.5) million due to the execution of $2 billion in interest rate derivatives and slowing prepayment speeds, described previously. In the Monte Carlo simulation analysis, we randomly sample up to 300 paths that short-term interest rates could take over the next 12 months and calculate the NII associated with each path. The result is a probability distribution of 12-month NII outcomes. Earnings-at risk (EaR), defined as the potential negative change in NII, is measured at a 97.5% confidence level and is managed within the limit established by the Board's ALM policy at 5 percent of mean NII. The following table summarizes our EaR as a percentage of mean NII as of June 30, 2002 and September 30, 2002. JUNE 30, SEPTEMBER 30, (DOLLARS IN MILLIONS) 2002 2002 _________________________________________ _________ _____________ EaR $25.8 $19.7 EaR as a percentage of mean NII 1.78% 1.39% Management's goal in the NII simulations is to capture the risk embedded in the balance sheet. As a result, asset and liability balances are kept constant throughout the analysis horizon. Two exceptions are non-maturity deposits, which vary with levels of interest rates according to statistically derived balance equations, and discretionary derivative hedges and fixed income portfolios, which are allowed to run off. Additional assumptions are made to model the future behavior of deposit rates and loan spreads based on statistical analysis, management's outlook, and historical experience. The prepayment risks related to residential loans and mortgage-backed securities are measured using industry estimates of prepayment speeds. The sensitivity of the simulation results to the underlying assumptions is tested as a regular part of the risk measurement process by running simulations with different assumptions. In addition, management supplements the official risk measures based on the constant balance sheet assumption with volume-based simulations based on forecasted balances. We believe that together, these simulations provide management with a reasonably comprehensive view of the sensitivity of our operating results to changes in interest rates, at least over the measurement horizon. However, as with any financial model, the underlying assumptions are inherently uncertain and subject to refinement as modeling techniques and theory improve and historical data becomes more readily accessible. Consequently, our simulation models cannot predict with certainty how rising or falling interest rates might impact net interest income. Actual and simulated NII results will differ to the extent there are differences between actual and assumed interest rate changes, balance sheet volumes, and management strategies, among other factors. A third measure that ALCO uses to monitor our risk profile is Economic Value of Equity (EVE). EVE is an estimate of the net present value of the future cash flows associated with all of our assets, liabilities and derivatives. EVE-at-Risk is defined as the negative change in the value of these cash flows resulting from either a +200 basis point or a -200 basis point shock scenario. Although ALCO has identified prototype guidelines for measuring EVE-at-Risk, the Board has not established official policy limits for EVE. We will continue to improve and refine the EVE methodology in the coming months with the goal of proposing an official EVE risk measure in 2003. 45 LIQUIDITY Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust our future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The ALM policy approved by the Board requires quarterly reviews of our liquidity by ALCO. Our liquidity management draws upon the strengths of our extensive retail and commercial market business franchise, coupled with the ability to obtain funds for various terms in a variety of domestic and international money markets. Liquidity is managed through an ALCO coordination process on a bank-wide basis, and implemented through the funding and investment functions of the Global Markets Group. Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our average core deposits, which include demand deposits, money market demand accounts, and savings and consumer time deposits, combined with average common shareholders' equity, funded 79 percent of average total assets of $35.8 billion for the third quarter ended September 30, 2002. Most of the remaining funding was provided by short-term borrowings in the form of negotiable certificates of deposit, foreign deposits, federal funds purchased and securities sold under repurchase agreements, commercial paper and other borrowings. In the fourth quarter of 2001, we issued $200 million in medium-term notes, the proceeds of which were utilized for general corporate purposes. Liquidity may also be provided by the sale or maturity of assets. Such assets include interest bearing deposits in banks, federal funds sold and securities purchased under resale agreements, and trading account securities. The aggregate of these assets averaged $0.8 billion during the third quarter of 2002. Additional liquidity may be provided by investment securities available for sale and by loan maturities. REGULATORY CAPITAL The following table summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, MINIMUM 2001 2001 2002 REGULATORY (DOLLARS IN THOUSANDS) REQUIREMENT ___________________________ ____________ ____________ _____________ ___________ CAPITAL COMPONENTS Tier 1 capital $ 3,631,340 $ 3,661,231 $ 3,617,173 Tier 2 capital 605,605 598,812 568,163 ___________ ___________ ___________ Total risk-based capital $ 4,236,945 $ 4,260,043 $ 4,185,336 =========== =========== =========== Risk-weighted assets $32,473,206 $31,906,438 $32,457,228 =========== =========== =========== Quarterly average assets $34,572,908 $34,760,203 $35,690,024 =========== =========== =========== CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ___________________________ __________ _____ __________ ______ __________ ______ __________ _____ Total capital (to risk-weighted assets) $4,236,945 13.05% $4,260,043 13.35% $4,185,336 12.89% > $2,596,578 8.0% - Tier 1 capital (to risk-weighted assets) 3,631,340 11.18 3,661,231 11.47 3,617,173 11.14 > 1,298,289 4.0 - Leverage(1) 3,631,340 10.50 3,661,231 10.53 3,617,173 10.13 > 1,427,601 4.0 - ____________ (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
UNION BANK OF CALIFORNIA, N.A. SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, MINIMUM "WELL-CAPITALIZED" 2001 2001 2002 REGULATORY REGULATORY (DOLLARS IN THOUSANDS) REQUIREMENT REQUIREMENT ___________________________ ____________ ____________ _____________ ___________ _________________ CAPITAL COMPONENTS Tier 1 capital $ 3,275,643 $ 3,323,096 $ 3,271,284 Tier 2 capital 495,165 487,640 479,792 ___________ ___________ ___________ Total risk-based capital $ 3,770,808 $ 3,810,736 $ 3,751,076 =========== =========== =========== Risk-weighted assets $31,887,207 $31,271,268 $31,803,655 =========== =========== =========== Quarterly average assets $34,132,248 $34,282,625 $35,160,630 =========== =========== =========== CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ___________________________ __________ _____ __________ ______ __________ ______ __________ _____ __________ _____ Total capital (to risk-weighted assets) $3,770,808 11.83% $3,810,736 12.19% $3,751,076 11.79% > $2,544,292 8.0% > $3,180,366 10.0% - - Tier 1 capital (to risk-weighted assets) 3,275,643 10.27 3,323,096 10.63 3,271,284 10.29 > 1,272,146 4.0 > 1,908,219 6.0 - - Leverage(1) 3,275,643 9.60 3,323,096 9.69 3,271,284 9.30 > 1,406,425 4.0 > 1,758,032 5.0 - - _____________ (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
46 We and Union Bank of California, N.A. are subject to various regulations issued by federal banking agencies, including minimum capital requirements. We and Union Bank of California, N.A. are required to maintain minimum ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the leverage ratio). Compared with December 31, 2001, our Tier 1 risk-based capital ratio at September 30, 2002 decreased 33 basis points to 11.14 percent, our total risk-based capital ratio decreased 46 basis points to 12.89 percent, and our leverage ratio decreased 40 basis points to 10.13 percent. The decreases in the capital ratios were primarily attributable to higher risk-weighted assets of $550.8 million, or 1.7 percent, resulting from higher earning asset levels in the current year. Shareholders' equity, excluding unrealized gains on securities available for sale and on cash flow hedges as recognized in other comprehensive income, was slightly lower by $13.5 million, or 0.4 percent. The impact of increased retained earnings from net income in the first nine months of 2002 on shareholders' equity was mostly offset by our $300 million common share repurchase from Bank of Tokyo-Mitsubishi announced on August 27, 2002. As of September 30, 2002, management believes the capital ratios of Union Bank of California, N.A. met all regulatory requirements of a "well-capitalized" institution, which are 10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio, and 5 percent for the leverage ratio. CERTAIN BUSINESS RISK FACTORS ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS A substantial majority of our assets and deposits are generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time, including the long-term impact of the California energy crisis and the decline in the technology sector. If economic conditions in California continue to decline, we expect that our level of problem assets could increase accordingly. THE TRAGIC EVENTS OF SEPTEMBER 11 AND THE ENSUING WAR ON TERRORISM CONTRIBUTED TO THE DOWNTURN IN US ECONOMIC CONDITIONS WHICH CONTINUES On-going acts or threats of terrorism and actions taken by the US or other governments as a result of such acts or threats, including possible military action, have contributed to the continuing downturn in US economic conditions and could further adversely affect business and economic conditions in the US generally and in our principal markets. For example, the events of September 11, 2001, caused a decrease in air travel in the US, which adversely affected the airline industry and many other travel-related industries, including those operating in California. ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD ADVERSELY AFFECT OUR BUSINESS We are subject to certain industry-specific economic factors. For example, a significant and increasing portion of our total loan portfolio is related to residential real estate. Accordingly, a downturn in the real estate and housing industries in California could have an adverse effect on our operations. Similarly, a portion of our total loan portfolio is to borrowers in the agricultural industry. Adverse weather conditions, combined with low commodity prices, may adversely affect the agricultural industry and, consequently, may impact our business negatively. In addition, auto leases comprise a declining portion of our total loan portfolio. We ceased originating auto leases in April 2001; however, continued deterioration in the used car market may result in additional losses on the valuation of auto lease residuals on our remaining auto leases. We provide financing to businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors, including the communications/media industry, the retailing industry, the airlines industry and the technology industry. Industry-specific risks are beyond our 47 control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans or charge-offs. RISKS ASSOCIATED WITH CURTAILED MARKET ACCESS OF POWER COMPANIES COULD AFFECT OUR PORTFOLIO CREDIT QUALITY The recent failure of Enron Corporation and WorldCom, Inc., coupled with continued turbulence in energy markets, has significantly impacted debt ratings and equity valuations of a broad spectrum of power companies, particularly those involved in energy trading and in deregulated or non-regulated markets. These developments have sharply reduced these companies' ability to access public debt and equity markets, contributing to heightened liquidity pressures. Should these negative trends continue and /or intensify, the credit quality of certain of our borrowers could be adversely affected. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, a decrease in interest rates could result in an acceleration in the prepayment of loans. An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs, which could adversely affect our business. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD Changes in market interest rates, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact our margin spread, that is, the difference between the interest rates we charge on interest earning assets, such as loans, and the interest rates we pay on interest bearing liabilities, such as deposits. The impact, particularly in a falling interest rate environment, could result in a decrease in our interest income relative to interest expense. SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD.; OUR INTERESTS MAY NOT BE THE SAME AS THE BANK OF TOKYO-MITSUBISHI'S INTERESTS The Bank of Tokyo-Mitsubishi, Ltd., a wholly owned subsidiary of Mitsubishi Tokyo Financial Group, Inc., owns a majority (approximately 65 percent as of September 30, 2002) of the outstanding shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi, Ltd. can elect all of our directors and as a result can control the vote on all matters, including determinations such as: approval of mergers or other business combinations; sales of all or substantially all of our assets; any matters submitted to a vote of our shareholders; issuance of any additional common stock or other equity securities; incurrence of debt other than in the ordinary course of business; the selection and tenure of our Chief Executive Officer; payment of dividends with respect to common stock or other equity securities; and other matters that might be favorable to The Bank of Tokyo-Mitsubishi, Ltd. A majority of our directors are not officers or employees of UnionBanCal Corporation or any of our affiliates, including The Bank of Tokyo-Mitsubishi, Ltd. However, because of The Bank of Tokyo-Mitsubishi, Ltd.'s control over the election of our directors, The Bank of Tokyo-Mitsubishi, Ltd. could change the composition of our Board of Directors so that the Board would not have a majority of outside directors. The Bank of Tokyo-Mitsubishi, Ltd.'s ability to prevent an unsolicited bid for us or any other change in control could have an adverse effect on the market price for our common stock. THE BANK OF TOKYO-MITSUBISHI, LTD.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS Although we fund our operations independently of The Bank of Tokyo-Mitsubishi, Ltd. and believe our business is not necessarily closely related to The Bank of Tokyo-Mitsubishi, Ltd.'s business or outlook, 48 The Bank of Tokyo-Mitsubishi, Ltd.'s credit ratings may affect our credit ratings. Deterioration in The Bank of Tokyo-Mitsubishi, Ltd.'s credit ratings or financial condition could result in an increase in our borrowing costs and could impair our access to the public and private capital markets. The Bank of Tokyo-Mitsubishi, Ltd. is also subject to regulatory oversight and review by Japanese and US regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns related to the Japanese financial system and The Bank of Tokyo-Mitsubishi, Ltd. POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT US As part of The Bank of Tokyo-Mitsubishi, Ltd.'s normal risk management processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit exposures and concentrations on an aggregate basis, including UnionBanCal Corporation. Therefore, at certain levels, our ability to approve certain credits and categories of customers is subject to concurrence by The Bank of Tokyo-Mitsubishi, Ltd. We may wish to extend credit to the same customer as The Bank of Tokyo-Mitsubishi, Ltd. Our ability to do so may be limited for various reasons, including The Bank of Tokyo-Mitsubishi, Ltd.'s aggregate credit exposure and marketing policies. Certain directors' and officers' ownership interests in The Bank of Tokyo-Mitsubishi, Ltd.'s common stock or service as a director or officer or other employee of both us and The Bank of Tokyo-Mitsubishi, Ltd. could create or appear to create potential conflicts of interest, especially since both of us compete in the US banking industry. SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY AFFECT US Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions and major foreign-affiliated or foreign banks, as well as many financial and non-financial firms that offer services similar to those offered by us. Some of our competitors are community banks that have strong local market positions. Other competitors include large financial institutions (such as Bank of America, California Federal, Washington Mutual, and Wells Fargo) that have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. Banks, securities firms, and insurance companies can now combine in a new type of financial services company called a "financial holding company." Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Recently, a number of foreign banks have acquired financial services companies in the US, further increasing competition in the US market. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS PAYABLE TO US As a holding company, a substantial portion of our cash flow typically comes from dividends our bank and nonbank subsidiaries pay to us. Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any of our subsidiaries liquidate, that subsidiary's creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. ADVERSE EFFECTS OF, OR CHANGES IN, BANKING OR OTHER LAWS AND REGULATIONS OR GOVERNMENTAL FISCAL OR MONETARY POLICIES COULD ADVERSELY AFFECT US We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, 49 regulations or policies currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by any future changes in laws, regulations, policies or interpretations, including legislative and regulatory reactions to the terrorist attack on September 11, 2001, and future acts of terrorism, and the Enron Corporation, WorldCom, Inc. and other major US corporate bankruptcies and recent reports of accounting irregularities at US public companies, including various large and publicly traded companies. Additionally, our international activities may be subject to the laws and regulations of the jurisdiction where business is being conducted. International laws, regulations and policies affecting us and our subsidiaries may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi, Ltd.'s controlling ownership of us, laws, regulations and policies adopted or enforced by the Government of Japan may adversely affect our activities and investments and those of our subsidiaries in the future. Additionally, our business is affected significantly by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board (FRB), which regulates the supply of money and credit in the US. Under long-standing policy of the FRB, a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in US government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on our business, results of operations and financial condition. POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK The Bank of Tokyo-Mitsubishi, Ltd. may sell shares of our common stock in compliance with the federal securities laws. By virtue of The Bank of Tokyo-Mitsubishi, Ltd.'s current control of us, The Bank of Tokyo-Mitsubishi, Ltd. could sell large amounts of shares of our common stock by causing us to file a registration statement that would allow them to sell shares more easily. In addition, The Bank of Tokyo-Mitsubishi, Ltd. could sell shares of our common stock without registration. Although we can make no prediction as to the effect, if any, that such sales would have on the market price of our common stock, sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect the market price of our common stock. If The Bank of Tokyo-Mitsubishi, Ltd. sells or transfers shares of our common stock as a block, another person or entity could become our controlling shareholder. WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR OPERATING STRATEGIES From time to time, we develop long-term financial performance goals to guide and measure the success of our operating strategies. We can make no assurances that we will be successful in achieving these long-term goals or that our operating strategies will be successful. Achieving success in these areas is dependent on a number of factors, many of which are beyond our direct control. Factors that may adversely affect our ability to attain our long-term financial performance goals include: o deterioration of our asset quality; o our inability to control noninterest expense, including, but not limited to, rising employee and healthcare costs; o our inability to increase noninterest income; 50 o our inability to decrease reliance on revenues generated from assets; o our ability to sustain loan growth; o our ability to find acquisition targets at valuation levels we find attractive; o regulatory and other impediments associated with making acquisitions; o deterioration in general economic conditions, especially in our core markets; o decreases in our net interest margin; o increases in competition; o adverse regulatory or legislative developments; and o unexpected increases in costs related to acquisitions. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR RESTRUCTURING MAY ADVERSELY AFFECT US We may seek to acquire or invest in companies, technologies, services or products that complement our business. There can be no assurance that we will be successful in completing any such acquisition or investment as this will depend on the availability of prospective target companies at valuation levels we find attractive and the competition for such opportunities from other bidders. In addition, we continue to evaluate the performance of all of our businesses and business lines and may sell a business or business line. Any acquisitions, divestitures or restructuring may result in the issuance of potentially dilutive equity securities, significant write-offs, including those related to goodwill and other intangible assets and/or the incurrence of debt, any of which could have a material adverse effect on our business, financial condition and results of operations. Acquisitions, divestitures or restructuring could involve numerous additional risks including difficulties in obtaining any required regulatory approvals and in the assimilation or separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, higher than expected deposit attrition (run-off), divestitures required by regulatory authorities, the disruption of our business, and the potential loss of key employees. There can be no assurance that we will be successful in overcoming these or any other significant risks encountered. 51 WRITTEN STATEMENTS UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The written statements of our chief executive officer and chief financial officer with respect to this report on Form 10-Q, as required by section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), have been submitted to the Securities and Exchange Commission as additional correspondence accompanying this report. ITEM 3. MARKET RISK. A complete explanation concerning our market risk exposure is incorporated by reference from the text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in the Form 10-K for the year ended December 31, 2001 and by reference to Part I, Item 2 of this document under the captions "Quantitative and Qualitative Disclosure about Interest Rate Risk Management (Other Than Trading)," "Liquidity," and "Certain Business Risk Factors." ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of a date within 90 days of the filing of this quarterly report on Form 10-Q, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (as defined by 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 ("the "Exchange Act") are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. 52 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain reserves for losses from legal actions that are both probable and estimable. Union Bank of California, our major subsidiary, (the Bank) has been named in two suits pending in the United States District Court for the Central District of California, ROCKOFF V UNION BANK OF CALIFORNIA ET AL (filed December 21, 2001) and NEILSON V UNION BANK OF CALIFORNIA ET AL (filed September 4, 2002) in which the plaintiffs seek in excess of $250 million lost by those who invested money in various investment arrangements conducted by an individual named Reed Slatkin. Mr. Slatkin is alleged to have been operating a fraudulent investment scheme commonly referred to as a "Ponzi" scheme. The plaintiffs in the ROCKOFF case are various investors in the arrangements conducted by Mr. Slatkin and the plaintiffs in the NEILSON case include both investors and the trustee of Mr. Slatkin's bankruptcy estate. A substantial majority of those who invested with Mr. Slatkin had no relationship with the Bank. A small minority, comprising less than five percent of the investors, had custodial accounts with the Bank. The NEILSON case seeks to impose liability upon the Bank and two other financial institutions for both the losses suffered by those custodial customers as well as investors who had no relationship with the Bank. Although the cases are in the preliminary stages of litigation, the Bank has numerous legal defenses which it will invoke. Based on our evaluation to date of these two cases, management believes that these lawsuits will not result in a material adverse effect on our financial position or results of operations. In addition, we believe that the disposition of all other claims currently pending will also not have a material adverse effect on our financial position or results of operations. ITEM 5. OTHER INFORMATION ANNUAL MEETING OF SHAREHOLDERS: The Annual Meeting of Shareholders will be held on Wednesday, April 23, 2003, at 9:30 a.m. upon the approval of the Board of Directors, expected at the December 2002 meeting. Shareholders who expect to present a proposal at the 2003 Annual Meeting of Shareholders for publication in the Company's proxy statement and action on the proxy form or otherwise for such meeting must submit their proposal by November 24, 2002. The proposal must be mailed to the Corporate Secretary of the Company at 400 California Street, Mail Code 1-001-16, San Francisco, CA 94104. Without such notice, proxy holders appointed by the Board of Directors of the Company will be entitled to exercise their discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the proposal in the proxy statement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS: NO. DESCRIPTION 2.0 Agreement and Plan of Merger, dated as of August 5, 2002 by and among Valencia Bank and Trust, Union Bank of California, N.A., and UnionBanCal Corporation(1) ___________ (1) Incorporated by reference to Exhibit 2 of the UnionBanCal Registration Statement on Form S-4 (file no. 333-99573) filed on September 26, 2002 53 (B) REPORTS ON FORM 8-K We filed a report on Form 8-K on August 14, 2002 reporting under Item 9 thereof which included the written certification statements of our chief executive officer and chief financial officer with respect to our quarterly report on Form 10-Q for the period ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002, as required by section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350). We filed a report on Form 8-K on October 17, 2002 reporting under Item 5 thereof that UnionBanCal Corporation issued a press release concerning earnings for the third quarter of 2002. 54 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIONBANCAL CORPORATION (Registrant) By:/s/ DAVID I. MATSON ________________________________ David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) By:/s/ DAVID A. ANDERSON ________________________________ David A. Anderson SENIOR VICE PRESIDENT AND CONTROLLER (Principal Accounting Officer) Dated: November 13, 2002 55 CERTIFICATIONS I, Norimichi Kanari, certify that: 1. I have reviewed this quarterly report on Form 10-Q of UnionBanCal Corporation (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By:/s/ NORIMICHI KANARI ____________________________ Norimichi Kanari PRESIDENT AND CHIEF EXECUTIVE OFFICER 56 I, David I. Matson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of UnionBanCal Corporation (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By:/s/ DAVID I. MATSON ____________________________ David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) 57 -----END PRIVACY-ENHANCED MESSAGE-----