-----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, HylOqykABsjzWUwglA6ov4JqmVuBYVZs6SKyRLjxiIVrAHAlITshoG/hR6UvBZvW Pr/nz8Iia05XG2Z4b0Rtqg== 0001092306-03-000333.txt : 20030814 0001092306-03-000333.hdr.sgml : 20030814 20030814124732 ACCESSION NUMBER: 0001092306-03-000333 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 03845155 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 secondqtr200310q.txt FORM 10-Q FOR PERIOD ENDING JUNE 30, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 COMMISSION FILE NUMBER 1-15081 UNIONBANCAL CORPORATION State of Incorporation: CALIFORNIA I.R.S. Employer Identification No. 94-1234979 400 CALIFORNIA STREET SAN FRANCISCO, CALIFORNIA 94104-1302 (Address and zip code of principal executive offices) 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 |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| Number of shares of Common Stock outstanding at July 31, 2003: 151,287,777 ================================================================================ 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 of Financial Condition and Results of Operations: Introduction.......................................................... 20 Summary............................................................... 21 Business Segments..................................................... 22 Net Interest Income................................................... 32 Noninterest Income.................................................... 35 Noninterest Expense................................................... 37 Income Tax Expense.................................................... 38 Loans................................................................. 39 Cross-Border Outstandings............................................. 40 Provision for Credit Losses........................................... 40 Allowance for Credit Losses........................................... 41 Nonperforming Assets.................................................. 45 Loans 90 Days or More Past Due and Still Accruing..................... 45 Quantitative and Qualitative Disclosure about Interest Rate Risk Management (Other Than Trading)..................................... 46 Liquidity Risk........................................................ 49 Regulatory Capital.................................................... 50 Certain Business Risk Factors......................................... 51 Item 3. Quantitative and Qualitative Disclosure About Market Risk....... 55 Item 4. Controls and Procedures......................................... 55 PART II OTHER INFORMATION Item 1. Legal Proceedings............................................... 56 Item 4. Submission of Matters to a Vote of Security Holders............. 56 Item 6. Exhibits and Reports on Form 8-K................................ 57 Signatures.................................................................. 58 PART I. FINANCIAL INFORMATION UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED)
AS OF AND FOR THE THREE MONTHS ENDED ----------------------------------------- JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2003 CHANGE - ------------------------------------------------------------ ----------- ----------- ------- RESULTS OF OPERATIONS: Net interest income(1).................................... $ 386,298 $ 386,422 0.03% Provision for credit losses............................... 50,000 25,000 (50.00) Noninterest income........................................ 175,606 203,171 15.70 Noninterest expense....................................... 316,623 351,004 10.86 ----------- ----------- Income before income taxes(1)............................. 195,281 213,589 9.38 Taxable-equivalent adjustment............................. 537 645 20.11 Income tax expense........................................ 64,802 68,186 5.22 ----------- ----------- Net income................................................ $ 129,942 $ 144,758 11.40% =========== =========== PER COMMON SHARE: Net income--basic......................................... $ 0.83 $ 0.96 15.66% Net income--diluted....................................... 0.81 0.96 18.52 Dividends(2).............................................. 0.28 0.31 10.71 Book value (end of period)................................ 23.94 25.79 7.73 Common shares outstanding (end of period)................. 157,718,215 149,993,652 (4.90) Weighted average common shares outstanding--basic......... 157,314,527 150,046,659 (4.62) Weighted average common shares outstanding--diluted....... 159,675,924 151,489,337 (5.13) BALANCE SHEET (END OF PERIOD): Total assets.............................................. $36,136,725 $42,668,834 18.08% Total loans............................................... 25,592,306 25,668,660 0.30 Nonaccrual loans.......................................... 414,482 379,487 (8.44) Nonperforming assets...................................... 414,972 379,758 (8.49) Total deposits............................................ 28,833,365 35,365,260 22.65 Medium and long-term debt................................. 406,869 420,853 3.44 Trust preferred securities................................ 366,265 360,166 (1.67) Shareholders' equity...................................... 3,775,663 3,868,959 2.47 BALANCE SHEET (PERIOD AVERAGE): Total assets.............................................. $35,730,492 $39,776,349 11.32% Total loans............................................... 25,578,846 26,517,316 3.67 Earning assets............................................ 32,674,628 36,074,488 10.41 Total deposits............................................ 28,222,245 32,587,173 15.47 Shareholders' equity...................................... 3,749,035 3,919,276 4.54 FINANCIAL RATIOS: Return on average assets(3)............................... 1.46% 1.46% Return on average shareholders' equity(3)................. 13.90 14.81 Efficiency ratio(4)....................................... 56.35 59.53 Net interest margin(1).................................... 4.74 4.29 Dividend payout ratio..................................... 33.73 32.29 Tangible equity ratio..................................... 10.16 8.59 Tier 1 risk-based capital ratio........................... 11.90 11.44 Total risk-based capital ratio............................ 13.65 13.06 Leverage ratio............................................ 10.77 9.63 Allowance for credit losses to total loans................ 2.44 2.17 Allowance for credit losses to nonaccrual loans........... 150.78 147.11 Net loans charged off to average total loans(3)........... 0.90 0.80 Nonperforming assets to total loans and foreclosed assets. 1.62 1.48 Nonperforming assets to total assets...................... 1.15 0.89 - ------------------------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent basis) and noninterest income. Foreclosed asset expense (income) was ($13) thousand for the second quarter of 2002 and nil for the second quarter of 2003.
2 PART I. FINANCIAL INFORMATION UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED ------------------------------------------ JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2003 CHANGE - ------------------------------------------------------------ ----------- ----------- ------- RESULTS OF OPERATIONS: Net interest income(1).................................... $ 767,271 $ 777,826 1.38% Provision for credit losses............................... 105,000 55,000 (47.62) Noninterest income........................................ 335,349 388,942 15.98 Noninterest expense....................................... 628,278 693,604 10.40 ----------- ----------- Income before income taxes(1)............................. 369,342 418,164 13.22 Taxable-equivalent adjustment............................. 1,070 1,269 18.60 Income tax expense........................................ 123,553 136,620 10.58 ----------- ----------- Net income................................................ $ 244,719 $ 280,275 14.53% =========== =========== PER COMMON SHARE: Net income--basic......................................... $ 1.56 $ 1.86 19.23% Net income--diluted....................................... 1.54 1.85 20.13 Dividends(2).............................................. 0.53 0.59 11.32 Book value (end of period)................................ 23.94 25.79 7.73 Common shares outstanding (end of period)................. 157,718,215 149,993,652 (4.90) Weighted average common shares outstanding--basic......... 156,774,339 150,329,939 (4.11) Weighted average common shares outstanding--diluted....... 158,534,791 151,746,328 (4.28) BALANCE SHEET (END OF PERIOD): Total assets.............................................. $36,136,725 $42,668,834 18.08% Total loans............................................... 25,592,306 25,668,660 0.30 Nonaccrual loans.......................................... 414,482 379,487 (8.44) Nonperforming assets...................................... 414,972 379,758 (8.49) Total deposits............................................ 28,833,365 35,365,260 22.65 Medium and long-term debt................................. 406,869 420,853 3.44 Trust preferred securities................................ 366,265 360,166 (1.67) Shareholders' equity...................................... 3,775,663 3,868,959 2.47 BALANCE SHEET (PERIOD AVERAGE): Total assets.............................................. $35,408,797 $39,066,221 10.33% Total loans............................................... 25,354,548 26,619,618 4.99 Earning assets............................................ 32,327,489 35,454,075 9.67 Total deposits............................................ 27,897,401 31,836,948 14.12 Shareholders' equity...................................... 3,687,244 3,896,909 5.69 FINANCIAL RATIOS: Return on average assets(3)............................... 1.39% 1.45% Return on average shareholders' equity(3)................. 13.38 14.50 Efficiency ratio(4)....................................... 56.97 59.44 Net interest margin(1).................................... 4.77 4.41 Dividend payout ratio..................................... 33.97 31.72 Tangible equity ratio..................................... 10.16 8.59 Tier 1 risk-based capital ratio........................... 11.90 11.44 Total risk-based capital ratio............................ 13.65 13.06 Leverage ratio............................................ 10.77 9.63 Allowance for credit losses to total loans................ 2.44 2.17 Allowance for credit losses to nonaccrual loans........... 150.78 147.11 Net loans charged off to average total loans(3)........... 0.93 0.80 Nonperforming assets to total loans and foreclosed assets. 1.62 1.48 Nonperforming assets to total assets...................... 1.15 0.89 - ------------------------------ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent basis) and noninterest income. Foreclosed asset expense was $112 thousand and $51 thousand for the first six months of 2002 and 2003, respectively.
3 ITEM 1. FINANCIAL STATEMENTS UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------- --------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2003 2002 2003 - -------------------------------------------------------------- -------- -------- -------- -------- INTEREST INCOME Loans....................................................... $378,572 $354,913 $754,370 $717,888 Securities.................................................. 78,244 78,036 159,580 157,899 Interest bearing deposits in banks.......................... 629 1,130 1,125 2,092 Federal funds sold and securities purchased under resale agreements................................................ 4,828 4,001 8,887 5,678 Trading account assets...................................... 930 943 1,621 1,870 -------- -------- -------- -------- Total interest income..................................... 463,203 439,023 925,583 885,427 -------- -------- -------- -------- INTEREST EXPENSE Domestic deposits........................................... 55,411 40,217 115,346 81,788 Foreign deposits............................................ 6,105 2,811 12,369 6,017 Federal funds purchased and securities sold under repurchase agreements..................................... 1,396 747 3,345 2,074 Commercial paper............................................ 4,536 2,946 8,510 5,674 Medium and long-term debt................................... 2,411 1,818 4,823 3,684 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust............................................. 3,948 3,652 7,911 7,323 Other borrowed funds........................................ 3,635 1,055 7,078 2,310 -------- -------- -------- -------- Total interest expense.................................... 77,442 53,246 159,382 108,870 -------- -------- -------- -------- NET INTEREST INCOME........................................... 385,761 385,777 766,201 776,557 Provision for credit losses................................. 50,000 25,000 105,000 55,000 -------- -------- -------- -------- Net interest income after provision for credit losses.................................................. 335,761 360,777 661,201 721,557 -------- -------- -------- -------- NONINTEREST INCOME Service charges on deposit accounts......................... 69,869 77,942 136,012 150,229 Trust and investment management fees........................ 37,587 33,141 74,312 65,816 International commissions and fees.......................... 19,239 21,276 37,462 40,889 Insurance commissions....................................... 6,252 15,706 13,405 28,711 Card processing fees, net................................... 8,736 9,340 17,275 19,022 Brokerage commissions and fees.............................. 9,275 8,729 18,907 17,595 Foreign exchange trading gains, net......................... 7,011 6,958 13,459 13,892 Merchant banking fees....................................... 9,081 6,191 16,026 12,209 Securities gains, net....................................... 1,969 9,013 1,969 9,013 Other....................................................... 6,587 14,875 6,522 31,566 -------- -------- -------- -------- Total noninterest income.................................. 175,606 203,171 335,349 388,942 -------- -------- -------- -------- NONINTEREST EXPENSE Salaries and employee benefits.............................. 186,100 198,929 364,976 397,036 Net occupancy............................................... 25,029 32,866 48,410 60,502 Equipment................................................... 15,967 16,354 32,307 33,025 Communications.............................................. 12,568 13,354 26,509 27,198 Professional services....................................... 10,936 13,566 20,439 25,580 Data processing............................................. 7,540 7,744 16,531 16,228 Foreclosed asset expense (income)........................... (13) -- 112 51 Other....................................................... 58,496 68,191 118,994 133,984 -------- -------- -------- -------- Total noninterest expense................................. 316,623 351,004 628,278 693,604 -------- -------- -------- -------- Income before income taxes.................................. 194,744 212,944 368,272 416,895 Income tax expense.......................................... 64,802 68,186 123,553 136,620 -------- -------- -------- -------- NET INCOME.................................................... $129,942 $144,758 $244,719 $280,275 ======== ======== ======== ======== NET INCOME PER COMMON SHARE--BASIC............................ $ 0.83 $ 0.96 $ 1.56 $ 1.86 ======== ======== ======== ======== NET INCOME PER COMMON SHARE--DILUTED.......................... $ 0.81 $ 0.96 $ 1.54 $ 1.85 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC............. 157,315 150,047 156,774 150,330 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED........... 159,676 151,489 158,535 151,746 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED) JUNE 30, DECEMBER 31, JUNE 30, (DOLLARS IN THOUSANDS) 2002 2002 2003 - ------------------------------------------------------------------------- ----------- ----------- ----------- ASSETS Cash and due from banks.................................................. $ 2,046,286 $ 2,823,573 $3,096,509 Interest bearing deposits in banks....................................... 153,423 278,849 212,746 Federal funds sold and securities purchased under resale agreements...... 640,500 1,339,700 1,624,552 ----------- ----------- ----------- Total cash and cash equivalents........................................ 2,840,209 4,442,122 4,933,807 Trading account assets................................................... 365,784 276,021 387,928 Securities available for sale: Securities pledged as collateral....................................... 133,219 157,823 154,961 Held in portfolio...................................................... 5,673,609 7,109,498 9,438,110 Loans (net of allowance for credit losses: June 30, 2002, $624,948; December 31, 2002, $609,190; June 30, 2003, $558,282).................. 24,967,358 25,828,893 25,110,378 Due from customers on acceptances........................................ 119,072 62,469 81,560 Premises and equipment, net.............................................. 500,584 504,666 498,708 Intangible assets........................................................ 23,965 38,518 46,240 Goodwill................................................................. 92,924 150,542 178,591 Other assets............................................................. 1,420,001 1,599,221 1,838,551 ----------- ----------- ----------- Total assets........................................................... $36,136,725 $40,169,773 $42,668,834 =========== =========== =========== LIABILITIES Domestic deposits: Noninterest bearing.................................................... $12,938,634 $15,537,906 $17,198,024 Interest bearing....................................................... 14,267,606 15,258,479 16,494,167 Foreign deposits: Noninterest bearing.................................................... 315,416 583,836 490,314 Interest bearing....................................................... 1,311,709 1,460,594 1,182,755 ----------- ----------- ----------- Total deposits......................................................... 28,833,365 32,840,815 35,365,260 Federal funds purchased and securities sold under repurchase agreements.. 318,365 334,379 337,785 Commercial paper......................................................... 955,328 1,038,982 835,268 Other borrowed funds..................................................... 395,826 267,047 238,239 Acceptances outstanding.................................................. 119,072 62,469 81,560 Other liabilities........................................................ 965,972 1,083,836 1,160,744 Medium and long-term debt................................................ 406,869 418,360 420,853 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust................................. 366,265 365,696 360,166 ----------- ----------- ----------- Total liabilities...................................................... 32,361,062 36,411,584 38,799,875 ----------- ----------- ----------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares, no shares issued or outstanding as of June 30, 2002, December 31, 2002, and June 30, 2003......................... -- -- -- Common stock--no stated value: Authorized 300,000,000 shares, issued 157,718,215 shares as of June 30, 2002, 150,702,363 shares as of December 31, 2002, and 149,993,652 shares as of June 30, 2003.................................................... 1,222,571 926,460 894,979 Retained earnings........................................................ 2,393,132 2,591,635 2,783,314 Accumulated other comprehensive income................................... 159,960 240,094 190,666 ----------- ----------- ----------- Total shareholders' equity............................................. 3,775,663 3,758,189 3,868,959 ----------- ----------- ----------- Total liabilities and shareholders' equity............................. $36,136,725 $40,169,773 $42,668,834 =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 5 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------------------------------- (DOLLARS IN THOUSANDS 2002 2003 - ------------------------------------------------------------ ----------------------- ----------------------- COMMON STOCK Balance, beginning of period.............................. $1,181,925 $ 926,460 Dividend reinvestment plan................................ 72 24 Deferred compensation - restricted stock.................. (15) -- Stock options exercised................................... 70,564 13,324 Stock issued in bank acquisitions......................... 23,852 -- Common stock repurchased(1)............................... (53,827) (44,829) ---------- ---------- Balance, end of period.................................. $1,222,571 $ 894,979 ---------- ---------- RETAINED EARNINGS Balance, beginning of period.............................. $2,231,384 $2,591,635 Net income................................................ 244,719 $244,719 280,275 $280,275 Dividends on common stock(2).............................. (83,077) (88,707) Deferred compensation - restricted stock.................. 106 111 ---------- ---------- Balance, end of period.................................. $2,393,132 $2,783,314 ---------- ---------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period.............................. $ 132,933 $ 240,094 Unrealized net gains on cash fllow hedges, net of tax expense of $23,776 and $22,289 in the first six months of 2002 and 2003, respectively........................... 38,383 35,983 Less: reclassification adjustment for net gains on cash flow hedges included in net income, net of tax expense of $21,285 and $27,236 in the first six months of 2002 and 2003, respectively.................... (34,361) (43,968) -------- -------- Net increase (reduction) in unrealized gains on cash flow hedges.............................................. 4,022 (7,985) Unrealized holding gains (losses) arising during the period on securities available for sale, net of tax expense (benefit) of $14,039 and $(22,296) in the first six months of 2002 and 2003, respectively.......... 22,664 (35,995) Less: reclassification adjustment for gains on securities available for sale included in net income, net of tax expense of $753 and $3,447 in the first six months of 2002 and 2003, respectively................ (1,216) (5,566) -------- -------- Net unrealized gains (losses) on securities available for sale................................................. 21,448 (41,561) Foreign currency translation adjustment, net of tax expense of $964 and $73 in the first six months of 2002 and 2003, respectively.............................. 1,557 118 -------- -------- Other comprehensive income (loss)......................... 27,027 27,027 (49,428) (49,428) ---------- -------- ---------- -------- Total comprehensive income................................ $271,746 $230,847 ======== ======== Balance, end of period.................................. $ 159,960 $ 190,666 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY............................ $3,775,663 $3,868,959 ========== ========== - --------------------------------- (1) Common stock repurchased includes commission costs. (2) Dividends per share were $0.53 and $0.59 for the first six months of 2002 and 2003, respectively. Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date.
See accompanying notes to condensed consolidated financial statements. 6 UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------- (DOLLARS IN THOUSANDS) 2002 2003 - ---------------------------------------------------------------------------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................ $ 244,719 $ 280,275 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses............................................. 105,000 55,000 Depreciation, amortization and accretion................................ 39,605 61,742 Provision for deferred income taxes..................................... 28,359 44,876 Gains on securities available for sale.................................. (1,969) (9,013) Net increase in prepaid expenses........................................ (86,060) (83,845) Net (increase) decrease in fees and other charges receivable............ 21,599 (94,140) Net increase in trading account assets.................................. (136,087) (111,907) Loans originated for resale............................................. (91,603) (55,608) Net proceeds from sale of loans originated for resale................... 97,222 57,029 Other, net.............................................................. (165,258) (34,102) ---------- ---------- Total adjustments....................................................... (189,192) (169,968) ---------- ---------- Net cash provided by operating activities................................. 55,527 110,307 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale...................... 125,688 35,296 Proceeds from matured and called securities available for sale............ 584,878 1,506,572 Purchases of securities available for sale................................ (772,509) (3,907,936) Net (increase) decrease in loans.......................................... (598,028) 643,659 Net cash received (paid) in acquisitions.................................. 64,689 (29,860) Other, net................................................................ (29,140) (46,370) ---------- ---------- Net cash used in investing activities................................... (624,422) (1,798,639) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits.................................................. 72,541 2,524,445 Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements.... .................................... (100,449) 3,406 Net decrease in commercial paper and other borrowed funds................. (179,906) (232,522) Common stock repurchased.................................................. (53,827) (44,829) Payments of cash dividends................................................ (78,165) (84,413) Stock options exercised................................................... 70,564 13,324 Other, net................................................................ 1,629 142 ---------- ---------- Net cash provided by (used in) financing activities..................... (267,613) 2,179,553 ---------- ---------- Net increase (decrease) in cash and cash equivalents........................ (836,508) 491,221 Cash and cash equivalents at beginning of period............................ 3,664,954 4,442,122 Effect of exchange rate changes on cash and cash equivalents................ 11,763 464 ---------- ---------- Cash and cash equivalents at end of period.................................. $2,840,209 $4,933,807 ========== ========== CASH PAID DURING THE PERIOD FOR: Interest.................................................................. $ 168,806 $ 117,463 Income taxes.............................................................. 73,098 51,197 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisitions: Fair value of assets acquired........................................... $ 256,276 $ 47,988 Purchase price: Cash.................................................................. (20,940) (40,300) Stock issued.......................................................... (23,852) -- ---------- ---------- Liabilities assumed..................................................... $ 211,484 $ 7,688 ========== ==========
See accompanying notes to condensed consolidated financial statements. 7 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission. However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. The results of operations for the period ended June 30, 2003 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/A for the year ended December 31, 2002. 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. UnionBanCal Corporation is a commercial bank holding company and has, as its major subsidiary, a banking subsidiary, Union Bank of California, N.A. (the Bank). The Company provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, and Washington, but also nationally and internationally. Since November 1999 through June 30, 2003, the Company has announced stock repurchase plans totaling $500 million. The Company repurchased $86 million, $27 million, and $18 million of common stock in 2002, the first quarter of 2003, and the second quarter of 2003, respectively, as part of these repurchase plans. As of June 30, 2003, $115 million of the Company's common stock is authorized for repurchase. In addition, on August 27, 2002, the Company announced that it purchased $300 million of its common stock from its majority owner, The Bank of Tokyo-Mitsubishi, Ltd. (BTM), which is a wholly-owned subsidiary of Mitsubishi Tokyo Financial Group, Inc. At June 30, 2003, BTM owned approximately 66 percent of the Company's outstanding common stock. Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure requirements to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements under this Statement are effective for financial statements issued after December 15, 2002. As allowed under the provisions of SFAS No. 123, as amended, the Company has chosen to continue to recognize compensation expense using the intrinsic value-based method of valuing stock options prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to 8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS (CONTINUED) Employees" and related Interpretations. Under the intrinsic value-based method, compensation cost is measured as the amount by which the quoted market price of the Company's stock at the date of grant exceeds the stock option exercise price. At June 30, 2003, the Company has two stock-based employee compensation plans. For further discussion concerning our stock-based employee compensation plans see Note 14--"Management Stock Plan" of the Notes to Consolidated Financial Statements included in the Form 10-K/A for the year ended December 31, 2002. Only restricted stock awards have been reflected in compensation expense, while all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- --------------------- (DOLLARS IN THOUSANDS) 2002 2003 2002 2003 - --------------------------------------------------------- -------- -------- -------- -------- AS REPORTED NET INCOME................................... $129,942 $144,758 $244,719 $280,275 Stock option-based employee compensation expense (determined under fair value based method for all awards, net of taxes)............................... (5,740) (6,527) (9,918) (12,483) -------- -------- -------- -------- Pro forma net income, after stock option-based employee compensation expense........................... $124,202 $138,231 $234,801 $267,792 ======== ======== ======== ======== EARNINGS PER SHARE--BASIC As reported.............................................. $ 0.83 $ 0.96 $ 1.56 $ 1.86 Pro forma................................................ $ 0.79 $ 0.92 $ 1.50 $ 1.78 EARNINGS PER SHARE--DILUTED As reported.............................................. $ 0.81 $ 0.96 $ 1.54 $ 1.85 Pro forma................................................ $ 0.78 $ 0.91 $ 1.48 $ 1.76
Compensation cost associated with the Company's unvested restricted stock issued under the management stock plan is measured based on the market price of the stock at the grant date and is expensed over the vesting period. Compensation expense related to restricted stock awards for the second quarters of 2002 and 2003 was not significant. NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes in this Statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 is 9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) effective for contracts entered into or modified after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003. All provisions should be applied prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, will be applied in accordance with their respective effective dates. In addition, the provisions of SFAS No. 149, which relate to forward purchases or sales of when-issued securities or other securities that do not exist, will be applied to both existing contracts and new contracts entered into after June 30, 2003. Management believes that adoption of the provisions of this Statement will not have a material impact on the Company's financial position or results of operations. ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement establishes standards for how the Company should classify and measure certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The new standards for the classification and measurement of financial instruments should be applied retroactively. Any gain or loss resulting from the implementation of SFAS No. 150 will be reported as a cumulative effect of a change in accounting principle. Management believes that adoption of the standards of this Statement will not have a material impact on the Company's financial position or results of operations. ACCOUNTING FOR GUARANTORS AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FIN 34, which is superseded. FIN 45 elaborates on the existing disclosure requirements for most guarantees and requires that guarantors recognize a liability for the fair value of guarantees at inception. The disclosure requirements of FIN 45 are effective for financial statements periods ending after December 15, 2002. The initial recognition and measurement provisions of FIN 45 are applied on a prospective basis to guarantees issued or modified after December 31, 2002. A complete description of significant guarantees that have been entered into by the Company may be found in "Note 7--Guarantees." Adopting the measurement provisions of FIN 45 did not have a material impact in the second quarter of 2003 and management believes that it will not have a material impact on the Company's future financial position or results of operations. CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." The purpose of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to 10 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate that entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, if they occur. New disclosure requirements are also prescribed by FIN 46. FIN 46 became effective upon its issuance. As of June 30, 2003, the Company does not believe it has any VIE's for which this interpretation would require consolidation. However, under FIN 46, the Company's subsidiary, which issued trust preferred securities, will be deconsolidated. Deconsolidation of this entity in the third quarter of 2003 will cause total assets and total liabilities to increase by approximately $10.8 million with no change to the Company's results of operations. For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1--"Summary of Significant Accounting Policies and Nature of Operations" of the Notes to Consolidated Financial Statements included in the Form 10-K/A for the year ended December 31, 2002. NOTE 3--EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options are a common stock equivalent. The following table presents a reconciliation of basic and diluted EPS for the three months and six months ended June 30, 2002 and 2003.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------------------- ------------------------------------------------- 2002 2003 2002 2003 ---------------------- ---------------------- ---------------------- --------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED - ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- Net Income............... $129,942 $129,942 $144,758 $144,758 $244,719 $244,719 $280,275 $280,275 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding..... 157,315 157,315 150,047 150,047 156,774 156,774 150,330 150,330 Additional shares due to: Assumed conversion of dilutive stock options................ -- 2,361 -- 1,442 -- 1,761 -- 1,416 -------- -------- -------- -------- -------- -------- -------- -------- Adjusted weighted average common shares outstanding............ 157,315 159,676 150,047 151,489 156,774 158,535 150,330 151,746 ======== ======== ======== ======== ======== ======== ======== ======== Net income per share..... $ 0.83 $ 0.81 $ 0.96 $ 0.96 $ 1.56 $ 1.54 $ 1.86 $ 1.85 ======== ======== ======== ======== ======== ======== ======== ========
11 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME The following table presents a summary of the components of accumulated other comprehensive income.
NET UNREALIZED GAINS NET UNREALIZED GAINS ON SECURITIES FOREIGN CURRENCY ON CASH FLOW HEDGES AVAILABLE FOR SALE TRANSLATION ADJUSTMENT --------------------- --------------------- ----------------------- FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2002 2003 2002 2003 2002 2003 - ------------------------------- ------- -------- -------- -------- -------- -------- Beginning balance.............. $62,840 $104,368 $ 83,271 $147,450 $(12,205) $(10,649) Change during the period....... 4,022 (7,985) 21,448 (41,561) 1,557 118 ------- -------- -------- -------- -------- -------- Ending balance................. $66,862 $ 96,383 $104,719 $105,889 $(10,648) $(10,531) ======= ======== ======== ======== ======== ========
MINIMUM PENSION ACCUMULATED OTHER LIABILITY ADJUSTMENT COMPREHENSIVE INCOME -------------------- --------------------- FOR THE SIX MONTHS ENDED JUNE 30, ----------------------------------------------- (DOLLARS IN THOUSANDS) 2002 2003 2002 2003 - --------------------------------------------------------- ------- -------- -------- -------- Beginning balance........................................ $ (973) $(1,075) $132,933 $240,094 Change during the period................................. -- -- 27,027 (49,428) ------- -------- -------- -------- Ending balance........................................... $ (973) $(1,075) $159,960 $190,666 ======= ======== ======== ========
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, cash management and deposit services, 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 and deposit 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 12 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 5--BUSINESS SEGMENTS (CONTINUED) 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 pages, 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. The information in these tables is derived from the internal management reporting system used by management to measure the performance of the business segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each business segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to a business segment are assigned to that business. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the business segments based on a predetermined percentage of usage. Under the Company's risk-adjusted return on capital (RAROC) methodology, credit expense is charged to business segments based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks. "Other" 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 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 Pacific Rim Corporate Group, with assets at June 30, 2003 of $342.4 million, which offers a range of credit, deposit, and investment management products and services to companies in the US, which are affiliated with companies headquartered in Japan; and o the residual costs of support groups. 13 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 5--BUSINESS SEGMENTS (CONTINUED) The business units' results for the prior periods have been restated to reflect transfer pricing changes and any reorganization changes that may have occurred.
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP --------------------- ---------------------- ------------------- AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 - --------------------------------------------------- -------- -------- -------- -------- ------- ------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income................................ $191,739 $212,859 $165,463 $204,011 $ 9,366 $ 9,829 Noninterest income................................. 94,305 111,872 54,474 61,552 16,632 26,090 -------- -------- -------- -------- ------- ------- Total revenue...................................... 286,044 324,731 219,937 265,563 25,998 35,919 Noninterest expense................................ 172,781 197,037 95,017 105,134 15,266 15,258 Credit expense (income)............................ 8,911 8,064 47,487 42,145 460 547 -------- -------- -------- -------- ------- ------- Income before income tax expense (benefit)......... 104,352 119,630 77,433 118,284 10,272 20,114 Income tax expense (benefit)....................... 39,915 45,758 24,331 38,351 3,929 7,693 -------- -------- -------- -------- ------- ------- Net income (loss).................................. $ 64,437 $ 73,872 $ 53,102 $ 79,933 $ 6,343 $12,421 ======== ======== ======== ======== ======= ======= TOTAL ASSETS, END OF PERIOD (dollars in millions):. $ 10,929 $ 12,248 $ 15,932 $ 14,976 $ 1,467 $ 1,937 ======== ======== ======== ======== ======= =======
GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION --------------------- ---------------------- ------------------- AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 - -------------------------------------------------- -------- -------- -------- ------- -------- -------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income............................... $ 12 $(60,157) $ 19,181 $19,235 $385,761 $385,777 Noninterest income................................ 4,708 1,882 5,487 1,775 175,606 203,171 -------- -------- -------- ------- -------- -------- Total revenue..................................... 4,720 (58,275) 24,668 21,010 561,367 588,948 Noninterest expense............................... 4,007 3,687 29,552 29,888 316,623 351,004 Credit expense (income)........................... 50 50 (6,908) (25,806) 50,000 25,000 -------- -------- -------- ------- -------- -------- Income (loss) before income tax expense (benefit). 663 (62,012) 2,024 16,928 194,744 212,944 Income tax expense (benefit)...................... 254 (23,719) (3,627) 103 64,802 68,186 -------- -------- -------- ------- -------- -------- Net income (loss)................................. $ 409 $(38,293) $ 5,651 $16,825 $129,942 $144,758 ======== ======== ======== ======= ======== ======== TOTAL ASSETS, END OF PERIOD (dollars in millions): $ 6,868 $ 11,824 $ 941 $ 1,684 $ 36,137 $ 42,669 ======== ======== ======== ======= ======== ========
14 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 5--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP --------------------- ---------------------- ------------------- AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 - --------------------------------------------------- -------- -------- -------- -------- -------- -------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income................................ $370,758 $418,550 $325,617 $396,362 $ 18,871 $ 20,048 Noninterest income................................. 183,409 213,469 102,978 119,462 32,720 41,573 -------- -------- -------- -------- -------- -------- Total revenue...................................... 554,167 632,019 428,595 515,824 51,591 61,621 Noninterest expense................................ 348,148 396,255 186,551 204,532 30,409 30,182 Credit expense (income)............................ 17,891 15,782 94,520 84,607 954 1,052 -------- -------- -------- -------- -------- -------- Income before income tax expense (benefit)......... 188,128 219,982 147,524 226,685 20,228 30,387 Income tax expense (benefit)....................... 71,959 84,143 47,038 73,804 7,737 11,623 -------- -------- -------- -------- -------- -------- Net income (loss).................................. $116,169 $135,839 $100,486 $152,881 $ 12,491 $ 18,764 ======== ======== ======== ======== ======== ======== TOTAL ASSETS, END OF PERIOD (dollars in millions):. $ 10,929 $ 12,248 $ 15,932 $ 14,976 $ 1,467 $ 1,937 ======== ======== ======== ======== ======== ========
GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION --------------------- ---------------------- --------------------- AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 - ---------------------------------------------- -------- -------- -------- -------- --------- --------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income........................ $ 12,718 $(93,775) $ 38,237 $ 35,372 $ 766,201 $ 776,557 Noninterest income......................... 6,226 3,408 10,016 11,030 335,349 388,942 -------- -------- -------- -------- --------- --------- Total revenue.............................. 18,944 (90,367) 48,253 46,402 1,101,550 1,165,499 Noninterest expense........................ 7,921 7,800 55,249 54,835 628,278 693,604 Credit expense (income).................... 100 100 (8,465) (46,541) 105,000 55,000 -------- -------- -------- -------- --------- --------- Income (loss) before income tax expense (benefit)................................ 10,923 (98,267) 1,469 38,108 368,272 416,895 Income tax expense (benefit)............... 4,178 (37,587) (7,359) 4,637 123,553 136,620 -------- -------- -------- -------- --------- --------- Net income (loss).......................... $ 6,745 $(60,680) $ 8,828 $ 33,471 $ 244,719 $ 280,275 ======== ======== ======== ======== ========= ========= TOTAL ASSETS, END OF PERIOD (dollars in millions):............................... $ 6,868 $ 11,824 $ 941 $ 1,684 $ 36,137 $ 42,669 ======== ======== ======== ======== ========= =========
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. 15 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (CONTINUED) CASH FLOW HEDGES HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT The Company engages in several types of cash flow hedging strategies for which the hedged transactions are forecasted future loan interest payments, and the hedged risk is the variability in those payments due to changes in the designated benchmark rate, e.g., US dollar LIBOR. In these strategies, the hedging instruments are matched with groups of variable rate loans such that the tenor of the variable rate loans and that of the hedging instrument is identical. Cash flow hedging strategies include the utilization of purchased floor, cap, corridor options and interest rate swaps. The maximum length of time over which the Company is hedging these exposures is 6.14 years. The Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments received under the floor contract offset the decline in loan interest income caused by the relevant LIBOR index falling below the floor's strike rate. The Company uses interest rate floor corridors to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the floor corridor contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the corridor's upper strike rate, but only to the extent the index falls to the lower strike rate. The corridor will not provide protection from declines in the relevant LIBOR index to the extent it falls below the corridor's lower strike rate. The Company uses interest rate collars to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Net payments to be received under the collar contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the collar's strike rate while net payments to be paid will reduce the increase in loan interest income caused by the LIBOR index rising above the collar's cap strike rate. The Company uses interest rate swaps to hedge the variable cash flows associated with 1-month LIBOR or 3-month LIBOR indexed loans. Payments to be received (or paid) under the swap contracts will offset the fluctuations in loan interest income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans' interest income caused by changes in the relevant LIBOR index. The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with the forecasted issuance and rollover of short-term, fixed rate negotiable certificates of deposit (CDs). In these hedging relationships, the Company hedges the LIBOR component of the CD rates, which is either 3-month LIBOR or 6-month LIBOR, based on the CD's original term to maturity, which reflects their repricing frequency. Net payments to be received under the cap contract offset the increase in interest expense caused by the relevant LIBOR index rising above the cap's strike rate. 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 16 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 6--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (CONTINUED) the mismatch between the timing of reset dates on the hedge versus those of the loans or CDs. In the second quarter of 2003, the Company recognized a net gain of $0.3 million due to ineffectiveness, which is recognized in noninterest expense, compared to a net loss of $0.1 million in the second quarter of 2002. FAIR VALUE HEDGES HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST (TRUST PREFERRED SECURITIES) The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specific interest bearing liability, UnionBanCal Corporation's Trust Preferred Securities, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, US dollar LIBOR. Fair value hedging transactions are structured at inception so that the notional amounts of the swap match an associated principal amount of the Trust Preferred Securities. The interest payment dates, the expiration date, and the embedded call option of the swap match those of the Trust Preferred Securities. The ineffectiveness on the fair value hedges in the second quarter of 2003 was a net loss of less than $0.1 million, compared to a net gain of $0.5 million in the second quarter of 2002. 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. 17 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 7--GUARANTEES Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. The majority of these types of commitments have terms of one year or less. Collateral may be obtained based on management's credit assessment of the customer. As of June 30, 2003, the Company's maximum exposure to loss for standby and commercial letters of credit is $3.0 billion and $280.1 million, respectively. The Company has contingent consideration agreements that guarantee additional payments to acquired insurance agencies' shareholders based on the agencies future performance in excess of established revenue and/or earnings before interest, taxes, depreciation and amortization (EBITDA) thresholds. If the insurance agencies' future performance exceeds these thresholds during a three-year period, the Company will be liable to make payments to former shareholders. As of June 30, 2003, the Company has a maximum exposure of $12.0 million for these agreements, which expire December 2005. The Company is fund manager for limited liability corporations issuing low-income housing investments. Low-income housing investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these investments, the Company guarantees the timely completion of projects and delivery of tax benefits throughout the investment term. Guarantees may include a minimum rate of return, the availability of tax credits, and operating deficit thresholds over a ten-year average period. Additionally, the Company receives project completion and tax credit guarantees from the limited liability corporations issuing the investments that reduce the Company's ultimate exposure to loss. As of June 30, 2003, the Company's maximum exposure to loss under these guarantees is limited to a return of investor capital and minimum investment yield, or $77.0 million. The Company maintains a liability of $3.0 million for these guarantees. The Company has guarantees that obligate it to perform if its affiliates are unable to discharge their obligations. These obligations include guarantee of trust preferred securities, commercial paper obligations and leveraged lease transactions. Guarantees issued by the Bank for an affiliate's commercial paper program are done in order to facilitate their sale. As of June 30, 2003, the Bank had a maximum exposure to loss under these guarantees, which have an average term of less than one year, of $842.1 million. The Bank's guarantee is fully collateralized by a pledged deposit. UnionBanCal Corporation guarantees its subsidiaries' leveraged lease transactions, which have terms ranging from 15 to 30 years. Following the original funding of the leveraged lease transactions, UnionBanCal Corporation has no material obligation to be satisfied. As of June 30, 2003, UnionBanCal Corporation had no exposure to loss for these agreements. NOTE 8--ACQUISITIONS On April 1, 2003, the Company completed its acquisition of Tanner Insurance Brokers, Inc., and recorded approximately $31 million of goodwill and $9 million of rights-to-expiration. The rights-to-expiration will be amortized on an accelerated basis over its useful economic life. 18 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) NOTE 9--SUBSEQUENT EVENTS On July 1, 2003, the Company completed its acquisition of Monterey Bay Bank, a savings and loan association based in Watsonville, California. As a result, the Company acquired $632 million in total assets and eight branches. The Company paid $96.7 million in cash and common stock. On July 23, 2003, the Board of Directors declared a quarterly cash dividend of $0.31 per share of common stock. The dividend will be paid on October 3, 2003 to shareholders of record as of September 5, 2003. 19 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. WE MAY MAKE FORWARD-LOOKING STATEMENTS IN OTHER UNITED STATES SECURITIES AND EXCHANGE COMMISSION (SEC) FILINGS, PRESS RELEASES, NEWS ARTICLES, CONFERENCE CALLS WITH WALL STREET ANALYSTS AND SHAREHOLDERS AND WHEN WE ARE SPEAKING ON BEHALF OF UNIONBANCAL CORPORATION. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. OFTEN, THEY INCLUDE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "ESTIMATE," "PROJECT," OR WORDS OF SIMILAR MEANING, OR FUTURE OR CONDITIONAL VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," OR "MAY." THESE FORWARD-LOOKING STATEMENTS ARE INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL INFORMATION WITH WHICH THEY MAY ASSESS OUR FUTURE POTENTIAL. ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ASSUMPTIONS ABOUT AN UNCERTAIN FUTURE AND ARE BASED ON INFORMATION AVAILABLE AT THE DATE SUCH STATEMENTS ARE ISSUED. WE DO NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT FACTS, CIRCUMSTANCES, ASSUMPTIONS OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING STATEMENTS ARE MADE. THERE ARE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD AND WILL CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY 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, AND RESULTS OF OPERATIONS OR PROSPECTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA, GLOBAL POLITICAL AND GENERAL ECONOMIC CONDITIONS RELATED TO THE TERRORIST ATTACKS ON SEPTEMBER 11, 2001, AND THEIR AFTERMATH, THE WAR IN IRAQ, ADVERSE ECONOMIC CONDITIONS AFFECTING CERTAIN INDUSTRIES, INCLUDING POWER COMPANIES AND THE AIRLINE INDUSTRY, FLUCTUATIONS IN INTEREST RATES, THE CONTROLLING INTEREST IN US OF THE BANK OF TOKYO-MITSUBISHI, LTD. (BTM), 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 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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION." ALL REPORTS THAT WE FILE ELECTRONICALLY WITH THE SEC, INCLUDING THE ANNUAL REPORT ON FORM 10-K OR 10-K/A, QUARTERLY REPORTS ON FORM 10-Q, AND CURRENT REPORTS ON FORM 8-K, AS WELL AS ANY AMENDMENTS TO THOSE REPORTS, ARE ACCESSIBLE AT NO COST ON OUR INTERNET WEBSITE AT WWW.UBOC.COM. THESE FILINGS ARE ALSO ACCESSIBLE ON THE SEC'S WEBSITE AT WWW.SEC.GOV. INTRODUCTION We are a California-based, commercial bank holding company incorporated in California, with consolidated assets of $42.7 billion at June 30, 2003. At June 30, 2003, Union Bank of California, N.A. (the Bank) was the fourth 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 through June 30, 2003, we have announced stock repurchase plans totaling $500 million. We repurchased $86 million, $27 million, and $18 million of common stock in 2002, the first quarter of 2003, and the second quarter of 2003, respectively, as part of these repurchase plans. As of June 30, 2003, $115 million of our common stock is authorized for repurchase. In addition, on August 27, 2002, we announced that we purchased $300 million of our common stock from our majority owner, BTM. At June 30, 2003, BTM owned approximately 66 percent of our outstanding common stock. 20 SUMMARY COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 Net income was $144.8 million, or $0.96 per diluted common share, in the second quarter of 2003, compared with $129.9 million, or $0.81 per diluted common share, in the second quarter of 2002. This increase in diluted earnings per share of $0.15, or 19 percent, above the second quarter of 2002 was due to a $27.6 million, or 16 percent, increase in noninterest income, a $25.0 million, or 50 percent, decrease in provision for credit losses, and a $0.1 million increase in net interest income (on a taxable-equivalent basis), offset by a $34.4 million, or 11 percent, increase in noninterest expense coupled with a decrease in weighted average shares outstanding due to share repurchases. Other highlights of the second quarter of 2003 include: o Net interest income, on a taxable-equivalent basis, was $386.4 million in the second quarter of 2003, an increase of $0.1 million over the second quarter of 2002. Net interest margin in the second quarter of 2003 was 4.29 percent, a decrease of 45 basis points from the second quarter of 2002. o A provision for credit losses of $25.0 million was recorded in the second quarter of 2003 compared with $50.0 million in the second quarter of 2002. 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 $558.3 million, or 147 percent of total nonaccrual loans, at June 30, 2003, compared with $624.9 million, or 151 percent of total nonaccrual loans, at June 30, 2002. o Noninterest income was $203.2 million in the second quarter of 2003, an increase of $27.6 million, or 16 percent, from the second quarter of 2002. This increase included a $9.5 million increase in insurance commissions mostly associated with our acquisitions of John Burnham & Company and Tanner Insurance Brokers, Inc., an $8.1 million increase in service charges on deposit accounts, a $7.0 million increase in securities gains mainly attributable to a $9.0 million gain arising from the early call of a Mexican Brady Bond, partly offset by a $4.4 million decrease in trust and investment management fees. o Noninterest expense was $351.0 million in the second quarter of 2003, an increase of $34.4 million, or 11 percent, over the second quarter of 2002. This increase included a $12.8 million increase in salaries and other compensation, which was primarily attributable to our 2002 acquisitions and new branch openings, higher employee benefits of $5.5 million and a $7.8 million increase in net occupancy, which included a $4.2 million write-off of leasehold improvements. o Income tax expense in the second quarter of 2003 was $68.2 million, resulting in a 32 percent effective income tax rate. For the second quarter of 2002, the effective income tax rate was 33 percent. o Return on average assets was unchanged at 1.46 percent in both the second quarter of 2003 and the second quarter of 2002. Our return on average shareholders' equity increased to 14.81 percent in the second quarter of 2003 compared to 13.90 percent in the second quarter of 2002. o Total loans at June 30, 2003 were $25.7 billion, a slight increase of $76.4 million from June 30, 2002. o Nonperforming assets were $379.8 million at June 30, 2003, a decrease of $35.2 million, or 8 percent, from June 30, 2002. Nonperforming assets, as a percentage of total assets, decreased to 0.89 percent at June 30, 2003, compared with 1.15 percent at June 30, 2002. Total nonaccrual loans were $379.5 million at June 30, 2003, compared with $414.5 million at June 30, 2002, contributing to a decrease in the ratio of nonaccrual loans to total loans of 1.48 percent at June 30, 2003 from 1.62 percent at June 30, 2002. 21 o Our Tier 1 and total risk-based capital ratios were 11.44 percent and 13.06 percent, respectively, at June 30, 2003, compared with 11.90 percent and 13.65 percent, respectively, at June 30, 2002. Our leverage ratio was 9.63 percent at June 30, 2003 compared with 10.77 percent at June 30, 2002. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 Net income was $280.3 million, or $1.85 per diluted common share, in the first six months of 2003, compared with $244.7 million, or $1.54 per diluted common share, in the first six months of 2002. This increase in diluted earnings per share of $0.31, or 20 percent, above the first six months of 2002 was due to a $53.6 million, or 16 percent, increase in noninterest income, a $50.0 million, or 48 percent, decrease in provision for credit losses, and a $10.6 million, or 1 percent, increase in net interest income (on a taxable-equivalent basis), offset by a $65.3 million, or 10 percent, increase in noninterest expense coupled with a decrease in weighted average shares outstanding due to share repurchases. Other highlights of the first six months of 2003 include: o Net interest income, on a taxable-equivalent basis, was $777.8 million in the first six months of 2003, an increase of $10.6 million, or 1 percent, over the first six months of 2002. Net interest margin in the first six months of 2003 was 4.41 percent, a decrease of 36 basis points from the first six months of 2002. o A provision for credit losses of $55.0 million was recorded in the first six months of 2003 compared with $105.0 million in the first six months of 2002. This resulted from management's regular assessment of overall credit quality, loan portfolio composition, and business and economic conditions in relation to the level of the allowance for credit losses. o Noninterest income was $388.9 million in the first six months of 2003, an increase of $53.6 million, or 16 percent, from the first six months of 2002. This increase included a $15.3 million increase in insurance commissions mostly associated with our acquisitions of John Burnham & Company and Tanner Insurance Brokers, Inc., a $14.2 million increase in service charges on deposit accounts, higher income related to private capital investments, net, of $10.5 million mainly due to lower writedowns in the current year, lower residual value writedowns on auto leases of $9.0 million and a $7.0 million increase in securities gains mainly attributable to a $9.0 million gain arising from the early call of a Mexican Brady Bond, partly offset by a $8.5 million decrease in trust and investment management fees. o Noninterest expense was $693.6 million in the first six months of 2003, an increase of $65.3 million, or 10 percent, over the first six months of 2002. This increase included a $32.1 million increase in salaries and employee benefits primarily attributable to higher salaries and other compensation of $18.0 million, mostly related to our 2002 acquisitions and new branch openings, higher employee benefits of $14.1 million and a $12.1 million increase in net occupancy, which included a $4.2 million write-off of leasehold improvements. o Income tax expense in the first six months of 2003 was $136.6 million, resulting in a 33 percent effective income tax rate. For the first six months of 2002, the effective income tax rate was 34 percent. o Return on average assets increased to 1.45 percent in the first six months of 2003 compared to 1.39 percent in the first six months of 2002. Our return on average shareholders' equity increased to 14.50 percent in the first six months of 2003 compared to 13.38 percent in the first six months of 2002. BUSINESS SEGMENTS We segregate our operations into four primary business units for the purpose of management reporting, as shown in the table on the following page. The results show the financial performance of our major business units. 22 The risk-adjusted return on capital (RAROC) methodology used seeks to attribute economic capital to business units consistent with the level of risk they assume. These risks are primarily credit risk, market risk and operational risk. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and equity prices. 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. 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. A performance center's purpose is to foster cross-selling with a total profitability view of the products and services it manages. For example, the Global Markets 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. 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. 23 We have restated the business units' results for the prior periods to reflect transfer pricing changes and any reorganization changes that may have occurred.
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP --------------------- ---------------------- ------------------- AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 -------- -------- -------- -------- ------- ------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income.............................. $191,739 $212,859 $165,463 $204,011 $ 9,366 $ 9,829 Noninterest income............................... 94,305 111,872 54,474 61,552 16,632 26,090 -------- -------- -------- -------- ------- ------- Total revenue.................................... 286,044 324,731 219,937 265,563 25,998 35,919 Noninterest expense.............................. 172,781 197,037 95,017 105,134 15,266 15,258 Credit expense (income).......................... 8,911 8,064 47,487 42,145 460 547 -------- -------- -------- -------- ------- ------- Income (loss) before income tax expense (benefit) 104,352 119,630 77,433 118,284 10,272 20,114 Income tax expense (benefit)..................... 39,915 45,758 24,331 38,351 3,929 7,693 -------- -------- -------- -------- ------- ------- Net income (loss)................................ $ 64,437 $ 73,872 $ 53,102 $ 79,933 $ 6,343 $12,421 ======== ======== ======== ======== ======= ======= PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income.............................. $ 222 $ 181 $ (326) $ (175) $ -- $ 10 Noninterest income............................... (12,387) (10,706) 14,715 17,039 1,157 253 Noninterest expense.............................. (9,628) (9,021) 8,437 9,504 861 83 Net income (loss)................................ (1,614) (948) 3,746 4,588 183 111 Total loans (dollars in millions)................ 26 25 (47) (45) -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)................................... $ 9,986 $ 11,229 $ 14,148 $ 13,071 $ 1,047 $ 1,606 Total assets..................................... 10,752 12,236 15,894 15,162 1,403 2,009 Total deposits(1)................................ 14,395 16,424 9,275 12,236 1,567 1,471 FINANCIAL RATIOS: Risk adjusted return on capital(2)............... 45% 45% 14% 19% 40% 73% Return on average assets (2)..................... 2.40 2.42 1.34 2.11 1.81 2.48 Efficiency ratio(3).............................. 60.4 60.7 43.2 39.6 58.7 42.5
GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION --------------------- ---------------------- -------------------- AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, -------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 -------- -------- -------- -------- -------- -------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income.......................... $ 12 $(60,157) $ 19,181 $ 19,235 $385,761 $385,777 Noninterest income........................... 4,708 1,882 5,487 1,775 175,606 203,171 -------- -------- -------- -------- -------- -------- Total revenue................................ 4,720 (58,275) 24,668 21,010 561,367 588,948 Noninterest expense.......................... 4,007 3,687 29,552 29,888 316,623 351,004 Credit expense (income)...................... 50 50 (6,908) (25,806) 50,000 25,000 -------- -------- -------- -------- -------- -------- Income (loss) before income tax expense (benefit).................................... 663 (62,012) 2,024 16,928 194,744 212,944 Income tax expense (benefit)................. 254 (23,719) (3,627) 103 64,802 68,186 -------- -------- -------- -------- -------- -------- Net income (loss)............................ $ 409 $(38,293) $ 5,651 $ 16,825 $129,942 $144,758 ======== ======== ======== ======== ======== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income.......................... $ -- $ (128) $ 104 $ 112 $ -- $ -- Noninterest income........................... (6,934) (9,876) 3,449 3,290 -- -- Noninterest expense.......................... (1,217) (2,025) 1,547 1,459 -- -- Net income (loss)............................ (3,531) (4,927) 1,216 1,176 -- -- Total loans (dollars in millions)............ -- -- 21 20 -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)............................... $ 70 $ 287 $ 328 $ 324 $ 25,579 $ 26,517 Total assets................................. 6,902 9,454 779 915 35,730 39,776 Total deposits(1)............................ 2,070 1,071 915 1,385 28,222 32,587 FINANCIAL RATIOS: Risk adjusted return on capital(2)........... --% (15)% na na na na Return on average assets (2)................. 0.01 (1.63) na na 1.46% 1.46% Efficiency ratio(3).......................... 84.9 na na na 56.4 59.5 - ---------------------------- (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 and noninterest income. Foreclosed asset expense (income) was ($13) thousand and nil in the second quarters of 2002 and 2003, respectively. na = not applicable
24
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP --------------------- ---------------------- -------------------- AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 -------- -------- -------- -------- -------- -------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income.............................. $370,758 $418,550 $325,617 $396,362 $ 18,871 $ 20,048 Noninterest income............................... 183,409 213,469 102,978 119,462 32,720 41,573 -------- -------- -------- -------- -------- -------- Total revenue.................................... 554,167 632,019 428,595 515,824 51,591 61,621 Noninterest expense.............................. 348,148 396,255 186,551 204,532 30,409 30,182 Credit expense (income).......................... 17,891 15,782 94,520 84,607 954 1,052 -------- -------- -------- -------- -------- -------- Income (loss) before income tax expense (benefit) 188,128 219,982 147,524 226,685 20,228 30,387 Income tax expense (benefit)..................... 71,959 84,143 47,038 73,804 7,737 11,623 -------- -------- -------- -------- -------- -------- Net income (loss)................................ $116,169 $135,839 $100,486 $152,881 $ 12,491 $ 18,764 ======== ======== ======== ======== ======== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income.............................. $ 443 $ 368 $ (672) $ (367) $ -- $ 14 Noninterest income............................... (24,672) (21,077) 29,537 31,888 2,041 585 Noninterest expense.............................. (18,744) (17,227) 16,225 17,811 1,627 334 Net income (loss)................................ (3,453) (2,190) 7,920 8,553 256 163 Total loans (dollars in millions)................ 26 26 (46) (46) -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)................................... $ 9,764 $ 11,171 $ 14,136 $13,301 $ 1,032 $ 1,566 Total assets..................................... 10,532 12,132 15,878 15,375 1,357 1,966 Total deposits(1)................................ 14,092 16,105 9,094 11,797 1,562 1,494 FINANCIAL RATIOS: Risk adjusted return on capital(2)............... 41% 42% 13% 18% 39% 59% Return on average assets (2)..................... 2.22 2.25 1.27 1.99 1.86 1.92 Efficiency ratio(3).............................. 62.8 62.7 43.5 39.7 58.9 49.0
GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION --------------------- ---------------------- ---------------------- AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 -------- -------- -------- -------- --------- --------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income...................... $ 12,718 $(93,775) $ 38,237 $ 35,372 $ 766,201 $ 776,557 Noninterest income....................... 6,226 3,408 10,016 11,030 335,349 388,942 -------- -------- -------- -------- --------- --------- Total revenue............................ 18,944 (90,367) 48,254 46,402 1,101,550 1,165,499 Noninterest expense...................... 7,921 7,800 55,249 54,835 628,278 693,604 Credit expense (income).................. 100 100 (8,465) (46,541) 105,000 55,000 -------- -------- -------- -------- --------- --------- Income (loss) before income tax expense (benefit)................................ 10,923 (98,267) 1,470 38,108 368,272 416,895 Income tax expense (benefit)............. 4,178 (37,587) (7,359) 4,637 123,553 136,620 -------- -------- -------- -------- --------- --------- Net income (loss)........................ $ 6,745 $(60,680) $ 8,828 $ 33,471 $ 244,719 $ 280,275 ======== ======== ======== ======== ========= ========= PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income...................... $ -- $ (230) $ 229 $ 215 $ -- $ -- Noninterest income....................... (13,569) (17,949) 6,663 6,553 -- -- Noninterest expense...................... (2,232) (3,653) 3,124 2,735 -- -- Net income (loss)........................ (7,001) (8,970) 2,278 24,444 -- -- Total loans (dollars in millions)........ -- -- 20 20 -- -- AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)........................... $ 85 $ 251 $ 338 $ 331 $ 25,355 $ 26,620 Total assets............................. 6,814 8,714 828 879 35,409 39,066 Total deposits(1)........................ 2,242 1,139 907 1,302 27,897 31,837 FINANCIAL RATIOS: Risk adjusted return on capital(2)....... 2% (12)% na na na na Return on average assets (2)............. 0.19 (1.41) na na 1.39% 1.45% Efficiency ratio(3)...................... 41.8 na na na 57.0 59.4 - --------------------------- (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 and noninterest income. Foreclosed asset expense was $112 thousand and $51 thousand in the first six months of 2002 and 2003, respectively. na = not applicable
25 COMMUNITY BANKING AND INVESTMENT SERVICES GROUP The Community Banking and Investment Services Group provides financial products including a set of credit, deposit, trust, risk management, and insurance products delivered through branches, relationship managers, private bankers, trust administrators, and insurance agents to individuals and small businesses. In the second quarter of 2003, net income increased $9.4 million, or 15 percent, compared to the second quarter of 2002. Total revenue increased $38.7 million, or 14 percent, compared to a year earlier. Increased asset and deposit volumes offset the effect of a lower interest rate environment leading to an increase of $21.1 million, or 11 percent, in net interest income over the prior year. Excluding auto lease residual writedowns of $3.0 million and none in the second quarter of 2002 and 2003, respectively, and the impact of performance center earnings, noninterest income was $12.9 million, or 12 percent, higher than the prior year primarily due to our acquisitions of John Burnham & Company, in the fourth quarter of 2002, and Tanner Insurance Brokers, Inc., on April 1, 2003, and higher deposit-related service fees. Noninterest expense increased $24.3 million, or 14 percent, in the second quarter of 2003 compared to the second quarter of 2002 with the majority of that increase being attributable to higher salaries and employee benefits mainly related to acquisitions, deposit gathering, small business growth and residential loan growth over the second quarter of 2002. In 2003, the Community Banking and Investment Services Group continues to emphasize growing 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 focused on mortgage and home equity products that may be originated through the branch network, as well as through channels such as wholesalers, correspondents, and whole loan purchases. As of June 30, 2003, residential mortgages have grown by $1.1 billion, or 20 percent, from the prior 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 and offer our customers 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 new branch openings. During 2002, we completed our acquisitions of Valencia Bank and Trust, a commercial bank with $266 million in assets and five branches, and First Western Bank, a commercial bank with $224 million in assets and seven branches. On July 1, 2003, we completed the acquisition of Monterey Bay Bank, a $632 million-asset savings and loan association headquartered in Watsonville, California, with eight full-service branches in the Greater Monterey Bay area. The Community Banking and Investment Services Group is comprised of five major divisions: Community Banking, Wealth Management, Institutional Services and Asset Management, Consumer Asset Management, and Insurance Services. COMMUNITY BANKING serves its customers through 267 full-service branches in California, 4 full-service branches in Oregon and Washington, and a network of 528 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; 26 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. 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 institutional clients and its proprietary mutual funds, the affiliated HighMark Funds. It also provides advisory services to Union Bank of California, N.A. trust and agency 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 California sites, one in San Diego and one in Brea, and o provides customer and credit management services for consumer loan products. CERTAIN INDUSTRY DEVELOPMENTS Union Bank of California, N.A. is a member of MasterCard International Incorporated ("MCI"), VISA U.S.A., Inc. and VISA International, Inc. (together, "Visa"), is an issuer of debit cards, primarily of the MCI "MasterMoney" card, and is an MCI and Visa merchant bank card services bank. 27 In 1996, Wal-Mart Stores, Inc. and several other retailers sued MCI and Visa in cases now pending in federal court in New York, asserting that MCI and Visa's rules regarding uniform acceptance of all Visa and MasterCard credit and debit cards were an illegal tying arrangement. Prior to trial, MCI and Visa agreed to settle these cases. The settlements reportedly remain subject to court approval. Neither we nor Union Bank of California, N.A. are a party to these suits, and neither will be directly liable for these settlements. However, MCI or Visa may seek to assess, or assert claims against, their members to fund the settlements. In addition, even if no direct claim is asserted against members, the implementation of the settlements could adversely affect their operations. In the year ended December 31, 2002, interchange income from our debit card operations was less than one percent of our gross revenues. While our 2003 debit card interchange income can be expected to be reduced if the settlements are approved and implemented in the current year, we cannot predict what effect the settlements will have on the competitive environment or our future earnings from debit card operations. INSURANCE SERVICES provides a range of risk management services and insurance products to business and retail customers. The group, which includes our fourth quarter 2001 acquisition of Armstrong/Robitaille, Inc., our fourth quarter 2002 acquisition of John Burnham & Company, and our April 1, 2003 acquisition of Tanner Insurance Brokers, Inc., 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. The group also offers 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, Citibank, 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 and government entities. In the second quarter of 2003, net income increased $26.8 million, or 51 percent, compared to the second quarter of 2002. Net interest income increased $38.5 million, or 23 percent, partially attributable to the impact of increasing deposit balances and a lower cost of funds resulting from the lower interest rate environment. Beginning in 2003, the transfer pricing credit for funds provides for a floor on analyzed DDA balances, which was triggered during the first quarter of 2003. Had such a floor existed in the second 28 quarter of 2002, net interest income would have been higher by approximately $11 million. Excluding higher income in the private equity portfolio of $3.7 million mainly related to lower writedowns on private capital investments in the second quarter of 2003 compared to the second quarter of 2002, noninterest income increased $3.4 million, or 6 percent. This 6 percent increase was mainly attributable to higher deposit-related service fees. Noninterest expense increased $10.1 million, or 11 percent, compared to a year earlier due to higher expenses to support increased product sales and deposit volume. Credit expense decreased $5.3 million mainly attributable to a refinement in the RAROC allocation of capital and expected losses and lower loan balances year-over-year. The group's initiatives during 2003 include expanding wholesale deposit activities and increasing domestic trade financing. Loan strategies include originating, underwriting and syndicating loans in core competency markets, such as the California middle-market, commercial real estate, energy, entertainment, equipment leasing and commercial finance. The Commercial Financial Services Group provides strong processing services, including services such as check processing, front-end item processing, cash vault services and digital imaging. The 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 and Treasury Management Division, which provides deposit and cash management expertise to clients in the middle-market, large corporate market, government agencies and specialized industries; 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 internationally; and o the Corporate Capital Markets Division, which provides custom financing to middle-market and large corporate clients in their defined industries and geographic markets, together with limited merchant and investment banking related products and services. 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, the group competes 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 mostly subsidiaries and affiliates of non-Japanese Asian companies 29 and US branches/agencies of foreign banks. The majority of the revenue generated by the International Banking Group is from customers domiciled outside of the US. In the second quarter of 2003, net income increased $6.1 million, or 96 percent, compared to the second quarter of 2002. Total revenue in the second quarter of 2003 increased $9.9 million, or 38 percent, compared to the second quarter of 2002. Net interest income increased $0.5 million, or 5 percent, from the second quarter of 2002, mainly attributable to higher loan volume. Noninterest income was $9.5 million, or 57 percent, higher than the second quarter of 2002, mainly attributable to a $9.0 million gain on an early call of a Mexican Brady Bond in the second quarter of 2003. Noninterest expense of $15.3 million was relatively unchanged from the second quarter of 2002. Credit expense of $0.5 million was relatively unchanged from the second quarter of 2002. The International Banking Group's business revolves around short-term trade financing, mostly to banks, which we believe tends to result in service-related income, as well as significantly lower credit risk when compared to other lending activities. The group has a long history of providing correspondent banking and trade-related products and services to international financial institutions. We believe the group continues to achieve 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 our institutional and business clients. Another primary area of the group is treasury management for our Company, which encompasses wholesale funding, liquidity management, interest rate risk management, including securities portfolio management, and hedging activities. The Global Markets Group results include the transfer pricing activity for the Bank, which allocates to the other business segments their cost of funds on all asset categories or credit for funds in the case of all liability categories. In the second quarter of 2003, net loss was $38.3 million compared to net income of $0.4 million in the second quarter of 2002. Total revenue in the second quarter of 2003 decreased by $63.0 million, or 1,335 percent, compared to the second quarter of 2002, resulting from a $60.2 million decrease in net interest income. The decrease in net interest income was primarily attributable to a higher transfer pricing residual in the second quarter of 2003 caused by significantly higher quarter-over-prior year quarter growth in deposits, which are priced on longer-term liability rates, compared to credits on earning assets, which are priced on shorter-term lending rates. Beginning in 2003, the transfer pricing credit for funds provides for a floor on analyzed DDA balances, which was triggered during the first quarter 2003. Had such a floor existed in the second quarter of 2002, net interest income would have declined by approximately $11 million. Noninterest income was $2.9 million, or 60 percent, lower than the second quarter of 2002, mainly attributable to gains of $2.0 million on the sale of securities in the prior year quarter. Compared to the second quarter of 2002, noninterest expense decreased $0.3 million, or 8 percent. 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 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; 30 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 Pacific Rim Corporate Group, with assets at June 30, 2003 of $342.4 million, which offers a range of credit, deposit, and investment management products and services to companies in the US, which are affiliated with companies headquartered in Japan; and o the residual costs of support groups. Net income for "Other" in the second quarter of 2003 was $16.8 million. The results were impacted by the following factors: o Credit expense (income) of ($25.8) million was due to the difference between the $25.0 million in provision for credit losses calculated under our US GAAP methodology and the $50.8 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; o Net interest income of $19.2 million, which resulted from the differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal Corporation, and a credit for deposits in the Pacific Rim Corporate Group; o Noninterest income of $1.8 million; and o Noninterest expense of $29.9 million. Net income for "Other" in the second quarter of 2002 was $5.7 million. The results were impacted by the following factors: o Credit expense (income) of ($6.9) million was due to the difference between the $50.0 million in provision for credit losses calculated under our US GAAP methodology and the $56.9 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; offset by o Net interest income of $19.2 million, which resulted from the differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal Corporation, and a credit for deposits in the Pacific Rim Corporate Group; o Noninterest income of $5.5 million; and o Noninterest expense of $29.6 million. 31 NET INTEREST INCOME The following tables show the major components of net interest income and net interest margin.
FOR THE THREE MONTHS ENDED --------------------------------------------------------------------------------------- JUNE 30, 2002 JUNE 30, 2003 ---------------------------------------- ---------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) - ------------------------------------- ----------- ---------- ------- ----------- ---------- ------- ASSETS Loans:(2) Domestic........................... $24,538,646 $ 371,173 6.06% $24,916,936 $ 346,204 5.63% Foreign(3)......................... 1,040,200 7,587 2.93 1,600,380 8,995 2.28 Securities--taxable.................. 5,570,242 77,553 5.57 7,685,140 77,341 4.03 Securities--tax-exempt............... 36,946 998 10.81 40,984 1,016 9.91 Interest bearing deposits in banks. 120,411 629 2.09 221,004 1,130 2.05 Federal funds sold and securities purchased under resale agreements 1,090,306 4,828 1.78 1,276,224 4,001 1.26 Trading account assets............... 277,877 972 1.40 333,820 981 1.18 ----------- ---------- ----------- ---------- Total earning assets........... 32,674,628 463,740 5.69 36,074,488 439,668 4.88 ---------- ---------- Allowance for credit losses.......... (630,120) (585,597) Cash and due from banks.............. 1,833,950 2,099,440 Premises and equipment, net.......... 498,683 509,372 Other assets......................... 1,353,351 1,678,646 ----------- ----------- Total assets................... $35,730,492 $39,776,349 =========== =========== LIABILITIES Domestic deposits: Interest bearing................... $ 7,883,320 $ 22,551 1.15 $ 9,928,211 $ 18,799 0.76 Savings and consumer time.......... 3,599,305 15,267 1.70 3,871,674 11,277 1.17 Large time......................... 3,218,788 17,593 2.19 2,532,971 10,141 1.61 Foreign deposits(3).................. 1,614,335 6,105 1.52 1,224,201 2,811 0.92 ----------- ---------- ----------- ---------- Total interest bearing deposits 16,315,748 61,516 1.51 17,557,057 43,028 0.98 ----------- ---------- ----------- ---------- Federal funds purchased and securities sold under repurchase agreements......................... 361,412 1,396 1.55 333,415 747 0.90 Commercial paper..................... 1,033,358 4,536 1.76 995,048 2,946 1.19 Other borrowed funds................. 667,234 3,635 2.19 138,074 1,055 3.06 Medium and long-term debt............ 399,681 2,411 2.42 399,745 1,818 1.82 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust.............................. 352,375 3,948 4.47 351,553 3,652 4.16 ----------- ---------- ----------- ---------- Total borrowed funds........... 2,814,060 15,926 2.27 2,217,835 10,218 1.85 ----------- ---------- ----------- ---------- Total interest bearing liabilities................. 19,129,808 77,442 1.62 19,774,892 53,246 1.08 ---------- ---------- Noninterest bearing deposits......... 11,906,497 15,030,116 Other liabilities.................... 945,152 1,052,065 ----------- ----------- Total liabilities.............. 31,981,457 35,857,073 SHAREHOLDERS' EQUITY Common equity........................ 3,749,035 3,919,276 ----------- ----------- Total shareholders' equity..... 3,749,035 3,919,276 ----------- ----------- Total liabilities and shareholders' equity........ $35,730,492 $39,776,349 =========== =========== Net interest income/margin (taxable-equivalent basis)......... 386,298 4.74% 386,422 4.29% Less: taxable-equivalent adjustment.. 537 645 ---------- ---------- Net interest income............ $ 385,761 $ 385,777 ========== ========== - ------------------------------------ (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.
32
FOR THE SIX MONTHS ENDED --------------------------------------------------------------------------------------- JUNE 30, 2002 JUNE 30, 2003 ---------------------------------------- ---------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) ------------------------------------ ----------- ---------- ------- ----------- ---------- ------- ASSETS Loans:(2) Domestic........................... $24,314,639 $ 739,235 6.12% $25,051,062 $ 701,277 5.63% Foreign(3)......................... 1,039,909 15,509 3.01 1,568,556 17,161 2.21 Securities--taxable................. 5,561,342 158,216 5.69 7,351,834 156,520 4.26 Securities--tax-exempt.............. 37,586 1,989 10.59 41,461 2,030 9.79 Interest bearing deposits in banks.. 102,509 1,125 2.21 212,266 2,092 1.99 Federal funds sold and securities purchased under resale agreements.. 1,013,769 8,887 1.77 908,213 5,678 1.26 Trading account assets.............. 257,735 1,692 1.32 320,683 1,938 1.22 ----------- ---------- ----------- ---------- Total earning assets........... 32,327,489 926,653 5.76 35,454,075 886,696 5.03 ---------- ---------- Allowance for credit losses......... (637,210) (594,370) Cash and due from banks............. 1,887,985 2,097,220 Premises and equipment, net......... 497,483 508,175 Other assets........................ 1,333,050 1,601,121 ----------- ----------- Total assets................... $35,408,797 $39,066,221 =========== =========== LIABILITIES Domestic deposits: Interest bearing................... $ 7,672,584 45,709 1.20 $ 9,648,251 37,608 0.79 Savings and consumer time.......... 3,574,422 32,237 1.82 3,845,754 23,593 1.24 Large time......................... 3,351,398 37,400 2.25 2,473,968 20,587 1.68 Foreign deposits(3)................. 1,681,420 12,369 1.48 1,303,747 6,017 0.93 ----------- ---------- ----------- ---------- Total interest bearing deposits 16,279,824 127,715 1.58 17,271,720 87,805 1.03 ----------- ---------- ----------- ---------- Federal funds purchased and securities sold under repurchase agreements......................... 450,800 3,345 1.50 424,955 2,074 0.98 Commercial paper.................... 976,624 8,510 1.76 959,386 5,674 1.19 Other borrowed funds................ 682,558 7,078 2.09 155,375 2,310 3.00 Medium and long-term debt........... 399,834 4,823 2.43 399,737 3,684 1.86 UnionBanCal Corporation--obligated mandatorily redeemable preferred securities of subsidiary grantor trust.............................. 352,337 7,911 4.47 351,603 7,323 4.17 ----------- ---------- ----------- ---------- Total borrowed funds........... 2,862,153 31,667 2.23 2,291,056 21,065 1.85 ----------- ---------- ----------- ---------- Total interest bearing liabilities................. 19,141,977 159,382 1.68 19,562,776 108,870 1.12 ---------- ---------- Noninterest bearing deposits........ 11,617,577 14,565,228 Other liabilities................... 961,999 1,041,308 ----------- ----------- Total liabilities.............. 31,721,553 35,169,312 SHAREHOLDERS' EQUITY Common equity....................... 3,687,244 3,896,909 ----------- ----------- Total shareholders' equity..... 3,687,244 3,896,909 ----------- ----------- Total liabilities and shareholders' equity........ $35,408,797 $39,066,221 =========== =========== Net interest income/margin (taxable-equivalent basis)........... 767,271 4.77% 777,826 4.41% Less: taxable-equivalent adjustment. 1,070 1,269 ---------- ---------- Net interest income............ $ 766,201 $ 776,557 ========== ========== - ------------------------------- (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.
33 THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 Our net interest income is impacted by changes in interest rates, the steepening and flattening of the yield curve and changes in volumes and mix of earning assets, deposits, and interest bearing liabilities. Net interest income, on a taxable-equivalent basis, was $386.4 million in the second quarter of 2003, compared with $386.3 million in the second quarter of 2002. This slight increase of $0.1 million 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, mostly offset by significantly lower yields on our earning assets. Decreasing market rates resulted in lower rates on our interest bearing liabilities of 54 basis points on average balances of $19.8 billion, which was mostly offset by lower average yield of 81 basis points on average earning assets of $36.1 billion, which was favorably impacted by higher interest rate derivatives income of $10.4 million. Mitigating the impact of the lower interest rate environment on our net interest margin was an increase in average earning assets of $3.4 billion, primarily in securities and residential mortgage loans, funded by a $3.1 billion, or 26 percent, increase in average noninterest bearing deposits. As a result of these changes and a flattening yield curve environment, as short-term interest rates rise while long-term interest rates decline, our net interest margin decreased by 45 basis points, to 4.29 percent. Average earning assets were $36.1 billion in the second quarter of 2003, compared with $32.7 billion in the second quarter of 2002. This growth was attributable to a $2.1 billion, or 38 percent, increase in average securities and a $938.5 million, or 4 percent, increase 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 increase in average loans was mostly due to a $1.2 billion increase in average residential mortgages, which was a result of a strategic portfolio shift from more volatile commercial loans. Other loan activities included an increase in average commercial mortgages of $449.9 million and a decrease in average commercial, financial, and industrial loans of $609.8 million. Deposit growth, especially in our title and escrow industries, has contributed significantly to our lower cost of funds year-over-year. Average noninterest bearing deposits were $3.1 billion, or 26 percent, higher in the second quarter of 2003 over the prior year, which included a $1.1 billion increase in average title and escrow deposits. We anticipate that growth rates in average noninterest bearing deposits will decline from the 2002 growth rates as refinancings slow down due to interest rate increases. SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 Our net interest income is impacted by changes in interest rates, the steepening and flattening of the yield curve and changes in volumes and mix of earning assets, deposits, and interest bearing liabilities. Net interest income, on a taxable-equivalent basis, was $777.8 million in the first six months of 2003, compared with $767.3 million in the first six months of 2002. This increase of $10.5 million, or 1 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 lower rates on our interest bearing liabilities of 56 basis points on average balances of $19.6 billion, which was partly offset by a lower average yield of 73 basis points on average earning assets of $35.5 billion, which was favorably impacted by higher interest rate derivatives income of $16.3 million. Mitigating the impact of the lower interest rate environment on our net interest margin was an increase in average earning assets of $3.1 billion, primarily in securities and residential mortgage loans, funded by a $2.9 billion, or 25 percent, increase in average noninterest bearing deposits. As a result of these changes and a flattening yield curve environment, as short-term interest rates rise while long-term interest rates decline, our net interest margin decreased by 36 basis points, to 4.41 percent. Average earning assets were $35.5 billion in the first six months of 2003, compared with $32.3 billion in 2002. This growth was attributable to a $1.8 billion, or 32 percent, increase in average securities and a 34 $1.3 billion, or 5 percent, increase 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 increase in average loans was mostly due to a $1.3 billion increase in average residential mortgages, which was a result of a strategic portfolio shift from more volatile commercial loans. Other loan activities included an increase in average commercial mortgages of $485.6 million and a decrease in average commercial, financial, and industrial loans of $507.9 million. Deposit growth, especially in our title and escrow industries, has contributed significantly to our lower cost of funds year-over-year. Average noninterest bearing deposits were $2.9 billion, or 25 percent, higher in the first six months of 2003 over the first six months of 2002, which included a $973.1 million increase in average title and escrow deposits. NONINTEREST INCOME
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ---------------------------------------------- ---------------------------------------------- INCREASE INCREASE (DECREASE) (DECREASE) JUNE 30, JUNE 30, ------------------- JUNE 30, JUNE 30, ------------------- (DOLLARS IN THOUSANDS) 2002 2003 AMOUNT PERCENT 2002 2003 AMOUNT PERCENT - --------------------------- -------- -------- ------- ------- -------- -------- ------- ------- Service charges on deposit accounts................. $ 69,869 $ 77,942 $ 8,073 11.55% $136,012 $150,229 $14,217 10.45% Trust and investment management fees.......... 37,587 33,141 (4,446) (11.83) 74,312 65,816 (8,496) (11.43) International commissions and fees................. 19,239 21,276 2,037 10.59 37,462 40,889 3,427 9.15 Insurance commissions...... 6,252 15,706 9,454 151.22 13,405 28,711 15,306 114.18 Card processing fees, net.. 8,736 9,340 604 6.91 17,275 19,022 1,747 10.11 Brokerage commissions and fees..................... 9,275 8,729 (546) (5.89) 18,907 17,595 (1,312) (6.94) Foreign exchange trading gains, net............... 7,011 6,958 (53) (0.76) 13,459 13,892 433 3.22 Merchant banking fees...... 9,081 6,191 (2,890) (31.82) 16,026 12,209 (3,817) (23.82) Securities gains, net...... 1,969 9,013 7,044 357.75 1,969 9,013 7,044 357.75 Other...................... 6,587 14,875 8,288 125.82 6,522 31,566 25,044 383.99 -------- -------- ------- -------- -------- ------- Total noninterest income. $175,606 $203,171 $27,565 15.70% $335,349 $388,942 $53,593 15.98% ======== ======== ======= ======== ======== =======
THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 In the second quarter of 2003, noninterest income was $203.2 million, an increase of $27.6 million, or 16 percent, over the second quarter of 2002. This increase was mainly attributable to a $9.5 million increase in insurance commissions mostly associated with our acquisitions of John Burnham & Company and Tanner Insurance Brokers, Inc., a $8.1 million increase in service charges on deposit accounts, higher income related to private capital investments, net, of $3.7 million mainly due to lower writedowns in the current year, lower residual value writedowns on auto leases of $3.0 million and a $7.0 million increase in securities gains mainly attributable to a $9.0 million gain arising from the early call of a Mexican Brady Bond, partly offset by a $4.4 million decrease in trust and investment management fees. Revenue from service charges on deposit accounts was $77.9 million, an increase of $8.1 million or 12 percent over the second quarter of 2002. This increase was primarily attributable to a 20 percent increase in quarterly average demand deposits (excluding title and escrow deposits) and overdraft fees of $3.5 million associated with a new overdraft program introduced in April 2003. Trust and investment management fees were $33.1 million, a decrease of $4.4 million, or 12 percent, from the second quarter of 2002. This decrease is primarily attributable to the decline in equity market values and lower revenues as our clients shift toward fixed income investments. In addition, the current low interest rate environment has led to a significant reduction in balances in the HighMark money market funds. Total assets under administration of $145.2 billion at June 30, 2003 increased by $8.3 billion, or 6 percent, from June 30, 2002. 35 Insurance commissions were $15.7 million, an increase of $9.5 million, or 151 percent, over the second quarter of 2002, reflecting the incremental revenues associated with our insurance agency acquisitions. Securities gains, net, were $9.0 million compared to securities gains, net, of $2.0 million in the second quarter of 2002. In the second quarter of 2003, we realized a gain of $9.0 million on an early call of a Mexican Brady Bond. Other noninterest income was $14.9 million, an increase of $8.3 million, or 126 percent from the second quarter of 2002. This increase was mainly attributable to: o an increase in income related to private capital investments, net, of $3.7 million primarily due to lower writedowns on private capital investments of $4.4 million in the second quarter of 2003 compared to the second quarter of 2002. Our private capital investments include direct investments in private and public companies and indirect investments in private equity funds. The fair values of publicly traded investments are determined by using quoted market prices. Investments that are not publicly traded are initially valued at cost and subsequent adjustments to fair value are estimated based on a company's businesses model, current projected financial performance, liquidity and overall economic and market conditions, and o no residual value writedowns on auto leases in the second quarter of 2003 compared to residual value writedowns of $3.0 million in the second quarter of 2002. The decline in our impairment for residual values for the auto lease portfolio over the previous year was impacted by (a) our decision to cease originating auto leases in April 2001, which resulted in a reduction in the number of automobiles under lease at June 30, 2003; and (b) the current period determination of used car valuations, obtained from a nationally recognized automobile valuation expert and our own experience. Residual values are affected by the rate at which automobiles are returned to the lessor and the auction values of the automobiles themselves. In 2003, the rate of decline in used car prices and the rate of increase in number of cars we expect to be returned over the remaining life of the portfolio, slowed from the previous year. As of June 30, 2003, auto lease financing was $156.2 million compared to $310.7 million for the same period last year. SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 In the first six months of 2003, noninterest income was $388.9 million, an increase of $53.6 million, or 16 percent, over the first six months of 2002. This increase was mainly attributable to a $15.3 million increase in insurance commissions mostly associated with our insurance agency acquisitions, a $14.2 million increase in service charges on deposit accounts, higher income related to private capital investments, net, of $10.5 million primarily due to lower writedowns in the current year, lower residual value writedowns on auto leases of $9.0 million and a $7.0 million increase in securities gains mainly attributable to a $9.0 million gain arising from the early call of a Mexican Brady Bond, partly offset by an $8.5 million decrease in trust and investment management fees. Revenue from service charges on deposit accounts was $150.2 million, an increase of $14.2 million, or 10 percent, over the first six months of 2002. This increase was primarily attributable to a 20 percent increase in quarterly average demand deposits (excluding title escrow deposits) and overdraft fees of $3.5 million associated with a new overdraft program introduced in April 2003. Trust and investment management fees were $65.8 million, a decrease of $8.5 million, or 11 percent, from the first six months of 2002. This decrease is primarily attributable to the decline in equity market values and lower revenues as our clients shift toward fixed income investments. In addition, the current low interest rate environment has led to a significant reduction in balances in the HighMark money market funds. 36 Insurance commissions were $28.7 million, an increase of $15.3 million, or 114 percent, reflecting the incremental revenues associated with our insurance agency acquisitions, and growth in insurance commissions at Armstrong/Robitaille, Inc. Securities gains, net, were $9.0 million compared to securities gains, net, of $2.0 million in the first six months of 2002. In the first six months of 2003, we realized a gain of $9.0 million on an early call of a Mexican Brady Bond. Other noninterest income was $31.6 million, an increase of $25.0 million, or 384 percent, from the first six months of 2002. This increase was mainly attributable to an increase in income related to private capital investments, net, of $10.5 million primarily due to lower writedowns in the current year, a decrease of $9.0 million in residual value writedowns on auto leases and a $3.3 million insurance recovery from the September 11, 2001 World Trade Center attack recorded in the first quarter of 2003. NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ----------------------------------------------- ---------------------------------------------- INCREASE INCREASE (DECREASE) (DECREASE) JUNE 30, JUNE 30, -------------------- JUNE 30, JUNE 30, ------------------- (DOLLARS IN THOUSANDS) 2002 2003 AMOUNT PERCENT 2002 2003 AMOUNT PERCENT - --------------------------- -------- -------- ------- ------- -------- -------- ------- ------- Salaries and other compensation............ $154,209 $161,567 $ 7,358 4.77% $296,633 $314,627 $17,994 6.07% Employee benefits......... 31,891 37,362 5,471 17.16 68,343 82,409 14,066 20.58 -------- -------- ------- -------- -------- ------- Salaries and employee benefits................ 186,100 198,929 12,829 6.89 364,976 397,036 32,060 8.78 Net occupancy............. 25,029 32,866 7,837 31.31 48,410 60,502 12,092 24.98 Equipment................. 15,967 16,354 387 2.42 32,307 33,025 718 2.22 Communications............ 12,568 13,354 786 6.25 26,509 27,198 689 2.60 Professional services..... 10,936 13,566 2,630 24.05 20,439 25,580 5,141 25.15 Software.................. 10,039 10,849 810 8.07 21,549 22,925 1,376 6.39 Advertising and public relations............... 8,621 9,693 1,072 12.43 18,629 19,360 731 3.92 Data processing........... 7,540 7,744 204 2.71 16,531 16,228 (303) (1.83) Intangible asset amortization............ 1,280 3,227 1,947 152.11 2,164 5,704 3,540 163.59 Foreclosed asset expense (income)................ (13) -- 13 (100.00) 112 51 (61) (54.46) Other..................... 38,556 44,422 5,866 15.21 76,652 85,995 9,343 12.19 -------- -------- ------- -------- -------- ------- Total noninterest expense $316,623 $351,004 $34,381 10.86% $628,278 $693,604 $65,326 10.40% ======== ======== ======= ======== ======== =======
THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 In the second quarter of 2003, noninterest expense was $351.0 million, an increase of $34.4 million, or 11 percent, over the second quarter of 2002. This increase was primarily due to a $12.8 million increase in salaries and employee benefits and a $7.8 million increase in net occupancy, which included a $4.2 million write-off of leasehold improvements. Salaries and employee benefits were $198.9 million, an increase of $12.8 million, or 7 percent, over the second quarter of 2002. This increase was primarily attributable to annual merit increases, higher staff levels associated with our recent acquisitions, and increased insurance and worker's compensation benefits expenses. Net occupancy expense was $32.9 million, an increase of $7.8 million, or 31 percent over the second quarter of 2002. This increase was primarily attributable to recent acquisitions, new branch openings, other facilities restructuring initiatives, higher property insurance and a $4.2 million write-off of leasehold improvements. 37 Professional services expense was $13.6 million, an increase of $2.6 million, or 24 percent, over the second quarter of 2002. This increase was primarily attributable to higher consulting and other professional service expenses. Intangible asset amortization was $3.2 million, an increase of $1.9 million, or 152 percent, from the second quarter of 2002. This increase was primarily associated with our acquisitions in the fourth quarter of 2002 and in the second quarter of 2003. Other noninterest expense was $44.4 million, an increase of $5.9 million, or 15 percent over the second quarter of 2002. This increase included a $2.6 million increase in unguaranteed low-income housing credit amortization expense and $2.1 million in write-offs related to two software development projects. SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2003 In the first six months of 2003, noninterest expense was $693.6 million, an increase of $65.3 million, or 10 percent, over the first six months of 2002. This increase was primarily due to a $32.1 million increase in salaries and employee benefits and a $12.1 million increase in net occupancy, including $4.2 million related to the write-off of leasehold improvements. Salaries and employee benefits were $397.0 million, an increase of $32.1 million, or 9 percent, over the first six months of 2002. This increase was primarily attributable to annual merit increases, higher staff levels mostly associated with our recent acquisitions, increased insurance and health benefits expense, and 401(k) plan expenses. Net occupancy expense was $60.5 million, an increase of $12.1 million, or 25 percent, over the first six months of 2002. This increase was primarily attributable to recent acquisitions, new branch openings, other facilities restructuring initiatives, higher property insurance and a $4.2 million write-off of leasehold improvements. Professional services expense was $25.6 million, an increase of $5.1 million, or 25 percent over the first six months of 2002. This increase was primarily attributable to increased legal services, consulting and other professional service expenses. Intangible asset amortization was $5.7 million, an increase of $3.5 million, or 164 percent, from the first six months of 2002. This increase was primarily associated with our acquisitions in the fourth quarter of 2002 and in the second quarter of 2003. Other noninterest expense was $86.0 million, an increase of $9.3 million, or 12 percent, over the first six months of 2002. This increase included a $4.8 million increase in unguaranteed low-income housing credit amortization expense and $2.1 million in write-offs related to two software development projects. INCOME TAX EXPENSE Income tax expense in the second quarter of 2003 was $68.2 million, resulting in a 32 percent effective income tax rate. Income tax expense in the second quarter of 2003 included a $2.7 million refund of income taxes paid in 1998, 1999, and 2000, resulting from the settlement of several tax issues with the Internal Revenue Service. For the second quarter of 2002, the effective income tax rate was 33 percent. Income tax expense in the first six months of 2003 was $136.6 million, resulting in a 33 percent effective income tax rate. For the first six months of 2002, the effective income tax rate was 34 percent. 38 LOANS The following table shows loans outstanding by loan type.
PERCENT CHANGE TO JUNE 30, 2003 FROM: -------------------------- JUNE 30, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 31, (DOLLARS IN THOUSANDS) 2002 2002 2003 2002 2002 - ------------------------------------------- ----------- ----------- ----------- -------- ------------ Domestic: Commercial, financial and industrial..... $11,006,283 $10,338,508 $ 9,404,285 (14.56)% (9.04)% Construction............................. 1,163,530 1,285,204 1,110,794 (4.53) (13.57) Mortgage: Residential............................ 5,673,529 6,382,227 6,799,874 19.85 6.54 Commercial............................. 3,769,068 4,150,178 4,172,864 10.71 0.55 ----------- ----------- ----------- Total mortgage....................... 9,442,597 10,532,405 10,972,738 16.20 4.18 Consumer: Installment............................ 997,973 909,787 851,857 (14.64) (6.37) Revolving lines of credit.............. 988,996 1,102,771 1,179,961 19.31 7.00 ----------- ----------- ----------- Total consumer....................... 1,986,969 2,012,558 2,031,818 2.26 0.96 Lease financing.......................... 880,892 812,918 704,353 (20.04) (13.35) ----------- ----------- ----------- Total loans in domestic offices...... 24,480,271 24,981,593 24,223,988 (1.05) (3.03) Loans originated in foreign branches....... 1,112,035 1,456,490 1,444,672 29.91 (0.81) ----------- ----------- ----------- Total loans.......................... $25,592,306 $26,438,083 $25,668,660 0.30% (2.91)% =========== =========== ===========
Our lending activities are predominantly domestic, with such loans comprising 94 percent of the total loan portfolio at June 30, 2003. Total loans at June 30, 2003, were $25.7 billion, an increase of $76 million, or 0.3 percent, from June 30, 2002. The increase was mainly attributable to an increase in the residential mortgage portfolio of $1.1 billion, an increase in the commercial mortgage portfolio of $404 million, and an increase in the loans originated in foreign branches of $333 million, partly offset by a decline in the commercial, financial and industrial loan portfolio of $1.6 billion and a decline in lease financing of $177 million. Commercial, financial and industrial loans represent one of the largest categories in the loan portfolio. These loans are extended principally to corporations, middle-market businesses, and small businesses, with no industry concentration exceeding 10 percent of total loans. This portfolio has a high degree of geographic diversification based upon our customers' revenue bases, which we believe lowers our vulnerability to changes in the economic outlook of any particular region of the US. The commercial, financial and industrial loan portfolio was $9.4 billion, or 37 percent of total loans, at June 30, 2003, compared with $11.0 billion, or 43 percent of total loans, at June 30, 2002. The decrease of $1.6 billion, or 15 percent, from the prior year was primarily attributable to current economic conditions that have reduced loan demand in some segments. Loan sales and managed exits are consistent with our strategy to reduce our exposure to more volatile commercial loans and increase the percentage of more stable consumer loans (including residential mortgages). The construction loan portfolio totaled $1.1 billion, or 4 percent of total loans, at June 30, 2003, compared with $1.2 billion, or 5 percent of total loans, at June 30, 2002. This decrease of $53 million, or 5 percent, from the prior year was primarily attributable to the slowing economy and its impact on development and construction projects. Commercial mortgages were $4.2 billion, or 16 percent of total loans, at June 30, 2003, compared with $3.8 billion, or 15 percent, at June 30, 2002. The mortgage loan portfolio consists of loans on commercial 39 and industrial projects primarily in California. The increase in commercial mortgages of $404 million, or 11 percent, from June 30, 2002, was primarily due to demand in the Southern California real estate market. Residential mortgages were $6.8 billion, or 26 percent of total loans, at June 30, 2003, compared with $5.7 billion, or 22 percent of total loans, at June 30, 2002. The increase in residential mortgages of $1.1 billion, or 20 percent, from June 30, 2002, 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. While we hold most of the loans we originate, we sell most of our 30-year, fixed rate non-Community Reinvestment Act (CRA) residential mortgage loans. Consumer loans totaled $2.0 billion, or 8 percent of total loans, at June 30, 2003, compared with $2.0 billion, or 8 percent of total loans, at June 30, 2002. The slight increase of $44.8 million, or 2 percent, was primarily attributable to an increase in home equity loans, partially offset by pay-offs related to the run-off of the automobile dealer lending business exited in the third quarter of 2000. The indirect automobile dealer lending portfolio at June 30, 2003 was $93.9 million. Lease financing totaled $704.4 million, or 3 percent of total loans, at June 30, 2003, compared with $880.9 million, or 3 percent of total loans, at June 30, 2002. As we announced in 2001, we have ceased originating auto leases. At June 30, 2003, our portfolio had declined to $156.2 million and will decline 40 percent by December 2003, 90 percent by December 2004, and will fully mature by mid-year 2006. Loans originated in foreign branches totaled $1.4 billion, or 6 percent of total loans, at June 30, 2003, compared with $1.1 billion, or 4 percent, at June 30, 2002. The increase in loans originated in foreign branches of $332.6 million, or 30 percent, from June 30, 2002, was primarily attributable to higher borrowings from financial institutions attracted to lower US interest rates and increased lending in Canada. CROSS-BORDER OUTSTANDINGS Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of June 30, 2002, December 31, 2002 and June 30, 2003, for any country where such outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding exclude local currency outstandings. For any country shown in the table below, we do not have significant local currency outstandings that are not hedged or are not funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL (DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS - ---------------------------------- ------------ -------- ------------ ------------ June 30, 2002 Korea............................. $491 $-- $42 $533 December 31, 2002 Korea............................. $599 $-- $75 $674 June 30, 2003 Korea............................. $559 $-- $73 $632
PROVISION FOR CREDIT LOSSES We recorded a $25 million provision for credit losses in the second quarter of 2003, 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 six months of 2003 was $55 million, compared with a $105 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. 40 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, leases and unused commitments, in each case based on the internal risk grade of such credit exposures. 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 loss factors 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 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 or a portfolio segment that management believes indicate the probability that a loss has been incurred. This amount may be determined either by a method prescribed by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" or methods that include a range of probable outcomes based upon certain qualitative factors. The unallocated allowance is 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; 41 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 into account our recent loss experience for commercial real estate mortgages and construction loans. Pooled loan loss factors are adjusted quarterly primarily 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, 2002 At December 31, 2002, our total allowance for credit losses was $609 million, or 2.30 percent of the total loan portfolio and 180.9 percent of total nonaccrual loans. At June 30, 2003, our total allowance for credit losses was $558 million, or 2.17 percent of the total loan portfolio and 147.1 percent of total nonaccrual loans. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114 as amended by SFAS No. 118. These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. At December 31, 2002, total impaired loans were $300 million, and the associated impairment allowance was $106 million, compared with $327 million and $113 million, respectively, at June 30, 2003. On June 30, 2003 and December 31, 2002, the total allowance for credit losses for off-balance sheet commitments was $72.3 million and $75.4 million, respectively. During the second quarter of 2003, 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. We recorded a $25 million provision in the second quarter of 2003, which took into consideration the following factors: the continued slow US economy; the adverse impact on the airline industry from the war in Iraq, severe acute respiratory syndrome (SARS), and the generally weak economy; uncertain, although improving, conditions in the communications/media, power, and other sectors in domestic markets in which we operate; and growth and changes in the composition of the loan portfolio. 42 CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES At June 30, 2003, the formula allowance was $276 million, compared to $294 million at December 31, 2002, a decrease of $18 million. The specific allowance was $124 million at June 30, 2003, compared to $121 million at December 31, 2002, an increase of $3 million. The changes in both the formula and specific allowances reflect the movement of credits to nonaccrual status and the reduction in the amount of commercial loans. CHANGES IN THE UNALLOCATED ALLOWANCE At June 30, 2003, the unallocated allowance was $158 million, compared to $194 million at December 31, 2002, a decrease of $36 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 With respect to the communications/media industry, management considered the impact of weakened consumer confidence on consumer spending and advertising revenues, as well as the increasingly competitive environment facing telecommunication carriers, which could be in the range of $12 million to $33 million. o With respect to the commercial real estate sector, management considered weak demand growth and continuing excess supply in many markets, as well as the specific weakness in Northern California resulting from regional over-dependence on the hi-tech sector and some portfolio concentration in the office and apartment markets, which could be in the range of $16 million to $32 million. o With respect to power companies and utilities, management considered excess generating capacity, cyclical weakness in demand, high debt burdens and capital market disaffection in the unregulated merchant-energy sector, which could be in the range of $15 million to $30 million. o With respect to cross-border loans and acceptances to certain Asia/Pacific Rim countries, management considered the effects of slow US growth coupled with the continuing struggle against recession and deflation in Japan, which could be in the range of $8 million to $17 million. o With respect to the retail sector, management considered the adverse effects of the weak economy and less robust consumer spending resulting in unwanted accumulation of inventories, which could be in the range of $6 million to $12 million. o With respect to leasing, management considered the on-going problems of the airline industry as it continues to struggle with the weak economy and excess capacity, exacerbated by the war in Iraq and public health concerns about SARS, which could be in the range of $6 million to $12 million. o With respect to the technology industry, management considered weak capital spending in the US, as well as the effects of excess capacity and steepening price declines in many technology segments, which could be in the range of $4 million to $9 million. There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth above. Although in certain instances the downgrading of a loan resulting from these effects was reflected in the formula allowance, management believes that in most instances the impact of these events on the collectibility of the applicable loans may not have been reflected in the level of nonperforming loans or in the internal risk grading process with respect of such loans. Accordingly, our evaluation of the probable losses related to these factors was reflected in the unallocated allowance. The evaluations of the inherent 43 losses with respect to these factors were subject to higher degrees of uncertainty because they were not identified with specific problem credits. CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES The following table sets forth a reconciliation of changes in our allowance for credit losses.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------- --------------------- (DOLLARS IN THOUSANDS) 2002 2003 2002 2003 - -------------------------------------------------------------- -------- -------- -------- -------- Balance, beginning of period.................................. $629,367 $586,197 $634,509 $609,190 Loans charged off: Commercial, financial and industrial........................ 67,952 51,130 130,178 88,956 Commercial mortgage......................................... -- -- 20 -- Consumer.................................................... 2,476 2,429 5,235 5,085 Lease financing............................................. 674 13,190 1,507 32,208 -------- -------- -------- -------- Total loans charged off................................... 71,102 66,749 136,940 126,249 Recoveries of loans previously charged off: Commercial, financial and industrial........................ 12,822 13,008 17,339 18,587 Construction................................................ 40 -- 40 -- Commercial mortgage......................................... 44 44 139 150 Consumer.................................................... 873 697 1,781 1,420 Lease financing............................................. 182 50 383 168 -------- -------- -------- -------- Total recoveries of loans previously charged off.......... 13,961 13,799 19,682 20,325 -------- -------- -------- -------- Net loans charged off................................... 57,141 52,950 117,258 105,924 Provision for credit losses................................... 50,000 25,000 105,000 55,000 Foreign translation adjustment and other net additions(2)..... 2,722 35 2,697 16 -------- -------- -------- -------- Balance, end of period........................................ $624,948 $558,282 $624,948 $558,282 ======== ======== ======== ======== Allowance for credit losses to total loans.................... 2.44% 2.17% 2.44% 2.17% Provision for credit losses to net loans charged off.......... 87.50 47.21 89.55 51.92 Net loans charged off to average loans outstanding for the period(1)............................................ 0.90 0.80 0.93 0.80 - --------------------------- (1) Annualized. (2) Includes $2.4 million related to the First Western Bank acquisition in the second quarter of 2002.
Total loans charged off in the second quarter of 2003 decreased by $4.4 million from the second quarter of 2002, primarily due to a $16.8 million decrease in commercial, financial and industrial loans charged off, partly offset by a $12.5 million increase in lease financing charge-offs. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through provisions for credit losses. Second quarter 2003 recoveries of loans previously charged off decreased by $0.2 million from the second quarter of 2002. The percentage of net loans charged off to average loans outstanding for the second quarter of 2003 decreased by 10 basis points from the same period in 2002. At June 30, 2003, the allowance for credit losses exceeded the annualized net loans charged off during the second quarter of 2003, 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. 44 NONPERFORMING ASSETS
JUNE 30, DECEMBER 31, JUNE 30, (DOLLARS IN THOUSANDS) 2002 2002 2003 - -------------------------------------------------------------- -------- ----------- -------- Commercial, financial and industrial.......................... $386,912 $ 276,415 $273,896 Construction.................................................. -- -- 1,559 Commercial mortgage........................................... 24,201 23,980 48,479 Lease financing............................................... 3,369 36,294 52,568 Loan originated in foreign branches........................... -- -- 2,985 -------- ----------- -------- Total nonaccrual loans...................................... 414,482 336,689 379,487 Foreclosed assets............................................. 490 715 271 -------- ----------- -------- Total nonperforming assets.................................. $414,972 $ 337,404 $379,758 ======== =========== ======== Allowance for credit losses................................... $624,948 $ 609,190 $558,282 ======== =========== ======== Nonaccrual loans to total loans............................... 1.62% 1.27% 1.48% Allowance for credit losses to nonaccrual loans............... 150.78 180.94 147.11 Nonperforming assets to total loans and foreclosed assets..... 1.62 1.28 1.48 Nonperforming assets to total assets.......................... 1.15 0.84 0.89
At June 30, 2003, nonperforming assets totaled $379.8 million, an increase of $42.4 million, or 13 percent, from December 31, 2002. The increase was primarily due to our decision to place additional airplane leases on nonaccrual, partially offset by our decision during the second quarter of 2003, to return two airplane leases, totaling $18.3 million, to accrual status. In addition, we placed two San Francisco Bay Area office loans, totaling approximately $22.8 million, on nonaccrual status. Nonaccrual loans as a percentage of total loans were 1.48 percent at June 30, 2003, compared with 1.62 percent at June 30, 2002. Nonperforming assets as a percentage of total loans and foreclosed assets were 1.48 percent at June 30, 2003, compared to 1.62 percent at June 30, 2002. LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
JUNE 30, DECEMBER 31, JUNE 30, (DOLLARS IN THOUSANDS) 2002 2002 2003 - ------------------------------------------------------------------ -------- ----------- -------- Commercial, financial and industrial.............................. $ 11,096 $ 1,705 $ 1,728 Construction...................................................... -- 679 2,311 Mortgage: Residential..................................................... 5,104 3,211 3,915 Commercial...................................................... 523 506 540 -------- ----------- -------- Total mortgage................................................ 5,627 3,717 4,455 Consumer and other................................................ 1,513 2,072 1,879 -------- ----------- -------- Total loans 90 days or more past due and still accruing......... $ 18,236 $ 8,173 $ 10,373
45 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 "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK." Market risk is the risk of loss to future earnings, to fair values, or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that affect market risk sensitive instruments. Market risk is attributable to all market risk sensitive financial instruments, including securities, loans, deposits, and borrowings, as well as derivative instruments. Our exposure to market risk is a function of our asset and liability management activities, our trading activities for our own account, and our role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of our earnings and equity to loss and to reduce the volatility inherent in certain financial instruments. The management of market risk is governed by policies reviewed and approved annually by our Board of Directors (Board). The Board assigns responsibility for market risk management to the Chief Executive Officer as the administrator of the Asset & Liability Management Committee (ALCO), which is composed of UnionBanCal Corporation executives. ALCO meets monthly and reports quarterly to the Finance and Capital Committee of the Board on activities related to the management of market risk. As part of the management of our market risk, ALCO may direct changes in the mix of assets and liabilities and the extent to which we utilize investment securities and derivative instruments such as interest rate swaps, caps and floors to hedge our interest rate exposures. ALCO reviews and approves specific market risk management programs involving investment and hedging activities and certain market risk limits. The ALCO Chairman is responsible for the company-wide management of market risk. The Treasurer is responsible for implementing funding, investing, and hedging strategies designed to manage this risk. On a day-to-day basis, the monitoring of market risk takes place at a centralized level within the Market Risk Monitoring unit (MRM). MRM is responsible for measuring risks to ensure compliance with all market risk limits and guidelines incorporated within the policies and procedures established by the Board and ALCO. MRM reports monthly to ALCO on trading risk exposures and on compliance with interest rate risk, securities portfolio and derivatives policy limits. MRM also reports quarterly to ALCO on the effectiveness of our hedging activities. In addition, periodic reviews by internal audit and regulators provide further evaluation of controls over the risk management process. We have separate and distinct methods for managing the market risk associated with our trading activities and our asset and liability management activities, as described below. INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) We engage in asset and liability management activities with the primary purposes of managing the sensitivity of net interest income (NII) to changes in interest rates within limits established by the 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 ALCO through a variety of modeling techniques that are used to quantify the sensitivity of NII to changes in interest rates. As directed by ALCO, and in consideration of the importance of our demand deposit accounts as a funding source, NII is adjusted in the official policy risk measure to incorporate the effect of certain noninterest expense items related to these deposits that are nevertheless sensitive to changes in interest rates. In managing interest rate risk, ALCO monitors NII sensitivity on both an adjusted and unadjusted basis. 46 Our unhedged NII remains inherently asset sensitive, meaning that our assets generally reprice more quickly than our liabilities, particularly our core deposits. Since the NII associated with an asset sensitive balance sheet tends to decrease when interest rates decline and increase when interest rates rise, derivative hedges and the securities portfolio are used to manage this risk. In the second quarter of 2003, we did not enter into any derivative hedges. We continued to increase the size of our securities portfolio in response to strong growth in core deposits, which respond more slowly to changes in market rates than wholesale liabilities. Together, our hedging and investment activities resulted in an essentially neutral risk profile for the hedged balance sheet with respect to parallel yield curve shifts. For a further discussion of derivative instruments and our hedging strategies, see Note 16--"Derivative Instruments" of the Notes to Consolidated Financial Statements included in our Form 10-K/A for the year ended December 31, 2002. However, our NII is also sensitive to non-parallel shifts in the yield curve. In general, our NII increases when the yield curve steepens (specifically when short rates, under one year, drop and long rates, beyond one year, rise), while a flattening curve tends to depress our NII and net interest margin. In this respect, our NII is asset sensitive when measured against changes in long rates and slightly liability sensitive when measured against changes in short rates. This asset sensitivity in relation to a flattening of the yield curve is manifested in the NII simulations primarily by an acceleration of mortgage prepayments (in both the residential portfolio and investment securities portfolio) when long rates decline. Prepayments depress NII even if interest rates do not change because the cash flows from the prepaid assets that were booked at higher rates must be reinvested at lower prevailing rates. As a result, a continuation of the recent high volume of prepayments will further compress our net interest margin and negatively affect NII in the coming months, even if market rates remain at current levels. Our official NII policy measure involves a simulation of "Earnings-at-Risk" (EaR) in which we estimate the impact that gradual, ramped-on parallel shifts in the yield curve would have on NII over a 12-month horizon. Under the Board's policy limits, the negative change in simulated NII in either the up or down 200 basis point shock scenarios may not exceed 4 percent of NII as measured in the base case, or no change, scenario. The following table sets forth the simulation results in both the up and down 200 basis point ramp scenarios as of June 30, 2003(1): MARCH 31, JUNE 30, (DOLLARS IN MILLIONS) 2003 2003 - ------------------------------------------- -------- ------- +200 basis points.......................... $15.4 $6.7 as a percentage of base case NII........... 1.04% 0.46% - -200 basis points.......................... $(15.3) $(2.4) as a percentage of base case NII........... 1.04% 0.17% - ------------------ (1) For these policy simulations, NII is adjusted to incorporate the effect of certain non-interest expense items related to demand deposits that are nevertheless sensitive to changes in interest rates. EaR in the down 200 basis point scenario was ($2.4) million, or .17 percent of adjusted NII in the base case scenario, well within the Board's guidelines. However, with federal funds and LIBOR rates already below two percent, a downward ramp scenario of 200 basis points would result in short-term rate levels below zero. As a result, we believe that a downward ramp scenario of 100 basis points provides a more reasonable measure of asset sensitivity in a falling interest rate environment. As of June 30, 2003, the difference between adjusted NII in the base case and adjusted NII after a gradual 100 basis point downward ramp was a positive $2.4 million, or .17 percent of the base case. 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. 47 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 of NII based on forecasted balances and with value-based simulations that measure the sensitivity of economic-value-of-equity (EVE) to changes in interest rates. 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. TRADING ACTIVITIES We enter into trading account activities primarily as a financial intermediary for customers, and, to a minor extent, for our own account. By acting as a financial intermediary, we are able to provide our customers with access to a wide range of products from the securities, foreign exchange, and derivatives markets. In acting for our own account, we may take positions in some of these instruments with the objective of generating trading profits. These activities expose us to two primary types of market risk: interest rate and foreign currency exchange risk. In order to manage interest rate and foreign currency exchange risk associated with our trading activities, we utilize a variety of non-statistical methods including: position limits for each trading activity, daily marking of all positions to market, daily profit and loss statements, position reports, and independent verification of all inventory pricing. Additionally, Market Risk Monitoring (MRM) reports positions and profits and losses daily to the Treasurer and trading managers and weekly to the ALCO Chairman. ALCO is provided reports on a monthly basis. We believe that these procedures, which stress timely communication between MRM and senior management, are the most important elements of the risk management process. We use a form of Value at Risk (VaR) methodology to measure the overall market risk inherent in our trading account activities. Under this methodology, management statistically calculates, with 97.5 percent confidence, the potential loss in fair value that we might experience if an adverse shift in market prices were to occur within a period of 5 business days. The amount of VaR is managed within limits well below the maximum limit established by Board policy at 0.5 percent of shareholders' equity. The VaR model incorporates a number of key assumptions, including assumed holding period and historical volatility based on 3 years of historical market data updated quarterly. The following table sets forth the average, high and low VaR during the year for our trading activities.
MARCH 31, 2003 JUNE 30, 2003 ---------------------- ---------------------- AVERAGE HIGH LOW AVERAGE HIGH LOW (DOLLARS IN THOUSANDS) VAR VAR VAR VAR VAR VAR - -------------------------------- ------- ---- --- ------- ---- --- Foreign exchange................ $155 $293 $67 $152 $340 $67 Securities...................... 207 463 97 231 463 97
Consistent with our business strategy of focusing on the sale of capital markets products to customers, we manage our trading risk exposures at conservative levels, well below the trading risk policy limits established by the Board. As a result, our foreign exchange business continues to derive the bulk of its 48 revenue from customer-related transactions. We take inter-bank trading positions only on a limited basis and we do not take any large or long-term strategic positions in the market for the Bank's own portfolio. In 2002, we continued to grow our customer-related foreign exchange business while maintaining an essentially unchanged inter-bank trading risk profile as measured under our VaR methodology. The Securities Trading & Institutional Sales department serves the fixed income needs of our institutional clients and acts as the fixed income wholesaler for our broker/dealer subsidiary, UBOC Investment Services, Inc. As with our foreign exchange business, we continue to generate the vast majority of our securities income from customer-related transactions. Our interest rate derivative contracts included as of June 30, 2003, $3.6 billion of derivative contracts entered into as an accommodation for customers. We act as an intermediary and match these contracts, at a credit spread, to contracts with major dealers, thus neutralizing the related market risk. LIQUIDITY RISK Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust our future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The ALM Policy approved by the Board requires quarterly reviews of our liquidity by ALCO. Additionally, ALCO conducts monthly ongoing reviews of our liquidity situation. Liquidity is managed through this ALCO coordination process on a Bank-wide basis, encompassing all major business units. The operating management of liquidity is implemented through the funding and investment functions of the Global Markets Group. Our liquidity management draws upon the strengths of our extensive retail and commercial core deposit franchise, coupled with the ability to obtain funds for various terms in a variety of domestic and international money markets. Our securities portfolio represents a significant source of additional liquidity. 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, savings, and consumer time deposits, combined with average common shareholders' equity, funded 82 percent of average total assets of $39.8 billion for the second quarter of 2003. Most of the remaining funding was provided by short-term borrowings in the form of negotiable certificates of deposit, large time deposits, foreign deposits, federal funds purchased, securities sold under repurchase agreements, commercial paper, and other borrowings. The securities portfolio provides additional enhancement to our liquidity position, which may be created through either securities sales, or repurchase agreements. Liquidity may also be provided by the sale or maturity of assets. Such assets include interest-bearing deposits in banks, federal funds sold, securities purchased under resale agreements, and trading account securities. The aggregate of these assets averaged $1.8 billion for the quarter ended June 30, 2003. Additional liquidity may be provided through loan maturities and sales. 49 REGULATORY CAPITAL The following tables summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios. UNIONBANCAL CORPORATION
MINIMUM JUNE 30, DECEMBER 31, JUNE 30, REGULATORY (DOLLARS IN THOUSANDS) 2002 2002 2003 REQUIREMENT - ---------------------------------- ----------------- ----------------- ----------------- ---------------- CAPITAL COMPONENTS Tier 1 capital.................... $ 3,834,103 $ 3,667,237 $ 3,791,651 Tier 2 capital.................... 562,165 573,858 538,163 ----------------- ----------------- ----------------- Total risk-based capital.......... $ 4,396,268 $ 4,241,095 $ 4,329,814 ================= ================= ================= Risk-weighted assets.............. $32,213,352 $32,811,441 $33,142,588 ================= ================= ================= Quarterly average assets.......... $35,613,957 $37,595,002 $39,366,344 ================= ================= =================
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - -------------- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total capital (to risk-weighted assets)......................... $4,396,268 13.65% $4,241,095 12.93% $4,329,814 13.06% >$2,651,407 8.0% - Tier 1 capital (to risk-weighted assets)......................... 3,834,103 11.90 3,667,237 11.18 3,791,651 11.44 > 1,325,704 4.0 - Leverage(1)....................... 3,834,103 10.77 3,667,237 9.75 3,791,651 9.63 > 1,574,654 4.0 - - ----------------------- (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
UNION BANK OF CALIFORNIA, N.A.
MINIMUM "WELL-CAPITALIZED" JUNE 30, DECEMBER 31, JUNE 30, REGULATORY REGULATORY (DOLLARS IN THOUSANDS) 2002 2002 2003 REQUIREMENT REQUIREMENT - ---------------------------------- ----------------- ----------------- ----------------- ---------------- ------------------- CAPITAL COMPONENTS Tier 1 capital.................... $ 3,473,828 $ 3,334,720 $ 3,490,596 Tier 2 capital.................... 471,258 484,062 467,613 ----------------- ----------------- ----------------- Total risk-based capital.......... $ 3,945,086 $ 3,818,782 $ 3,958,209 ================= ================= ================= Risk-weighted assets.............. $31,581,189 $32,161,047 $32,492,833 ================= ================= ================= Quarterly average assets.......... $35,113,945 $37,019,328 $38,811,257 ================= ================= =================
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - -------------- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total capital (to risk-weighted assets)......................... $3,945,086 12.49% $3,818,782 11.87% $3,958,209 12.18% >$2,599,427 8.0% >$3,249,283 10.0% - - Tier 1 capital (to risk-weighted assets)......................... 3,473,828 11.00 3,334,720 10.37 3,490,596 10.74 > 1,299,713 4.0 > 1,949,570 6.0 - - Leverage(1)....................... 3,473,828 9.89 3,334,720 9.01 3,490,596 8.99 > 1,552,450 4.0 > 1,940,563 5.0 - - - ---------------------------- (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
We and Union Bank of California, N.A. are subject to various regulations of the federal banking agencies, including minimum capital requirements. We both 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, 2002, our Tier 1 risk-based capital ratio at June 30, 2003, increased 26 basis points to 11.44 percent, our total risk-based capital ratio increased 13 basis points to 13.06 percent, and our leverage ratio decreased 12 basis points to 9.63 percent. The increase in our capital ratios was primarily attributable to an increase in shareholders' equity, partly offset by an increase in risk-weighted assets. As of June 30, 2003, management believes the capital ratios of Union Bank of California, N.A. met all regulatory requirements of "well-capitalized" institutions, 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. 50 CERTAIN BUSINESS RISK FACTORS ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS A substantial majority of our assets, deposits and fee income 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, the decline in the technology sector and the California state government's recent budgetary crisis and continuing fiscal difficulties. If economic conditions in California continue to decline, we expect that our level of problem assets could increase. THE CONTINUING WAR ON TERRORISM CONTRIBUTES TO THE CONTINUING DOWNTURN IN US ECONOMIC CONDITIONS On-going acts or threats of terrorism and actions taken by the US or other governments as a result of such acts or threats 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. 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 retail industry, the airline industry, the power industry and the technology industry. Industry-specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans or charge-offs. RISKS ASSOCIATED WITH CURTAILED MARKET ACCESS OF POWER COMPANIES COULD AFFECT OUR PORTFOLIO CREDIT QUALITY The failure of Enron Corporation, coupled with continued turbulence in the 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, further decreases 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. 51 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 or other borrowings. 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 BTM; OUR INTERESTS MAY NOT BE THE SAME AS BTM'S INTERESTS BTM, a wholly owned subsidiary of Mitsubishi Tokyo Financial Group, Inc., owns a majority (approximately 66 percent as of June 30, 2003) of the outstanding shares of our common stock. As a result, BTM 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 BTM. A majority of our directors are not officers or employees of UnionBanCal Corporation or any of our affiliates, including BTM. However, because of BTM's control over the election of our directors, BTM could change the composition of our Board of Directors so that the Board would not have a majority of outside directors. BTM'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. POSSIBLE FUTURE SALES OF SHARES BY BTM COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK BTM may sell shares of our common stock in compliance with the federal securities laws. By virtue of BTM's current control of us, BTM 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, BTM 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 BTM sells or transfers shares of our common stock as a block, another person or entity could become our controlling shareholder. BTM'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS Although we fund our operations independently of BTM and believe our business is not necessarily closely related to BTM's business or outlook, BTM's credit ratings may affect our credit ratings. BTM 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 BTM. POTENTIAL CONFLICTS OF INTEREST WITH BTM COULD ADVERSELY AFFECT US BTM's view of possible new businesses, strategies, acquisitions, divestitures or other initiatives may differ from ours. This may delay or hinder us from pursuing such initiatives. Also, as part of BTM's normal risk management processes, BTM manages global credit exposures and concentrations on an aggregate basis, including UnionBanCal Corporation. Therefore, at certain levels or in certain circumstances, our ability to approve certain credits or other banking transactions and categories of customers is subject to the concurrence of BTM. We may wish to extend credit or furnish other banking 52 services to the same customers as BTM. Our ability to do so may be limited for various reasons, including BTM's aggregate credit exposure and marketing policies. Certain directors' and officers' ownership interests in BTM's common stock or service as a director or officer or other employee of both us and BTM 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, Citibank, 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 as a "financial holding company." Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Recently, a number of foreign banks have acquired financial services companies in the US, further increasing competition in the US market. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS PAYABLE TO US As a holding company, a substantial portion of our cash flow typically comes from dividends our bank and nonbank subsidiaries pay to us. Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any of our subsidiaries liquidate, that subsidiary's creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. ADVERSE EFFECTS OF, OR CHANGES IN, BANKING OR OTHER LAWS AND REGULATIONS OR GOVERNMENTAL FISCAL OR MONETARY POLICIES COULD ADVERSELY AFFECT US We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies, including accounting standards and interpretations 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 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 BTM'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 53 (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 by depository institutions, and (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. 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; o our inability to decrease reliance on revenues generated from assets; o our ability to manage 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 54 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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/A for the year ended December 31, 2002 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 Risk," and "Certain Business Risk Factors." ITEM 4. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of June 30, 2003, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) are effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission (SEC) rules and forms. (b) CHANGES IN INTERNAL CONTROLS. These officers have also concluded that during the second quarter of 2003 there was no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 55 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, N.A., our major subsidiary (the Bank), has been named in two suits pending in the United States District Court for the Central District of California, Christensen v. Union Bank of California (formerly captioned as 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), and one suit in Los Angeles County Superior Court, Kilpatrick v Orrick Herrington & Sutcliffe, et al (filed April 22, 2003 as to the Bank). The plaintiffs in these suits collectively seek in excess of $250 million alleged to have been 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 Christensen 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. The plaintiff in the Kilpatrick case is an individual investor who seeks recovery of funds placed in an account for a limited liability company which he formed with Slatkin. Another suit has been filed with regard to an unrelated "Ponzi" scheme perpetrated by PinnFund, USA, located in San Diego, California. The victims of this scheme have filed suit against the Bank seeking $235 million. They assert that the Bank improperly opened and administered a deposit account, which was used by PinnFund in furtherance of the fraud. Although these claims are in the preliminary stages, the Bank has numerous legal defenses, which it will invoke. Based on our evaluation to date of these claims, management believes that they 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS For information regarding matters submitted to a vote at the Annual Meeting of Shareholders on April 23, 2003 ("Annual Meeting"), see Part II, Item 4 of Form 10-Q for the quarter ended March 31, 2003, incorporated herein. At that annual meeting, our shareholders approved our reincorporation from California to Delaware. This is expected to occur by the end of the year. 56 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS: NO. DESCRIPTION - ---- ---------------------------------------------------------------------- 10.1 Form of Change-of-Control Agreement, dated as of May 1, 2003, between UnionBanCal Corporation and each of the policy-making officers of UnionBanCal Corporation(1) 31.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) 31.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) - ------------------------ (1) Provided herewith (B) REPORTS ON FORM 8-K We furnished a report on Form 8-K on April 16, 2003 reporting under Item 9 thereof that UnionBanCal Corporation issued a press release concerning earnings for the first quarter of 2003. 57 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, UnionBanCal Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIONBANCAL CORPORATION (Registrant) By: /S/ NORIMICHI KANARI ---------------------------------------------- Norimichi Kanari PRESIDENT AND CHIEF EXECUTIVE OFFICER (Principal Executive Officer) 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) Date: August 14, 2003 58 EX-10 3 exhibit10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 CHANGE-OF-CONTROL AGREEMENT THIS AGREEMENT, dated as of the 1st day of May, 2003 (the "Agreement"), by and between UnionBanCal Corporation, a California corporation (the "Company"), and __________________ (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its Shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the current Company and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: SECTION 1. CERTAIN DEFINITIONS. (a) "Effective Date" means the first date -------------------- during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (1) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (2) otherwise arose in connection with or anticipation of a Change of Control, then "Effective Date" means the date immediately prior to the date of such termination of employment. (b) "Change of Control Period" means the period commencing on the date hereof and ending thirty months after such date; PROVIDED, HOWEVER, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate thirty months from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) "Affiliated Company" means any company controlled by the Company. (d) "Change of Control" means: consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets or stock of the Company or the acquisition of the assets or stock of another entity ("Business Combination"); excluding, however, such a Business Combination pursuant to which (a) a Permitted Holder will beneficially own, directly or indirectly, 30% or more of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled -1- to vote generally in the election of directors (together, the "Company Stock"), as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries), and (b) no individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended has a greater beneficial interest, directly or indirectly, in the Company Stock than a Permitted Holder. For purposes of this definition, "Permitted Holder" shall mean (i) The Bank of Tokyo-Mitsubishi, Ltd. or any successor thereto ("BTM"), (ii) an employee benefit plan of BTM or (iii) a corporation controlled by BTM. SECTION 2. EMPLOYMENT PERIOD. The Company hereby agrees to continue the ------------------ Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending thirty months after the Effective Date (the "Employment Period"). The Employment Period shall terminate upon the Executive's termination of employment for any reason. SECTION 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (1) During the -------------------- -------------------- Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the office where the Executive was employed immediately preceding the Effective Date or at any other location less than 35 miles from such office. (2) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (1) BASE SALARY. During the Employment Period, the ------------ ------------ Executive shall receive an annual base salary (the "Annual Base Salary") at an annual rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to the Executive by the Company and the Affiliated Companies in respect of the 12-month period immediately preceding the month in which the -2- Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased. (2) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive ------------- shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus opportunity (the "Annual Bonus") in cash at least equal to the Executive's target bonus under the Company's Senior Management Bonus Plan or its successors for the year in which the Effective Date occurs (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (3) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, ---------------------------------------- the Executive shall be entitled to participate in all cash incentive, equity incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. In addition, on the Effective Date, all stock options, restricted stock and other equity and long-term incentives held by the Executive shall vest and/or become immediately exercisable, as the case may be. (4) WELFARE BENEFIT PLANS. During the Employment Period, the Executive ----------------------- and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the Affiliated Companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies. (5) EXPENSES. During the Employment Period, the Executive shall be entitled -------- to receive prompt reimbursement for all reasonable expenses incurred by the Executive in -3- accordance with the most favorable policies, practices and procedures of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (6) FRINGE BENEFITS. During the Employment Period, the Executive shall be --------------- entitled to fringe benefits and perquisites, in accordance with the most favorable plans, practices, programs and policies of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (7) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive ------------------------ shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the Affiliated Companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. (8) VACATION. During the Employment Period, the Executive shall be entitled -------- to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the Affiliated Companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies. SECTION 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The --------------------------- --------------------- Executive's employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines in good faith that the Disability (as defined herein) of the Executive has occurred during the Employment Period (pursuant to the definition of "Disability"), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), PROVIDED that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. "Disability" means the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the ----- Employment Period for Cause. "Cause" means: (1) the willful and continued failure of the Executive to perform substantially the Executive's duties (as contemplated by Section 3(a)(1)(A)) with the Company or any -4- Affiliated Company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive's delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive's duties, or (2) the conviction of, or plea by the Executive of NOLO CONTENDERE to, a felony. For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or an executive officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the Executive, if the Executive is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail. (C) GOOD REASON. The Executive's employment may be terminated by the ------------ Executive for Good Reason or by the Executive voluntarily without Good Reason. "Good Reason" means: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a), or any other diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company's ceasing to be a publicly traded entity), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (3) the Company's requiring the Executive (i) to be based at any office or location other than as provided in Section 3(a)(1)(B), (ii) to be based at a location other than the principal executive offices of the Company if the Executive was employed at -5- such location immediately preceding the Effective Date, or (iii) to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (4) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (5) any failure by the Company to comply with and satisfy Section 10(c). For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason pursuant to a Notice of Termination given during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. The Executive's mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executive's ability to terminate employment for Good Reason. (D) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by --------------------- the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b). "Notice of Termination" means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's respective rights hereunder. (E) DATE OF TERMINATION. "Date of Termination" means (1) if the Executive's ------------------- employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, (which date shall not be more than 30 days after the giving of such notice), as the case may be, (2) if the Executive's employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination, and (3) if the Executive resigns without Good Reason, the date on which the Executive notifies the Company of such termination, and (4) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be. SECTION 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; -------------------------------------------- ------------ OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the - ----------------------------------------- Company terminates the Executive's employment other than for Cause or Disability or the Executive terminates employment for Good Reason: -6- (1) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: (A) the sum of (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (ii) the product of (x) the Recent Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365, and (iii) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the "Accrued Obligations"); (B) the amount equal to the product of (i) three (the "Multiplier") and (ii) the sum of (x) the Executive's Annual Base Salary and (y) the Recent Annual Bonus, provided that if the Executive is 62 years old or older on the Date of Termination, the Multiplier shall be multiplied by a fraction, the numerator of which shall be the number of months (which shall not be deemed to be less than twelve) until the Executive's 65th birthday, and the denominator of which shall be 36; and (C) an amount equal to the excess of (i) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Effective Date) and any excess or supplemental retirement plan in which the Executive participates (collectively, the "SERP") that the Executive would receive if the Executive's employment continued for three years after the Date of Termination, or if earlier, until the Executive's 65th birthday (which shall be deemed to be no less than 12 months after the Date of Termination), assuming for this purpose that all accrued benefits are fully vested and assuming that the Executive's compensation in each of the three years is that required by Sections 3(b)(1) and 3(b)(2), over (ii) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; (2) for three years after the Executive's Date of Termination, or if earlier, until the Executive's 65th birthday (which shall be deemed to be no less than 12 months after the Date of Termination), or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Sections 3(b)(4) and 3(b)(6) if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies and their families; PROVIDED, HOWEVER, that, if the Executive becomes reemployed with another employer and is eligible to receive such benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those -7- provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (3) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion, PROVIDED that the cost of such outplacement shall not exceed 15% of the Executive's Annual Base Salary; and (4) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any Other Benefits (as defined in Section 6). (B) DEATH. If the Executive's employment is terminated by reason of the ----- Executive's death during the Employment Period, the Company shall provide the Executive's estate or beneficiaries with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 5(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the Affiliated Companies to the estates and beneficiaries of peer executives of the Company and the Affiliated Companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and the Affiliated Companies and their beneficiaries. (C) DISABILITY. If the Executive's employment is terminated by reason of ---------- the Executive's Disability during the Employment Period, the Company shall provide the Executive with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the Affiliated Companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the Affiliated Companies and their families. -8- (D) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is ---------------------------------- terminated for Cause during the Employment Period, the Company shall provide to the Executive (1) the Executive's Annual Base Salary through the Date of Termination, (2) the amount of any compensation previously deferred by the Executive, and (3) the Other Benefits, in each case, to the extent theretofore unpaid, and shall have no other severance obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, the Company shall provide to the Executive the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. In such case, all the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. SECTION 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall -------------------------- prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or the Affiliated Companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or the Affiliated Companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any other contract or agreement with the Company or the Affiliated Companies at or subsequent to the Date of Termination ("Other Benefits") shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 5(a) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, program or policy of the Company and the Affiliated Companies, unless otherwise specifically provided therein in a specific reference to this Agreement. SECTION 7. FULL SETTLEMENT. The Company's obligation to make the payments --------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred (within 10 days following the Company's receipt of an invoice from the Executive), to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). SECTION 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the -9- Excise Tax, then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to the Gross-Up Payment, but that the Parachute Value of all Payments does not exceed 110% of the Safe Harbor Amount, then no Gross-Up Payment shall be made to the Executive and the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Section 5(a)(i)(B), unless an alternative method of reduction is elected by the Executive, and in any event shall be made in such a manner as to maximize the Value of all Payments actually made to the Executive. For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 8(a). The Company's obligation to make Gross-Up Payments under this Section 8 shall not be conditioned upon the Executive's termination of employment. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm as may be designated by the Company (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period -10- following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order effectively to contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of the Executive and direct the Executive to sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that, if the Company pays such claim and directs the Executive to sue for a refund, the Company shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and PROVIDED, FURTHER, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of a Gross-Up Payment or payment by the Company of an amount on the Executive's behalf pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company's -11- complying with the requirements of Section 8(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after payment by the Company of an amount on the Executive's behalf pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) Notwithstanding any other provision of this Section 8, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding. (F) DEFINITIONS. The following terms shall have the following meanings for ----------- purposes of this Section 8. (i) "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax. (ii) "Parachute Value" of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a "parachute payment" under Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment. (iii) A "Payment" shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise. (iv) The "Safe Harbor Amount" means 2.99 times the Executive's "base amount," within the meaning of Section 280G(b)(3) of the Code. (v) "Value" of a Payment shall mean the economic present value of a Payment as of the date of the change of control for purposes of Section 280G of the Code, as determined by the Accounting Firm using the discount rate required by Section 280G(d)(4) of the Code. SECTION 9. (a) CONFIDENTIAL INFORMATION. The Executive shall hold in a ------------------------- fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or the Affiliated Companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive's employment by the Company or the Affiliated Companies and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than -12- the Company and those persons designated by the Company. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) NONDISPARAGEMENT/COOPERATION. Executive shall not intentionally make ---------------------------- any public statements, encourage others to make statements or release information intended to disparage or defame the Company or its Affiliates or any of their respective directors or officers. Notwithstanding the foregoing, nothing in this Paragraph 9(b) shall prohibit any person from making truthful statements when required by order of a court or other body having jurisdiction. (c) NON-SOLICITATION OF EMPLOYEES. The Executive agrees that for a period ----------------------------- of twelve months following the Date of Termination, Executive shall not on his/her own behalf or on behalf of any other person, firm, partnership, association, corporation, or business organization, entity or enterprise call on, solicit or attempt to induce any other officer or employee of the Company or its affiliates to terminate his or her employment with the Company or its affiliates and shall not assist any other person or entity in such a solicitation unless such employee is terminated by the Company. SECTION 10. SUCCESSORS. (a) This Agreement is personal to the Executive, ---------- and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 10(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. SECTION 11. MISCELLANEOUS. (a) This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -13- if to the Executive: [Name of Executive] [Address of Executive] if to the Company: 400 California Street San Francisco, California 94104 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a), prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date, except as specifically provided herein, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, provided that any provision with regard to supplemental retirement benefits in any prior employment agreement shall remain in full force and effect. -14- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ----------------------------------------- [Executive] [Title of Executive] UNIONBANCAL CORPORATION By: -------------------------------------------------- Paul E. Fearer Executive Vice President Human Resources -15- EX-31 4 exhibit31-12003q2.txt EXHIBIT 31.1 Exhibit 31.1 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-15(e) and 15d-15(e) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: August 14 , 2003 By: /s/ NORIMICHI KANARI -------------------------------------- Norimichi Kanari PRESIDENT AND CHIEF EXECUTIVE OFFICER 2 EX-31 5 exhibit31-22003q2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATIONS 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-15(e) and 15d-15(e) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; c) disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: August 14 , 2003 By: /s/ DAVID I. MATSON -------------------------------------- David I. Matson EXECUTIVE VICE PRESIDENT CHIEF FINANCIAL OFFICER (Principal Financial Officer) 2 EX-32 6 exhibit32-1q22003.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Quarterly Report of UnionBanCal Corporation (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Norimichi Kanari, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 By: /S/ NORIMICHI KANARI ----------------------------------------- Norimichi Kanari Chief Executive Officer EX-32 7 exhibit32-2q22003.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Quarterly Report of UnionBanCal Corporation (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David I. Matson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2003 By: /S/ DAVID I. MATSON ----------------------------------------- David I. Matson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----