UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-15081
UnionBanCal Corporation
(Exact name of registrant as specified in its charter)
Delaware | 94-1234979 | |||
(State of Incorporation) | (I.R.S. Employer Identification No.) | |||
400 California Street, San Francisco, California | 94104-1302 | |||
(Address of principal executive offices) | (Zip Code) |
Registrants 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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | þ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Number of shares of Common Stock outstanding at October 31, 2011: 136,330,830
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
UnionBanCal Corporation and Subsidiaries
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which include expectations for our operations and business and our assumptions for those expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our expectations. See Part I, Item 1A. Risk Factors, in our 2010 Annual Report on Form 10-K, Part II, Item 1A. Risk Factors in this report, and the other risks described in this report and in our 2010 Annual Report on Form 10-K for factors to be considered when reading any forward-looking statements in this filing.
This report includes forward-looking statements, which are 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 our Securities and Exchange Commission (SEC) filings, press releases, news articles 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, target, anticipate, intend, plan, seek, estimate, potential, project, or words of similar meaning, or future or conditional verbs such as will, would, should, could, might, 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 known to our management at the date of these statements. 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.
In this document, for example, we make forward-looking statements, which discuss our expectations about:
¡ | Our business objectives, strategies and initiatives, our organizational structure, the growth of our business, our competitive position and prospects, and the effect of competition on our business and strategies |
¡ | Our assessment of significant factors and developments that have affected or may affect our results |
¡ | Our assessment of economic conditions and trends and economic and credit cycles, and their impact on our business |
¡ | The economic outlook for the California, U.S. and global economy |
¡ | The impact of changes in interest rates, our strategy to manage our interest rate risk profile and our outlook for short-term and long-term interest rates and their effect on our net interest margin |
¡ | Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook within specific industries, for the U.S. in general, for particular states in the U.S. including California, Oregon, Texas and Washington, and in foreign countries (including Japan) |
¡ | Pending and recent legislative and regulatory actions, and future legislative and regulatory developments, including the effects of legislation and governmental measures introduced in response to the financial crises affecting the banking system, financial markets and the U.S. economy, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), changes to the Federal Deposit Insurance Corporations deposit insurance assessment policies, the effect on and application of foreign laws and regulations to our business and operations, and anticipated fees, costs or other impacts on our business and operations as a result of these developments |
¡ | Our strategies and expectations regarding capital levels and liquidity, our funding base, core deposits, our intent and ability to implement new capital standards under the Dodd-Frank Act and the Basel Committee capital standards and the effect of the foregoing on our business |
¡ | Regulatory controls and processes and their impact on our business |
¡ | The costs and effects of legal actions, investigations, regulatory actions, criminal proceedings or similar matters, our anticipated litigation strategies, our assessment of the timing and ultimate outcome of legal actions, or adverse facts and developments related thereto |
¡ | Our allowance for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, risk grade and credit migration trends and loss reserves for FDIC covered loans |
¡ | Loan portfolio composition and risk grade trends, residential loan delinquency rates compared to the industry average, portfolio credit quality, our strategy regarding troubled debt restructurings (TDRs), and our intent to sell or hold loans we originate |
¡ | Our intent to sell or hold, and the likelihood that we would be required to sell, or expectations regarding recovery of the amortized cost basis of, various investment securities and our hedging strategies and activities |
3
¡ | Expected rates of return, maturities, yields, loss exposure, growth rates and projected results |
¡ | Tax rates and taxes, the possible effect of changes in taxable profits of the U.S. operations of Mitsubishi UFJ Financial Group, Inc. (MUFG) on our state tax obligations and of expected tax credits or benefits |
¡ | Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements, guidance or changes in accounting principles and future recognition of impairments for the fair value of assets, including goodwill, financial instruments, intangible assets and other assets acquired in our April 2010 FDIC-assisted acquisitions |
¡ | Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network, pursue acquisitions, purchase banking facilities and equipment, or otherwise restructure, reorganize or change our business mix, and their timing and their impact on our business |
¡ | Our expectations regarding the impact of acquisitions on our business and results of operations and amounts we will receive from the FDIC, or must pay to the FDIC, under loss share agreements |
¡ | The impact of changes in our credit rating |
¡ | Maintenance of casualty and liability insurance coverage appropriate for our operations |
¡ | The relationship between our business and that of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) and MUFG, the impact of their credit ratings, operations or prospects on our credit ratings and actions that may or may not be taken by BTMU and MUFG |
¡ | Descriptions of assumptions underlying or relating to any of the foregoing |
There are numerous risks and uncertainties that could cause actual outcomes and 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 financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to, those listed in Item 1A. Risk Factors of Part II and Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations of Part I of this Form 10-Q.
Readers of this document should not rely unduly on any forward-looking statements, which reflect only our managements belief as of the date of this report and should consider all uncertainties and risks disclosed throughout this document and in our other reports to the SEC, including, but not limited to, those discussed below. Any factor described in this report could by itself, or together with one or more other factors, adversely affect our business, future prospects, results of operations or financial condition.
4
UnionBanCal Corporation and Subsidiaries
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Financial Highlights
For the Three Months Ended | Percent Change |
For the Nine Months Ended | Percent Change |
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September 30, | September 30, | |||||||||||||||||||||||
(Dollars in millions) |
2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||
Results of operations: |
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Net interest income |
$ | 606 | $ | 618 | (2 | )% | $ | 1,838 | $ | 1,793 | 3 | % | ||||||||||||
Noninterest income |
185 | 218 | (15 | ) | 665 | 672 | (1 | ) | ||||||||||||||||
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Total revenue |
791 | 836 | (5 | ) | 2,503 | 2,465 | 2 | |||||||||||||||||
Noninterest expense |
603 | 562 | 7 | 1,796 | 1,671 | 7 | ||||||||||||||||||
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Pre-tax, pre-provision income |
188 | 274 | (31 | ) | 707 | 794 | (11 | ) | ||||||||||||||||
(Reversal of) provision for loan losses |
(13 | ) | 8 | nm | (209 | ) | 222 | nm | ||||||||||||||||
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Income before income taxes and including noncontrolling interests |
201 | 266 | (24 | ) | 916 | 572 | 60 | |||||||||||||||||
Income tax expense |
33 | 99 | (67 | ) | 278 | 181 | 54 | |||||||||||||||||
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Net income including noncontrolling interests |
168 | 167 | 1 | 638 | 391 | 63 | ||||||||||||||||||
Deduct: Net loss from noncontrolling interests |
4 | 3 | 33 | 11 | 10 | 10 | ||||||||||||||||||
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Net income attributable to UnionBanCal Corporation (UNBC) |
$ | 172 | $ | 170 | 1 | $ | 649 | $ | 401 | 62 | ||||||||||||||
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Balance sheet (period average): |
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Total assets |
$ | 82,197 | $ | 82,265 | - | % | $ | 80,870 | $ | 84,186 | (4 | )% | ||||||||||||
Total securities |
19,145 | 22,487 | (15 | ) | 20,421 | 23,037 | (11 | ) | ||||||||||||||||
Total loans held for investment |
50,214 | 48,105 | 4 | 49,121 | 47,598 | 3 | ||||||||||||||||||
Earning assets |
73,303 | 73,603 | - | 72,128 | 76,210 | (5 | ) | |||||||||||||||||
Total deposits |
59,580 | 64,822 | (8 | ) | 59,129 | 66,910 | (12 | ) | ||||||||||||||||
UNBC Stockholders equity |
10,708 | 9,913 | 8 | 10,417 | 9,693 | 7 | ||||||||||||||||||
Performance Ratios: |
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Return on average assets (1) |
0.83 | % | 0.82 | % | 1.07 | % | 0.64 | % | ||||||||||||||||
Return on average UNBC stockholders equity (1) |
6.36 | 6.80 | 8.33 | 5.53 | ||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization (2) |
70.41 | 61.13 | 67.13 | 61.68 | ||||||||||||||||||||
Net interest margin (1) (3) |
3.31 | 3.36 | 3.41 | 3.15 | ||||||||||||||||||||
Net loans charged off to average total loans held for investment (1) |
0.35 | 0.74 | 0.57 | 0.85 | ||||||||||||||||||||
Net loans charged off to average total loans held for investment, excluding FDIC covered assets (1)(8) |
0.36 | 0.77 | 0.58 | 0.87 | ||||||||||||||||||||
As of | ||||||||||||||||||||||||
September 30, 2011 |
December 31, 2010 |
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Balance sheet (end of period): |
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Total assets |
$ | 84,013 | $ | 79,097 | 6 | % | ||||||||||||||||||
Total securities |
20,962 | 22,114 | (5 | ) | ||||||||||||||||||||
Total loans held for investment |
50,998 | 48,094 | 6 | |||||||||||||||||||||
Nonperforming assets |
870 | 1,142 | (24 | ) | ||||||||||||||||||||
Total deposits |
60,454 | 59,954 | 1 | |||||||||||||||||||||
Long-term debt |
7,064 | 5,598 | 26 | |||||||||||||||||||||
UNBC Stockholders equity |
10,900 | 10,125 | 8 | |||||||||||||||||||||
Capital ratios: |
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Tier 1 risk-based capital ratio |
13.09 | % | 12.44 | % | ||||||||||||||||||||
Total risk-based capital ratio |
15.41 | 15.01 | ||||||||||||||||||||||
Leverage ratio |
10.96 | 10.34 | ||||||||||||||||||||||
Tier 1 common capital ratio (4) |
13.09 | 12.42 | ||||||||||||||||||||||
Tangible common equity ratio (5) |
10.10 | 9.67 | ||||||||||||||||||||||
Credit Ratios: |
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Allowance for loan losses to total loans held for investment (6) |
1.51 | % | 2.48 | % | ||||||||||||||||||||
Allowance for loan losses to nonaccrual loans (6) |
105.97 | 123.40 | ||||||||||||||||||||||
Allowance for credit losses to total loans held for investment (7) |
1.76 | 2.81 | ||||||||||||||||||||||
Allowance for credit losses to nonaccrual loans (7) |
124.09 | 140.23 | ||||||||||||||||||||||
Nonperforming assets to total loans held for investment and other real estate owned (OREO) |
1.70 | 2.37 | ||||||||||||||||||||||
Nonperforming assets to total assets |
1.04 | 1.44 | ||||||||||||||||||||||
Nonaccrual loans to total loans held for investment |
1.42 | 2.01 | ||||||||||||||||||||||
Excluding FDIC covered assets (8): |
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Allowance for loan losses to total loans held for investment (6) |
1.51 | % | 2.50 | % | ||||||||||||||||||||
Allowance for loan losses to nonaccrual loans (6) |
112.28 | 137.32 | ||||||||||||||||||||||
Allowance for credit losses to total loans held for investment (7) |
1.77 | 2.85 | ||||||||||||||||||||||
Allowance for credit losses to nonaccrual loans (7) |
131.92 | 156.44 | ||||||||||||||||||||||
Nonperforming assets to total loans held for investment and OREO |
1.38 | 1.91 | ||||||||||||||||||||||
Nonperforming assets to total assets |
0.83 | 1.15 | ||||||||||||||||||||||
Nonaccrual loans to total loans held for investment |
1.34 | 1.82 |
5
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
(1) | Annualized. |
(2) | The core efficiency ratio, excluding impact of privatization, a non-GAAP financial measure, is net noninterest expense (noninterest expense excluding privatization-related expenses and fair value amortization/accretion, foreclosed asset expense, (reversal of) provision for losses on off-balance sheet commitments, low income housing credit investment amortization expense, expenses of the consolidated Variable Interest Entities (VIEs), merger costs related to the acquisitions of certain assets and assumption of certain liabilities of Frontier Bank (Frontier) and Tamalpais Bank (Tamalpais) and asset impairment charge) as a percentage of total revenue (net interest income (taxable-equivalent basis) and noninterest income). Management discloses the core efficiency ratio as a measure of the efficiency of our operations, focusing on those costs most relevant to our core activities. Refer to Noninterest Expense in this Form 10-Q for further information. |
(3) | Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. |
(4) | The Tier 1 common capital ratio is the ratio of Tier 1 capital, less qualifying trust preferred securities, to risk-weighted assets. All of the trust preferred securities were paid off during the first quarter of 2011. The Tier 1 common capital ratio, a non-GAAP financial measure, has been included to facilitate the understanding of the Companys capital structure and for use in assessing and comparing the quality and composition of UNBCs capital structure to other financial institutions. Refer to Capital in this Form 10-Q for further information. |
(5) | The tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible common equity divided by tangible assets. The methodology for determining tangible common equity may differ among companies. The tangible common equity ratio has been included to facilitate the understanding of the Companys capital structure and for use in assessing and comparing the quality and composition of UNBCs capital structure to other financial institutions. Refer to Capital in this Form 10-Q for further information. |
(6) | The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans held for investment or total nonaccrual loans, as appropriate. |
(7) | The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans held for investment or total nonaccrual loans, as appropriate. |
(8) | These ratios exclude the impact of the FDIC covered loans, the related allowance for loan losses and FDIC covered OREO, which are covered under loss share agreements between Union Bank, N.A. and the Federal Deposit Insurance Corporation. Such agreements are related to the April 2010 acquisitions of certain assets and assumption of certain liabilities of Frontier Bank and Tamalpais Bank. Management believes the exclusion of FDIC covered loans and FDIC covered OREO in certain asset quality ratios that include nonperforming loans, nonperforming assets, total loans held for investment and the allowance for loan losses or credit losses in the numerator or denominator provides a better perspective into underlying asset quality trends. |
nm = not meaningful
6
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Please refer to our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K) along with the following discussion and analysis of our consolidated financial condition and results of operations for the period ended September 30, 2011 in this Form 10-Q. Averages, as presented in the following tables, are substantially all based upon daily average balances.
As used in this Form 10-Q, the term UnionBanCal or the Company and terms such as we, us and our refer to UnionBanCal Corporation, Union Bank, N.A., one or more of their consolidated subsidiaries, or to all of them together.
We are a California-based financial holding company and commercial bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington, Texas and New York, as well as nationally and internationally. We had consolidated assets of $84.0 billion at September 30, 2011.
On November 4, 2008, we became a privately held company (privatization transaction). All of our issued and outstanding shares of common stock are owned by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU).
We are providing you with an overview of what we believe are the most significant factors and developments that impacted our third quarter 2011 results and that could impact our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties that impact us.
Our sources of revenue are net interest income and noninterest income (collectively total revenue). Net interest income is generated predominantly from interest received from loans, investment securities and other interest-earning assets, less interest paid on deposits and borrowings. The primary sources of noninterest income are revenues from service charges on deposit accounts, trust and investment management fees, and trading account activities. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that impact our revenue sources. A summary of our key financial results are presented below:
Performance Highlights
In the third quarter of 2011, net income was $172 million, up slightly from $170 million in the third quarter of 2010. While total revenue was lower and noninterest expense was higher, credit quality improved and our effective tax rate was lower in the third quarter 2011. Net income increased for the nine months ended September 30, 2011, to $649 million compared to $401 million for the nine months ended September 30, 2010, primarily due to a reversal of provision for loan losses of $209 million in 2011 compared to a provision for loan losses of $222 million for the same period in 2010, reflecting improved credit quality.
Our net interest income declined $12 million, or 2 percent, to $606 million in the third quarter of 2011 compared to the third quarter of 2010. The decrease was substantially due to a 5 basis point decline in the net interest margin, which was primarily due to lower yields on loans, a decrease in our average balances in securities along with an increase in lower yielding interest bearing deposits in banks, and a higher proportion of long-term debt within our mix of interest bearing liabilities, partially offset by a higher average balance of noninterest bearing funding sources. As a result of our targeted rate reductions, our average interest bearing deposits decreased by 17 percent to $40.9 billion compared to the third quarter of 2010.
In the third quarter of 2011, economic indicators reflected increased economic uncertainty and weak economic growth for the U.S. economy. In response, the Federal Reserve announced in September 2011 that it would adopt a more accommodative monetary policy that would provide additional stimulus to the economic recovery. Those actions are expected to result in a period of persistently low short-term and long-term interest rates, which would place downward pressure on our net interest margin.
In the third quarter of 2011, our noninterest income decreased $33 million, or 15 percent, from the third quarter of 2010 to $185 million, primarily due to a decrease in accretion on the indemnification asset associated with FDIC covered loans. Our noninterest expense increased $41 million, or 7 percent, to $603 million compared to the same period last year, primarily due to higher salaries and employee benefits expense. The increase was partially offset by lower regulatory assessment expense, which resulted from a change in the FDICs methodology for deposit insurance from a deposit-based model to an asset-based model.
Credit Quality
The provision for credit losses was a benefit of $13 million in the third quarter of 2011 compared to no provision for credit losses in the third quarter of 2010. The decrease in the provision for credit losses was primarily due to improved credit quality of the loan
7
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
portfolio reflected by the lower level of criticized and nonaccrual loans during the third quarter of 2011 compared to the third quarter of 2010. Our ratio of nonaccrual loans to total loans held for investment, excluding FDIC covered loans, decreased from 2.50 percent at September 30, 2010 to 1.34 percent at September 30, 2011. The allowance for credit losses as a percent of total loans, excluding FDIC covered loans, was 1.77 percent at September 30, 2011, compared with 3.12 percent at September 30, 2010. See further discussion under Allowance for Credit Losses.
Capital Ratios
We continued to build capital during the nine months ended September 30, 2011. Our Tier 1 risk-based capital ratio increased to 13.09 percent from 12.44 percent, the total risk-based capital ratio increased to 15.41 percent from 15.01 percent and our tangible common equity ratio increased to 10.10 percent from 9.67 percent, at September 30, 2011 from December 31, 2010, respectively. Effective October 1, 2011, BTMU transferred its trust company, The Bank of Tokyo-Mitsubishi UFJ Trust Company, to us. This transaction had the effect of increasing our assets by over $900 million and increasing our Tier 1 common capital by over $700 million.
UnionBanCal Corporations consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and the general practices of the banking industry, which include management estimates and judgments. The financial information contained within our statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use discount factors and other assumptions to determine the fair value of certain assets and liabilities. A change in the discount factor or another important assumption could significantly increase or decrease the values of those assets and liabilities and result in either a beneficial or an adverse impact to our financial results. We use historical loss factors, adjusted for current conditions, to estimate the inherent credit loss present in our loan and lease portfolio. Actual losses could differ significantly from the loss factors that we use. Other significant estimates that we use include the fair values of our acquired loans (see Note 5 in this Form 10-Q), FDIC indemnification asset, and certain derivatives and securities (see Notes 10 and 11 in this Form 10-Q), assumptions used in measuring our pension obligations, and assumptions regarding our effective tax rates.
For each financial reporting period, our most significant estimates are presented to and discussed with the Audit & Finance Committee of our Board of Directors.
Understanding our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our Critical Accounting Estimates and our significant accounting policies are discussed in detail in our 2010 Form 10-K. There have been no material changes to these critical accounting estimates during the nine months ended September 30, 2011.
8
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Performance
The following table shows the major components of net interest income and net interest margin.
For the Three Months Ended | Increase (Decrease) in | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1)(2) |
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1)(2) |
Average Balance |
Interest Income/ Expense (1) |
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(Dollars in millions) |
Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets |
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Loans held for investment:(3) |
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Commercial and industrial |
$ | 16,947 | $ | 160 | 3.76 | % | $ | 14,628 | $ | 176 | 4.78 | % | $ | 2,319 | 16 | % | $ | (16 | ) | (9 | )% | |||||||||||||||||||||||||||||||||||||
Commercial mortgage |
7,838 | 82 | 4.22 | 8,006 | 85 | 4.23 | (168 | ) | (2 | ) | (3 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Construction |
992 | 12 | 5.04 | 1,946 | 16 | 3.12 | (954 | ) | (49 | ) | (4 | ) | (25 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Lease financing |
697 | 8 | 4.28 | 639 | 6 | 3.77 | 58 | 9 | 2 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage |
18,818 | 221 | 4.70 | 17,196 | 226 | 5.26 | 1,622 | 9 | (5 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Home equity and other consumer loans |
3,751 | 40 | 4.25 | 3,900 | 43 | 4.43 | (149 | ) | (4 | ) | (3 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Total loans, excluding FDIC covered loans |
49,043 | 523 | 4.26 | 46,315 | 552 | 4.75 | 2,728 | 6 | (29 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
FDIC covered loans |
1,171 | 55 | 18.60 | 1,790 | 32 | 7.17 | (619 | ) | (35 | ) | 23 | 72 | ||||||||||||||||||||||||||||||||||||||||||||||
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Total loans held for investment |
50,214 | 578 | 4.60 | 48,105 | 584 | 4.84 | 2,109 | 4 | (6 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Securities |
19,145 | 123 | 2.56 | 22,487 | 132 | 2.36 | (3,342 | ) | (15 | ) | (9 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits in banks |
3,610 | 3 | 0.25 | 2,407 | 1 | 0.25 | 1,203 | 50 | 2 | 200 | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under resale agreements |
61 | - | 0.03 | 390 | 1 | 0.15 | (329 | ) | (84 | ) | (1 | ) | (100 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Trading account assets |
166 | - | 0.68 | 214 | - | 1.10 | (48 | ) | (22 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Other earning assets |
107 | - | 0.54 | - | - | - | 107 | nm | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total earning assets |
73,303 | 704 | 3.83 | 73,603 | 718 | 3.89 | (300 | ) | (0 | ) | (14 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
(785 | ) | (1,375 | ) | 590 | 43 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks |
1,254 | 1,184 | 70 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net |
676 | 672 | 4 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets |
7,749 | 8,181 | (432 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 82,197 | $ | 82,265 | $ | (68 | ) | (0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transaction and money market accounts |
$ | 23,836 | $ | 14 | 0.23 | $ | 32,722 | $ | 34 | 0.40 | $ | (8,886 | ) | (27 | ) | $ | (20 | ) | (59 | ) | ||||||||||||||||||||||||||||||||||||||
Savings |
5,476 | 3 | 0.21 | 4,414 | 3 | 0.28 | 1,062 | 24 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Time |
11,634 | 36 | 1.28 | 12,254 | 33 | 1.07 | (620 | ) | (5 | ) | 3 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total interest bearing deposits |
40,946 | 53 | 0.53 | 49,390 | 70 | 0.56 | (8,444 | ) | (17 | ) | (17 | ) | (24 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Commercial paper and other short-term borrowings (4) |
2,371 | 2 | 0.20 | 1,026 | 1 | 0.35 | 1,345 | 131 | 1 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt |
7,066 | 41 | 2.31 | 4,528 | 27 | 2.40 | 2,538 | 56 | 14 | 52 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total borrowed funds |
9,437 | 43 | 1.78 | 5,554 | 28 | 2.02 | 3,883 | 70 | 15 | 54 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities |
50,383 | 96 | 0.76 | 54,944 | 98 | 0.71 | (4,561 | ) | (8 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest bearing deposits |
18,634 | 15,432 | 3,202 | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities |
2,203 | 1,698 | 505 | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities |
71,220 | 72,074 | (854 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNBC Stockholders equity |
10,708 | 9,913 | 795 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests |
269 | 278 | (9 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity |
10,977 | 10,191 | 786 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 82,197 | $ | 82,265 | $ | (68 | ) | (0 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/spread (taxable-equivalent basis) |
608 | 3.07 | % | 620 | 3.18 | % | (12 | ) | (2 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||
Impact of noninterest bearing deposits |
0.20 | 0.16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of other noninterest bearing sources |
0.04 | 0.02 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin |
3.31 | 3.36 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: taxable-equivalent adjustment |
2 | 2 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income |
$ | 606 | $ | 618 | $ | (12 | ) | (2 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
(1) | Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. |
(2) | Annualized. |
(3) | 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. |
(4) | Includes interest bearing trading liabilities. |
9
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
For the Nine Months Ended | Increase (Decrease) in | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1)(2) |
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1)(2) |
Average Balance |
Interest Income/ Expense (1) |
|||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) |
Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans held for investment:(3) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 16,035 | $ | 476 | 3.97 | % | $ | 14,722 | $ | 506 | 4.59 | % | $ | 1,313 | 9 | % | $ | (30 | ) | (6 | )% | |||||||||||||||||||||||||||||||||||||
Commercial mortgage |
7,780 | 251 | 4.31 | 8,139 | 257 | 4.21 | (359 | ) | (4 | ) | (6 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Construction |
1,148 | 35 | 4.11 | 2,132 | 48 | 2.99 | (984 | ) | (46 | ) | (13 | ) | (27 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Lease financing |
748 | 24 | 4.20 | 643 | 18 | 3.82 | 105 | 16 | 6 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage |
18,316 | 662 | 4.82 | 16,990 | 680 | 5.34 | 1,326 | 8 | (18 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Home equity and other consumer loans |
3,785 | 120 | 4.26 | 3,912 | 129 | 4.42 | (127 | ) | (3 | ) | (9 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total loans, excluding FDIC covered loans |
47,812 | 1,568 | 4.38 | 46,538 | 1,638 | 4.70 | 1,274 | 3 | (70 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
FDIC covered loans |
1,309 | 138 | 14.03 | 1,060 | 58 | 7.31 | 249 | 23 | 80 | 138 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment |
49,121 | 1,706 | 4.64 | 47,598 | 1,696 | 4.76 | 1,523 | 3 | 10 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities |
20,421 | 405 | 2.64 | 23,037 | 411 | 2.38 | (2,616 | ) | (11 | ) | (6 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits in banks |
2,300 | 5 | 0.25 | 4,959 | 9 | 0.25 | (2,659 | ) | (54 | ) | (4 | ) | (44 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under resale agreements |
76 | - | 0.11 | 414 | 1 | 0.13 | (338 | ) | (82 | ) | (1 | ) | (100 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Trading account assets |
151 | 1 | 0.84 | 202 | 2 | 1.37 | (51 | ) | (25 | ) | (1 | ) | (50 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Other earning assets |
59 | - | 1.03 | - | - | - | 59 | nm | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total earning assets |
72,128 | 2,117 | 3.92 | 76,210 | 2,119 | 3.71 | (4,082 | ) | (5 | ) | (2 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
(985 | ) | (1,414 | ) | 429 | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks |
1,236 | 1,197 | 39 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net |
693 | 673 | 20 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets |
7,798 | 7,520 | 278 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 80,870 | $ | 84,186 | $ | (3,316 | ) | (4 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transaction and money market accounts |
$ | 24,325 | $ | 43 | 0.24 | $ | 36,704 | $ | 145 | 0.53 | $ | (12,379 | ) | (34 | ) | $ | (102 | ) | (70 | ) | ||||||||||||||||||||||||||||||||||||||
Savings |
5,042 | 9 | 0.25 | 4,237 | 13 | 0.40 | 805 | 19 | (4 | ) | (31 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Time |
11,847 | 107 | 1.21 | 11,090 | 76 | 0.92 | 757 | 7 | 31 | 41 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total interest bearing deposits |
41,214 | 159 | 0.52 | 52,031 | 234 | 0.60 | (10,817 | ) | (21 | ) | (75 | ) | (32 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Commercial paper and other short-term borrowings (4) |
2,640 | 5 | 0.23 | 1,304 | 4 | 0.40 | 1,336 | 102 | 1 | 25 | ||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt |
6,443 | 108 | 2.24 | 4,611 | 81 | 2.36 | 1,832 | 40 | 27 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total borrowed funds |
9,083 | 113 | 1.65 | 5,915 | 85 | 1.93 | 3,168 | 54 | 28 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities |
50,297 | 272 | 0.72 | 57,946 | 319 | 0.74 | (7,649 | ) | (13 | ) | (47 | ) | (15 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest bearing deposits |
17,915 | 14,879 | 3,036 | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities |
1,971 | 1,449 | 522 | 36 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities |
70,183 | 74,274 | (4,091 | ) | (6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNBC Stockholders equity |
10,417 | 9,693 | 724 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests |
270 | 219 | 51 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity |
10,687 | 9,912 | 775 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 80,870 | $ | 84,186 | $ | (3,316 | ) | (4 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income/spread |
1,845 | 3.20 | % | 1,800 | 2.97 | % | 45 | 3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Impact of noninterest bearing deposits |
0.19 | 0.15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of other noninterest bearing sources |
0.02 | 0.03 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin |
3.41 | 3.15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: taxable-equivalent adjustment |
7 | 7 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income |
$ | 1,838 | $ | 1,793 | $ | 45 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
(1) | Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. |
(2) | Annualized. |
(3) | 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. |
(4) | Includes interest bearing trading liabilities. |
Net interest income for the third quarter of 2011 decreased $12 million, or 2 percent, compared to the third quarter of 2010. The decrease was substantially due to a 5 basis point decline in the net interest margin, which was primarily due to lower yields on loans, a decrease in our average balances in securities along with an increase in lower yielding interest bearing deposits in banks, and a higher proportion of long-term debt within our mix of interest bearing liabilities, partially offset by a higher average balance of noninterest bearing funding sources. Average noninterest bearing deposits funded 25 percent of average total earning assets for the three months
10
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
ended September 30, 2011 compared to 21 percent for the three months ended September 30, 2010. Average total loans, excluding FDIC covered loans, increased $2.7 billion, or 6 percent, reflecting growth in commercial and industrial loans and residential mortgage loans.
Net interest income for the nine months ended September 30, 2011 increased $45 million, or 3 percent, compared to the nine months ended September 30, 2010. The increase was due to growth in the net interest margin, which increased to 3.41 percent for the nine months ended September 30, 2011, compared with 3.15 percent for the nine months ended September 30, 2010. The growth in the net interest margin was primarily due to higher yields on securities and a shift in balances from interest bearing deposits in banks into loans. Average noninterest bearing deposits funded 25 percent of average total earning assets for the nine months ended September 30, 2011 compared to 20 percent for the nine months ended September 30, 2010.
Noninterest Income and Noninterest Expense
The following tables detail our noninterest income and noninterest expense for the three and nine months ended September 30, 2011 and 2010.
Noninterest Income
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2011 |
September 30, 2010 |
Increase (Decrease) | September 30, 2011 |
September 30, 2010 |
Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) |
Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||||||||||||||
Service charges on deposit accounts |
$ | 57 | $ | 62 | $ | (5 | ) | (8 | )% | $ | 170 | $ | 192 | $ | (22 | ) | (11 | )% | ||||||||||||||||||||||||||||||
Trust and investment management fees |
33 | 33 | - | - | 101 | 99 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||
Trading account activities |
27 | 32 | (5 | ) | (16 | ) | 88 | 78 | 10 | 13 | ||||||||||||||||||||||||||||||||||||||
Merchant banking fees |
27 | 19 | 8 | 42 | 75 | 55 | 20 | 36 | ||||||||||||||||||||||||||||||||||||||||
Securities gains, net |
1 | 11 | (10 | ) | (91 | ) | 58 | 72 | (14 | ) | (19 | ) | ||||||||||||||||||||||||||||||||||||
Brokerage commissions and fees |
12 | 11 | 1 | 9 | 37 | 30 | 7 | 23 | ||||||||||||||||||||||||||||||||||||||||
Standby letters of credit fees |
11 | 8 | 3 | 38 | 34 | 26 | 8 | 31 | ||||||||||||||||||||||||||||||||||||||||
Card processing fees, net |
11 | 10 | 1 | 10 | 33 | 31 | 2 | 6 | ||||||||||||||||||||||||||||||||||||||||
Other |
6 | 32 | (26 | ) | (81 | ) | 69 | 89 | (20 | ) | (22 | ) | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Total noninterest income |
$ | 185 | $ | 218 | $ | (33 | ) | (15 | )% | $ | 665 | $ | 672 | $ | (7 | ) | (1 | )% | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Noninterest Expense | ||||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2011 |
September 30, 2010 |
Increase (Decrease) | September 30, 2011 |
September 30, 2010 |
Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in millions) |
Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||||||||||||||
Salaries and other compensation |
$ | 282 | $ | 251 | $ | 31 | 12 | % | $ | 825 | $ | 745 | $ | 80 | 11 | % | ||||||||||||||||||||||||||||||||
Employee benefits |
66 | 42 | 24 | 57 | 213 | 147 | 66 | 45 | ||||||||||||||||||||||||||||||||||||||||
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|
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Salaries and employee benefits |
348 | 293 | 55 | 19 | 1,038 | 892 | 146 | 16 | ||||||||||||||||||||||||||||||||||||||||
Net occupancy and equipment |
64 | 65 | (1 | ) | (2 | ) | 196 | 188 | 8 | 4 | ||||||||||||||||||||||||||||||||||||||
Professional and outside services |
55 | 54 | 1 | 2 | 154 | 143 | 11 | 8 | ||||||||||||||||||||||||||||||||||||||||
Intangible asset amortization |
25 | 31 | (6 | ) | (19 | ) | 74 | 93 | (19 | ) | (20 | ) | ||||||||||||||||||||||||||||||||||||
Regulatory assessments |
14 | 30 | (16 | ) | (53 | ) | 54 | 90 | (36 | ) | (40 | ) | ||||||||||||||||||||||||||||||||||||
Software |
16 | 18 | (2 | ) | (11 | ) | 48 | 49 | (1 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||
Low income housing credit investment amortization |
16 | 13 | 3 | 23 | 47 | 41 | 6 | 15 | ||||||||||||||||||||||||||||||||||||||||
Advertising and public relations |
9 | 12 | (3 | ) | (25 | ) | 33 | 34 | (1 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||
Communications |
10 | 11 | (1 | ) | (9 | ) | 31 | 30 | 1 | 3 | ||||||||||||||||||||||||||||||||||||||
Data Processing |
9 | 10 | (1 | ) | (10 | ) | 29 | 26 | 3 | 12 | ||||||||||||||||||||||||||||||||||||||
(Reversal of) provision for losses on off-balance sheet commitments |
- | (8 | ) | 8 | 100 | (31 | ) | (12 | ) | (19 | ) | 158 | ||||||||||||||||||||||||||||||||||||
Other |
37 | 33 | 4 | 12 | 123 | 97 | 26 | 27 | ||||||||||||||||||||||||||||||||||||||||
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Total noninterest expense |
$ | 603 | $ | 562 | $ | 41 | 7 | % | $ | 1,796 | $ | 1,671 | $ | 125 | 7 | % | ||||||||||||||||||||||||||||||||
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Noninterest income decreased to $185 million in the third quarter 2011 from $218 million in the third quarter 2010. This decrease was mainly due to other noninterest income decreasing by $26 million, substantially due to a decrease in indemnification asset accretion, driven by better than expected FDIC covered loan performance. Securities gains, net decreased primarily due to a $14 million gain on the sale of U.S. Government sponsored agency securities in 2010. These were partially offset by an increase in merchant banking fees, which increased primarily due to a $6 million increase in fees from syndicated loan activity.
11
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Noninterest income decreased to $665 million in the nine months ended September 30, 2011 from $672 million in the nine months ended September 30, 2010. This decrease was mainly due to service charges on deposit accounts decreasing primarily due to lower overdraft volumes resulting from changes in customer behavior and the impact of changes to fee-related regulations. Other noninterest income decreased $20 million, primarily due to a $37 million decrease in indemnification asset accretion, driven by better than expected FDIC covered loan performance, partially offset by a $15 million gain on the sale of MasterCard shares in the first quarter of 2011. These decreases were partially offset by an increase in merchant banking fees primarily due to a $15 million increase in fees from syndicated loan activity.
Our card processing fees are substantially composed of debit card interchange fees. We expect our debit card interchange fees to decline beginning October 1, 2011 due to the Dodd-Frank Act and the recently enacted Federal Reserve final rule, which sets a cap on interchange fees at a rate below the third quarter 2011 levels. Management believes that the impact of these developments on our interchange fee income will not be material relative to our total revenue.
Noninterest expense increased to $603 million in the third quarter 2011 from $562 million in the third quarter 2010. This increase was primarily due to an increase in salaries and employee benefits, which resulted from an increase in incentive compensation accruals, and higher costs related to employee benefit plans. This increase was partially offset by a decrease in regulatory assessments mainly due to a change in the FDICs methodology from a deposit-based to an asset-based model.
Noninterest expense increased to $1.8 billion in the nine months ended September 30, 2011 from $1.7 billion in the nine months ended September 30, 2010. This increase was primarily due to an increase in salaries and employee benefits, which was largely driven by the growth in the number of employees, and higher costs related to employee benefit plans. Other expenses also increased due to additional reserves for certain contingencies. This increase was partially offset by a decrease in regulatory assessments mainly due to a change in the FDICs methodology from a deposit-based to an asset-based model, as well as an increase in the reversal of the provision for losses on off-balance sheet commitments of $19 million, primarily due to improved credit quality.
The core efficiency ratio, excluding the privatization transaction, is a non-GAAP financial measure that is used by management to measure the efficiency of our operations, focusing on those costs management believes to be most relevant to our core activities. The following table shows the calculation of this ratio for the three and nine months ended September 30, 2011 and 2010.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||
(Dollars in millions) |
September 30, 2011 |
September 30, 2010 |
September 30, 2011 |
September 30, 2010 |
||||||||||||||||||
Noninterest Expense |
$ | 603 | $ | 562 | $ | 1,796 | $ | 1,671 | ||||||||||||||
Less: Foreclosed asset expense |
4 | 6 | 8 | 7 | ||||||||||||||||||
Less: (Reversal of) provision for losses on off-balance sheet commitments |
- | (8 | ) | (31 | ) | (12 | ) | |||||||||||||||
Less: Low income housing credit investment amortization expense |
15 | 13 | 47 | 41 | ||||||||||||||||||
Less: Expenses of the consolidated VIEs |
6 | 6 | 18 | 17 | ||||||||||||||||||
Less: Merger costs related to acquisitions |
- | 11 | 23 | 24 | ||||||||||||||||||
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Net noninterest expense before privatization adjustments |
$ | 578 | $ | 534 | $ | 1,731 | $ | 1,594 | ||||||||||||||
Net adjustments related to privatization transaction |
26 | 33 | 77 | 104 | ||||||||||||||||||
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Net noninterest expense, excluding privatization transaction (a) |
$ | 552 | $ | 501 | $ | 1,654 | $ | 1,490 | ||||||||||||||
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Total Revenue |
$ | 791 | $ | 836 | $ | 2,503 | $ | 2,465 | ||||||||||||||
Add: Net interest income taxable-equivalent adjustment |
2 | 2 | 7 | 7 | ||||||||||||||||||
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Total revenue, including taxable-equivalent adjustment |
793 | 838 | 2,510 | 2,472 | ||||||||||||||||||
Less: Accretion related to privatization-related fair value adjustments |
10 | 18 | 47 | 56 | ||||||||||||||||||
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Total revenue, excluding impact of privatization transaction (b) |
$ | 783 | $ | 820 | $ | 2,463 | $ | 2,416 | ||||||||||||||
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Core efficiency ratio, excluding impact of privatization transaction (a)/(b) |
70.41 | % | 61.13 | % | 67.13 | % | 61.68 | % | ||||||||||||||
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Our effective tax rate in the third quarter of 2011 was 17 percent, compared to 38 percent for the third quarter of 2010. Our effective tax rate for the nine months ended September 30, 2011 was 31 percent, compared to 32 percent for the nine months ended September 30, 2010. The change in the effective tax rate for the third quarter of 2011 was primarily driven by income tax benefits related to a change in estimate to the valuation of FDIC covered assets, and the proportionately larger effect from a stable level of low income housing and alternative energy income tax credits compared to pre-tax income in the third quarter of 2011.
Our unrecognized tax benefits balance increased by $36 million to $268 million at September 30, 2011 from December 31, 2010, and the amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, increased by $18 million. The increase in our unrecognized tax benefits balance relates to tax positions taken in prior periods.
12
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
For further information regarding income tax expense, see Managements Discussion and Analysis of Financial Condition and Results of OperationsIncome Tax Expense and Changes in our tax rates could affect our future results in Risk Factors in Part I, Item 1A and Note 12 to the consolidated financial statements in our 2010 Form 10-K.
Our securities portfolio is managed to promote the maximization of return while maintaining prudent levels of quality, market risk and liquidity. At September 30, 2011, substantially all of our securities were investment grade. The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities are detailed in Note 4 to our consolidated financial statements included in this Form 10-Q. Substantially all of our securities available for sale are held for Asset and Liability Management (ALM) purposes.
Our securities held to maturity consist of collateralized loan obligations (CLOs), which primarily consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans, unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral.
The following table shows loans held for investment outstanding by loan type at the end of each period presented.
September 30, 2011 |
December
31, 2010 |
Increase / (Decrease) September 30, 2011 From December 31, 2010 |
||||||||||||||||||||
(Dollars in millions) |
Amount | Percent | ||||||||||||||||||||
Loans held for investment: |
||||||||||||||||||||||
Commercial and industrial |
$ | 17,545 | $ | 15,162 | $ | 2,383 | 16 | % | ||||||||||||||
Commercial mortgage |
7,927 | 7,816 | 111 | 1 | ||||||||||||||||||
Construction |
966 | 1,460 | (494 | ) | (34 | ) | ||||||||||||||||
Lease financing |
693 | 757 | (64 | ) | (8 | ) | ||||||||||||||||
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|
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Total commercial portfolio |
27,131 | 25,195 | 1,936 | 8 | ||||||||||||||||||
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Residential mortgage |
19,043 | 17,531 | 1,512 | 9 | ||||||||||||||||||
Home equity and other consumer loans |
3,730 | 3,858 | (128 | ) | (3 | ) | ||||||||||||||||
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Total consumer portfolio |
22,773 | 21,389 | 1,384 | 6 | ||||||||||||||||||
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|
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Total loans held for investment, excluding |
49,904 | 46,584 | 3,320 | 7 | ||||||||||||||||||
FDIC covered loans |
1,094 | 1,510 | (416 | ) | (28 | ) | ||||||||||||||||
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|
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Total loans held for investment |
$ | 50,998 | $ | 48,094 | $ | 2,904 | 6 | % | ||||||||||||||
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Commercial and Industrial Loans
Our commercial and industrial loans are extended principally to corporations, middle-market businesses and small businesses and are originated primarily through our commercial banking offices. These offices, which rely extensively on relationship-oriented banking, provide a variety of services including cash management services, lines of credit, accounts receivable and inventory financing. Separately, we originate or participate in a variety of financial services to major corporations. These services include traditional commercial banking and specialized financing tailored to the needs of each customers specific industry. We are active in, among other sectors, power and utilities, oil and gas, manufacturing, wholesale trade, real estate and leasing, communications, healthcare, retailing, and finance and insurance services. These industries comprise the majority of our commercial and industrial portfolio. While loans extended within these sectors comprise the majority of our commercial and industrial portfolio, no individual industry sector exceeded 10 percent of our total loans held for investment at either September 30, 2011 or December 31, 2010.
The commercial and industrial portfolio increased $2.4 billion, or 16 percent, from December 31, 2010 to September 30, 2011, reflecting improved lending conditions. The overall credit quality of our portfolio of commercial and industrial loans continued to improve as borrowers financial condition improved and as they had access to more refinancing options.
13
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Construction and Commercial Mortgage Loans
We engage in real estate lending that includes commercial mortgage loans and construction loans secured by deeds of trust. The commercial mortgage loan portfolio consists of loans secured by commercial income properties, 77 percent of which are located in California, 6 percent in Washington, and the remaining 17 percent in various other states.
Construction loans are extended primarily to commercial property developers and to residential builders. As of September 30, 2011, the construction loan portfolio consisted of approximately 81 percent of commercial income producing real estate and 19 percent with residential homebuilders. The construction loan portfolio decreased $0.5 billion or 34 percent from December 31, 2010 to September 30, 2011 mainly due to declines of $508 million, or 42 percent, in the income property portfolio and $17 million, or 9 percent, in the homebuilder portfolio. The income property portfolio reductions were concentrated mostly in the office and apartment property types. Geographically, 45 percent of the construction loan portfolio was domiciled in California as of September 30, 2011. The largest concentration outside of California was 11 percent in the state of Washington. The California portfolio is distributed as follows: 41 percent in the Los Angeles/Orange County region, including the Inland Empire, 21 percent in the San Francisco Bay Area, 13 percent in Sacramento and the Central Valley, 12 percent in San Diego, and 13 percent in the Central Coast region.
Residential Mortgage Loans
We originate residential mortgage loans secured by one-to-four family residential properties, through our multiple channel network (including branches, private bankers, mortgage brokers, and telephone centers) throughout California, Oregon and Washington, and we periodically purchase loans in our market area. We hold substantially all of the loans we originate. The residential mortgage portfolio increased $1.5 billion, or 9 percent, from December 31, 2010 to September 30, 2011, as we experienced strong new origination activity.
At September 30, 2011, 72 percent of our residential mortgage loans have current payment terms in which the monthly payment covers the full amount of interest due, but does not reduce the principal balance. At origination, these interest-only loans had strong credit profiles and had weighted average loan-to-value (LTV) ratios of approximately 67 percent. The remainder of the portfolio consists of regularly amortizing loans and a small amount of balloon loans.
We do not have a program for originating or purchasing subprime loan products. The Banks no doc and low doc loan origination programs were discontinued in 2008, except for a streamlined refinance process for existing Bank mortgages. At September 30, 2011, the outstanding balances of the no doc and low doc portfolios were approximately 36 percent of our total residential loan portfolio, and the loan delinquency rates with respect to these portfolios remained below the industry average for California prime loans. At September 30, 2011, the aggregate balance of no doc and low doc loans past due 30 days or more was $167 million, compared with $175 million at December 31, 2010.
Total residential mortgage loans 30 days or more delinquent were $382 million at September 30, 2011, compared with $350 million at December 31, 2010. Our residential loan delinquency rates remained below the industry average for California prime loans.
Home Equity and Other Consumer Loans
We originate home equity and other consumer loans and lines, principally through our branch network and Private Banking Offices. We had approximately 32 percent and 31 percent of these home equity loans and lines supported by first liens on residential properties at September 30, 2011 and December 31, 2010, respectively. Our total home equity loans and lines delinquent 30 days or more were $42 million at September 30, 2011, compared to $36 million at December 31, 2010. To manage risk associated with lending commitments, we review all equity-secured lines annually for creditworthiness and reduce or freeze limits, as permitted by laws and regulations.
Lease Financing
We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. At September 30, 2011, we had leveraged leases of $465 million, which were net of non-recourse debt of approximately $860 million. We utilize a number of special purpose entities for our leveraged leases. These entities do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP for leveraged leases, the gross lease receivable is offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased assets for repayment in the event of lessee default.
FDIC Covered Loans
We acquired loans as part of the FDIC-assisted acquisitions of certain assets and assumption of certain liabilities of Frontier Bank (Frontier) and Tamalpais Bank (Tamalpais) during the second quarter of 2010. All of the acquired loans are covered under loss share agreements with the FDIC and are referred to as FDIC covered loans. We will be reimbursed for a substantial portion of any
14
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
future losses on the FDIC covered loans under the terms of the FDIC loss share agreements. Total FDIC covered loans outstanding at September 30, 2011 were composed of $1.0 billion in commercial mortgage, construction and commercial and industrial loans, and $0.1 billion in residential mortgage and other consumer loans. See Notes 1 and 2 to our consolidated financial statements included in our 2010 Form 10-K for more information on covered assets and FDIC loss share agreements.
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. Our total cross-border outstandings for Canada, the only country where such outstandings exceeded one percent of total assets, were $989 million and $804 million, as of September 30, 2011 and December 31, 2010, respectively. The cross-border outstandings are based on 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.
Allowance Policy and Methodology
We maintain an allowance for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. Understanding our policies on the allowance for credit losses is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, our significant policies and methodology on the allowance for credit losses are discussed in detail in Note 1 to our consolidated financial statements and in the section Allowances for Credit Losses included in our Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2010 Form 10-K.
Total Allowance and Related Provision for Credit Losses
At September 30, 2011 and December 31, 2010, our total allowance for credit losses, excluding FDIC covered loans, was $882 million, or 1.77 percent of total loans held for investment, and $1.3 billion, or 2.85 percent of total loans held for investment, respectively. At September 30, 2011, our total allowance for credit losses, excluding FDIC covered loans, of $882 million consisted of $751 million for loan losses and $131 million for losses on off-balance sheet commitments. The allowance for credit losses was composed of $755 million of allocated allowance and $127 million of unallocated allowance for loan losses. At September 30, 2011 and December 31, 2010, our allowance for loan losses on FDIC covered loans was $17 million and $25 million, respectively.
We recorded a reversal of the provision for loan losses, excluding FDIC covered loans, of $13 million in the third quarter of 2011, compared to a provision for loan losses of $8 million during the third quarter of 2010. In the third quarter of 2011, the reversal of the provision, excluding FDIC covered loans, was primarily attributable to the improved credit quality of the loan portfolio. The improved credit quality of the loan portfolio was particularly evident in lower levels of criticized credits in the commercial segment, which declined from $3.4 billion at December 31, 2010 to $2.0 billion at September 30, 2011, continuing the significant downward trend that was observed during the second half of 2010. The ratio of nonaccrual loans to total loans held for investment, excluding FDIC covered loans, decreased to 1.34 percent at September 30, 2011 from 1.82 percent at December 31, 2010. In addition, annualized net loans charged off to average loans outstanding, excluding FDIC covered loans, for the third quarter of 2011 decreased to 0.36 percent from 0.77 percent for the third quarter of 2010.
At September 30, 2011, the allocated portion of the allowance for credit losses included $248 million related to criticized credits, compared to $468 million at December 31, 2010. Criticized credits are those that are internally risk graded as special mention, substandard or doubtful. Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, could jeopardize repayment of the loan and result in further downgrade. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as doubtful has critical weaknesses that make full collection improbable.
Changes in the Unallocated Allowance
The decrease from December 31, 2010 to September 30, 2011 was primarily due to broad-based improvements in the commercial loan portfolios and the sustained yet mild recovery which has reduced, in managements opinion, the inherent losses not already reflected in the allocated allowance. The unallocated allowance continues to reflect higher than normal default rates for smaller balance commercial mortgages, the fiscal challenges for the State of California and local governments, extended collection periods for residential mortgage loans, and the continuation of historically low natural gas prices.
15
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
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 Ended September 30, |
Increase /(Decrease) For the Three Months Ended September 30, 2011 From September 30, 2010 |
For the Nine Months Ended September 30, |
Increase /(Decrease) For the Nine Months Ended September 30, 2011 From September 30, 2010 |
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(Dollars in millions) |
2011 | 2010 | Amount | Percent | 2011 | 2010 | Amount | Percent | ||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance of allowance for loan losses |
$ | 826 | $ | 1,358 | $ | (532 | ) | (39 | ) | % | $ | 1,191 | $ | 1,357 | $ | (166 | ) | (12 | ) | % | ||||||||||||||||||||||||||||||||||||
(Reversal of) provision for loan losses, excluding FDIC covered loans |
(13 | ) | 8 | (21 | ) | nm | (207 | ) | 222 | (429 | ) | (193 | ) | |||||||||||||||||||||||||||||||||||||||||||
(Reversal of) provision for FDIC covered loan losses not subject to FDIC indemnification |
- | - | - | - | (2 | ) | - | (2 | ) | nm | ||||||||||||||||||||||||||||||||||||||||||||||
Decrease in allowance covered by FDIC indemnification |
- | - | - | - | (5 | ) | - | (5 | ) | nm | ||||||||||||||||||||||||||||||||||||||||||||||
Other |
(1 | ) | - | (1 | ) | 100 | (1 | ) | - | (1 | ) | 100 | ||||||||||||||||||||||||||||||||||||||||||||
Loans charged off: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial |
(20 | ) | (37 | ) | 17 | (46 | ) | (54 | ) | (134 | ) | 80 | (60 | ) | ||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage |
(10 | ) | (27 | ) | 17 | (63 | ) | (48 | ) | (110 | ) | 62 | (56 | ) | ||||||||||||||||||||||||||||||||||||||||||
Construction |
- | (2 | ) | 2 | (100 | ) | (4 | ) | (28 | ) | 24 | (86 | ) | |||||||||||||||||||||||||||||||||||||||||||
Lease financing |
(5 | ) | - | (5 | ) | nm | (76 | ) | - | (76 | ) | nm | ||||||||||||||||||||||||||||||||||||||||||||
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Total commercial portfolio |
(35 | ) | (66 | ) | 31 | (47 | ) | (182 | ) | (272 | ) | 90 | (33 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Residential mortgage |
(13 | ) | (25 | ) | 12 | (48 | ) | (40 | ) | (47 | ) | 7 | (15 | ) | ||||||||||||||||||||||||||||||||||||||||||
Home equity and other consumer loans |
(8 | ) | (11 | ) | 3 | (27 | ) | (29 | ) | (30 | ) | 1 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Total consumer portfolio |
(21 | ) | (36 | ) | 15 | (42 | ) | (69 | ) | (77 | ) | 8 | (10 | ) | ||||||||||||||||||||||||||||||||||||||||||
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FDIC covered loans |
(1 | ) | - | (1 | ) | nm | (2 | ) | - | (2 | ) | nm | ||||||||||||||||||||||||||||||||||||||||||||
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Total loans charged off |
(57 | ) | (102 | ) | 45 | (44 | ) | (253 | ) | (349 | ) | 96 | (28 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Recoveries of loans previously charged off: |
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Commercial and industrial |
5 | 5 | - | - | 20 | 26 | (6 | ) | (23 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage |
1 | 1 | - | - | 11 | - | 11 | nm | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction |
4 | 7 | (3 | ) | (43 | ) | 10 | 17 | (7 | ) | (41 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Total commercial portfolio |
10 | 13 | (3 | ) | (23 | ) | 41 | 43 | (2 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage |
1 | - | 1 | 100 | 1 | 3 | (2 | ) | (67 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Home equity and other consumer loans |
1 | - | 1 | nm | 2 | 1 | 1 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Total consumer portfolio |
2 | - | 2 | nm | 3 | 4 | (1 | ) | (25 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
FDIC covered loans |
1 | - | 1 | nm | 1 | - | 1 | nm | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Total recoveries of loans previously charged off |
13 | 13 | - | - | 45 | 47 | (2 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Net loans charged off |
(44 | ) | (89 | ) | 45 | (51 | ) | (208 | ) | (302 | ) | 94 | (31 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Ending balance of allowance for loan losses |
$ | 768 | $ | 1,277 | $ | (509 | ) | (40 | ) | $ | 768 | $ | 1,277 | $ | (509 | ) | (40 | ) | ||||||||||||||||||||||||||||||||||||||
Allowance for losses on off-balance sheet commitments |
131 | 164 | (33 | ) | (20 | ) | 131 | 164 | (33 | ) | (20 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses |
$ | 899 | $ | 1,441 | $ | (542 | ) | (38 | ) | % | $ | 899 | $ | 1,441 | $ | (542 | ) | (38 | ) | % | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Components of allowance for loan losses and credit losses: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses, excluding allowance on FDIC covered loans |
$ | 751 | $ | 1,277 | $ | (526 | ) | (41 | ) | % | $ | 751 | $ | 1,277 | $ | (526 | ) | (41 | ) | % | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses on FDIC covered loans |
17 | - | 17 | nm | 17 | - | 17 | nm | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses |
$ | 768 | $ | 1,277 | $ | (509 | ) | (40 | ) | % | $ | 768 | $ | 1,277 | $ | (509 | ) | (40 | ) | % | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses, excluding allowance on FDIC covered loans |
$ | 882 | $ | 1,441 | $ | (559 | ) | (39 | ) | % | $ | 882 | $ | 1,441 | $ | (559 | ) | (39 | ) | % | ||||||||||||||||||||||||||||||||||||
Allowance for credit losses on FDIC covered loans |
17 | - | 17 | nm | 17 | - | 17 | nm | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Total allowance for credit losses |
$ | 899 | $ | 1,441 | $ | (542 | ) | (38 | ) | % | $ | 899 | $ | 1,441 | $ | (542 | ) | (38 | ) | % | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses to total loans held for investment |
1.51 | % | 2.67 | % | 1.51 | % | 2.67 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses to total loans held for investment |
1.76 | 3.01 | 1.76 | 3.01 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loans charged off to average loan soutstanding for the period (2) |
0.35 | 0.74 | 0.57 | 0.85 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Excluding FDIC covered loans (1): |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses to total loans held for investment |
1.51 | % | 2.76 | % | 1.51 | % | 2.76 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses to total loans held for investment |
1.77 | 3.12 | 1.77 | 3.12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loans charged off to average loans outstanding for the period (2) |
0.36 | 0.77 | 0.58 | 0.87 |
(1) These ratios exclude the impact of the FDIC covered loans, which are covered under loss share agreements between
Union Bank, N.A. and the FDIC. Such agreements are related to the April 2010 acquisitions of certain assets and the
assumption of certain liabilities of Frontier and Tamalpais.
(2) Annualized.
nm = not meaningful
16
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Nonperforming assets consist of nonaccrual loans, including troubled debt restructurings (TDRs) that are nonperforming and other real estate owned (OREO). Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to our consolidated financial statements included in our 2010 Form 10-K. OREO includes property where the Bank acquired title through foreclosure or deed in lieu of foreclosure.
The following table sets forth an analysis of nonperforming assets.
September
30, 2011 |
December
31, 2010 |
Increase /(Decrease) September 30, 2011 From December 31, 2010 |
||||||||||||||||||||
(Dollars in millions) |
Amount | Percent | ||||||||||||||||||||
Commercial and industrial |
$ | 163 | $ | 115 | $ | 48 | 42 | % | ||||||||||||||
Commercial mortgage |
206 | 329 | (123 | ) | (37 | ) | ||||||||||||||||
Construction |
16 | 140 | (124 | ) | (89 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total commercial portfolio |
385 | 584 | (199 | ) | (34 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Residential mortgage |
259 | 243 | 16 | 7 | ||||||||||||||||||
Home equity and other consumer loans |
25 | 22 | 3 | 14 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total consumer portfolio |
284 | 265 | 19 | 7 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total nonaccrual loans, excluding FDIC covered loans |
669 | 849 | (180 | ) | (21 | ) | ||||||||||||||||
FDIC covered loans |
56 | 116 | (60 | ) | (52 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total nonaccrual loans |
725 | 965 | (240 | ) | (25 | ) | ||||||||||||||||
OREO, excluding FDIC covered OREO |
21 | 41 | (20 | ) | (49 | ) | ||||||||||||||||
FDIC covered OREO |
124 | 136 | (12 | ) | (9 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total nonperforming assets |
$ | 870 | $ | 1,142 | $ | (272 | ) | (24 | ) | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Total nonperforming assets, excluding FDIC covered assets |
$ | 690 | $ | 890 | $ | (200 | ) | (22 | ) | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Troubled debt restructurings: |
||||||||||||||||||||||
Accruing |
$ | 226 | $ | 22 | $ | 204 | nm | |||||||||||||||
Nonaccruing (included in total nonaccrual loans above) |
$ | 354 | $ | 198 | $ | 156 | 79 | % | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Allowance for loan losses |
$ | 768 | $ | 1,191 | $ | (423 | ) | (36 | ) | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Allowance for credit losses |
$ | 899 | $ | 1,353 | $ | (454 | ) | (34 | ) | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||||
Nonaccrual loans to total loans held for investment |
1.42 | % | 2.01 | % | ||||||||||||||||||
Allowance for loan losses to nonaccrual loans |
105.97 | 123.40 | ||||||||||||||||||||
Allowance for credit losses to nonaccrual loans |
124.09 | 140.23 | ||||||||||||||||||||
Nonperforming assets to total loans held for investment and OREO |
1.70 | 2.37 | ||||||||||||||||||||
Nonperforming assets to total assets |
1.04 | 1.44 | ||||||||||||||||||||
Excluding FDIC covered assets:(1) |
||||||||||||||||||||||
Nonaccrual loans to total loans held for investment |
1.34 | % | 1.82 | % | ||||||||||||||||||
Allowance for loan losses to nonaccrual loans |
112.28 | 137.32 | ||||||||||||||||||||
Allowance for credit losses to nonaccrual loans |
131.92 | 156.44 | ||||||||||||||||||||
Nonperforming assets to total loans held for investment and OREO |
1.38 | 1.91 | ||||||||||||||||||||
Nonperforming assets to total assets |
0.83 | 1.15 |
(1) These ratios exclude the impact of the FDIC covered loans and FDIC covered OREO, which are covered under loss share agreements between Union Bank, N.A. and the FDIC. Such agreements are related to the April 2010 acquisitions of certain assets and the assumption of certain liabilities of Frontier and Tamalpais.
nm = not meaningful
During the third quarters of 2011 and 2010, we sold nonperforming loans of $15 million and $84 million, respectively. During the nine months ended September 30, 2011 and 2010, we sold nonperforming loans of $101 million and $247 million, respectively.
17
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Troubled Debt Restructurings
TDRs are those loans for which we have granted a concession to a borrower experiencing financial difficulty and, consequently, we receive less than the current market-based compensation for loans with similar risk characteristics. Such loans are classified as impaired and are reviewed for specific reserves either individually or in pools with similar risk characteristics. Our loss mitigation strategies are designed to minimize economic loss and, at times, may result in changes to original terms, including maturity date extensions, loan-to-value requirements, and interest rates. We evaluate whether these changes to the terms and conditions of our loans meet the TDR criteria after considering the specific situation of the borrower and all relevant facts and circumstances related to the modification. For our consumer portfolio segment, TDRs are initially placed on nonaccrual and a minimum of six consecutive months of sustained performance is generally required before returning to accrual status. For our commercial portfolio segment, we generally determine accrual status for TDRs by performing an individual assessment of each loan, which may include the consideration of demonstrated performance by the borrower under the previous terms in making this determination.
Modifications of FDIC covered loans that are accounted for within loan pools in accordance with the accounting standards for purchased credit-impaired loans do not result in the removal of these loans from the pool even if the modification would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not TDRs.
The following table provides a summary of TDRs by loan type, including nonaccrual loans and loans that have been returned to accrual status, as of September 30, 2011 and December 31, 2010. Refer to Note 5 to our consolidated financial statements in this Form 10-Q for more information.
September 30, 2011 |
December 31, 2010 |
As a percentage of ending loan balances |
||||||||||||||||||||||||
(Dollars in millions) |
Amount | Amount | September 30, 2011 |
December 31, 2010 |
||||||||||||||||||||||
Commercial and industrial |
$ | 207 | $ | 30 | 1.18 | % | 0.20 | % | ||||||||||||||||||
Commercial mortgage |
174 | 111 | 2.20 | 1.41 | ||||||||||||||||||||||
Construction |
67 | - | 6.94 | - | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
Total commercial portfolio |
448 | 141 | 1.65 | 0.56 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
Residential mortgage |
121 | 79 | 0.64 | 0.45 | ||||||||||||||||||||||
Home equity and other consumer loans |
3 | - | 0.08 | - | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
Total consumer portfolio |
124 | 79 | 0.54 | 0.37 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
FDIC covered loans |
8 | - | 0.73 | - | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
Total TDRs |
$ | 580 | $ | 220 | 1.14 | % | 0.47 | % | ||||||||||||||||||
|
|
|
|
Loans 90 Days or More Past Due and Still Accruing
Loans held for investment 90 days or more past due and still accruing totaled $3 million at September 30, 2011 and $2 million at December 31, 2010. These amounts exclude FDIC covered loans accounted for within loan pools in accordance with the accounting standards for purchased credit-impaired loans as the past due status of individual loans within the pools is not meaningful.
18
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The table below presents our deposits as of September 30, 2011 and December 31, 2010.
September
30, 2011 |
December
31, 2010 |
Increase /(Decrease) September 30, 2011 From December 31, 2010 |
||||||||||||||||||
(Dollars in millions) |
Amount | Percent | ||||||||||||||||||
Interest checking |
$ | 739 | $ | 931 | $ | (192 | ) | (21 | ) | % | ||||||||||
Money market |
22,678 | 26,159 | (3,481 | ) | (13 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total interest-bearing transaction and money market accounts |
23,417 | 27,090 | (3,673 | ) | (14 | ) | ||||||||||||||
Savings |
5,421 | 4,433 | 988 | 22 | ||||||||||||||||
Time |
11,986 | 12,088 | (102 | ) | (1 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total interest bearing deposits (1) |
40,824 | 43,611 | (2,787 | ) | (6 | ) | ||||||||||||||
Noninterest bearing deposits |
19,630 | 16,343 | 3,287 | 20 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total deposits |
$ | 60,454 | $ | 59,954 | $ | 500 | 1 | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||
(1) Total interest bearing deposits include: |
||||||||||||||||||||
Brokered deposits: |
||||||||||||||||||||
Interest bearing transaction and money market accounts |
$ | 2,054 | $ | 2,354 | $ | (300 | ) | (13 | ) | % | ||||||||||
Time |
2,017 | 1,217 | 800 | 66 | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total interest bearing brokered deposits |
4,071 | 3,571 | 500 | 14 | ||||||||||||||||
Nonbrokered deposits |
36,753 | 40,040 | (3,287 | ) | (8 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total interest bearing deposits |
$ | 40,824 | $ | 43,611 | $ | (2,787 | ) | (6 | ) | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Core Deposits: |
||||||||||||||||||||
Total deposits |
$ | 60,454 | $ | 59,954 | $ | 500 | 1 | % | ||||||||||||
Less: Total interest bearing brokered deposits |
4,071 | 3,571 | 500 | 14 | ||||||||||||||||
Less: Total foreign deposits and nonbrokered domestic time deposits of over $250,000 |
5,663 | 6,283 | (620 | ) | (10 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total core deposits |
$ | 50,720 | $ | 50,100 | $ | 620 | 1 | % | ||||||||||||
|
|
|
|
|
|
The decline in money market balances was primarily driven by targeted rate reductions in conjunction with ongoing internal balance sheet management strategies. Factors that drove growth in noninterest bearing deposits included the current availability of unlimited FDIC deposit insurance coverage for noninterest bearing demand deposit accounts, the low rate environment and ongoing business development activity. Customers displayed a propensity to maintain higher noninterest bearing balances in the prolonged low rate environment to obtain unlimited FDIC deposit insurance on eligible deposits.
The Dodd-Frank Act includes a provision that permanently increased the standard amount of FDIC deposit insurance coverage from $100,000 to $250,000 per customer. As a result, in the third quarter of 2011, we revised our definition of core deposits to include domestic time deposit accounts with balances up to $250,000. Core deposits continue to exclude all brokered deposits and foreign deposits.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is defined as the risk of loss arising from an adverse change in the market value of financial instruments caused by fluctuations in market prices or rates. The primary market risk to which the Company is exposed is interest rate risk. Substantially all of our interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. These include loans, securities, deposits, borrowings and derivative financial instruments. To a much lesser degree, we are exposed to price risk in our trading portfolio. The objective of market risk management is to mitigate any undue adverse impact on earnings and capital arising from changes in interest rates and other market variables. This risk management objective supports our broad objective of enhancing shareholder value, which encompasses stable earnings growth and capital stability over time.
The Board of Directors (Board), directly or through its appropriate committee, approves our Asset Liability Management Policy (ALM Policy), which governs the management of market and liquidity risks and guides our investment, derivatives, trading and funding activities. The ALM Policy establishes the Banks risk tolerance guidelines by outlining standards for measuring market and liquidity risks, creates Board-level limits for specific market risks, establishes guidelines for reporting market and liquidity risk and requires independent review and oversight of market and liquidity risk activities.
The Risk & Capital Committee (RCC), composed of selected senior officers of the Bank, among other things, strives to ensure that the Bank has an effective process to identify, monitor, measure, and manage market risk as required by the ALM Policy.
19
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The RCC provides the broad and strategic guidance of market risk management by defining the risk/return direction for the Bank, delegating to and reviewing market risk management activities of the Asset Liability Management Committee (ALCO) and by approving the investment, derivatives and trading policies that govern the Banks activities. ALCO, as authorized by the RCC, is responsible for the management of market risk and approves specific risk management programs including those related to interest rate hedging, investment securities, wholesale funding and trading activities.
The Treasurer is primarily responsible for the implementation of risk management strategies approved by ALCO and for operational management of market risk through the funding, investment and derivatives hedging activities of Corporate Treasury. The manager of the Global Capital Markets Group (GCMG) is responsible for managing price risk through the trading activities conducted in GCMG. The Market Risk Management (MRM) unit is responsible for the monitoring of market risk and functions independently of all operating and management units.
The Bank has separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below.
Interest Rate Risk Management (Other Than Trading)
ALCO monitors interest rate risk monthly through a variety of modeling techniques that are used to quantify the sensitivity of Net Interest Income (NII) to changes in interest rates. (NII was previously referred to as Accounting NII in the full year 2010 and first quarter of 2011.) In managing interest rate risk, ALCO monitors NII sensitivity over various time horizons and in response to a variety of interest rate changes.
Our NII policy measurement typically involves a simulation of Earnings-at-Risk (EaR) in which we estimate the earnings impact of gradual parallel shifts in the yield curve of up and down 200 basis points over a 12-month horizon, given our projected balance sheet profile. Given the current and persistently low interest rate environment, the -200 basis point parallel scenario was replaced with a -100 basis point parallel scenario. Our EaR simulations use a 12-month projected balance sheet in order to model the impact of interest rate changes. Assumptions are made to model the future behavior of deposit rates and loan spreads based on statistical analysis, managements outlook and historical experience. The prepayment risks related to residential loans and mortgage-backed securities are measured using a calibrated third-party model that estimates prepayment speeds.
Earnings at Risk
The table below presents the estimated increase (decrease) in NII given a gradual parallel shift in the yield curve up 200 basis points and down 100 basis points over a 12-month horizon.
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
||||||
Effect on NII: |
||||||||
increase 200 basis points |
$ | 102.0 | $ | 108.8 | ||||
as a percentage of base case NII |
4.21 | % | 4.75 | % | ||||
decrease 100 basis points |
$ | (60.2 | ) | $ | (64.8 | ) | ||
as a percentage of base case NII |
(2.49 | ) % | (2.83 | ) % |
Generally, our short-term assets re-price faster than short-term non-maturity liabilities. As a result, higher short-term rates would improve NII. Alternatively, gradually lower short-term rates would reduce NII. With regard to the curve shape, curve steepening would improve NII while curve flattening would slightly decrease NII.
We believe that our EaR simulation provides management with a reasonably comprehensive view of the sensitivity of NII to changes in interest rates, 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 evolve. Actual and simulated NII will differ to the extent there are variances between actual and assumed interest rate changes, balance sheet volumes and changes in management strategies, among other factors. Key underlying assumptions include prepayment speeds on mortgage-related assets, changes in market conditions, loan volume and pricing, deposit volume and price sensitivity, customer preferences and cash flows and maturities of derivative financial instruments.
ALM Activities
During the nine months ended September 30, 2011, the Banks asset sensitive EaR profile decreased slightly due to changes in the balance sheet composition and forecasted new activity over the next twelve months. In managing the interest rate sensitivity of our balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our interest rate risk profile, if necessary.
20
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
ALM Securities
At September 30, 2011 and December 31, 2010, our available for sale securities portfolio included $19.4 billion and $20.6 billion, respectively, of securities for ALM purposes. Our ALM securities portfolio consists of securities issued by U.S. government sponsored agencies, residential and commercial mortgage-backed securities, and asset-backed securities and has an expected weighted average maturity of 2.5 years. At September 30, 2011, approximately $4.8 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the third quarter of 2011, we purchased $3.4 billion and sold $512 million of securities, as part of our investment portfolio strategy, while $1.5 billion of ALM securities matured or were called.
Based on current prepayment projections, the estimated ALM securities portfolios effective duration was 1.5 at September 30, 2011, compared to 2.2 at December 31, 2010. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 1.5 suggests an expected price decrease of approximately 1.5 percent for an immediate 1.0 percent parallel increase in interest rates.
ALM Derivatives
During the nine months ended September 30, 2011, the notional amount of the ALM derivatives portfolio increased by $1.2 billion due to the addition of $2.2 billion of new interest rate swaps partially offset by the termination of $1.0 billion of interest rate swaps. The new interest rate swaps consisted of a notional amount of $1.5 billion of receive fixed rate swaps to hedge floating rate commercial loans and $650 million of pay fixed rate swaps to hedge debt issuances and variable rate borrowings. The terminated swaps were pay fixed rate swaps associated with the planned issuance of fixed rate debt.
The fair value of the ALM derivatives portfolio decreased primarily due to the erosion of time value on interest rate cap contracts and the negative impact of a decrease in interest rates on the interest rate swap pay fixed contracts. For additional discussion of derivative instruments and our hedging strategies, see Note 11 to our consolidated financial statements in this Form 10-Q and Note 18 to our consolidated financial statements included in our 2010 Form 10-K.
(Dollars in millions) |
September 30, 2011 |
|
December 31, 2010 |
|
Increase /(Decrease) September 30, 2011 From December 31, 2010 |
|||||||||||
Total gross notional amount of positions held for purposes other than trading: |
||||||||||||||||
Interest rate swap pay fixed contracts |
$ | 1,150 | $ | 1,500 | $ | (350 | ) | |||||||||
Interest rate receive fixed contracts |
1,500 | - | 1,500 | |||||||||||||
Interest rate cap purchased contracts |
4,000 | 4,000 | - | |||||||||||||
|
|
|
|
|
|
|||||||||||
Total interest rate contracts |
$ | 6,650 | $ | 5,500 | $ | 1,150 | ||||||||||
|
|
|
|
|
|
|||||||||||
Fair value of positions held for purposes other than trading: |
||||||||||||||||
Gross positive fair value |
- | 21 | (21 | ) | ||||||||||||
Gross negative fair value |
13 | - | 13 | |||||||||||||
|
|
|
|
|
|
|||||||||||
Positive (negative) fair value of positions, net |
$ | (13 | ) | $ | 21 | $ | (34 | ) | ||||||||
|
|
|
|
|
|
Trading Activities
We enter into trading account activities primarily as a financial intermediary for customers and, to some extent, for our own account. By acting as a financial intermediary, we are able to provide our customers with access to a range of products supporting the securities, foreign exchange and derivatives markets. In acting for our own account, we may take positions in certain securities, foreign exchange and interest rate instruments, subject to various limits in amount, tenor and other respects, with the objective of generating trading profits.
We believe that the risks associated with these positions are conservatively managed. We utilize a combination of position limits, Value-at-Risk (VaR), and stop-loss limits, applied at an aggregated level and to various sub-components within those limits. Positions are controlled and reported both in notional and VaR terms. Our calculation of VaR estimates how high the loss in fair value might be, at a 99 percent confidence level, due to an adverse shift in market prices over a period of ten business days. VaR at the trading activity level is managed within the maximum limit of $14 million established by Board policy for total trading positions. The VaR model incorporates assumptions on key parameters, including holding period and historical volatility.
Consistent with our business strategy of focusing on the sale of capital markets products to customers, we manage our trading risk exposures at relatively low levels. Our foreign exchange business continues to derive the majority of its revenue from customer
21
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
-related transactions. We take trading positions with other banks only on a limited basis and we do not take any large or long-term strategic positions in the market for our own portfolio. Similarly, we continue to generate most of our securities trading income from customer-related transactions.
As of September 30, 2011, we had a notional amount of $33.4 billion of interest rate derivative contracts compared with $28.8 billion at December 31, 2010. The increase was primarily due to larger notional amounts on certain customer transactions. We enter into these agreements for customer accommodations and for our own account, accepting risks up to management approved VaR levels. As of September 30, 2011, we had a notional amount of $3.3 billion of foreign exchange derivative contracts. We enter into these agreements for customer accommodations to support their hedging and operating needs and for our own account, accepting risks up to management approved VaR levels. As of September 30, 2011, we had a notional amount of $4.8 billion of commodity derivative contracts. We enter into such contracts to satisfy the needs of our customers, and remove our exposure to market risk by entering into matching contracts with other counterparties. As of September 30, 2011, we had a notional amount of $2.6 billion of equity contracts representing our exposure to the embedded derivatives and the related hedges contained in our market-link CDs.
The following table provides the notional value and the fair value of our trading derivatives portfolio as of September 30, 2011 and December 31, 2010 and the change in fair value between September 30, 2011 and December 31, 2010.
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
Increase /(Decrease) September 30, 2011 From December 31, 2010 |
|||||||||||||
Total gross notional amount of positions held for trading purposes: |
||||||||||||||||
Interest rate contracts |
$ | 33,413 | $ | 28,820 | $ | 4,593 | ||||||||||
Commodity contracts |
4,835 | 4,679 | 156 | |||||||||||||
Foreign exchange contracts (1) |
3,316 | 2,594 | 722 | |||||||||||||
Equity contracts |
2,632 | 1,313 | 1,319 | |||||||||||||
Other contracts |
60 | 60 | - | |||||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 44,256 | $ | 37,466 | $ | 6,790 | ||||||||||
|
|
|
|
|
|
|||||||||||
Fair value of positions held for trading purposes: |
||||||||||||||||
Gross positive fair value |
$ | 1,292 | $ | 922 | $ | 370 | ||||||||||
Gross negative fair value |
1,202 | 897 | 305 | |||||||||||||
|
|
|
|
|
|
|||||||||||
Positive fair value of positions, net |
$ | 90 | $ | 25 | $ | 65 | ||||||||||
|
|
|
|
|
|
(1) | Excludes spot contracts with notional amounts of $0.6 billion and $0.4 billion at September 30, 2011 and December 31, 2010, respectively. |
Liquidity risk is the risk that the Banks financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its contractual obligations. The objective of liquidity risk management is to maintain a sufficient amount of liquidity and diversity of funding sources to allow the Bank to meet expected obligations in both stable and adverse conditions.
The management of liquidity risk is governed by the ALM Policy under the oversight of the RCC and the Audit & Finance Committee of the Board. ALCO oversees liquidity risk management activities. Corporate Treasury formulates the Banks liquidity and contingency planning strategies and is responsible for identifying, managing and reporting on liquidity risk. Market Risk Management, which is part of the Enterprise Wide Risk Reporting and Analysis unit, partners with Corporate Treasury to establish sound policy and effective risk controls. RCC and ALCO also maintain a Contingency Funding Plan that identifies actions to be taken to help ensure adequate liquidity if an event should occur that disrupts or adversely affects the Banks normal funding activities.
Liquidity risk is managed using a total balance sheet perspective that analyzes all sources and uses of liquidity including loans, investments, deposits and borrowings, as well as off-balance sheet exposures. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs. Various tools are used to measure and monitor liquidity, including pro-forma forecasting of the sources and uses of cash flows over a 12-month time horizon, stress testing of the pro-forma forecast and assessment of the Banks capacity to raise incremental unsecured and secured funding. Stress testing, which incorporates both bank-specific and systemic market scenarios that would adversely affect the Banks liquidity position, facilitates the identification of appropriate remedial measures to help ensure that the Bank maintains adequate liquidity in adverse conditions. Such measures may include extending the maturity profile of liabilities, optimizing liability levels through pricing strategies, adding new funding sources, altering dependency on certain funding sources and/or selling assets.
22
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Our primary sources of liquidity are core deposits (described below), our securities portfolio and wholesale funding. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international, including both senior and subordinated debt. Also included are secured funds raised by selling securities under repurchase agreements and by borrowing from the Federal Home Loan Bank (FHLB). We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse circumstances. We generally view our core deposits to be relatively stable. Secured borrowings via repurchase agreements and advances from the FHLB are also recognized as highly reliable funding sources, and we, therefore, maintain these sources primarily to meet our contingency funding needs.
To support asset growth, wholesale funding increased by $2.7 billion from $9.9 billion at December 31, 2010 to $12.6 billion at September 30, 2011. Total deposits increased $0.5 billion from $60.0 billion at December 31, 2010 to $60.5 billion at September 30, 2011.
Core deposits, which consist of total deposits excluding brokered deposits, foreign time deposits and domestic time deposits greater than $250,000, provide us with a sizable source of relatively stable and low-cost funds. At September 30, 2011, our core deposits totaled $50.7 billion and our total loan-to-total deposit ratio was 84.4 percent.
The Bank maintains a variety of other funding sources, secured and unsecured, which management believes will be adequate to meet the Banks liquidity needs, including the following:
| The Bank has secured borrowing facilities with the FHLB and the Federal Reserve Bank (FRB). As of September 30, 2011, the Bank had $4.5 billion of borrowings outstanding with the FHLB, and the Bank had a remaining combined unused borrowing capacity from the FHLB and the FRB of $21.0 billion. |
| Our securities portfolio provides liquidity through either securities sales or repurchase agreements. Total unpledged securities decreased by $1.1 billion from $15.2 billion at December 31, 2010 to $14.1 billion at September 30, 2011. |
| The Bank has a $4.0 billion unsecured Bank Note Program. Available funding under the Bank Note Program was $1.2 billion at September 30, 2011. We do not have any firm commitments in place to sell securities under the Bank Note Program. |
| In addition to the funding provided by the Bank, we raise funds at the holding company level. UnionBanCal Corporation has in place a shelf registration with the SEC permitting ready access to the public debt markets. As of September 30, 2011, $1.5 billion of debt or other securities were available for issuance under this shelf registration. We do not have any firm commitments in place to sell securities under this shelf registration. |
We believe that these sources, in addition to our core deposits and equity capital, provide a stable funding base. As a result, we have not historically relied on BTMU for our normal funding needs.
Our costs and ability to raise funds in the capital markets are influenced by our credit ratings. Our credit ratings could be impacted by changes in the credit ratings of BTMU and MUFG. For further information, including information about recent ratings agency downgrades of Japans credit rating and related rating downgrades for most major Japanese banks, including BTMU, see The Bank of Tokyo Mitsubishi UFJs and Mitsubishi UFJ Financial Groups credit ratings and financial or regulatory condition could adversely affect our operations in Part II, Item 1A. Risk Factors of this Form 10-Q. The following table provides our credit ratings as of September 30, 2011.
Union Bank, N.A. | UnionBanCal Corporation | |||||||
Standard & Poors |
|
Long-term Short-term |
|
A+ A-1 |
A A-1 | |||
Moodys |
|
Long-term Short-term |
|
A2 P-1 |
- - | |||
Fitch |
|
Long-term Short-term |
|
A F1 |
A F1 | |||
DBRS |
|
Long-term Short-term |
|
A (high) R-1 (middle) |
A R-1 (low) |
23
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following tables summarize our risk-based capital, risk-weighted assets, and risk-based capital ratios.
UnionBanCal Corporation
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
||||||||||
Capital Components |
||||||||||||
Tier 1 capital |
$ | 8,724 | $ | 8,029 | ||||||||
Tier 2 capital |
1,542 | 1,656 | ||||||||||
|
|
|
|
|||||||||
Total risk-based capital |
$ | 10,266 | $ | 9,685 | ||||||||
|
|
|
|
|||||||||
Risk-weighted assets |
$ | 66,628 | $ | 64,516 | ||||||||
|
|
|
|
|||||||||
Quarterly average assets |
$ | 79,570 | $ | 77,659 | ||||||||
|
|
|
|
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 | September 30, 2011 Minimum Regulatory Requirement |
|||||||||||||||||||||||||||
Capital Ratios | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) |
$ | 8,724 | 13.09 | % | $ | 8,029 | 12.44 | % | ³ | $ | 2,665 | 4.0 | % | |||||||||||||||||
Total capital (to risk-weighted assets) |
10,266 | 15.41 | 9,685 | 15.01 | ³ | 5,330 | 8.0 | |||||||||||||||||||||||
Leverage (1) |
8,724 | 10.96 | 8,029 | 10.34 | ³ | 3,183 | 4.0 |
(1) Tier | 1 capital divided by quarterly average assets (excluding certain intangible assets). |
Union Bank, N.A.
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
||||||||||
Capital Components |
||||||||||||
Tier 1 capital |
$ | 8,447 | $ | 7,377 | ||||||||
Tier 2 capital |
1,380 | 1,489 | ||||||||||
|
|
|
|
|||||||||
Total risk-based capital |
$ | 9,827 | $ | 8,866 | ||||||||
|
|
|
|
|||||||||
Risk-weighted assets |
$ | 66,483 | $ | 63,993 | ||||||||
|
|
|
|
|||||||||
Quarterly average assets |
$ | 79,487 | $ | 77,229 | ||||||||
|
|
|
|
(Dollars in millions) |
September 30, 2011 | December 31, 2010 | September 30, 2011 Minimum Regulatory Requirement |
September 30,
2011 Well-Capitalized Regulatory Requirement |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital Ratios | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) |
$ | 8,447 | 12.71 | % | $ | 7,377 | 11.53 | % | ³ | $ | 2,659 | 4.0 | % | ³ | $ | 3,989 | 6.0 | % | ||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
9,827 | 14.78 | 8,866 | 13.85 | ³ | 5,319 | 8.0 | ³ | 6,648 | 10.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Leverage (1) |
8,447 | 10.63 | 7,377 | 9.55 | ³ | 3,179 | 4.0 | ³ | 3,974 | 5.0 |
(1) Tier | 1 capital divided by quarterly average assets (excluding certain intangible assets). |
We and Union Bank are subject to various regulations of the federal banking agencies, including minimum capital requirements. We are both 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). As of September 30, 2011, management believes the capital ratios of Union Bank met all regulatory requirements of well-capitalized institutions.
In addition to capital ratios determined in accordance with regulatory requirements, we consider the tangible common equity ratio and the Tier 1 common capital ratio when evaluating capital utilization and adequacy. These capital ratios are viewed by management, and presented below, to further facilitate the understanding of our capital structure and for use in assessing and comparing the quality and composition of UNBCs capital structure to other financial institutions. These ratios are not defined by US GAAP or federal banking regulations. Therefore, they are considered to be non-GAAP financial measures. Our tangible common equity ratio calculation methods may differ from those used by other financial services companies. Refer to Supervision and Regulation-Basel Committee Capital Standards in Part I, Item 1 of our 2010 Form 10-K for additional information regarding the Basel Committee capital standards.
24
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following table summarizes the calculation of our tangible common equity ratio and Tier 1 common capital ratio as of September 30, 2011 and December 31, 2010.
September
30, 2011 |
December
31, 2010 |
Increase /(Decrease) September 30, 2011 From December 31, 2010 |
| |||||||||||||||||||||||
(Dollars in millions) |
Amount | Percent | ||||||||||||||||||||||||
Total UNBC stockholders equity |
$ | 10,900 | $ | 10,125 | $ | 775 | 8 | % | ||||||||||||||||||
Goodwill |
(2,447 | ) | (2,456 | ) | 9 | - | ||||||||||||||||||||
Intangible assets |
(383 | ) | (457 | ) | 74 | (16 | ) | |||||||||||||||||||
Deferred tax liabilities related to goodwill and intangible assets |
140 | 168 | (28 | ) | (17 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Tangible common equity (a) |
$ | 8,210 | $ | 7,380 | $ | 830 | 11 | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Tier 1 capital, determined in accordance with regulatory requirements |
$ | 8,724 | $ | 8,029 | $ | 695 | 9 | |||||||||||||||||||
Trust preferred securities |
- | (13 | ) | 13 | (100 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Tier 1 common equity (b) |
$ | 8,724 | $ | 8,016 | $ | 708 | 9 | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 84,013 | $ | 79,097 | $ | 4,916 | 6 | |||||||||||||||||||
Goodwill |
(2,447 | ) | (2,456 | ) | 9 | - | ||||||||||||||||||||
Intangible assets |
(383 | ) | (457 | ) | 74 | (16 | ) | |||||||||||||||||||
Deferred tax liabilities related to goodwill and intangible assets |
140 | 168 | (28 | ) | (17 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Tangible assets (c) |
$ | 81,323 | $ | 76,352 | $ | 4,971 | 7 | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Risk-weighted assets, determined in accordance with regulatory requirements (d) |
$ | 66,628 | $ | 64,516 | $ | 2,112 | 3 | % | ||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||
Tangible common equity ratio (a)/(c) |
10.10 | % | 9.67 | % | ||||||||||||||||||||||
Tier 1 common capital ratio (b)/(d) |
13.09 | 12.42 |
We have three operating segments: Retail Banking Group, Corporate Banking Group and Pacific Rim Corporate Group. The Pacific Rim Corporate Group is included in Other. We have two reportable business segments: Retail Banking and Corporate Banking.
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, and they are not necessarily indicative of the results that would be reported by our business units if they were unique economic entities.
We reflect a market view perspective in measuring our business segments. The market view is a measurement of our customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are eliminated in Reconciling Items. The market view approach fosters cross-selling with a total profitability view of the products and services being managed.
The table that follows reflects the condensed income statements, selected average balance sheet items, and selected financial ratios, including changes from the prior year, for each of our reportable business segments. Business unit results are prepared using various management accounting methodologies to measure the performance of the individual units. Our management accounting methodologies, which are enhanced from time to time, measure segment profitability by assigning balance sheet and income statement items to each operating segment. Methodologies that are applied to the measurement of segment profitability include:
| A 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. During the nine months ended September 30, 2011, we refined our transfer pricing methodology for non-maturity deposits to reflect expected balance run-off and average life assumptions as well as for rate repricing expectations. |
| An activity-based costing methodology, in which 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 segments based on a predetermined percentage of usage. |
25
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
| A risk-adjusted return on capital (RAROC) methodology, in which credit expense is charged to an operating segment based upon expected losses arising from credit risk. As a result of the methodology used in 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. |
The reportable business segment results for the prior periods have been adjusted to reflect changes in the transfer pricing methodology that have occurred.
26
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Retail Banking | Corporate Banking | |||||||||||||||||||||||||||||||||||||||||||||
As of and for
the Three Months Ended September 30, |
Increase/(Decrease) | As of and for the Three Months Ended September 30, |
Increase/(Decrease) | |||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | Percent | 2011 | 2010 | Amount | Percent | |||||||||||||||||||||||||||||||||||||||
Results of operations - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 273 | $ | 254 | $ | 19 | 7 | % | $ | 317 | $ | 313 | $ | 4 | 1 | % | ||||||||||||||||||||||||||||||
Noninterest income (expense) |
70 | 67 | 3 | 4 | 143 | 134 | 9 | 7 | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Total revenue |
343 | 321 | 22 | 7 | 460 | 447 | 13 | 3 | ||||||||||||||||||||||||||||||||||||||
Noninterest expense (income) |
255 | 236 | 19 | 8 | 235 | 238 | (3 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||
Credit expense (income) |
6 | 7 | (1 | ) | (14 | ) | 44 | 64 | (20 | ) | (31 | ) | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Income (loss) before income taxes |
82 | 78 | 4 | 5 | 181 | 145 | 36 | 25 | ||||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
32 | 31 | 1 | 3 | 46 | 32 | 14 | 44 | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Net income (loss) including noncontrolling interests |
50 | 47 | 3 | 6 | 135 | 113 | 22 | 19 | ||||||||||||||||||||||||||||||||||||||
Deduct: Net loss from noncontrolling interests (2) |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Net income (loss) attributable to UNBC |
$ | 50 | $ | 47 | $ | 3 | 6 | % | $ | 135 | $ | 113 | $ | 22 | 19 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Average balances - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment |
$ | 23,591 | $ | 22,025 | $ | 1,566 | 7 | $ | 27,693 | $ | 26,168 | $ | 1,525 | 6 | ||||||||||||||||||||||||||||||||
Total assets |
24,666 | 22,952 | 1,714 | 7 | 32,138 | 30,181 | 1,957 | 6 | ||||||||||||||||||||||||||||||||||||||
Total deposits |
24,585 | 24,516 | 69 | - | 31,343 | 34,947 | (3,604 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||
Financial ratios - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1) |
0.80 | % | 0.83 | % | 1.67 | % | 1.49 | % | ||||||||||||||||||||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization (3) |
73.83 | 73.21 | 47.72 | 49.81 | ||||||||||||||||||||||||||||||||||||||||||
Other | Reconciling Items | |||||||||||||||||||||||||||||||||||||||||||||
As of and for the Three Months Ended September 30, |
Increase / (Decrease) | As of and for the Three Months Ended September 30, |
||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | Percent | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||||
Results of operations - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 35 | $ | 68 | $ | (33 | ) | (49 | )% | $ | (19 | ) | $ | (17 | ) | |||||||||||||||||||||||||||||||
Noninterest income (expense) |
(9 | ) | 34 | (43 | ) | nm | (19 | ) | (17 | ) | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Total revenue |
26 | 102 | (76 | ) | (75 | ) | (38 | ) | (34 | ) | ||||||||||||||||||||||||||||||||||||
Noninterest expense (income) |
127 | 101 | 26 | 26 | (14 | ) | (13 | ) | ||||||||||||||||||||||||||||||||||||||
Credit expense (income) |
(63 | ) | (63 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
(38 | ) | 64 | (102 | ) | nm | (24 | ) | (21 | ) | ||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
(36 | ) | 44 | (80 | ) | nm | (9 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Net income (loss) including noncontrolling interests |
(2 | ) | 20 | (22 | ) | nm | (15 | ) | (13 | ) | ||||||||||||||||||||||||||||||||||||
Deduct: Net loss from noncontrolling interests (2) |
4 | 3 | 1 | 33 | - | - | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to UNBC |
$ | 2 | $ | 23 | $ | (21 | ) | (91 | )% | $ | (15 | ) | $ | (13 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Average balances - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment |
$ | 1,037 | $ | 1,844 | $ | (807 | ) | (44 | ) | $ | (2,107 | ) | $ | (1,932 | ) | |||||||||||||||||||||||||||||||
Total assets |
27,532 | 31,083 | (3,551 | ) | (11 | ) | (2,139 | ) | (1,951 | ) | ||||||||||||||||||||||||||||||||||||
Total deposits |
5,884 | 7,230 | (1,346 | ) | (19 | ) | (2,232 | ) | (1,871 | ) | ||||||||||||||||||||||||||||||||||||
Financial ratios - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1) |
na | na | na | na | ||||||||||||||||||||||||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization (3) |
na | na | na | na | ||||||||||||||||||||||||||||||||||||||||||
UnionBanCal Corporation | ||||||||||||||||||||||||||||||||||||||||||||||
As of and for the Three Months Ended September 30, |
Increase /(Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | Percent | |||||||||||||||||||||||||||||||||||||||||||
Results of operations - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 606 | $ | 618 | $ | (12 | ) | (2 | )% | |||||||||||||||||||||||||||||||||||||
Noninterest income (expense) |
185 | 218 | (33 | ) | (15 | ) | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Total revenue |
791 | 836 | (45 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||
Noninterest expense (income) |
603 | 562 | 41 | 7 | ||||||||||||||||||||||||||||||||||||||||||
Credit expense (income) |
(13 | ) | 8 | (21 | ) | nm | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
201 | 266 | (65 | ) | (24 | ) | ||||||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
33 | 99 | (66 | ) | (67 | ) | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Net income (loss) including noncontrolling interests |
168 | 167 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Deduct: Net loss from noncontrolling interests (2) |
4 | 3 | 1 | 33 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to UNBC |
$ | 172 | $ | 170 | $ | 2 | 1 | % | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Average balances - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment |
$ | 50,214 | $ | 48,105 | $ | 2,109 | 4 | |||||||||||||||||||||||||||||||||||||||
Total assets |
82,197 | 82,265 | (68 | ) | - | |||||||||||||||||||||||||||||||||||||||||
Total deposits |
59,580 | 64,822 | (5,242 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||
Financial ratios - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1) |
0.83 | % | 0.82 | % | ||||||||||||||||||||||||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization (3) |
70.41 | 61.13 |
(1) | Annualized. |
(2) | Reflects net loss attributed to noncontrolling interest related to our consolidated variable interest entities (VIEs). |
(3) | The core efficiency ratio, excluding impact of privatization, a non-GAAP financial measure, is net noninterest expense (noninterest expense excluding privatization-related expenses and fair value amortization/accretion, foreclosed asset expense, (reversal of) provision for losses on off-balance sheet commitments, low income housing credit investment amortization expense, expenses of the consolidated VIEs, merger costs related to the acquisitions of certain assets and assumption of certain liabilities of Frontier and Tamalpais and asset impairment charge) as a percentage of total revenue (net interest income (taxable-equivalent basis) and noninterest income). Management discloses the core efficiency ratio as a measure of the efficiency of our operations, focusing on those costs most relevant to our core activities. |
na = not applicable
nm = not meaningful
27
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Retail Banking | Corporate Banking | |||||||||||||||||||||||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, |
Increase/(Decrease) | As of and for the Nine Months Ended September 30, |
Increase/(Decrease) | |||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | Percent | 2011 | 2010 | Amount | Percent | |||||||||||||||||||||||||||||||||||||||
Results of operations - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 807 | $ | 723 | $ | 84 | 12 | % | $ | 933 | $ | 917 | $ | 16 | 2 | % | ||||||||||||||||||||||||||||||
Noninterest income (expense) |
207 | 208 | (1 | ) | - | 422 | 391 | 31 | 8 | |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Total revenue |
1,014 | 931 | 83 | 9 | 1,355 | 1,308 | 47 | 4 | ||||||||||||||||||||||||||||||||||||||
Noninterest expense (income) |
784 | 683 | 101 | 15 | 713 | 712 | 1 | - | ||||||||||||||||||||||||||||||||||||||
Credit expense (income) |
19 | 20 | (1 | ) | (5 | ) | 145 | 216 | (71 | ) | (33 | ) | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
211 | 228 | (17 | ) | (7 | ) | 497 | 380 | 117 | 31 | ||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
82 | 89 | (7 | ) | (8 | ) | 119 | 78 | 41 | 53 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Net income (loss) including noncontrolling interests |
129 | 139 | (10 | ) | (7 | ) | 378 | 302 | 76 | 25 | ||||||||||||||||||||||||||||||||||||
Deduct: Net loss from noncontrolling interests (2) |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Net income (loss) attributable to UNBC |
$ | 129 | $ | 139 | $ | (10 | ) | (7 | )% | $ | 378 | $ | 302 | $ | 76 | 25 | % | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Average balances - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment |
$ | 23,023 | $ | 21,832 | $ | 1,191 | 5 | $ | 26,861 | $ | 26,544 | $ | 317 | 1 | ||||||||||||||||||||||||||||||||
Total assets |
24,057 | 22,727 | 1,330 | 6 | 31,102 | 30,359 | 743 | 2 | ||||||||||||||||||||||||||||||||||||||
Total deposits |
24,448 | 22,613 | 1,835 | 8 | 30,429 | 38,415 | (7,986 | ) | (21 | ) | ||||||||||||||||||||||||||||||||||||
Financial ratios - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1) |
0.71 | % | 0.82 | % | 1.62 | % | 1.33 | % | ||||||||||||||||||||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization (3) |
77.09 | 73.25 | 49.18 | 51.22 | ||||||||||||||||||||||||||||||||||||||||||
Other | Reconciling Items | |||||||||||||||||||||||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, |
Increase/(Decrease) | As of and for the Nine Months Ended September 30, |
||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | Percent | 2011 | 2010 | |||||||||||||||||||||||||||||||||||||||||
Results of operations - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 155 | $ | 201 | $ | (46 | ) | (23 | )% | $ | (57 | ) | $ | (48 | ) | |||||||||||||||||||||||||||||||
Noninterest income (expense) |
91 | 124 | (33 | ) | (27 | ) | (55 | ) | (51 | ) | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Total revenue |
246 | 325 | (79 | ) | (24 | ) | (112 | ) | (99 | ) | ||||||||||||||||||||||||||||||||||||
Noninterest expense (income) |
341 | 315 | 26 | 8 | (42 | ) | (39 | ) | ||||||||||||||||||||||||||||||||||||||
Credit expense (income) |
(372 | ) | (14 | ) | (358 | ) | nm | (1 | ) | - | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
277 | 24 | 253 | nm | (69 | ) | (60 | ) | ||||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
104 | 37 | 67 | 181 | (27 | ) | (23 | ) | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Net income (loss) including noncontrolling interests |
173 | (13 | ) | 186 | nm | (42 | ) | (37 | ) | |||||||||||||||||||||||||||||||||||||
Deduct: Net loss from noncontrolling interests (2) |
11 | 10 | 1 | 10 | - | - | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to UNBC |
$ | 184 | $ | (3 | ) | $ | 185 | nm | % | $ | (42 | ) | $ | (37 | ) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Average balances - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment |
$ | 1,303 | $ | 1,124 | $ | 179 | 16 | $ | (2,066 | ) | $ | (1,902 | ) | |||||||||||||||||||||||||||||||||
Total assets |
27,805 | 33,022 | (5,217 | ) | (16 | ) | (2,094 | ) | (1,922 | ) | ||||||||||||||||||||||||||||||||||||
Total deposits |
6,382 | 10,632 | (4,250 | ) | (40 | ) | (2,130 | ) | (1,750 | ) | ||||||||||||||||||||||||||||||||||||
Financial ratios - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1) |
na | na | na | na | ||||||||||||||||||||||||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization (3) |
na | na | na | na | ||||||||||||||||||||||||||||||||||||||||||
UnionBanCal Corporation | ||||||||||||||||||||||||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, |
Increase/(Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | Percent | |||||||||||||||||||||||||||||||||||||||||||
Results of operations - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 1,838 | $ | 1,793 | $ | 45 | 3 | % | ||||||||||||||||||||||||||||||||||||||
Noninterest income (expense) |
665 | 672 | (7 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Total revenue |
2,503 | 2,465 | 38 | 2 | ||||||||||||||||||||||||||||||||||||||||||
Noninterest expense (income) |
1,796 | 1,671 | 125 | 7 | ||||||||||||||||||||||||||||||||||||||||||
Credit expense (income) |
(209 | ) | 222 | (431 | ) | nm | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
916 | 572 | 344 | 60 | ||||||||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
278 | 181 | 97 | 54 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Net income (loss) including noncontrolling interests |
638 | 391 | 247 | 63 | ||||||||||||||||||||||||||||||||||||||||||
Deduct: Net loss from noncontrolling interests (2) |
11 | 10 | 1 | 10 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to UNBC |
$ | 649 | $ | 401 | $ | 248 | 62 | % | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||
Average balances - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions): |
||||||||||||||||||||||||||||||||||||||||||||||
Total loans held for investment |
$ | 49,121 | $ | 47,598 | $ | 1,523 | 3 | |||||||||||||||||||||||||||||||||||||||
Total assets |
80,870 | 84,186 | (3,316 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
Total deposits |
59,129 | 69,910 | (10,781 | ) | (15 | ) | ||||||||||||||||||||||||||||||||||||||||
Financial ratios - Market View |
||||||||||||||||||||||||||||||||||||||||||||||
Return on average assets (1) |
1.07 | % | 0.64 | % | ||||||||||||||||||||||||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization (3) |
67.13 | 61.68 |
(1) | Annualized. |
(2) | Reflects net loss attributed to noncontrolling interest related to our consolidated VIEs. |
(3) | The core efficiency ratio, excluding impact of privatization, a non-GAAP financial measure, is net noninterest expense (noninterest expense excluding privatization-related expenses and fair value amortization/accretion, foreclosed asset expense, (reversal of) provision for losses on off-balance sheet commitments, low income housing credit investment amortization expense, expenses of the consolidated VIEs, merger costs related to the acquisitions of certain assets and assumption of certain liabilities of Frontier and Tamalpais and asset impairment charge) as a percentage of total revenue (net interest income (taxable-equivalent basis) and noninterest income). Management discloses the core efficiency ratio as a measure of the efficiency of our operations, focusing on those costs most relevant to our core activities. |
na = not applicable
nm = not meaningful
28
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Retail Banking
Retail Banking provides deposit and lending products delivered through our branches and relationship managers to individuals and small businesses. Retail Banking is focused on executing a strategy that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and sales strategies to attract new customers in these identified target markets.
Retail Banking is comprised of two major divisions:
| the Community Banking Division serves its customers through 353 full-service branches in California and 50 full-service branches in Oregon and Washington. Customers may also access our services 24 hours-a-day by telephone or through our website at www.unionbank.com. In addition, the branches offer automated teller and point-of-sale merchant services. |
The Community Banking Division is organized geographically and serves its customers in the following ways:
| through banking branches and ATMs which serve consumers and businesses with checking and deposit products and services, as well as various types of consumer financing and investment services; |
| through its call center and internet banking services, which augment its physical delivery channels by providing an array of customer transaction, bill payment and loan payment services; and |
| through alliances with other financial institutions, the Community Banking Division offers additional products and services, such as credit cards and merchant services. |
| the Consumer Lending Division provides the centralized origination, underwriting, processing, servicing, collection and administration for consumer assets including residential mortgages. |
During the nine months ended September 30, 2011, net income of Retail Banking decreased 7 percent compared to the same period in 2010, resulting from a 15 percent increase in noninterest expense, partially offset by a 12 percent increase in net interest income. The increase in noninterest expense was primarily due to higher staff and other costs allocated from support groups as well as higher staff costs and ongoing acquisition-related expenses. The increase in net interest income was primarily due to the growth in loans and deposits along with a decline in the funding charge for loans, which outpaced the rate of decline in the loan yields.
Average asset growth for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was primarily driven by a 5 percent growth in average loans held for investment, mainly in residential mortgages.
Average deposits increased 8 percent during the nine months ended September 30, 2011 compared to the same period in 2010. The key drivers for this increase include acquisition-related deposits and Retail Bankings strategy, which continues to focus on marketing activities to attract new consumer and small business deposits, customer cross-sell, and relationship management.
Corporate Banking
Corporate Banking offers a range of financial products to both middle market and corporate businesses headquartered throughout the U.S. Corporate Banking focuses its activities on specific specialized industries, such as power and utilities, petroleum, real estate, healthcare, equipment leasing and commercial finance as well as general corporate and middle-market lending in regional markets throughout the U.S. Corporate Banking relationship managers provide credit services including commercial loans, accounts receivable and inventory financing, project financing, trade financing and real estate financing. In addition to credit services, Corporate Banking offers its customers a range of noncredit services, which include global treasury management solutions, foreign exchange and various interest rate risk and commodity risk management products. These products are delivered through deposit managers and product specialists with significant industry expertise and experience in businesses of all sizes, including numerous vertical industry niches such as U.S. correspondent banks and certain government entities.
One of the primary strategies of our Corporate Banking business units is to target industries and companies for which we can reasonably expect to be one of a customers primary banks. Consistent with this strategy, Corporate Banking business units attempt to serve a large part of the targeted customers credit and depository needs. The Corporate Banking business units compete with other banks primarily on the basis of the quality of our relationship managers, the level of industry expertise, the delivery of quality customer service, and our reputation as a commercial bank. We also compete with a variety of other financial services companies as well as non-bank companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies and insurance companies.
Corporate Banking initiatives continue to expand commercial and loan relationship strategies that include originating, underwriting and syndicating loans in core competency markets, such as in our West Coast commercial lending markets, as well as our national specialty markets, including real estate, energy, equipment leasing and commercial finance.
29
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Corporate Banking is comprised of the following main divisions:
| the Commercial Banking Division, which includes the following operating units: |
| Commercial Banking, which provides commercial lending products and treasury management services to middle market and corporate companies primarily in California, Oregon and Washington; |
| Power and Utilities, which provides treasury management products and commercial lending products including commercial lines of credit and project financing to independent power producers as well as regulated utility companies; |
| Petroleum, which provides commercial lending products, including reserve-based lines of credit, commercial lines of credit as well as treasury management products to oil and gas companies; |
| National Banking provides commercial lending and treasury management products to corporate clients on a national basis, in states outside of California, Oregon, and Washington. National Banking also targets certain defined industries, such as healthcare, entertainment, and food and beverage; and |
| Specialized Industries provides commercial lending and treasury products to middle-market and corporate clients in specific industries on a national basis, including commercial finance, funds finance, environmental services and non-profits. |
| the Real Estate Industries Division serves professional real estate investors and developers with products such as construction loans, commercial mortgages and bridge financing. Additionally, through our Community Development Finance unit, we make tax credit investments in affordable housing projects, as well as provide construction and permanent financing; |
| the Global Capital Markets Division helps to serve our customers with their foreign exchange, interest rate and energy risk management needs in addition to facilitating merchant and investment banking related transactions. The division takes market risk when buying and selling securities, interest rate derivatives and foreign exchange contracts for its own account and accepts limited market risk when providing commodity and equity derivative contracts, since a significant portion of the market risk for these products is offset with third parties. Additionally, the divisions Equipment Leasing arm provides lease financing services to corporate customers; |
| the Global Treasury Management Division targets numerous industry relationship markets with deep industry and product expertise. The Global Treasury Management Division provides working capital solutions to meet deposit, investment and global treasury management services to businesses of all sizes. This division manages Union Banks web strategies for retail, small business, wealth management and commercial clients, as well as commercial product development. Additionally, this division includes the Institutional Services operating unit, which provides custody, corporate trust, and retirement plan services. The client base of this operating unit includes financial institutions, corporations, government agencies, unions, insurance companies, mutual funds, investment managers and non-profit organizations. 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, and provides escrow services and trustee services for project finance. Retirement Plan Services provides defined benefit services, including trustee services and investment management; and |
| the Wealth Markets Division consists of the following operating units: |
| 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, foundations and endowments. Specific products and services include trust and estate services, financial planning, investment account management services, and deposit and credit products; |
| UnionBanc Investment Services LLC (UBIS) is a subsidiary of Union Bank and is our registered broker-dealer and registered investment advisor. UBIS provides services to retail and institutional clients in several core products areas, including annuities, mutual funds, and fixed income products. Retail services are delivered through dedicated investment specialists located throughout the Banks geographical footprint. Institutional services are delivered through a dedicated trading desk and sales force specializing in fixed income products; and |
| Asset Management, which consists of HighMark Capital Management, Inc., a subsidiary of Union Bank and a registered investment advisor, provides investment management and advisory services to institutional clients as well as investment advisory, administration and support services to our proprietary mutual funds, the affiliated |
HighMark Funds. It also provides investment management services to Union Bank with respect to most of its trust and agency clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc.s strategy is to expand distribution, to broaden its client base and to increase its assets under management. |
30
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
During the nine months ended September 30, 2011, net income of Corporate Banking increased 25 percent, compared to the same period in 2010, primarily resulting from a 2 percent increase in net interest income, an 8 percent increase in noninterest income and a 33 percent decrease in credit expense. During the nine months ended September 30, 2011, average loans held for investment increased 1 percent compared to the same period in 2010, primarily due to increases in our commercial and industrial loan portfolio, partially offset by a decrease in our real estate construction loan portfolio.
During the nine months ended September 30, 2011, average deposits decreased 21 percent compared to the same period in 2010, primarily due to a decrease in interest bearing core deposits. This planned deposit decline resulted primarily from targeted rate reductions.
Noninterest income increased 8 percent during the nine months ended September 30, 2011, compared to the same period in 2010, primarily due to higher merchant banking fees, partially offset by lower deposit fees.
Other
Other includes the following:
| The Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies headquartered in either Japan or the U.S.; |
| the funds transfer pricing results for our entire company, which allocates to the business segments their cost of funds on all asset categories and credit for funds on all liability categories; |
| Corporate Treasury, which is responsible for our ALM, wholesale funding and the ALM investment and derivatives hedging portfolios. These Treasury management activities are carried out to manage the net interest rate and liquidity risks of our balance sheet and to manage those risks within the guidelines established by ALCO. For additional discussion regarding these risk management activities, see Quantitative and Qualitative Disclosures About Market Risk in Part I, Item 2 of this Form 10-Q; |
| the adjustment between the credit expense (income) under RAROC and (reversal of) provision for credit losses under US GAAP; |
| the residual costs of support groups; |
| corporate activities that are not directly attributable to one of the two business segments. Included in this category are certain other items such as the results of operations of certain non-bank subsidiaries of UnionBanCal and the elimination of the fully taxable-equivalent basis amount; |
| goodwill, intangible assets, and related amortization/accretion associated with our privatization transaction; |
| the FDIC covered assets; and |
| the adjustment between the tax expense calculated using the adjusted statutory tax rate of 39.1 percent and our consolidated effective tax rate. |
The increase in net income of $185 million for the nine months ended September 30, 2011 compared with the nine months ended September 30, 2010 is primarily due to the following factors:
| an increase in credit income of $358 million, which reflects the improvement in credit quality of our loan portfolio. Credit income of $372 million for the nine months ended September 30, 2011 was due to the difference between the $209 million reversal of provision for loan losses calculated under our US GAAP methodology and the $163 million in expected losses for the reportable business segments, which utilizes the RAROC methodology. This compares to a credit income of $14 million in the nine months ended September 30, 2010; |
| noninterest income decreased $33 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This decrease is due to lower gains on the sales of ALM investment securities and a decrease in indemnification asset accretion, driven by better than expected FDIC covered loan performance; and |
| noninterest expense increased $26 million in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This increase is due to higher staff costs, partially offset by an increase in the reversal of the provision for losses on off-balance sheet commitments. |
31
UnionBanCal Corporation and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
A discussion of our market risk exposure is incorporated by reference to Part I, Item 2 of this Form 10-Q under the caption Quantitative and Qualitative Disclosures About Market Risk and to Part II, Item 1A of this Form 10-Q under the caption Risk Factors.
Item 4. | Controls and Procedures |
Disclosure Controls. Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2011. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is recorded, processed, summarized and reported in a timely manner and in accordance with SECs rules and regulations and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Controls Over Financial Reporting. During the three months ended September 30, 2011, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
32
Item 1. | Financial Statements |
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||||||||
(Dollars in millions) |
2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Interest Income |
||||||||||||||||||||||
Loans |
$ | 576 | $ | 582 | $ | 1,700 | $ | 1,690 | ||||||||||||||
Securities |
123 | 132 | 404 | 410 | ||||||||||||||||||
Other |
3 | 2 | 6 | 12 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total interest income |
702 | 716 | 2,110 | 2,112 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Interest Expense |
||||||||||||||||||||||
Deposits |
53 | 70 | 159 | 234 | ||||||||||||||||||
Commercial paper and other short-term borrowings |
2 | 1 | 5 | 4 | ||||||||||||||||||
Long-term debt |
41 | 27 | 108 | 81 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total interest expense |
96 | 98 | 272 | 319 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net Interest Income |
606 | 618 | 1,838 | 1,793 | ||||||||||||||||||
(Reversal of) provision for loan losses |
(13 | ) | 8 | (209 | ) | 222 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net interest income after (reversal of) provision for loan losses |
619 | 610 | 2,047 | 1,571 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Noninterest Income |
||||||||||||||||||||||
Service charges on deposit accounts |
57 | 62 | 170 | 192 | ||||||||||||||||||
Trust and investment management fees |
33 | 33 | 101 | 99 | ||||||||||||||||||
Trading account activities |
27 | 32 | 88 | 78 | ||||||||||||||||||
Merchant banking fees |
27 | 19 | 75 | 55 | ||||||||||||||||||
Securities gains, net |
1 | 11 | 58 | 72 | ||||||||||||||||||
Brokerage commissions and fees |
12 | 11 | 37 | 30 | ||||||||||||||||||
Card processing fees, net |
11 | 10 | 33 | 31 | ||||||||||||||||||
Other |
17 | 40 | 103 | 115 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total noninterest income |
185 | 218 | 665 | 672 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Noninterest Expense |
||||||||||||||||||||||
Salaries and employee benefits |
348 | 293 | 1,038 | 892 | ||||||||||||||||||
Net occupancy and equipment |
64 | 65 | 196 | 188 | ||||||||||||||||||
Professional and outside services |
55 | 54 | 154 | 143 | ||||||||||||||||||
Intangible asset amortization |
25 | 31 | 74 | 93 | ||||||||||||||||||
Regulatory assessments |
14 | 30 | 54 | 90 | ||||||||||||||||||
(Reversal of) provision for losses on off-balance sheet commitments |
- | (8 | ) | (31 | ) | (12 | ) | |||||||||||||||
Other |
97 | 97 | 311 | 277 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total noninterest expense |
603 | 562 | 1,796 | 1,671 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes and including noncontrolling interests |
201 | 266 | 916 | 572 | ||||||||||||||||||
Income tax expense |
33 | 99 | 278 | 181 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net Income including Noncontrolling Interests |
168 | 167 | 638 | 391 | ||||||||||||||||||
Deduct: Net loss from noncontrolling interests |
4 | 3 | 11 | 10 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net Income attributable to UnionBanCal Corporation (UNBC) |
$ | 172 | $ | 170 | $ | 649 | $ | 401 | ||||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
33
UnionBanCal Corporation and Subsidiaries
(Unaudited)
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
||||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 1,277 | $ | 946 | ||||||||
Interest bearing deposits in banks (includes $7 at September 30, 2011 and $11 at December 31, 2010 related to consolidated variable interest entities (VIEs)) |
2,757 | 217 | ||||||||||
Federal funds sold and securities purchased under resale agreements |
28 | 11 | ||||||||||
|
|
|
|
|||||||||
Total cash and cash equivalents |
4,062 | 1,174 | ||||||||||
Trading account assets (includes $6 at September 30, 2011 and $43 at December 31, 2010 of assets pledged as collateral) |
1,120 | 999 | ||||||||||
Securities available for sale (includes $10 at December 31, 2010 of securities pledged as collateral) |
19,633 | 20,791 | ||||||||||
Securities held to maturity (Fair value: September 30, 2011, $1,474; December 31, 2010, $1,560) |
1,329 | 1,323 | ||||||||||
Loans held for investment: |
||||||||||||
Loans, excluding Federal Deposit Insurance Corporation (FDIC) covered loans |
49,904 | 46,584 | ||||||||||
FDIC covered loans |
1,094 | 1,510 | ||||||||||
|
|
|
|
|||||||||
Total loans held for investment |
50,998 | 48,094 | ||||||||||
Allowance for loan losses |
(768 | ) | (1,191 | ) | ||||||||
|
|
|
|
|||||||||
Loans held for investment, net |
50,230 | 46,903 | ||||||||||
Premises and equipment, net |
673 | 712 | ||||||||||
Intangible assets Goodwill |
383 | 457 | ||||||||||
2,447 | 2,456 | |||||||||||
FDIC indemnification asset |
616 | 783 | ||||||||||
Other assets (includes $290 at September 30, 2011 and $283 at December 31, 2010 related to consolidated VIEs) |
3,520 | 3,499 | ||||||||||
|
|
|
|
|||||||||
Total assets |
$ | 84,013 | $ | 79,097 | ||||||||
|
|
|
|
|||||||||
Liabilities |
||||||||||||
Deposits: |
||||||||||||
Noninterest bearing |
$ | 19,630 | $ | 16,343 | ||||||||
Interest bearing |
40,824 | 43,611 | ||||||||||
|
|
|
|
|||||||||
Total deposits |
60,454 | 59,954 | ||||||||||
Commercial paper and other short-term borrowings |
2,455 | 1,356 | ||||||||||
Long-term debt (includes $8 at September 30, 2011 and December 31, 2010 related to consolidated VIEs) |
7,064 | 5,598 | ||||||||||
Trading account liabilities |
946 | 774 | ||||||||||
Other liabilities (includes $3 at September 30, 2011 and $2 at December 31, 2010 related to consolidated VIEs) |
1,925 | 1,024 | ||||||||||
|
|
|
|
|||||||||
Total liabilities |
72,844 | 68,706 | ||||||||||
|
|
|
|
|||||||||
Commitments, contingencies and guaranteesSee Note 13 |
||||||||||||
Equity |
||||||||||||
UNBC Stockholders Equity: |
||||||||||||
Preferred stock: |
||||||||||||
Authorized 5,000,000 shares; no shares issued or outstanding |
- | - | ||||||||||
Common stock, par value $1 per share: |
||||||||||||
Authorized 300,000,000 shares; 136,330,829 shares issued |
136 | 136 | ||||||||||
Additional paid-in capital |
5,203 | 5,198 | ||||||||||
Retained earnings |
6,117 | 5,468 | ||||||||||
Accumulated other comprehensive loss |
(556 | ) | (677 | ) | ||||||||
|
|
|
|
|||||||||
Total UNBC stockholders equity |
10,900 | 10,125 | ||||||||||
Noncontrolling interests |
269 | 266 | ||||||||||
|
|
|
|
|||||||||
Total equity |
11,169 | 10,391 | ||||||||||
|
|
|
|
|||||||||
Total liabilities and equity |
$ | 84,013 | $ | 79,097 | ||||||||
|
|
|
|
See accompanying notes to consolidated financial statements.
34
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
UNBC Stockholders Equity | ||||||||||||||||||||||||||||||||||||
(Dollars in millions) |
Common stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive income (loss) |
Noncontrolling interests |
Total stockholders equity |
||||||||||||||||||||||||||||||
BALANCE DECEMBER 31, 2009 |
$ | 136 | $ | 5,195 | $ | 4,900 | $ | (651 | ) | $ | - | $ | 9,580 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Cumulative effect from change in accounting for VIEs |
272 | 272 | ||||||||||||||||||||||||||||||||||
Cumulative effect from change in accounting for embedded credit derivatives, net of tax |
(5 | ) | 7 | 2 | ||||||||||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income (loss) - For the nine months ended September 30, 2010 |
401 | (10 | ) | 391 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||||||||||
Net change in unrealized gains on cash flow hedges |
(51 | ) | (51 | ) | ||||||||||||||||||||||||||||||||
Net change in unrealized losses on securities |
190 | 190 | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
1 | 1 | ||||||||||||||||||||||||||||||||||
Net change in pension and other benefits |
11 | 11 | ||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
Total comprehensive income, net of tax |
542 | |||||||||||||||||||||||||||||||||||
Other |
11 | 11 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Net change |
- | - | 396 | 158 | 273 | 827 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE SEPTEMBER 30, 2010 |
$ | 136 | $ | 5,195 | $ | 5,296 | $ | (493 | ) | $ | 273 | $ | 10,407 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE DECEMBER 31, 2010 |
$ | 136 | $ | 5,198 | $ | 5,468 | $ | (677 | ) | $ | 266 | $ | 10,391 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income (loss) - For the nine months ended |
649 | (11 | ) | 638 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||||||||||
Net change in unrealized gains on cash flow hedges |
(3 | ) | (3 | ) | ||||||||||||||||||||||||||||||||
Net change in unrealized losses on securities |
96 | 96 | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
(1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||
Net change in pension and other benefits |
29 | 29 | ||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
Total comprehensive income, net of tax |
759 | |||||||||||||||||||||||||||||||||||
Compensation expenserestricted stock units |
5 | 5 | ||||||||||||||||||||||||||||||||||
Other |
14 | 14 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Net change |
- | 5 | 649 | 121 | 3 | 778 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE SEPTEMBER 30, 2011 |
$ | 136 | $ | 5,203 | $ | 6,117 | $ | (556 | ) | $ | 269 | $ | 11,169 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
35
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine
Months Ended September 30, |
||||||||||||
(Dollars in millions) |
2011 | 2010 | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net income including noncontrolling interests |
$ | 638 | $ | 391 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||||
(Reversal of) provision for loan losses |
(209 | ) | 222 | |||||||||
(Reversal of) provision for losses on off-balance sheet commitments |
(31 | ) | (12 | ) | ||||||||
Depreciation, amortization and accretion, net |
157 | 185 | ||||||||||
Stock-based compensation - restricted stock units |
5 | - | ||||||||||
Deferred income taxes |
185 | 31 | ||||||||||
Net gains on sales of securities |
(58 | ) | (72 | ) | ||||||||
Net decrease (increase) in trading account assets |
(121 | ) | (446 | ) | ||||||||
Net decrease (increase) in prepaid expenses |
55 | (10 | ) | |||||||||
Net decrease (increase) in fees and other receivable |
(93 | ) | (161 | ) | ||||||||
Net decrease (increase) in other assets |
51 | 143 | ||||||||||
Net increase (decrease) in accrued expenses |
(4 | ) | 78 | |||||||||
Net increase (decrease) in trading account liabilities |
171 | 457 | ||||||||||
Net increase (decrease) in other liabilities |
824 | 105 | ||||||||||
Loans originated for resale |
(17 | ) | - | |||||||||
Net proceeds from sale of loans originated for resale |
19 | - | ||||||||||
Other, net |
(74 | ) | (1 | ) | ||||||||
|
|
|
|
|||||||||
Total adjustments |
860 | 519 | ||||||||||
|
|
|
|
|||||||||
Net cash provided by (used in) operating activities |
1,498 | 910 | ||||||||||
|
|
|
|
|||||||||
Cash Flows from Investing Activities: |
||||||||||||
Proceeds from sales of securities available for sale |
4,463 | 3,137 | ||||||||||
Proceeds from matured and called securities available for sale |
3,941 | 8,218 | ||||||||||
Purchases of securities available for sale |
(7,083 | ) | (6,721 | ) | ||||||||
Proceeds from matured securities held to maturity |
74 | 5 | ||||||||||
Purchases of premises and equipment, net |
(44 | ) | (72 | ) | ||||||||
Proceeds from sales of loans |
186 | 360 | ||||||||||
Net decrease (increase) in loans |
(3,376 | ) | 541 | |||||||||
Proceeds from FDIC loss share agreements |
134 | 95 | ||||||||||
Net cash acquired from acquisitions |
- | 272 | ||||||||||
Other, net |
(3 | ) | (7 | ) | ||||||||
|
|
|
|
|||||||||
Net cash provided by (used in) investing activities |
(1,708 | ) | 5,828 | |||||||||
|
|
|
|
|||||||||
Cash Flows from Financing Activities: |
||||||||||||
Net increase (decrease) in deposits |
500 | (9,865 | ) | |||||||||
Net increase (decrease) in commercial paper and other short-term borrowings |
1,099 | (657 | ) | |||||||||
Proceeds from issuance of long-term debt |
2,000 | 1,250 | ||||||||||
Repayment of long-term debt |
(513 | ) | (1,519 | ) | ||||||||
Other, net |
(2 | ) | 1 | |||||||||
Change in noncontrolling interests |
14 | 11 | ||||||||||
|
|
|
|
|||||||||
Net cash provided by (used in) financing activities |
3,098 | (10,779 | ) | |||||||||
|
|
|
|
|||||||||
Net change in cash and cash equivalents |
2,888 | (4,041 | ) | |||||||||
Cash and cash equivalents at beginning of period |
1,174 | 8,226 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
- | 1 | ||||||||||
|
|
|
|
|||||||||
Cash and cash equivalents at end of period |
$ | 4,062 | $ | 4,186 | ||||||||
|
|
|
|
|||||||||
Cash Paid During the Period For: |
||||||||||||
Interest |
$ | 246 | $ | 300 | ||||||||
Income taxes, net |
117 | 99 | ||||||||||
Supplemental Schedule of Noncash Investing and Financing Activities: |
||||||||||||
Acquisitions: |
||||||||||||
Fair value of assets acquired |
$ | - | $ | 3,227 | ||||||||
Fair value of liabilities assumed |
- | 3,499 | ||||||||||
Net transfer of loans held for investment to loans held for sale |
198 | 417 | ||||||||||
Transfer of loans held for investment to other real estate owned assets (OREO) |
126 | 78 |
See accompanying notes to consolidated financial statements.
36
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 1 - Basis of Presentation and Nature of Operations
The unaudited consolidated financial statements of UnionBanCal Corporation, its subsidiaries, and its consolidated VIEs (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 (SEC). However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of the operating results anticipated for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in UnionBanCal Corporations Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
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 the 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. Although such estimates contemplate current conditions and managements expectations of how they may change in the future, it is reasonably possible that actual results could differ significantly from those estimates. This could materially affect the Companys results of operations and financial condition in the near term. Significant estimates made by management in the preparation of the Companys financial statements include, but are not limited to, the evaluation of other-than-temporary impairment on investment securities (Note 4), allowance for credit losses (Note 5), purchased credit-impaired loans (Note 5), annual goodwill impairment analysis, pension accounting (Note 7), valuing financial instruments (Note 10), and income taxes.
UnionBanCal Corporation is a financial holding company and commercial bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. The Company provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington, Texas, and New York, as well as nationally and internationally.
During the nine months ended September 30, 2011, payments received of $134 million related to the loss share agreements with the Federal Deposit Insurance Corporation (FDIC) in conjunction with the Companys FDIC-assisted acquisitions are disclosed separately as proceeds from FDIC loss share agreements and are classified within cash flows from investing activities. These proceeds were previously classified under cash flows from operating activities and totaled $95 million and $165 million in the third quarter and full year 2010, respectively.
Note 2 - Recently Issued Accounting Pronouncements That Are Not Yet Adopted
Goodwill- Impairment testing
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, IntangiblesGoodwill and Other (Topic 350)Testing Goodwill for Impairment (ASU 2011-08), which provides an option of performing a qualitative approach to determine whether further impairment testing is necessary. ASU 2011-08 permits an entity to first assess qualitatively whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, an entity must perform step one of the two-step goodwill impairment test. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Earlier adoption is permitted. Management does not expect the adoption of this guidance to impact the Companys financial position and results of operations.
Presentation of Comprehensive Income
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05), which removes the option of presenting comprehensive income in the Consolidated Statements of Changes in Stockholders Equity. ASU 2011-05 provides entities with an option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (OCI) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, entities must display adjustments for items that are reclassified from OCI to net income in both net income and OCI. This guidance does not change the items that must be reported in
OCI or when an item of OCI must be reclassified to net income. This guidance, related only to disclosures, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted.
37
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Fair Value Measurement and Disclosures
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between US GAAP and International Financial Reporting Standards. While many of the amendments to US GAAP are not expected to have a significant effect on practice, the new guidance changes some fair value measurement principles and disclosure requirements. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. Management is currently assessing the impact of this guidance on the Companys financial position and results of operations.
Reconsideration of Effective Control for Repurchase Agreements
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The update removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. This guidance is effective prospectively for transactions, or modifications of existing transactions, that occur on or after the first interim or annual period beginning on or after December 15, 2011. Management is currently assessing the impact of this guidance on the Companys financial position and results of operations.
Note 3 - Business Combinations
On April 30, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain liabilities of Frontier Bank, a Washington state-chartered commercial bank headquartered in Everett, Washington (Frontier). Additionally, on April 16, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain liabilities of Tamalpais Bank of San Rafael, California (Tamalpais). For further information related to the Tamalpais and Frontier acquisitions, see Note 2 to the consolidated financial statements in the Companys 2010 Form 10-K. In the first quarter of 2011, the Company recorded an adjustment, which reduced goodwill by $9 million, related to the value of expected interest income on the acquired loans and FDIC indemnification assets. For further information related to goodwill and intangibles, see Note 5 to the consolidated financial statements in the Companys 2010 Form 10-K.
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below.
Securities Available for Sale
September 30, 2011 | ||||||||||||||||
(Dollars in millions) |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
U.S. government sponsored agencies |
$ | 5,570 | $ | 42 | $ | 1 | $ | 5,611 | ||||||||
Residential mortgage-backed securities: |
||||||||||||||||
U.S. government and government sponsored agencies |
11,630 | 184 | 6 | 11,808 | ||||||||||||
Privately issued |
851 | 1 | 58 | 794 | ||||||||||||
Commercial mortgage-backed securities |
859 | 3 | 5 | 857 | ||||||||||||
Asset-backed securities |
287 | 1 | - | 288 | ||||||||||||
Other debt securities |
183 | 9 | 2 | 190 | ||||||||||||
Equity securities |
85 | - | - | 85 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 19,465 | $ | 240 | $ | 72 | $ | 19,633 | ||||||||
|
|
|
|
|
|
|
|
38
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
December 31, 2010 | ||||||||||||||||
(Dollars in millions) |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
U.S. Treasury |
$ | 150 | $ | - | $ | - | $ | 150 | ||||||||
U.S. government sponsored agencies |
6,689 | 75 | - | 6,764 | ||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
U.S. government and government sponsored agencies |
12,743 | 138 | 125 | 12,756 | ||||||||||||
Privately issued |
710 | 4 | 32 | 682 | ||||||||||||
Commercial mortgage-backed securities |
3 | - | 1 | 2 | ||||||||||||
Asset-backed securities |
240 | - | - | 240 | ||||||||||||
Other debt securities |
151 | 6 | - | 157 | ||||||||||||
Equity securities |
40 | 1 | 1 | 40 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 20,726 | $ | 224 | $ | 159 | $ | 20,791 | ||||||||
|
|
|
|
|
|
|
|
Securities Held to Maturity
September 30, 2011 | ||||||||||||||||||||||||||||
Recognized in Other Comprehensive Income (OCI) |
Not Recognized in OCI |
|||||||||||||||||||||||||||
(Dollars in millions) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Carrying Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||||||||||
Collateralized loan obligations (CLOs) |
$ | 1,728 | $ | - | $ | 399 | $ | 1,329 | $ | 151 | $ | 6 | $ | 1,474 | ||||||||||||||
|
|
|
|
|
|
|
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|
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|
|
|
|
|||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||
Recognized in OCI |
Not Recognized in OCI |
|||||||||||||||||||||||||||
(Dollars in millions) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Carrying Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||||||||||
CLOs |
$ | 1,778 | $ | - | $ | 455 | $ | 1,323 | $ | 238 | $ | 1 | $ | 1,560 | ||||||||||||||
|
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|
For securities held to maturity, the amount recognized in OCI reflects the unrealized loss at date of transfer to the held to maturity classification, net of amortization, while the amount not recognized in OCI reflects the incremental change in value after such transfer. Amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of a purchase discount or premium, less principal payments and any impairment previously recognized in earnings.
The amortized cost, fair value and carrying value of securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because of prepayments.
Maturity Schedule of Securities
Securities Available for Sale
September 30, 2011 | ||||||||
(Dollars in millions) |
Amortized Cost |
Fair Value | ||||||
Due in one year or less |
$ | 2,600 | $ | 2,614 | ||||
Due after one year through five years |
3,412 | 3,449 | ||||||
Due after five years through ten years |
712 | 736 | ||||||
Due after ten years |
12,656 | 12,749 | ||||||
No stated maturityequity securities |
85 | 85 | ||||||
|
|
|
|
|||||
Total securities available for sale |
$ | 19,465 | $ | 19,633 | ||||
|
|
|
|
39
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Securities Held to Maturity
September 30, 2011 | ||||||||||||
(Dollars in millions) |
Amortized Cost | Carrying Value | Fair Value | |||||||||
Due after one year through five years |
$ | 391 | $ | 325 | $ | 367 | ||||||
Due after five years through ten years |
1,269 | 958 | 1,057 | |||||||||
Due after ten years |
68 | 46 | 50 | |||||||||
|
|
|
|
|
|
|||||||
Total securities held to maturity |
$ | 1,728 | $ | 1,329 | $ | 1,474 | ||||||
|
|
|
|
|
|
The proceeds from sales of securities available for sale and gross realized gains for the three and nine months ended September 30, 2011 and 2010 are shown below. There were no gross realized losses for the same periods. The specific identification method is used to calculate realized gains and losses on sales. The table below excludes losses from other-than-temporary impairment.
Sales of Securities Available for Sale
For the Three Months Ended September 30, |
For the Nine Months
Ended September 30, |
|||||||||||||||
(Dollars in millions) |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Proceeds from sales |
$ | 632 | $ | 1,047 | $ | 4,463 | $ | 3,137 | ||||||||
Gross realized gains |
1 | 14 | 59 | 79 |
Analysis of Unrealized Losses on Securities
At September 30, 2011 and December 31, 2010, the Companys securities with a continuous unrealized loss position are shown below, separately for periods less than 12 months and 12 months or more.
Securities Available for Sale
September 30, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
(Dollars in millions) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
U.S. government sponsored agencies |
$ | 804 | $ | 1 | $ | - | $ | - | $ | 804 | $ | 1 | ||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||
U.S. government and government sponsored agencies |
1,601 | 5 | 74 | 1 | 1,675 | 6 | ||||||||||||||||||
Privately issued |
561 | 22 | 82 | 36 | 643 | 58 | ||||||||||||||||||
Commercial mortgage-backed securities |
463 | 4 | 2 | 1 | 465 | 5 | ||||||||||||||||||
Asset-backed securities |
28 | - | - | - | 28 | - | ||||||||||||||||||
Other debt securities |
23 | 2 | 3 | - | 26 | 2 | ||||||||||||||||||
Equity securities |
4 | - | - | - | 4 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total securities available for sale |
$ | 3,484 | $ | 34 | $ | 161 | $ | 38 | $ | 3,645 | $ | 72 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
(Dollars in millions) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
U.S. government sponsored agencies |
$ | 240 | $ | - | $ | - | $ | - | $ | 240 | $ | - | ||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||
U.S. government and government sponsored agencies |
6,320 | 125 | 35 | - | 6,355 | 125 | ||||||||||||||||||
Privately issued |
140 | 1 | 165 | 31 | 305 | 32 | ||||||||||||||||||
Commercial mortgage-backed securities |
- | - | 2 | 1 | 2 | 1 | ||||||||||||||||||
Asset-backed securities |
110 | - | - | - | 110 | - | ||||||||||||||||||
Other debt securities |
1 | - | 20 | - | 21 | - | ||||||||||||||||||
Equity securities |
5 | 1 | - | - | 5 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total securities available for sale |
$ | 6,816 | $ | 127 | $ | 222 | $ | 32 | $ | 7,038 | $ | 159 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
40
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Securities Held to Maturity
September 30, 2011 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
Unrealized Losses | Unrealized Losses | Unrealized Losses | ||||||||||||||||||||||||||||||||||
(Dollars in millions) |
Fair Value |
Recognized in OCI |
Not Recognized in OCI |
Fair Value |
Recognized in OCI |
Not Recognized in OCI |
Fair Value |
Recognized in OCI |
Not Recognized in OCI |
|||||||||||||||||||||||||||
CLOs |
$ | 57 | $ | - | $ | 3 | $ | 1,408 | $ | 399 | $ | 3 | $ | 1,465 | $ | 399 | $ | 6 | ||||||||||||||||||
|
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|
|
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|
|
|
|
|
|
|
|
|||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
Unrealized Losses | Unrealized Losses | Unrealized Losses | ||||||||||||||||||||||||||||||||||
(Dollars in millions) |
Fair Value |
Recognized in OCI |
Not Recognized in OCI |
Fair Value |
Recognized in OCI |
Not Recognized in OCI |
Fair Value |
Recognized in OCI |
Not Recognized in OCI |
|||||||||||||||||||||||||||
CLOs |
$ | - | $ | - | $ | - | $ | 1,558 | $ | 455 | $ | 1 | $ | 1,558 | $ | 455 | $ | 1 | ||||||||||||||||||
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|
At September 30, 2011, the Company did not have the intent to sell temporarily impaired securities until a recovery of the amortized cost, which may be at maturity. The Company also believes it is more likely than not that it will not have to sell the securities prior to recovery of amortized cost.
The following describes the nature of the Companys investments, the causes of impairment, the severity and duration of the impairment, if applicable, and the conclusions reached on the temporary or other-than-temporary status of the significant unrealized losses.
Residential Mortgage-Backed SecuritiesPrivately Issued
Non-agency residential mortgage-backed securities are privately issued by financial institutions with no guarantee from government sponsored entities. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The securities are primarily rated investment grade. The unrealized losses on non-agency residential mortgage-backed securities resulted from declining credit quality of underlying collateral and additional credit spread widening since purchase. The Company estimated loss projections for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using industry consensus estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Based on this assessment of expected credit losses of each security, impairment recognized during the nine months ended September 30, 2011 was not significant. With respect to the remaining portfolio at September 30, 2011, the Company expects to recover the entire amortized cost basis of these securities.
Collateralized Loan Obligations
The Companys CLOs primarily consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. Certain of these CLOs are illiquid securities for which fair values are difficult to obtain. Unrealized losses arise from widening credit spreads, credit quality of the underlying collateral, uncertainty regarding the valuation of such securities and the markets opinion of the performance of the fund managers. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Based on the analysis performed as of September 30, 2011, no other-than-temporary impairment was recorded.
Securities Pledged as Collateral
Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the same or substantially the same securities before maturity at a fixed or determinable price. The Companys policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
The Company separately identifies in the consolidated balance sheets, securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At September 30, 2011, the Company had
41
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
$4.8 billion of securities available for sale pledged as collateral where the secured party cannot resell or repledge such securities. These available for sale securities have been pledged to secure borrowings ($1.1 billion), to support unrealized losses on derivative transactions reported in trading liabilities ($0.6 billion) and to secure public and trust department deposits ($3.1 billion).
At September 30, 2011 and December 31, 2010, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $28 million ($14 million of which has been repledged to cover short sales) and $12 million ($1 million of which has been repledged to secure public agency or bankruptcy deposits and to cover short sales), respectively. These securities were received as collateral for secured lending and to obtain qualified securities to meet the Companys collateral needs.
Note 5 Loans and Allowance for Loan Losses
A summary of loans, net of unearned discount/premiums and deferred fees of $53 million and $70 million at September 30, 2011 and December 31, 2010, respectively, is as follows:
September 30, | December 31, | |||||||
(Dollars in millions) |
2011 | 2010 | ||||||
Loans held for investment, excluding FDIC covered loans: |
||||||||
Commercial and industrial |
$ | 17,545 | $ | 15,162 | ||||
Commercial mortgage |
7,927 | 7,816 | ||||||
Construction |
966 | 1,460 | ||||||
Lease financing |
693 | 757 | ||||||
|
|
|
|
|||||
Total commercial portfolio |
27,131 | 25,195 | ||||||
|
|
|
|
|||||
Residential mortgage |
19,043 | 17,531 | ||||||
Home equity and other consumer loans |
3,730 | 3,858 | ||||||
|
|
|
|
|||||
Total consumer portfolio |
22,773 | 21,389 | ||||||
|
|
|
|
|||||
Total loans held for investment, excluding FDIC covered loans |
49,904 | 46,584 | ||||||
FDIC covered loans |
1,094 | 1,510 | ||||||
|
|
|
|
|||||
Total loans held for investment |
50,998 | 48,094 | ||||||
Allowance for loan losses |
(768) | (1,191) | ||||||
|
|
|
|
|||||
Loans held for investment, net |
$ | 50,230 | $ | 46,903 | ||||
|
|
|
|
Loans Acquired in Business Combinations
The Company evaluated loans acquired in the Frontier and Tamalpais transactions in accordance with accounting guidance related to loans acquired with deteriorated credit quality as of the acquisition date. Management elected to account for all acquired loans, except for revolving lines of credit, within the scope of the accounting guidance related to loans acquired with deteriorated credit quality.
The acquired loans are referred to as covered loans as the Bank will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss share agreements. As of acquisition dates, the estimated fair value of the purchased credit-impaired loan portfolios of Frontier and Tamalpais subject to the loss share agreements represents the present value of expected cash flows from the portfolio. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents the estimated credit losses in the acquired loan portfolios at the acquisition date.
The accretable yield for purchased credit-impaired loans for the three and nine months ended September 30, 2011 was as follows:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(Dollars in millions) |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Accretable yield, begining of period |
$ | 350 | $ | 313 | $ | 231 | $ | - | ||||||||
Additions |
- | - | - | 335 | ||||||||||||
Accretion |
(54 | ) | (30 | ) | (132 | ) | (52 | ) | ||||||||
Reclassifications from nonacccretable difference during the period |
111 | - | 308 | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Accretable yield, end of period |
$ | 407 | $ | 283 | $ | 407 | $ | 283 | ||||||||
|
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|
|
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|
|
42
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The carrying value and outstanding balance for the purchased credit-impaired loans as of September 30, 2011, December 31, 2010 and as of the respective acquisition dates were as follows:
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
Acquisition Date |
|||||||||
Total outstanding balance |
$ | 2,272 | $ | 2,829 | $ | 3,153 | ||||||
|
|
|
|
|
|
|||||||
Carrying value |
$ | 1,038 | $ | 1,394 | $ | 1,725 | ||||||
|
|
|
|
|
|
The carrying value of other acquired loans totaled $56 million and $116 million as of September 30, 2011 and December 31, 2010, respectively. Acquired loans were recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses was not carried over or recorded as of the respective acquisition dates. The acquired loans are subject to the Banks internal credit review. When credit deterioration is noted subsequent to the respective acquisition dates, a provision for loan losses is charged to earnings, with a partial offset reflecting the increase to the FDIC indemnification asset for FDIC covered loans.
Allowance for Loan Losses
The following table provides a reconciliation of changes in the allowance for loan losses by portfolio segments.
For the Three Months Ended September 30, 2011 | For the Three Months Ended September 30, 2010 |
|||||||||||||||||||||||
(Dollars in millions) |
Commercial | Consumer | FDIC Covered |
Unallocated | Total | Total | ||||||||||||||||||
Allowance for loan losses, beginning of period |
$ | 475 | $ | 151 | $ | 17 | $ | 183 | $ | 826 | $ | 1,358 | ||||||||||||
(Reversal of) provision for loan losses |
30 | 13 | - | (56 | ) | (13 | ) | 8 | ||||||||||||||||
Provision for FDIC covered loan losses not subject to |
||||||||||||||||||||||||
FDIC indemnification |
- | - | - | - | - | - | ||||||||||||||||||
Decrease in allowance covered by FDIC indemnification |
- | - | - | - | - | - | ||||||||||||||||||
Other |
(1 | ) | - | - | - | (1 | ) | - | ||||||||||||||||
Loans charged off |
(35 | ) | (21 | ) | (1 | ) | - | (57 | ) | (102 | ) | |||||||||||||
Recoveries of loans previously charged off |
10 | 2 | 1 | - | 13 | 13 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses, end of period |
$ | 479 | $ | 145 | $ | 17 | $ | 127 | $ | 768 | $ | 1,277 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2011 | For the Nine Months Ended September 30, 2010 |
|||||||||||||||||||||||
(Dollars in millions) |
Commercial | Consumer | FDIC Covered |
Unallocated | Total | Total | ||||||||||||||||||
Allowance for loan losses, beginning of period |
$ | 683 | $ | 185 | $ | 25 | $ | 298 | $ | 1,191 | $ | 1,357 | ||||||||||||
(Reversal of) provision for loan losses |
(62 | ) | 26 | - | (171 | ) | (207 | ) | 222 | |||||||||||||||
Provision for FDIC covered loan losses not subject to |
||||||||||||||||||||||||
FDIC indemnification |
- | - | (2 | ) | - | (2 | ) | - | ||||||||||||||||
Decrease in allowance covered by FDIC indemnification |
- | - | (5 | ) | - | (5 | ) | - | ||||||||||||||||
Other |
(1 | ) | - | - | - | (1 | ) | - | ||||||||||||||||
Loans charged off |
(182 | ) | (69 | ) | (2 | ) | - | (253 | ) | (349 | ) | |||||||||||||
Recoveries of loans previously charged off |
41 | 3 | 1 | - | 45 | 47 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses, end of period |
$ | 479 | $ | 145 | $ | 17 | $ | 127 | $ | 768 | $ | 1,277 | ||||||||||||
|
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43
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following table shows the allowance for loans losses and related loan balances by portfolio segment as of September 30, 2011 and December 31, 2010.
September 30, 2011 | ||||||||||||||||||||
(Dollars in millions) |
Commercial | Consumer | FDIC covered loans |
Unallocated | Total | |||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 60 | $ | 12 | $ | 1 | $ | - | $ | 73 | ||||||||||
Collectively evaluated for impairment |
419 | 133 | - | 127 | 679 | |||||||||||||||
Purchased credit-impaired loans |
- | - | 16 | - | 16 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total allowance for loan losses |
$ | 479 | $ | 145 | $ | 17 | $ | 127 | $ | 768 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans held for investment: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 497 | $ | 125 | $ | 13 | $ | - | $ | 635 | ||||||||||
Collectively evaluated for impairment |
26,634 | 22,648 | 43 | - | 49,325 | |||||||||||||||
Purchased credit-impaired loans |
- | - | 1,038 | - | 1,038 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans held for investment |
$ | 27,131 | $ | 22,773 | $ | 1,094 | $ | - | $ | 50,998 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2010 | ||||||||||||||||||||
(Dollars in millions) |
Commercial | Consumer | FDIC covered loans |
Unallocated | Total | |||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 112 | $ | 8 | $ | - | $ | - | $ | 120 | ||||||||||
Collectively evaluated for impairment |
571 | 177 | - | 298 | 1,046 | |||||||||||||||
Purchased credit-impaired loans |
- | - | 25 | - | 25 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total allowance for loan losses |
$ | 683 | $ | 185 | $ | 25 | $ | 298 | $ | 1,191 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans held for investment: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 572 | $ | 79 | $ | 26 | $ | - | $ | 677 | ||||||||||
Collectively evaluated for impairment |
24,623 | 21,310 | 90 | - | 46,023 | |||||||||||||||
Purchased credit-impaired loans |
- | - | 1,394 | - | 1,394 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans held for investment |
$ | 25,195 | $ | 21,389 | $ | 1,510 | $ | - | $ | 48,094 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The Company maintains an allowance for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. The allowances are based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio and unused commitments to provide financing. The Companys methodology for measuring the appropriate level of the allowances relies on several key elements, which include the formula allowance, the specific allowance for impaired loans, the unallocated allowance and the allowance for off-balance sheet commitments.
Nonaccrual and Past Due Loans
Nonaccrual loans, excluding FDIC covered loans, totaled $0.7 billion and $0.8 billion at September 30, 2011 and December 31, 2010, respectively. There were $580 million and $220 million of TDR loans at September 30, 2011 and December 31, 2010, respectively. Loans 90 days or more past due and still accruing totaled $3 million at September 30, 2011 and $2 million at December 31, 2010.
44
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents nonaccrual loans as of September 30, 2011 and December 31, 2010.
(Dollars in millions) | September 30, 2011 | December 31, 2010 |
||||||
Commercial and industrial |
$ | 163 | $ | 115 | ||||
Commercial mortgage |
206 | 329 | ||||||
Construction |
16 | 140 | ||||||
|
|
|
|
|||||
Total commercial portfolio |
385 | 584 | ||||||
|
|
|
|
|||||
Residential mortgage |
259 | 243 | ||||||
Home equity and other consumer loans |
25 | 22 | ||||||
|
|
|
|
|||||
Total consumer portfolio |
284 | 265 | ||||||
|
|
|
|
|||||
Total nonaccrual loans, excluding FDIC covered loans |
669 | 849 | ||||||
FDIC covered loans |
56 | 116 | ||||||
|
|
|
|
|||||
Total nonaccrual loans |
$ | 725 | $ | 965 | ||||
|
|
|
|
|||||
Troubled debt restructured loans that continue to accrue interest |
$ | 226 | $ | 22 | ||||
|
|
|
|
|||||
Troubled debt restructured nonaccrual loans (included in total nonaccrual loans above) |
$ | 354 | $ | 198 | ||||
|
|
|
|
The following table shows an aging of the balance of loans held for investment, excluding FDIC covered loans, by class as of September 30, 2011 and December 31, 2010.
September 30, 2011 | ||||||||||||||||||||||||
Aging Analysis of Loans | 90 days or more past due |
|||||||||||||||||||||||
30 to 89 | 90 days or | |||||||||||||||||||||||
days past | more past | Total past | and still | |||||||||||||||||||||
(Dollars in millions) | Current | due | due | due | Total | accruing | ||||||||||||||||||
Commercial and industrial |
$ | 18,214 | $ | 15 | $ | 9 | $ | 24 | $ | 18,238 | $ | 1 | ||||||||||||
Commercial mortgage |
7,846 | 58 | 23 | 81 | 7,927 | 2 | ||||||||||||||||||
Construction |
930 | 36 | - | 36 | 966 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial portfolio |
26,990 | 109 | 32 | 141 | 27,131 | 3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential mortgage |
18,661 | 177 | 205 | 382 | 19,043 | - | ||||||||||||||||||
Home equity and other consumer loans |
3,688 | 22 | 20 | 42 | 3,730 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer portfolio |
22,349 | 199 | 225 | 424 | 22,773 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans held for investment, excluding FDIC covered loans |
$ | 49,339 | $ | 308 | $ | 257 | $ | 565 | $ | 49,904 | $ | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Aging Analysis of Loans | 90 days or more past due |
|||||||||||||||||||||||
30 to 89 | 90 days or | |||||||||||||||||||||||
days past | more past | Total past | and still | |||||||||||||||||||||
(Dollars in millions) | Current | due | due | due | Total | accruing | ||||||||||||||||||
Commercial and industrial |
$ | 15,866 | $ | 22 | $ | 31 | $ | 53 | $ | 15,919 | $ | 2 | ||||||||||||
Commercial mortgage |
7,695 | 71 | 50 | 121 | 7,816 | - | ||||||||||||||||||
Construction |
1,378 | 41 | 41 | 82 | 1,460 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial portfolio |
24,939 | 134 | 122 | 256 | 25,195 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential mortgage |
17,181 | 148 | 202 | 350 | 17,531 | - | ||||||||||||||||||
Home equity and other consumer loans |
3,819 | 20 | 19 | 39 | 3,858 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer portfolio |
21,000 | 168 | 221 | 389 | 21,389 | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans held for investment, excluding FDIC covered loans |
$ | 45,939 | $ | 302 | $ | 343 | $ | 645 | $ | 46,584 | $ | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
45
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Credit Quality Indicators
Management analyzes the Companys loan portfolios by applying specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics within the various loan portfolios. For further information related to the credit quality indicators the Company uses to monitor the portfolio, see Note 4 to the consolidated financial statements in the Companys 2010 Form 10-K.
The following tables summarize the loans in the commercial portfolio segment monitored for credit quality based on internal ratings, excluding $1.0 billion and $1.5 billion covered by FDIC loss share agreements, at September 30, 2011 and December 31, 2010, respectively. Amounts also exclude $541 million and $635 million at September 30, 2011 and December 31, 2010, respectively, of small business loans, which are monitored by business credit score and delinquency status; unamortized nonrefundable loan fees; and related direct loan origination costs.
September 30, 2011 | ||||||||||||||||
(Dollars in millions) | Commercial
and industrial |
Construction | Commercial mortgage |
Total | ||||||||||||
Pass |
$ | 16,437 | $ | 799 | $ | 6,713 | $ | 23,949 | ||||||||
Criticized |
706 | 154 | 1,112 | 1,972 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 17,143 | $ | 953 | $ | 7,825 | $ | 25,921 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2010 | ||||||||||||||||
(Dollars in millions) | Commercial and industrial |
Construction | Commercial mortgage |
Total | ||||||||||||
Pass |
$ | 13,982 | $ | 902 | $ | 6,205 | $ | 21,089 | ||||||||
Criticized |
1,235 | 623 | 1,526 | 3,384 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 15,217 | $ | 1,525 | $ | 7,731 | $ | 24,473 | ||||||||
|
|
|
|
|
|
|
|
The Company monitors the credit quality of its consumer segment based primarily on payment status. The following tables summarize the loans in the consumer portfolio segment, which excludes $89 million and $122 million of loans covered by FDIC loss share agreements, at September 30, 2011 and December 31, 2010, respectively.
September 30, 2011 | ||||||||||||
(Dollars in millions) | Accrual | Nonaccrual | Total | |||||||||
Residential mortgage |
$ | 18,784 | $ | 259 | $ | 19,043 | ||||||
Home equity and other consumer loans |
3,705 | 25 | 3,730 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 22,489 | $ | 284 | $ | 22,773 | ||||||
|
|
|
|
|
|
December 31, 2010 | ||||||||||||
(Dollars in millions) | Accrual | Nonaccrual | Total | |||||||||
Residential mortgage |
$ | 17,288 | $ | 243 | $ | 17,531 | ||||||
Home equity and other consumer loans |
3,836 | 22 | 3,858 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 21,124 | $ | 265 | $ | 21,389 | ||||||
|
|
|
|
|
|
46
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The Company also monitors the credit quality for substantially all of its consumer portfolio segment using the credit score provided by Fair Isaacs Corporation (FICO). FICO credit scores are refreshed at least on a quarterly basis to monitor the quality of the portfolio. The following table summarizes the loans in the consumer portfolio segment monitored for credit quality based on refreshed FICO scores at September 30, 2011, excluding loans serviced by third-party service providers and loans covered by FDIC loss share agreements, as discussed above. Amounts also exclude unamortized nonrefundable loan fees, related direct loan origination costs and the Companys privatization adjustments.
September 30, 2011 | ||||||||||||||||
(Dollars in millions) |
Residential mortgage | Home equity and other consumer loans |
Total | Percentage of total |
||||||||||||
FICO scores: |
||||||||||||||||
720 and above |
$ | 14,393 | $ | 2,614 | $ | 17,007 | 76 | % | ||||||||
Below 720 |
3,985 | 995 | 4,980 | 23 | ||||||||||||
No FICO available (1) |
245 | 69 | 314 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 18,623 | $ | 3,678 | $ | 22,301 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
(1) | Represents loans for which management was not able to obtain an updated FICO score (e.g., due to recent profile changes). |
Troubled Debt Restructurings
The Company adopted ASU 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02) as of July 1, 2011. This update provides additional guidance to creditors on evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (TDR) and clarifies the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties. Applying this new guidance, the Company reassessed its TDR determination for all loan modifications made to borrowers experiencing financial difficulty occurring on or after January 1, 2011. As of September 30, 2011, the recorded investment in TDRs for which the allowance for loan losses was previously measured under a formula allowance and is now measured on an individual loan basis was $215 million, and the related allowance for loan losses was $22 million. There was no significant impact to our allowance for loan losses as a result of adopting this guidance.
The following table provides a summary of the Companys TDRs as of September 30, 2011 and December 31, 2010. The summary includes those TDRs that are on nonaccrual status and those that continue to accrue interest. The Company had $33 million in commitments to lend additional funds to borrowers with loan modifications classified as TDRs as of September 30, 2011.
(Dollars in millions) | September 30, 2011 |
December 31, 2010 |
||||||
Commercial and industrial |
$ | 207 | $ | 30 | ||||
Commercial mortgage |
174 | 111 | ||||||
Construction |
67 | - | ||||||
|
|
|
|
|||||
Total commercial portfolio |
448 | 141 | ||||||
|
|
|
|
|||||
Residential mortgage |
121 | 79 | ||||||
Home equity and other consumer loans |
3 | - | ||||||
|
|
|
|
|||||
Total consumer portfolio |
124 | 79 | ||||||
|
|
|
|
|||||
FDIC covered loans |
8 | - | ||||||
|
|
|
|
|||||
Total troubled debt restructured loans |
$ |
580 |
|
$ | 220 | |||
|
|
|
|
For the three and nine months ended September 30, 2011, the significant TDR modifications made within our commercial and consumer portfolio segments were primarily long-term in nature. In the commercial and industrial, commercial mortgage and construction loan classes, modifications were primarily composed of interest rate concessions, maturity extensions, and payment deferrals, or some combination thereof. In the residential mortgage and home equity and other consumer loan classes, substantially all of the modifications were composed of interest rate reductions and maturity extensions. Charge-offs related to these TDR loan modifications were insignificant for the three and nine months ended September 30, 2011, respectively. For the commercial and
47
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
consumer portfolio segments, the allowance for loan losses for TDRs is measured on an individual loan basis or in pools with similar risk characteristics.
The following table provides the pre- and post-modification outstanding recorded investment amounts of TDRs as of the date of the restructuring for the three and nine months ended September 30, 2011.
For the three months ended | For the nine months ended | |||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||
Pre-modification | Post-modification | Pre-modification | Post-modification | |||||||||||||
outstanding | outstanding | outstanding | outstanding | |||||||||||||
recorded | recorded | recorded | recorded | |||||||||||||
(Dollars in millions) |
investment (1) | investment (1) | investment (1) | investment (1) | ||||||||||||
Commercial and industrial |
$ | 168 | $ | 162 | $ | 220 | $ | 213 | ||||||||
Commercial mortgage |
115 | 109 | 115 | 109 | ||||||||||||
Construction |
24 | 24 | 72 | 72 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial portfolio |
307 | 295 | 407 | 394 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential mortgage |
21 | 21 | 51 | 51 | ||||||||||||
Home equity and other consumer loans |
- | - | 3 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer portfolio |
21 | 21 | 54 | 54 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
FDIC covered loans |
9 | 9 | 12 | 12 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total troubled debt restructurings |
$ | 337 | $ | 325 | $ | 473 | $ | 460 | ||||||||
|
|
|
|
|
|
|
|
(1) | Represents pre- and post-modification amounts as of the date of restructuring. |
The following table provides the recorded investment amounts of TDRs as of September 30, 2011 which were modified within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2011. A payment default is defined as the loan being 60 days or more past due.
As of the three | As of the nine | |||||||
months ended | months ended | |||||||
(Dollars in millions) |
September 30, 2011 | September 30, 2011 | ||||||
Commercial and industrial |
$ | 8 | $ | 8 | ||||
Commercial mortgage |
8 | 33 | ||||||
Construction |
15 | 15 | ||||||
|
|
|
|
|||||
Total commercial portfolio |
31 | 56 | ||||||
|
|
|
|
|||||
Residential mortgage |
10 | 13 | ||||||
Home equity and other consumer loans |
- | - | ||||||
|
|
|
|
|||||
Total consumer portfolio |
10 | 13 | ||||||
|
|
|
|
|||||
FDIC covered loans |
5 | 5 | ||||||
|
|
|
|
|||||
Total troubled debt restructurings |
$ | 46 | $ | 74 | ||||
|
|
|
|
Loan Impairment
The Companys impaired loans generally include larger commercial and industrial, construction, commercial mortgage, and TDRs where it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the value of an impaired loan is less than the recorded investment in the loan, the Company records an impairment allowance.
48
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following tables show information about impaired loans by class as of September 30, 2011 and December 31, 2010.
September 30, 2011 | ||||||||||||||||||||||||||||
Recorded Investment | Allowance for impaired loans |
Unpaid principal balance | ||||||||||||||||||||||||||
With an | Without an | Average | With an | Without an | ||||||||||||||||||||||||
(Dollars in millions) |
allowance | allowance | Total | balance | allowance | allowance | ||||||||||||||||||||||
Commercial and industrial |
$ | 176 | $ | 54 | $ | 230 | $ | 43 | $ | 159 | $ | 183 | $ | 97 | ||||||||||||||
Commercial mortgage |
120 | 80 | 200 | 10 | 238 | 150 | 101 | |||||||||||||||||||||
Construction |
26 | 41 | 67 | 7 | 75 | 38 | 35 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial portfolio |
322 | 175 | 497 | 60 | 472 | 371 | 233 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Residential mortgage |
122 | - | 122 | 11 | 101 | 121 | - | |||||||||||||||||||||
Home equity and other consumer loans |
3 | - | 3 | 1 | 2 | 3 | - | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer portfolio |
125 | - | 125 | 12 | 103 | 124 | - | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total, excluding FDIC covered loans |
447 | 175 | 622 | 72 | 575 | 495 | 233 | |||||||||||||||||||||
FDIC covered loans |
3 | 10 | 13 | 1 | 19 | 7 | 26 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 450 | $ | 185 | $ | 635 | $ | 73 | $ | 594 | $ | 502 | $ | 259 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 | ||||||||||||||||||||||||||||
Recorded Investment | Allowance for impaired loans |
Unpaid principal balance | ||||||||||||||||||||||||||
With an | Without an | Average | With an | Without an | ||||||||||||||||||||||||
(Dollars in millions) |
allowance | allowance | Total | balance | allowance | allowance | ||||||||||||||||||||||
Commercial and industrial |
$ | 110 | $ | 3 | $ | 113 | $ | 31 | $ | 210 | $ | 138 | $ | 10 | ||||||||||||||
Commercial mortgage |
308 | 12 | 320 | 66 | 434 | 371 | 18 | |||||||||||||||||||||
Construction |
134 | 5 | 139 | 15 | 301 | 162 | 6 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial portfolio |
552 | 20 | 572 | 112 | 945 | 671 | 34 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Residential mortgage |
79 | - | 79 | 8 | 40 | 79 | - | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer portfolio |
79 | - | 79 | 8 | 40 | 79 | - | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total, excluding FDIC covered loans |
631 | 20 | 651 | 120 | 985 | 750 | 34 | |||||||||||||||||||||
FDIC covered loans |
1 | 25 | 26 | - | 5 | 11 | 45 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 632 | $ | 45 | $ | 677 | $ | 120 | $ | 990 | $ | 761 | $ | 79 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized for impaired loans during the third quarter of 2011 for the commercial, consumer and FDIC covered loan portfolio segments were $4.2 million, $1.7 million and $0.6 million, respectively. Interest income recognized for impaired loans during the nine months ended September 30, 2011 for the commercial, consumer and FDIC covered loan portfolio segments were $5.4 million, $3.9 million and $1.1 million, respectively.
The Company transferred $198 million of loans from held for investment to held for sale and sold $187 million in loans during the nine months ended September 30, 2011.
Note 6 - Variable Interest Entities, Private Capital and Other Investments
The Company is involved in various structures that are considered to be VIEs. Generally, a VIE is a corporation, partnership, trust or any other legal structure that has equity investors that: 1) do not have sufficient equity at risk for the entity to independently finance its activities; 2) lack the power to direct the activities that significantly impact the entitys economic success; and/or 3) do not have an obligation to absorb the entitys losses or the right to receive the entitys returns. The Companys investments in VIEs primarily consist of equity investments in low income housing credit (LIHC) structures and renewable energy projects, which are designed to generate a return primarily through the realization of federal tax credits, and private capital investments. For further information related to the Companys consolidated VIEs and those that were not consolidated, see Note 7 to the consolidated financial statements in the Companys 2010 Form 10-K.
Consolidated VIEs
At September 30, 2011, assets of $297 million and liabilities of $11 million were consolidated by the Company on its consolidated balance sheet related to two LIHC investment fund structures because the Company sponsors, manages and syndicates the funds. The assets are included in other assets as well as interest bearing deposits in banks, the liabilities are primarily included in long-term debt, and third-party investor interests are included in stockholders equity as noncontrolling interests. Neither creditors nor equity investors in the LIHC investments have any recourse to the general credit of the Company, and the Companys creditors do not have any recourse to the assets of the consolidated LIHC investments.
For the three months and nine months ended September 30, 2011, the Company recorded $6 million and $18 million of expenses related to its consolidated VIEs, respectively. For the three months and nine months ended September 30, 2010, the Company recorded $6 million and $17 million of expenses related to its consolidated VIEs, respectively. These expenses are included in other noninterest expense on the Companys consolidated statements of income.
49
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Unconsolidated VIEs in which the Company has a Variable Interest
The following table presents the Companys carrying amounts related to the unconsolidated VIEs and location on the consolidated balance sheet at September 30, 2011. The table also presents the Companys maximum exposure to loss resulting from its involvement with these VIEs. The maximum exposure to loss represents the carrying value of the Companys involvement plus any legally binding unfunded commitments in the unlikely event that all of the assets in the VIEs become worthless.
September 30, 2011 | ||||||||||||
(Dollars in millions) |
Total Assets |
Total Liabilities |
Maximum Exposure to Loss |
|||||||||
LIHC investments |
$ | 517 | $ | 27 | $ | 690 | ||||||
Renewable energy investments |
294 | - | 294 | |||||||||
Private capital investments |
121 | - | 182 | |||||||||
|
|
|
|
|
|
|||||||
Total unconsolidatcd VIEs |
$ | 932 | $ | 27 | $ | 1,166 | ||||||
|
|
|
|
|
|
Private Capital and Other Investments
The following table shows the balances of private capital and other investments as of September 30, 2011 and December 31, 2010.
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
||||||
Private capital and other investments: |
||||||||
Renewable energy investments |
$ | 294 | $ | 300 | ||||
Consolidated VIEs |
290 | 283 | ||||||
LIHC investments - unguaranteed |
347 | 316 | ||||||
LIHC investments - guaranteed |
170 | 157 | ||||||
Private capital investments - cost basis |
92 | 85 | ||||||
Private capital investments - equity method |
41 | 40 | ||||||
|
|
|
|
|||||
Total private capital and other investments |
$ | 1,234 | $ | 1,181 | ||||
|
|
|
|
The Company evaluates these investments periodically for other-than-temporary impairment. During the nine months ended September 30, 2011, the Company did not record any impairment related to these investments. For further information on the Companys private capital and other investments, see Note 8 to the consolidated financial statements in the Companys 2010 Form 10-K.
Note 7 - Employee Pension and Other Postretirement Benefits
The following table summarizes the components of net periodic benefit cost for the three and nine months ended September 30, 2011 and 2010.
Pension Benefits | Other Benefits | Superannuation, SERP (1) and ESBP (2) |
||||||||||||||||||||||
For the Three Months Ended September 30, |
For the Three Months Ended September 30, |
For the Three Months Ended September 30, |
||||||||||||||||||||||
(Dollars in millions) |
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||||||||||
Service cost |
$ | 14 | $ | 12 | $ | 3 | $ | 2 | $ | - | $ | - | ||||||||||||
Interest cost |
25 | 23 | 4 | 4 | - | - | ||||||||||||||||||
Expected return on plan assets |
(37) | (37) | (4) | (3) | - | - | ||||||||||||||||||
Amortization of transition amount |
- | - | 1 | - | - | - | ||||||||||||||||||
Recognized net actuarial loss |
11 | 4 | 1 | 1 | 1 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net periodic benefit cost |
$ | 13 | $ | 2 | $ | 5 | $ | 4 | $ | 1 | $ | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
50
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Pension Benefits | Other Benefits | Superannuation, SERP (1) and ESBP (2) |
||||||||||||||||||||||
For the Nine
Months Ended September 30, |
For the Nine Months Ended September 30, |
For the Nine Months Ended September 30, |
||||||||||||||||||||||
(Dollars in millions) |
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||||||||||
Service cost |
$ | 43 | $ | 37 | $ | 9 | $ | 7 | $ | 1 | $ | 1 | ||||||||||||
Interest cost |
74 | 68 | 10 | 10 | 2 | 2 | ||||||||||||||||||
Expected return on plan assets |
(110) | (109) | (10) | (9) | - | - | ||||||||||||||||||
Amortization of transition amount |
- | - | 1 | 1 | - | - | ||||||||||||||||||
Recognized net actuarial loss |
33 | 11 | 4 | 4 | 1 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total net periodic benefit cost |
$ | 40 | $ | 7 | $ | 14 | $ | 13 | $ | 4 | $ | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Supplemental Executives Retirement Plan (SERP).
(2) Executive Supplemental Benefit Plans (ESBP).
Note 8 - Commercial Paper and Other Short-Term Borrowings
The following is a summary of the Companys commercial paper and other short-term borrowings:
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
||||||
Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 0.06% and 0.15% at September 30, 2011 and December 31, 2010, respectively |
$ | 125 | $ | 170 | ||||
Commercial paper, with weighted average interest rates of 0.17% and 0.22% at September 30, 2011 and December 31, 2010, respectively |
1,760 | 745 | ||||||
Other borrowed funds: |
||||||||
Term federal funds purchased, with weighted average interest rate of 0.28% at December 31, 2010 |
- | 335 | ||||||
Federal Home Loan Bank advances with a weighted average interest rate of 0.27% at September 30, 2011 |
500 | - | ||||||
All other borrowed funds, with weighted average interest rates of 0.55% and 1.20% at September 30, 2011 and December 31, 2010, respectively |
70 | 106 | ||||||
|
|
|
|
|||||
Total commercial paper and other short-term borrowings |
$ | 2,455 | $ | 1,356 | ||||
|
|
|
|
The following is a summary of the Companys long-term debt:
(Dollars in millions) |
September 30, 2011 |
December 31, 2010 |
||||||
Senior debt: |
||||||||
Fixed and floating rate Federal Home Loan Bank advances with maturities ranging from December 2011 to February 2016. These notes bear a combined weighted-average rate of 1.79% at September 30, 2011 and 1.72% at December 31, 2010 |
$ | 4,000 | $ | 3,000 | ||||
Floating rate notes due March 2011. These notes, which bear interest at 0.08% above 3-month LIBOR, had a rate of 0.38% at December 31, 2010 |
- | 500 | ||||||
Floating rate notes due March 2012. These notes, which bear interest at 0.20% above 3-month LIBOR, had a rate of 0.55% at September 30, 2011 and 0.50% at December 31, 2010 |
500 | 500 | ||||||
Floating rate notes due June 2014. These notes, which bear interest at 0.95% above 3-month LIBOR, had a rate of 1.28% at September 30, 2011 |
300 | - | ||||||
Fixed rate 2.125% notes due December 2013 |
399 | 399 | ||||||
Fixed rate 3.0% notes due June 2016 |
698 | - | ||||||
Note payable: |
||||||||
Fixed rate 6.03% notes due July 2014 (related to consolidated VIE) |
8 | 8 | ||||||
Subordinated debt: |
||||||||
Fixed rate 5.25% notes due December 2013 |
415 | 422 | ||||||
Fixed rate 5.95% notes due May 2016 |
744 | 756 | ||||||
Junior subordinated debt payable to subsidiary grantor trust: |
||||||||
Fixed rate 10.875% notes due March 2030 |
- | 10 | ||||||
Fixed rate 10.60% notes due September 2030 |
- | 3 | ||||||
|
|
|
|
|||||
Total long-term debt |
$ | 7,064 | $ | 5,598 | ||||
|
|
|
|
51
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Senior Debt
On June 6, 2011, the Bank issued $300 million in aggregate principal amount of Senior Floating Rate Notes due 2014 (2014 Notes). The 2014 Notes were issued at par and bear interest at a rate equal to three-month LIBOR plus 0.95 percent per annum and will mature on June 6, 2014. Interest payments are due on the 6th of March, June, September and December of each year, with the first interest payment on September 6, 2011.
On June 6, 2011, the Bank also issued $700 million in aggregate principal amount of 3.00 percent Senior Bank Notes due 2016 (2016 Notes). The 2016 Notes were issued to purchasers at a price of 99.733 percent, resulting in proceeds to the Bank, after dealer discount, of $698 million. The 2016 Notes bear interest of 3.00 percent per annum payable on the 6th of June and December of each year, with the first interest payment on December 6, 2011. These notes mature on June 6, 2016.
Both the 2014 Notes and 2016 Notes are not redeemable at the option of the Bank prior to maturity or subject to repayment at the option of the holders prior to maturity. The net proceeds from the sale of these notes were used by the Bank for general corporate purposes in the ordinary course of its business. These notes were issued as part of a $4 billion Bank Note Program under which the Bank may issue, from time to time, senior unsecured debt obligations with maturities of more than one year from their respective dates of issue and subordinated debt obligations with maturities of five years or more from their respective dates of issue. After issuing these notes, there was $1.2 billion available for issuance under the program at September 30, 2011.
Note 10 - Fair Value Measurement and Fair Value of Financial Instruments
Valuation Methodologies
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between willing market participants at the measurement date. The Company has an established and documented process for determining fair value for financial assets and financial liabilities that are measured at fair value on either a recurring or nonrecurring basis. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as interest rates, yield curves, foreign exchange rates, commodity prices, volatilities and credit curves. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that consider the Companys creditworthiness in determining the fair value of its trading liabilities. For further information related to the valuation methodologies used for certain financial assets and financial liabilities measured at fair value, see Note 17 to the consolidated financial statements in the Companys 2010 Form 10-K.
Fair Value Hierarchy
In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Companys estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy as defined by US GAAP. This hierarchy is based on the quality and reliability of the information used to determine fair value. For further information related to the fair value hierarchy, see Note 17 to the consolidated financial statements in the Companys 2010 Form 10-K.
52
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Fair Value Measurements on a Recurring Basis
The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, by major category and by valuation hierarchy level.
September 30, 2011 | ||||||||||||||||||||
(Dollars in millions) |
Level 1 | Level 2 | Level 3 | Netting Adjustment (1) |
Fair Value | |||||||||||||||
Assets |
||||||||||||||||||||
Trading account assets: |
||||||||||||||||||||
U.S. Treasury |
$ | 66 | $ | - | $ | - | $ | - | $ | 66 | ||||||||||
U.S. government sponsored agencies |
20 | - | - | - | 20 | |||||||||||||||
State and municipal |
- | 10 | - | - | 10 | |||||||||||||||
Commercial paper |
- | 31 | - | - | 31 | |||||||||||||||
Foreign exchange derivative contracts |
1 | 101 | - | (49) | 53 | |||||||||||||||
Commodity derivative contracts |
- | 226 | - | (170) | 56 | |||||||||||||||
Interest rate derivative contracts |
- | 908 | - | (81) | 827 | |||||||||||||||
Equity derivative contracts |
- | 57 | - | - | 57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total trading account assets |
87 | 1,333 | - | (300) | 1,120 | |||||||||||||||
Securities available for sale: |
||||||||||||||||||||
U.S. government sponsored agencies |
5,611 | - | - | - | 5,611 | |||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||
U.S. government and government sponsored agencies |
- | 11,808 | - | - | 11,808 | |||||||||||||||
Privately issued |
- | 794 | - | - | 794 | |||||||||||||||
Commercial mortgage-backed securities |
- | 857 | - | - | 857 | |||||||||||||||
Asset-backed securities |
- | 288 | - | - | 288 | |||||||||||||||
Other debt securities |
- | 143 | 47 | - | 190 | |||||||||||||||
Equity securities |
84 | - | 1 | - | 85 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total securities available for sale |
5,695 | 13,890 | 48 | - | 19,633 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 5,782 | $ | 15,223 | $ | 48 | $ | (300) | $ | 20,753 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of Total |
28% | 73% | - | (1)% | 100% | |||||||||||||||
Percentage of Total Company Assets |
7% | 18% | - | - | 25% | |||||||||||||||
Liabilities |
||||||||||||||||||||
Trading account liabilities: |
||||||||||||||||||||
Foreign exchange derivative contracts |
$ | 2 | $ | 55 | $ | - | $ | (4) | $ | 53 | ||||||||||
Commodity derivative contracts |
- | 220 | - | (25) | 195 | |||||||||||||||
Interest rate derivative contracts |
7 | 854 | - | (241) | 620 | |||||||||||||||
Equity derivative contracts |
- | 57 | - | - | 57 | |||||||||||||||
Other derivative contracts |
- | - | 9 | - | 9 | |||||||||||||||
Securities sold, not yet purchased |
12 | - | - | - | 12 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total trading account liabilities |
21 | 1,186 | 9 | (270) | 946 | |||||||||||||||
Other liabilities |
- | 13 | 45 | - | 58 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
$ | 21 | $ | 1,199 | $ | 54 | $ | (270) | $ | 1,004 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of Total |
2% | 120% | 5% | (27)% | 100% | |||||||||||||||
Percentage of Total Company Liabilities |
- | 1% | - | - | 1% | |||||||||||||||
|
(1) | Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts. |
53
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
December 31, 2010 | ||||||||||||||||||||
(Dollars in millions) |
Level 1 | Level 2 | Level 3 | Netting Adjustment (1) |
Fair Value | |||||||||||||||
Assets |
||||||||||||||||||||
Trading account assets: |
||||||||||||||||||||
U.S. Treasury |
$ | 43 | $ | - | $ | - | $ | - | $ | 43 | ||||||||||
U.S. government sponsored agencies |
68 | - | - | - | 68 | |||||||||||||||
State and municipal |
- | 42 | - | - | 42 | |||||||||||||||
Commercial paper |
- | 34 | - | - | 34 | |||||||||||||||
Foreign exchange derivative contracts |
1 | 42 | - | (10) | 33 | |||||||||||||||
Commodity derivative contracts |
- | 234 | - | (58) | 176 | |||||||||||||||
Interest rate derivative contracts |
3 | 593 | - | (42) | 554 | |||||||||||||||
Equity derivative contracts |
- | 50 | - | (1) | 49 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total trading account assets |
115 | 995 | - | (111) | 999 | |||||||||||||||
Securities available for sale: |
||||||||||||||||||||
U.S. Treasury |
150 | - | - | - | 150 | |||||||||||||||
U.S. government sponsored agencies |
6,764 | - | - | - | 6,764 | |||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||
U.S. government and government sponsored agencies |
- | 12,756 | - | - | 12,756 | |||||||||||||||
Privately issued |
- | 682 | - | - | 682 | |||||||||||||||
Commercial mortgage-backed securities |
- | 2 | - | - | 2 | |||||||||||||||
Asset-backed securities |
- | 240 | - | - | 240 | |||||||||||||||
Other debt securities |
- | 150 | 7 | - | 157 | |||||||||||||||
Equity securities |
39 | - | 1 | - | 40 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total securities available for sale |
6,953 | 13,830 | 8 | - | 20,791 | |||||||||||||||
Other assets: |
||||||||||||||||||||
Interest rate hedging contracts |
- | 21 | - | (2) | 19 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other assets |
- | 21 | - | (2) | 19 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 7,068 | $ | 14,846 | $ | 8 | $ | (113) | $ | 21,809 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of Total |
33% | 68% | - | (1)% | 100% | |||||||||||||||
Percentage of Total Company Assets |
9% | 19% | - | - | 28% | |||||||||||||||
Liabilities |
||||||||||||||||||||
Trading account liabilities: |
||||||||||||||||||||
Foreign exchange derivative contracts |
$ | 1 | $ | 48 | $ | - | $ | (13) | $ | 36 | ||||||||||
Commodity derivative contracts |
- | 233 | - | (51) | 182 | |||||||||||||||
Interest rate derivative contracts |
- | 551 | - | (60) | 491 | |||||||||||||||
Equity derivative contracts |
- | 50 | - | - | 50 | |||||||||||||||
Other derivative contracts |
- | - | 14 | - | 14 | |||||||||||||||
Securities sold, not yet purchased |
1 | - | - | - | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total trading account liabilities |
2 | 882 | 14 | (124) | 774 | |||||||||||||||
Other liabilities |
- | - | 36 | - | 36 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
$ | 2 | $ | 882 | $ | 50 | $ | (124) | $ | 810 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of Total |
- | 109% | 6% | (15)% | 100% | |||||||||||||||
Percentage of Total Company Liabilities |
- | 1% | - | - | 1% | |||||||||||||||
|
(1) | Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts. |
54
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following tables present a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010. Level 3 available for sale securities at September 30, 2011 and 2010 primarily consist of tax exempt community development bonds. There were no transfers in (out) of Level 1, 2, and 3 during the nine months ended September 30, 2011.
For the Three Months Ended | ||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||
(Dollars in millions) |
Securities Available for Sale |
Trading Liabilities |
Other Liabilities |
Securities Available for Sale |
Trading Liabilities |
Other Liabilities |
||||||||||||||||||
Asset (liability) balance, beginning of period |
$ | 48 | $ | (8) | $ | (41) | $ | 9 | $ | - | $ | (39) | ||||||||||||
Total gains (losses) (realized/unrealized): |
||||||||||||||||||||||||
Included in income before taxes |
- | (1) | (4) | - | - | - | ||||||||||||||||||
Included in other comprehensive income |
- | - | - | - | - | - | ||||||||||||||||||
Purchases/additions |
- | - | - | 1 | 14 | - | ||||||||||||||||||
Sales |
- | - | - | - | - | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Asset (liability) balance, end of period |
$ | 48 | $ | (9) | $ | (45) | $ | 10 | $ | 14 | $ | (39) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Changes in unrealized losses included in income before taxes for assets and liabilities still held at end of period |
$ | - | $ | (1) | $ | (4) | $ | - | $ | - | $ | - |
For the Nine Months Ended | ||||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||
(Dollars in millions) |
Securities Available for Sale |
Trading Liabilities |
Other Liabilities |
Securities Available for Sale |
Trading Liabilities |
Other Liabilities |
||||||||||||||||||
Asset (liability) balance, beginning of period |
$ | 8 | $ | (14) | $ | (36) | $ | 7 | $ | - | $ | - | ||||||||||||
Total gains (losses) (realized/unrealized): |
||||||||||||||||||||||||
Included in income before taxes |
- | 5 | (9) | - | - | - | ||||||||||||||||||
Included in other comprehensive income |
(1) | - | - | - | - | - | ||||||||||||||||||
Purchases/additions |
42 | - | - | 3 | 14 | (39) | ||||||||||||||||||
Sales |
(1) | - | - | - | - | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Asset (liability) balance, end of period |
$ | 48 | $ | (9) | $ | (45) | $ | 10 | $ | 14 | $ | (39) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Changes in unrealized losses included in income before taxes for assets and liabilities still held at end of period |
$ | - | $ | 5 | $ | 9 | $ | - | $ | - | $ | - |
Fair Value Measurement on a Nonrecurring Basis
Certain assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2011 and September 30, 2010 that were still held on the consolidated balance sheet as of the respective periods ended, the following tables present the carrying value of such financial instruments by the level of valuation assumptions used to determine each fair value adjustment.
September 30, 2011 | Loss for
the Three Months Ended September 30, 2011 |
Loss for
the Nine Months Ended September 30, 2011 |
||||||||||||||||||||||
(Dollars in millions) |
Carrying Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Loans held for sale |
$ | 2 | $ | - | $ | - | $ | 2 | $ | - | $ | - | ||||||||||||
Impaired loans |
199 | - | - | 199 | (28) | (79) | ||||||||||||||||||
Other assets: |
||||||||||||||||||||||||
OREO |
123 | - | - | 123 | (8) | (27) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 324 | $ | - | $ | - | $ | 324 | $ | (36) | $ | (106) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
55
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
September 30, 2010 | Loss for
the Three Months Ended September 30, 2010 |
Loss for
the Nine Months Ended September 30, 2010 |
||||||||||||||||||||||
(Dollars in millions) |
Carrying Value |
Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Impaired loans |
$ | 561 | $ | - | $ | - | $ | 561 | $ | (56) | $ | (80) | ||||||||||||
Other assets: |
||||||||||||||||||||||||
OREO |
51 | - | - | 51 | (11) | (13) | ||||||||||||||||||
Private equity investments |
16 | - | - | 16 | (1) | (5) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 628 | $ | - | $ | - | $ | 628 | $ | (68) | $ | (98) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Loans include commercial loans held for sale measured at the lower cost or fair value and individually impaired loans that are measured based on the fair value of the underlying collateral or the fair value of the loan. The fair value of impaired loans was determined based on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment.
Other assets consist of private equity investments, and OREO that was measured at the lower of cost or fair value, net of cost of disposal. The fair value of OREO was primarily based on independent appraisals. The fair value of private equity investments was estimated using net asset value.
Fair Value of Financial Instruments Disclosures
The table below presents the carrying value and estimated fair value of certain financial instruments held by the Company as of September 30, 2011 and December 31, 2010.
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(Dollars in millions) |
Value | Value | Value | Value | ||||||||||||
Assets |
||||||||||||||||
Securities held to maturity |
$ | 1,329 | $ | 1,474 | $ | 1,323 | $ | 1,560 | ||||||||
Loans held for investment, net of allowance for loan losses (1) |
49,543 | 50,022 | 46,164 | 46,231 | ||||||||||||
FDIC indemnification asset |
616 | 494 | 783 | 750 | ||||||||||||
Liabilities |
||||||||||||||||
Interest bearing deposits |
40,824 | 41,055 | 43,611 | 43,610 | ||||||||||||
Commercial paper and other short-term borrowings |
2,455 | 2,455 | 1,356 | 1,356 | ||||||||||||
Long-term debt |
7,064 | 7,185 | 5,598 | 5,669 |
(1) Excludes lease financing, net of related allowance.
Off-balance sheet commitments, which include commitments to extend credit and standby and commercial letters of credit, are excluded from the above table. These instruments generate ongoing fees, which are recognized over the term of the commitment period. In situations where the credit quality of the counterparty to a commitment has declined, the Company records a reserve. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related reserve. This estimate totaled $275 million and $298 million at September 30, 2011 and December 31, 2010, respectively.
Certain financial instruments that are not recognized at fair value on the consolidated balance sheet are carried at amounts that approximate fair value due to their short-term nature. These financial instruments include cash and due from banks, interest bearing deposits in banks, federal funds sold and purchased, securities purchased under resale agreements, securities sold under repurchase agreements and commercial paper. In addition, the fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, interest bearing checking, and market rate and other savings are deemed to equal their carrying values. For further information on methodologies for approximating fair values, see Note 17 to the consolidated financial statements in the Companys 2010 Form 10-K.
Note 11 Derivative Instruments and Other Financial Instruments Used For Hedging
The Company is a party to certain derivative and other financial instruments that are entered into for the purpose of trading, meeting the needs of customers, and changing the impact on the Companys operating results due to market fluctuations in currency rates, interest rates or commodity prices.
56
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Credit and market risks are inherent in derivative instruments. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting and collateral support annex (CSA) agreements in order to reduce its exposure to credit risk. Additionally, the Company considers the potential loss in the event of counterparty default in estimating the fair value amount of the derivative instrument. Market risk is defined as the risk of loss arising from an adverse change in the market value of financial instruments caused by fluctuations in market prices or rates.
Derivatives are used to manage exposure to interest rate, commodity and foreign currency risk, generate profits from proprietary trading and to assist customers with their risk management objectives. The Company designates derivative instruments as those used for hedge accounting purposes, and those for trading or economic hedge purposes. All derivative instruments are recognized as assets or liabilities on the consolidated balance sheet at fair value.
The tables below present the notional amounts, and the location and fair value amounts of the Companys derivative instruments reported on the consolidated balance sheet, segregated between derivative instruments designated and qualifying as hedging instruments and all other derivative instruments as of September 30, 2011 and December 31, 2010. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and CSA agreements.
September 30, 2011 | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
Balance | Balance | |||||||||||||||
Notional | Sheet | Fair | Sheet | Fair | ||||||||||||
(Dollars in millions) |
Amount | Location | Value | Location | Value | |||||||||||
Total derivatives designated as hedging instruments: |
||||||||||||||||
Interest rate contracts |
$ | 6,650 | Other assets | $ | - | Other liabilities | $ | 13 | ||||||||
|
|
|
|
|
|
|||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||
Interest rate contracts |
$ | 33,413 | Trading account assets | $ | 908 | Trading account liabilities | $ | 861 | ||||||||
Commodity contracts |
4,835 | Trading account assets | 226 | Trading account liabilities | 221 | |||||||||||
Foreign exchange contracts |
3,884 | Trading account assets | 102 | Trading account liabilities | 56 | |||||||||||
Equity contracts |
2,632 | Trading account assets | 57 | Trading account liabilities | 57 | |||||||||||
Other contracts |
60 | - | Trading account liabilities | 9 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total derivatives not designated as hedging instruments |
$ | 44,824 | $ | 1,293 | $ | 1,204 | ||||||||||
|
|
|
|
|
|
|||||||||||
Total derivative instruments |
$ | 51,474 | $ | 1,293 | $ | 1,217 | ||||||||||
|
|
|
|
|
|
|||||||||||
December 31, 2010 | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
Balance | Balance | |||||||||||||||
Notional | Sheet |
Fair | Sheet | Fair | ||||||||||||
(Dollars in millions) |
Amount | Location | Value | Location | Value | |||||||||||
Total derivatives designated as hedging instruments: |
||||||||||||||||
Interest rate contracts |
$ | 5,500 | Other assets | $ | 21 | Other liabilities | $ | - | ||||||||
|
|
|
|
|
|
|||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||
Interest rate contracts |
$ | 28,820 | Trading account assets | $ | 596 | Trading account liabilities | $ | 551 | ||||||||
Commodity contracts |
4,679 | Trading account assets | 234 | Trading account liabilities | 233 | |||||||||||
Foreign exchange contracts |
3,011 | Trading account assets | 43 | Trading account liabilities | 49 | |||||||||||
Equity contracts |
1,313 | Trading account assets | 50 | Trading account liabilities | 50 | |||||||||||
Other contracts |
60 | - | Trading account liabilities | 14 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total derivatives not designated as hedging instruments |
$ | 37,883 | $ | 923 | $ | 897 | ||||||||||
|
|
|
|
|
|
|||||||||||
Total derivative instruments |
$ | 43,383 | $ | 944 | $ | 897 | ||||||||||
|
|
|
|
|
|
Certain of the Companys derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the Companys credit rating was to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions. At September 30, 2011, the aggregate fair value (including net interest payable/receivable) of all derivative instruments with credit-risk mitigated contingent features that are in a liability position was $9 million. At
57
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
September 30, 2011, the Company had not pledged any collateral to secure these obligations. If all of the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2011, the Company would have been required to provide collateral of $9 million to settle these contracts.
Derivatives Used in Asset and Liability Management
The Company uses interest rate derivatives to manage the financial impact on the Company from changes in market 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, borrowings, and future debt issuances. The following describes the significant hedging strategies of the Company.
Cash Flow Hedges
Hedging Strategies for Variable Rate Loans, Borrowings and Certificates of Deposit and Other Time Deposits
The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged risk being the changes in cash flows attributable to changes in the designated benchmark rate (i.e., U.S. dollar LIBOR). In these strategies, the hedging instruments are matched with groups of similar variable rate instruments such that the reset tenor of the variable rate instruments and that of the hedging instrument are identical at inception. Cash flow hedging instruments currently being utilized include purchased caps and interest rate swaps. At September 30, 2011, the weighted average remaining life of the currently active cash flow hedges was approximately 2.1 years.
In the first quarter of 2011, the Company terminated $1.0 billion notional amount of interest rate swaps concurrent with the issuance of $1.0 billion of fixed rate debt. The swaps were accounted for as a cash flow hedge and were used to mitigate the changes in cash flows on the forecasted fixed rate debt. At termination, the Company had a related unrealized gain of $14 million, which is being amortized into interest expense over the life of the debt. The hedge ineffectiveness that was recognized in earnings upon the termination of the interest rate swap was not significant.
The Company used purchased interest rate caps with a notional amount of $1.0 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed borrowings. Payments received under the cap contract offset the increase in borrowing interest expense if the relevant LIBOR index rises above the caps strike rate.
The Company used interest rate swaps with a notional amount of $1.2 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed other borrowings and long-term debt. Payments received (or paid) under the swap contract offset fluctuations in other borrowings and long-term debt interest expense caused by changes in the relevant LIBOR index.
The Company used purchased interest rate caps with a notional amount of $3 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate component of forecasted issuances of short-term, fixed rate certificates of deposit (CDs). Net payments to be received under the cap contract offset increases in interest expense if the relevant LIBOR index rises above the caps strike rate.
The Company used interest rate swaps with a notional amount of $1.5 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed loans. Payments received (or paid) under the swap contract offset fluctuations in interest income on loans caused by changes in the relevant LIBOR index.
Hedging transactions are structured at inception so that the notional amounts of the hedging instruments are matched to an equal principal amount of loans, CDs, or borrowings, the index and repricing frequencies of the hedging instruments match those of the loans, CDs, or borrowings and the period in which the designated hedged cash flows occurs is equal to the term of the hedge instruments. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedging instruments versus those of the loans, CDs or borrowings.
58
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness and any non qualifying hedge components are recognized in noninterest expense in the period in which they arise. At September 30, 2011, the Company expects to reclassify approximately $2 million of income from accumulated other comprehensive income to net interest income during the twelve months ending September 30, 2012. This amount could differ from amounts actually realized due to changes in interest rates and the addition of other hedges subsequent to September 30, 2011.
The following table presents the amount and location of the net gains and losses recorded in the Companys consolidated statements of income and changes in stockholders equity for derivatives designated as cash flow hedges for the three and nine months ended September 30, 2011 and 2010.
Amount of Gain or (Loss) | Gain or (Loss) Recognized in Income on | |||||||||||||||||||||||||||||
Recognized in OCI on | Derivative Instruments (Ineffective Portion | |||||||||||||||||||||||||||||
Derivative Instruments | Gain or (Loss) Reclassified from Accumulated | and Amount Excluded from Effectiveness | ||||||||||||||||||||||||||||
(Effective Portion) | OCI into Income (Effective Portion) | Testing) | ||||||||||||||||||||||||||||
For the Three Months | For the Three Months | For the Three Months | ||||||||||||||||||||||||||||
Ended September 30, | Ended September 30, | Ended September 30, | ||||||||||||||||||||||||||||
(Dollars in millions) |
2011 | 2010 | Location | 2011 | 2010 | Location | 2011 | 2010 | ||||||||||||||||||||||
Derivatives in cash flow hedging relationships |
||||||||||||||||||||||||||||||
Interest income | $ | (3 | ) | $ | 16 | |||||||||||||||||||||||||
Interest rate contracts |
$ | (8 | ) | $ | (15 | ) | Interest expense | (1 | ) | - | Noninterest expense (1) | $ | (1 | ) | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | (8 | ) | $ | (15 | ) | $ | (4 | ) | $ | 16 | $ | (1 | ) | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Amount of Gain or (Loss) | Gain or (Loss) Recognized in Income on | |||||||||||||||||||||||||||||
Recognized in OCI on | Derivative Instruments (Ineffective Portion | |||||||||||||||||||||||||||||
Derivative Instruments | Gain or (Loss) Reclassified from Accumulated | and Amount Excluded from Effectiveness | ||||||||||||||||||||||||||||
(Effective Portion) | OCI into Income (Effective Portion) | Testing) | ||||||||||||||||||||||||||||
For the Nine Months | For the Nine Months | For the Nine Months | ||||||||||||||||||||||||||||
Ended September 30, | Ended September 30, | Ended September 30, | ||||||||||||||||||||||||||||
(Dollars in millions) |
2011 | 2010 | Location | 2011 | 2010 | Location | 2011 | 2010 | ||||||||||||||||||||||
Derivatives in cash flow hedging relationships |
||||||||||||||||||||||||||||||
Interest income | $ | (7 | ) | $ | 53 | |||||||||||||||||||||||||
Interest rate contracts |
$ | (15 | ) | $ | (30 | ) | Interest expense | (3 | ) | - | Noninterest expense | (1) | $ | (1 | ) | $ | - | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | (15 | ) | $ | (30 | ) | $ | (10 | ) | $ | 53 | $ | (1 | ) | $ | - | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) For the three and nine months ended September 30, 2010, the amount recognized was less than less than $1 million.
Trading Derivatives
Derivative instruments classified as trading include both derivatives entered into for the Companys own account and as an accommodation for customers. Trading derivatives are included in trading assets or trading liabilities with changes in fair value reflected in income from trading account activities. The majority of the Companys derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures.
The Company offers market-linked certificates of deposit, which allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to either equity, commodity or currency indices. The Company hedges its exposure to the embedded derivative contained in market-linked CDs with a perfectly matched over-the-counter option. Both the embedded derivative and hedge options are recorded at fair value with the realized and unrealized changes in fair value recorded in noninterest income within trading account activities.
59
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents the amount and location of the net gains and losses reported in the consolidated statement of income for derivative instruments classified as trading for the three and nine months ended September 30, 2011 and 2010.
Gain or (Loss) Recognized in Income on Derivative Instruments | ||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||
(Dollars in millions) |
Location | September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||||||
Trading Derivatives: |
||||||||||||||||||||
Interest rate contracts |
Trading account activities | $ | 12 | $ | 17 | $ | 31 | $ | 25 | |||||||||||
Equity contracts |
Trading account activities | 8 | 4 | 21 | 10 | |||||||||||||||
Foreign exchange contracts |
Trading account activities | 7 | 6 | 20 | 23 | |||||||||||||||
Commodity contracts |
Trading account activities | - | 1 | 2 | 6 | |||||||||||||||
Other contracts |
Trading account activities | (1 | ) | - | 5 | - | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 26 | $ | 28 | $ | 79 | $ | 64 | ||||||||||||
|
|
|
|
|
|
|
|
Note 12 Accumulated Other Comprehensive Loss
The following table presents the change in each of the components of accumulated other comprehensive income (loss) and the related tax effect of the change allocated to each component.
Before | ||||||||||||
Tax | Tax | Net of | ||||||||||
(Dollars in millions) |
Amount | Effect | Tax | |||||||||
For the Nine Months Ended September 30, 2010: |
||||||||||||
Cash flow hedge activities: |
||||||||||||
Unrealized net losses on hedges arising during the period |
$ | (30 | ) | $ | 12 | $ | (18 | ) | ||||
Less: accretion of privatization related fair value adjustment |
2 | (1 | ) | 1 | ||||||||
Less: reclassification adjustment for net gains on hedges included in net income |
(55 | ) | 21 | (34 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in unrealized gains on hedges |
(83 | ) | 32 | (51 | ) | |||||||
|
|
|
|
|
|
|||||||
Securities: |
||||||||||||
Cumulative effect from change in accounting for embedded credit derivatives |
11 | (4 | ) | 7 | ||||||||
Unrealized holding gains arising during the period on securities available for sale |
338 | (133 | ) | 205 | ||||||||
Reclassification adjustment for net gains on securities available for sale included in net income |
(72 | ) | 28 | (44 | ) | |||||||
Less: accretion of privatization related fair value adjustment on securities available for sale |
(2 | ) | 1 | (1 | ) | |||||||
Less: accretion of privatization related fair value adjustment on held-to-maturity securities |
(20 | ) | 8 | (12 | ) | |||||||
Less: accretion of net unrealized losses on held to maturity securities |
69 | (27 | ) | 42 | ||||||||
|
|
|
|
|
|
|||||||
Net change in unrealized losses on securities |
324 | (127 | ) | 197 | ||||||||
|
|
|
|
|
|
|||||||
Foreign currency translation adjustment |
1 | - | 1 | |||||||||
|
|
|
|
|
|
|||||||
Reclassification adjustment for pension and other benefits included in net income: |
||||||||||||
Amortization of transition amount |
1 | - | 1 | |||||||||
Recognized net actuarial loss |
16 | (6 | ) | 10 | ||||||||
|
|
|
|
|
|
|||||||
Net change in pension and other benefits |
17 | (6 | ) | 11 | ||||||||
|
|
|
|
|
|
|||||||
Net change in accumulated other comprehensive loss |
$ | 259 | $ | (101 | ) | $ | 158 | |||||
|
|
|
|
|
|
|||||||
For the Nine Months Ended September 30, 2011: |
||||||||||||
Cash flow hedge activities: |
||||||||||||
Unrealized net losses on hedges arising during the period |
(15 | ) | 6 | (9 | ) | |||||||
Less: reclassification adjustment for net losses on hedges included in net income |
10 | (4 | ) | 6 | ||||||||
|
|
|
|
|
|
|||||||
Net change in unrealized losses on hedges |
(5 | ) | 2 | (3 | ) | |||||||
|
|
|
|
|
|
|||||||
Securities: |
||||||||||||
Unrealized holding gains arising during the period on securities available for sale |
165 | (65 | ) | 100 | ||||||||
Reclassification adjustment for net gains on securities available for sale included in net income |
(58 | ) | 23 | (35 | ) | |||||||
Less: accretion of fair value adjustment on securities available for sale |
(5 | ) | 2 | (3 | ) | |||||||
Less: accretion of fair value adjustment on held to maturity securities |
(21 | ) | 8 | (13 | ) | |||||||
Less: accretion of net unrealized losses on held to maturity securities |
77 | (30 | ) | 47 | ||||||||
|
|
|
|
|
|
|||||||
Net change in unrealized losses on securities |
158 | (62 | ) | 96 | ||||||||
|
|
|
|
|
|
|||||||
Foreign currency translation adjustment |
(2 | ) | 1 | (1 | ) | |||||||
|
|
|
|
|
|
|||||||
Reclassification adjustment for pension and other benefits included in net income: |
||||||||||||
Amortization of transition amount |
1 | - | 1 | |||||||||
Recognized net actuarial loss |
38 | (15 | ) | 23 | ||||||||
Pension and other benefits |
9 | (4 | ) | 5 | ||||||||
|
|
|
|
|
|
|||||||
Net change in pension and other benefits |
48 | (19 | ) | 29 | ||||||||
|
|
|
|
|
|
|||||||
Net change in accumulated other comprehensive loss |
$ | 199 | $ | (78 | ) | $ | 121 | |||||
|
|
|
|
|
|
60
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents the change in accumulated other comprehensive income (loss) balances.
Net | ||||||||||||||||||||
Unrealized | ||||||||||||||||||||
Gains (Losses) | Net | Foreign | Pension | Accumulated | ||||||||||||||||
on Cash | Unrealized | Currency | and Other | Other | ||||||||||||||||
Flow | Gains (Losses) | Translation | Benefits | Comprehensive | ||||||||||||||||
(Dollars in millions) |
Hedges | on Securities | Adjustment | Adjustment | Loss | |||||||||||||||
Balance, December 31, 2009 |
$ | 19 | $ | (296) | $ | - | $ | (374) | $ | (651) | ||||||||||
Change during the period |
(51) | 197 | 1 | 11 | 158 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, Sep 30, 2010 |
$ | (32) | $ | (99) | $ | 1 | $ | (363) | $ | (493) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, December 31, 2010 |
$ | (21) | $ | (238) | $ | 1 | $ | (419) | $ | (677) | ||||||||||
Change during the period |
(3) | 96 | (1) | 29 | 121 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, September 30, 2011 |
$ | (24) | $ | (142) | $ | - | $ | (390) | $ | (556) | ||||||||||
|
|
|
|
|
|
|
|
|
|
Note 13 Commitments, Contingencies and Guarantees
The following table summarizes the Companys commitments.
(Dollars in millions) |
September 30, 2011 | |||
Commitments to extend credit |
$ | 23,585 | ||
Standby letters of credit |
5,543 | |||
Commercial letters of credit |
53 | |||
Commitments to fund principal investments |
61 | |||
Commitments to fund LIHC investments |
173 | |||
Commitments to fund CLO securities and other securities |
19 |
Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. Additionally, the Company enters into risk participations in bankers acceptances wherein a fee is received to guarantee a portion of the credit risk on an acceptance of another bank. The majority of these types of commitments have terms of one year or less. At September 30, 2011, the carrying value of the Companys risk participations in bankers acceptances and standby and commercial letters of credit totaled $5 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments. The carrying value of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the consolidated balance sheet.
The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on managements credit assessment of the customer.
Principal investments include direct investments in private and public companies and indirect investments in private equity funds. The Company issues commitments to provide equity and mezzanine capital financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately-held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate.
The Company invests in either guaranteed or unguaranteed LIHC investments. The guaranteed LIHC investments carry a minimum rate of return guarantee by a creditworthy entity. The unguaranteed LIHC investments carry partial guarantees covering the
61
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
timely completion of projects, availability of tax credits and operating deficit thresholds from the issuer. For these LIHC investments, the Company has committed to provide additional funding as stipulated by its investment participation.
The Company is a fund manager for limited liability companies issuing LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over a twelve-year weighted average period. Additionally, the Company receives guarantees, which include the timely completion of projects, availability of tax credits and operating deficit thresholds, from the limited liability partnerships/corporations issuing the LIHC investments that reduce the Companys ultimate exposure to loss. As of September 30, 2011, the Companys maximum exposure to loss under these guarantees was limited to a return of investor capital and minimum investment yield, or $189 million. The risk that the Company would be required to pay investors for a yield deficiency is low, based on the continued satisfactory performance of the underlying properties. At September 30, 2011, the Company had a reserve of $7 million recorded related to these guarantees, which represents the remaining unamortized fair value of the guarantee fees that were recognized at inception. For information on the Companys LIHC investments that were consolidated, refer to Note 6 to these consolidated financial statements.
The Company guarantees its subsidiaries leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease transactions, the Company does not have any material obligation to be satisfied. As of September 30, 2011, we had no exposure to loss for these agreements.
The Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $1.5 billion at September 30, 2011 and the market value of the associated collateral was $1.5 billion. As of September 30, 2011, the Company had no exposure that would require it to pay under this securities lending indemnification, since the collateral market value exceeded the securities lent.
The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of September 30, 2011, the current exposure to loss under these contracts totaled $30 million, and the maximum potential exposure to loss in the future was estimated at $35 million.
The Company is subject to various pending and threatened legal actions that arise in the normal course of business. Liabilities for losses from legal actions are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. Management believes that the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material adverse effect, either individually or in the aggregate, on the Companys consolidated financial condition, operating results or liquidity.
The Company has three operating segments: Retail Banking Group, Corporate Banking Group and Pacific Rim Corporate Group. The Pacific Rim Corporate Group is included in Other. The Company has two reportable business segments: Retail Banking and Corporate Banking.
| Retail Banking offers a range of banking products and services, primarily to individuals and small businesses, delivered generally through a network of branches and ATMs located in the western U.S. and telephone and internet access 24-hours-a-day. These products offered include mortgages, home equity lines of credit, consumer and commercial loans, and deposit accounts. |
| Corporate Banking provides credit, depository and cash management services, investment and risk management products to businesses, individuals and target specialty niches. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services and capital markets products, as well as trust, private banking, investment and asset management services for individuals and institutions. |
62
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Other is comprised of certain non-bank subsidiaries of UnionBanCal Corporation; the transfer pricing center; the amount of the provision for credit losses over/(under) the risk-adjusted return on capital (RAROC) expected loss for the period; the residual costs of support groups; goodwill, intangible assets, and the related amortization/accretion associated with the Companys privatization transaction; the elimination of the fully taxable-equivalent basis amount; and the difference between the marginal tax rate and the consolidated effective tax rate. In addition, Other includes Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies headquartered in either Japan or the U.S., Corporate Treasury, which is responsible for Asset-Liability Management (ALM), wholesale funding, and the ALM investment securities and derivatives hedging portfolios, and the FDIC covered assets.
The information, set forth in the tables that follow, is prepared using various management accounting methodologies to measure the performance of the individual segments. 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, and they are not necessarily indicative of the results that would be reported by our business units if they were unique economic entities. The management reporting accounting methodologies, which are enhanced from time to time, measure segment profitability by assigning balance sheet and income statement items to each operating segment. Methodologies that are applied to the measurement of segment profitability include:
| A 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. During the nine months ended September 30, 2011, we refined our transfer pricing methodology for non-maturity deposits to reflect expected balance run-off and average life assumptions as well as for rate repricing expectations. |
| An activity-based costing methodology, in which 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 segments based on a predetermined percentage of usage. |
| A RAROC methodology, in which credit expense is charged to an operating segment based upon expected losses arising from credit risk. As a result of the methodology used in 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. |
The Company reflects a market view perspective in measuring the business segments. The market view is a measurement of customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are eliminated in Reconciling Items.
63
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The reportable business segment results for prior periods have been adjusted to reflect changes in the transfer pricing methodology that have occurred.
Retail Banking | Corporate Banking | |||||||||||||||
As of and for the Three Months Ended September 30, |
As of and for the Three Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Results of operations - Market View (dollars in millions): |
||||||||||||||||
Net interest income (expense) |
$ | 273 | $ | 254 | $ | 317 | $ | 313 | ||||||||
Noninterest income (expense) |
70 | 67 | 143 | 134 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
343 | 321 | 460 | 447 | ||||||||||||
Noninterest expense (income) |
255 | 236 | 235 | 238 | ||||||||||||
Credit expense (income) |
6 | 7 | 44 | 64 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes and including noncontrolling interests |
82 | 78 | 181 | 145 | ||||||||||||
Income tax expense (benefit) |
32 | 31 | 46 | 32 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) including noncontrolling interests |
50 | 47 | 135 | 113 | ||||||||||||
Deduct: Net loss from noncontrolling interests |
- | - | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to UNBC |
$ | 50 | $ | 47 | $ | 135 | $ | 113 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets, end of period - Market View (dollars in millions): |
$ | 24,872 | $ | 23,046 | $ | 32,821 | $ | 30,223 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other | Reconciling Items | |||||||||||||||
As of and for the Three Months Ended September 30, |
As of and for the Three Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Results of operations - Market View (dollars in millions): |
||||||||||||||||
Net interest income (expense) |
$ | 35 | $ | 68 | $ | (19) | $ | (17) | ||||||||
Noninterest income (expense) |
(9) | 34 | (19) | (17) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
26 | 102 | (38) | (34) | ||||||||||||
Noninterest expense (income) |
127 | 101 | (14) | (13) | ||||||||||||
Credit expense (income) |
(63) | (63) | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes and including noncontrolling interests |
(38) | 64 | (24) | (21) | ||||||||||||
Income tax expense (benefit) |
(36) | 44 | (9) | (8) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) including noncontrolling interests |
(2) | 20 | (15) | (13) | ||||||||||||
Deduct: Net loss from noncontrolling interests |
4 | 3 | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to UNBC |
$ | 2 | $ | 23 | $ | (15) | $ | (13) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets, end of period - Market View (dollars in millions): |
$ | 28,478 | $ | 28,553 | $ | (2,158) | $ | (1,982) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
UnionBanCal Corporation |
||||||||||||||||
As of and for the Three Months Ended September 30, |
||||||||||||||||
2011 | 2010 | |||||||||||||||
Results of operations - Market View (dollars in millions): |
||||||||||||||||
Net interest income (expense) |
$ | 606 | $ | 618 | ||||||||||||
Noninterest income (expense) |
185 | 218 | ||||||||||||||
|
|
|
|
|||||||||||||
Total revenue |
791 | 836 | ||||||||||||||
Noninterest expense (income) |
603 | 562 | ||||||||||||||
Credit expense (income) |
(13) | 8 | ||||||||||||||
|
|
|
|
|||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
201 | 266 | ||||||||||||||
Income tax expense (benefit) |
33 | 99 | ||||||||||||||
|
|
|
|
|||||||||||||
Net income (loss) including noncontrolling interests |
168 | 167 | ||||||||||||||
Deduct: Net loss from noncontrolling interests |
4 | 3 | ||||||||||||||
|
|
|
|
|||||||||||||
Net income (loss) attributable to UNBC |
$ | 172 | $ | 170 | ||||||||||||
|
|
|
|
|||||||||||||
Total assets, end of period - Market View (dollars in millions): |
$ | 84,013 | $ | 79,840 | ||||||||||||
|
|
|
|
64
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Retail Banking | Corporate Banking | |||||||||||||||
As of and for the Nine Months Ended September 30, |
As of and for the Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Results of operations - Market View (dollars in millions): |
||||||||||||||||
Net interest income (expense) |
$ | 807 | $ | 723 | $ | 933 | $ | 917 | ||||||||
Noninterest income (expense) |
207 | 208 | 422 | 391 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
1,014 | 931 | 1,355 | 1,308 | ||||||||||||
Noninterest expense (income) |
784 | 683 | 713 | 712 | ||||||||||||
Credit expense (income) |
19 | 20 | 145 | 216 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes and including noncontrolling interests |
211 | 228 | 497 | 380 | ||||||||||||
Income tax expense (benefit) |
82 | 89 | 119 | 78 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) including noncontrolling interests |
129 | 139 | 378 | 302 | ||||||||||||
Deduct: Net loss from noncontrolling interests |
- | - | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to UNBC |
$ | 129 | $ | 139 | $ | 378 | $ | 302 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets, end of period - Market View (dollars in millions): |
$ | 24,872 | $ | 23,046 | $ | 32,821 | $ | 30,223 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other | Reconciling Items | |||||||||||||||
As of and for the Nine Months Ended September 30, |
As of and for the Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Results of operations - Market View (dollars in millions): |
||||||||||||||||
Net interest income (expense) |
$ | 155 | $ | 201 | $ | (57) | $ | (48) | ||||||||
Noninterest income (expense) |
91 | 124 | (55) | (51) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
246 | 325 | (112) | (99) | ||||||||||||
Noninterest expense (income) |
341 | 315 | (42) | (39) | ||||||||||||
Credit expense (income) |
(372) | (14) | (1) | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes and including noncontrolling interests |
277 | 24 | (69) | (60) | ||||||||||||
Income tax expense (benefit) |
104 | 37 | (27) | (23) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) including noncontrolling interests |
173 | (13) | (42) | (37) | ||||||||||||
Deduct: Net loss from noncontrolling interests |
11 | 10 | - | - | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to UNBC |
$ | 184 | $ | (3) | $ | (42) | $ | (37) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets, end of period - Market View (dollars in millions): |
$ | 28,478 | $ | 28,553 | $ | (2,158) | $ | (1,982) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
UnionBanCal Corporation |
||||||||||||||||
As of and for the Nine Months Ended September 30, |
||||||||||||||||
2011 | 2010 | |||||||||||||||
Results of operations - Market View (dollars in millions): |
||||||||||||||||
Net interest income (expense) |
$ | 1,838 | $ | 1,793 | ||||||||||||
Noninterest income (expense) |
665 | 672 | ||||||||||||||
|
|
|
|
|||||||||||||
Total revenue |
2,503 | 2,465 | ||||||||||||||
Noninterest expense (income) |
1,796 | 1,671 | ||||||||||||||
Credit expense (income) |
(209) | 222 | ||||||||||||||
|
|
|
|
|||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
916 | 572 | ||||||||||||||
Income tax expense (benefit) |
278 | 181 | ||||||||||||||
|
|
|
|
|||||||||||||
Net income (loss) including noncontrolling interests |
638 | 391 | ||||||||||||||
Deduct: Net loss from noncontrolling interests |
11 | 10 | ||||||||||||||
|
|
|
|
|||||||||||||
Net income (loss) attributable to UNBC |
$ | 649 | $ | 401 | ||||||||||||
|
|
|
|
|||||||||||||
Total assets, end of period - Market View (dollars in millions): |
$ | 84,013 | $ | 79,840 | ||||||||||||
|
|
|
|
65
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Effective October 1, 2011, The Bank of Tokyo-Mitsubishi UFJ, Ltd. transferred its trust company, The Bank of Tokyo-Mitsubishi UFJ Trust Company, to the Company. This transaction had the effect of increasing assets by over $900 million and increasing Tier 1 common capital by over $700 million.
66
Cynthia Larsen v. Union Bank, N.A.: This class action was filed on July 15, 2009 by Union Bank customer Cynthia Larsen. In October 2009, the action was transferred from the Northern District of California to the Multidistrict Litigation action (MDL) in the Southern District of Florida. Omnibus motions to dismiss the complaints in many of the suits included in the MDL, including Larsen, were denied on March 12, 2010. Plaintiffs allege that, by posting charges to their demand deposit accounts in order from highest to lowest amount, the Bank charged them more overdraft fees than it would have charged had the Bank posted items to their accounts in chronological order.
Plaintiffs complaint asserts common-law causes of action for breach of contract and breach of duty of an implied duty of good faith, unconscionability, conversion, unjust enrichment and violation of California Business & Professions Code section 17200 et seq. Plaintiffs seek unspecified damages, return or refund of all improper overdraft fees, disgorgement of profits derived from the Banks alleged conduct, injunctive relief, and attorneys fees and costs. Plaintiffs represent a class of other Union Bank customers who were charged overdraft charges as a result of re-sequencing within the applicable statute of limitations period. On November 2, 2011, a Notice of Settlement in the Larsen case was filed with the court. The proposed settlement, which will be memorialized in a written settlement agreement and related documents, and in which Union Bank admits no liability, is subject to court approval. If approved by the court, the settlement will provide for Union Bank's payment of $35 million to create a common fund for the benefit of the proposed settlement class of all Union Bank customers in the U.S. who had one or more consumer accounts and who, from July 16, 2005 through August 13, 2010, incurred an overdraft fee as a result of Union Bank's prior practice of sequencing debit card transactions in a customer's account from highest to lowest amount.
We are subject to various other pending and threatened legal actions that arise in the normal course of business. We maintain liabilities for losses from legal actions that are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. In addition, we believe the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material adverse effect, either individually or in the aggregate, on our consolidated financial condition, operating results or liquidity.
For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our 2010 Form 10-K, which is incorporated by reference herein, in addition to the following information.
Industry Factors
U.S. and global economies have experienced a serious recession, unprecedented volatility in the financial markets, and significant deterioration in sectors of the U.S. consumer and business economy, all of which continue to present challenges for the banking and financial services industry and for UnionBanCal Corporation; the U.S. Government has responded to these circumstances in the U.S. with a variety of measures; there can be no assurance that these measures will successfully address these circumstances.
Over the past three years, adverse financial and economic developments have impacted the U.S. and global economies and financial markets and have presented challenges for the banking and financial services industry and for UnionBanCal Corporation. These developments included a general recession both globally and in the U.S. and have contributed to substantial volatility in the financial markets.
In response, various significant economic and monetary stimulus measures have been enacted and considered by the U.S. Congress. Refer to Supervision and Regulation in Item 1 of our 2010 Form 10-K for discussion of certain of these measures.
It cannot be predicted whether U.S. Governmental actions will result in lasting improvement in financial and economic conditions affecting the U.S. banking industry and the U.S. economy. It also cannot be predicted whether and to what extent the efforts of the U.S. Government to combat the mixed economic conditions will continue. If, notwithstanding the governments fiscal and monetary measures, the U.S. economy were to deteriorate, this would continue to present significant challenges for the U.S. banking and financial services industry and for our Company. In addition, as a wholly-owned subsidiary of a foreign bank, we have not been eligible to participate in some federal programs such as the U.S. Treasurys Capital Purchase Program and may not qualify for participation in future federal programs.
67
Recently, certain European sovereign borrowers have encountered difficulties in financing renewals of their indebtedness. If this trend continues or worsens, it could have adverse impacts on costs in the global debt markets which could increase funding costs for banks generally and could generate further adverse financial and economic conditions for global and U.S. markets. Continued concerns regarding significant economic weaknesses in the European Union and, in particular, Greece, Italy, Ireland, Portugal and Spain, continue to erode confidence in European financial markets. During 2011, leaders of the major countries in the European Union have been pursuing a variety of measures to address the Eurozone debt crisis including support plans for Greece, Ireland and Portugal. There can be no assurance that measures that have been or may be taken to address the Eurozone debt crisis will resolve the challenging economic and financial situation of these countries or prevent the spread of such difficulties or their having an adverse impact on the global and U.S. economies, with possible consequent adverse effects on the U.S. banking industry and our business and prospects.
The challenges to the level of economic activity in the U.S., and therefore to the banking industry, have also been exacerbated by the extensive political disagreements regarding the statutory debt limit on U.S. federal government obligations and measures to address the substantial federal deficits. Following enactment of federal legislation in August 2011 which averted a default by the U.S. federal government on its sovereign obligations by raising the statutory debt limit and which established a process whereby cuts in federal spending may be accomplished, Standard & Poor's Ratings Services (Standard & Poors) lowered its long-term sovereign credit rating on the U.S. to AA+ from AAA while affirming its highest rating on short-term U.S. obligations. Standard & Poors also stated that its outlook on the long-term rating remained negative. At the present time, the other two major U.S. credit rating agencies have not lowered their credit rating on the U.S.; however, one of them has stated that its outlook is negative. Although it is not possible to predict the long-term impact of these developments on the U.S. economy in general and the banking industry in particular, the downgrade by Standard & Poor's and any further downgrades could increase over time the U.S. federal government's cost of borrowing which may worsen its fiscal challenges, as well as generating upward pressure on interest rates generally in the U.S. which could, in turn, have adverse consequences for borrowers and the level of business activity. Any such developments could also generate further economic uncertainties and challenges which could have adverse affects on the prospects of the banking industry in the U.S.
The effects of changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us
We are subject to significant federal and state banking regulation and supervision, which is primarily for the benefit and protection of our customers and the Federal Deposit Insurance Fund and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This will continue and likely intensify 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 changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance which could result in the imposition of significant civil money penalties or fines. Changes in laws and regulations may also increase our expenses by imposing additional supervision, fees, taxes or restrictions on our operations. Compliance with laws and regulations, especially new laws and regulations, increases our expenses and diverts management attention from our business operations.
On July 21, 2010, President Obama signed into law the Dodd-Frank Act. This important legislation has affected U.S. financial institutions, including UnionBanCal Corporation and Union Bank, in many ways, some of which have increased, or may increase in the future, the cost of doing business and present other challenges to the financial services industry. Due to our size, we will likely be designated as systemically significant to the financial health of the U.S. economy and, as a result, may be subject to additional regulations. Many of the laws provisions are in the process of being implemented by rules and regulations of the federal banking agencies, the scope and impact of which cannot yet be fully determined. The law contains many provisions which may have particular relevance to the business of UnionBanCal Corporation and Union Bank. While the full effect of these provisions of the Dodd-Frank Act on Union Bank cannot be predicted at this time, they may result in adjustments to our FDIC deposit insurance premiums, increased capital and liquidity requirements, increased supervision, increased regulatory and compliance risks and costs and other operational costs and expenses, reduced fee-based revenues and restrictions on some aspects of our operations, and increased interest expense on our demand deposits, some or all of which may be material.
On February 11, 2011, the U.S. Treasury released a White Paper addressing possible solutions to the current problems with Government Sponsored Entities Fannie Mae and Freddie Mac (GSEs). The Treasury White Paper presents three possible long-term options to wind down the GSEs, reform the mortgage market and better target government support of affordable housing. While the specific nature of the reform and its impact on the financial services industry in general, and on Union Bank in particular, is unclear at this time, such reform, if enacted, is likely to have a substantial impact on the mortgage market and could potentially reduce our income from mortgage originations by increasing mortgage costs or lowering originations. The GSE reform could also reduce real
68
estate prices, which could reduce the value of collateral securing outstanding mortgage loans. This reduction of collateral value could negatively impact the value or perceived collectability of these mortgage loans and may increase our allowance for loan losses. Such reforms may also include changes to the Federal Home Loan Bank System, which could adversely affect a significant source of term funding for lending activities by the banking industry, including Union Bank. These reforms may also result in higher interest rates on residential mortgage loans, thereby reducing demand which could have an adverse impact on our residential mortgage lending business.
President Obamas proposed 2012 U.S. budget included a Financial Crisis Responsibility Fee that would apply to banks with greater than $50 billion in assets. This fee is intended to recover taxpayer funds provided to U.S. financial institutions through the U.S. Treasurys Troubled Asset Relief Program (TARP). Although we did not receive, and were not eligible to receive, direct TARP investment from the U.S. Treasury, as we have greater than $50 billion in assets, it appears that we would be subject to this fee. Therefore, our costs will likely increase if this fee is enacted.
International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to our ownership by BTMU, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely affect our activities and investments and those of our subsidiaries in the future. In addition to changes in required capital resulting from the Dodd-Frank Act, the Basel Committee published in December 2010 guidelines for the Basel III global regulatory framework for capital and liquidity, including calibration for increased capital requirements approved by the G20 leadership in November 2010. Current U.S. regulatory leverage ratio requirements are more stringent than those proposed by Basel III, which will be further assessed prior to finalization. New liquidity standards are expected to be adopted by U.S. bank regulatory agencies with some modifications. These new liquidity standards could require that we raise and maintain additional liquidity. While the ultimate implementation of these proposals in the U.S. is subject to the discretion of the U.S. bank regulators, these proposals, if adopted, could restrict our ability to grow during favorable market conditions or require us to raise additional capital and liquidity. As a result, our business, results of operations, financial condition or prospects could be adversely affected. Refer to Supervision and Regulation-Basel Committee Capital Standards in Item 1 of our 2010 Form 10-K for additional information regarding the Basel Committee capital standards.
We maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if compliance systems and procedures were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation.
Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the U.S. Under the Dodd-Frank Act and a long-standing policy of the Federal Reserve Board, a bank holding company is expected to act as a source of financial and managerial 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 Federal Reserve Board are (a) conducting open market operations in U.S. Government securities, (b) changing the discount rates on borrowings by depository institutions and the federal funds rate, 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 Federal Reserve Board may have a material effect on our business, prospects, results of operations and financial condition.
Refer to Supervision and Regulation in Item 1 of our 2010 Form 10-K for discussion of certain existing and proposed laws and regulations that may affect our business.
Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers and decrease our revenue from other customers
Under current bankruptcy laws, courts cannot force a modification of mortgage and home equity loans secured by primary residences. In response to the financial crisis, in 2009, legislation was proposed to allow mortgage loan cram-downs, which would empower courts to modify the terms of mortgage and home equity loans including the ability to reduce the principal amounts to reflect lower underlying property values. Although this legislation has not moved forward at this time, legislation of this type could result in our writing down the value of our residential mortgage and home equity loans to reflect their lower loan values. There is also risk that home equity loans in a second lien position (i.e., behind a mortgage) could experience significantly higher losses to the extent they become unsecured as a result of a cram-down. The availability of principal reductions or other mortgage loan modifications could make bankruptcy a more attractive option for troubled borrowers, leading to increased bankruptcy filings and accelerated defaults.
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Changes in federal rules have imposed new restrictions on banks abilities to charge overdraft services and interchange fees. Under the final rule, effective October 1, 2011, the maximum permissible interchange fee that a bank may receive is the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction, with an additional upward adjustment of no more than $0.01 per transaction if a bank develops and implements policies and procedures reasonably designed to achieve fraud-prevention standards set by regulation. These restrictions are resulting in decreased revenues and increased compliance costs for the industry and Union Bank and there can be no assurance that alternative sources of revenues can be implemented to offset the impact of this development. See Supervision and Regulation Overdraft and Interchange Fees in Item 1 of our 2010 Form 10-K for additional information.
In April 2011, new federal rules went into effect regulating residential mortgage broker compensation. Generally, such compensation must now be based solely on the loan amount and not on any loan terms. In addition, mortgage brokers must offer the borrower the lowest possible interest rate and fees for which they qualify and may not collect fees from both the bank and the borrower. Although these amendments do not apply to banks directly, they regulate the compensation that banks may pay to mortgage brokers and the types of transactions they may refer to banks. In addition, in April 2011, the Federal Reserve proposed further rules to prohibit banks from making a residential mortgage loan without regard to a borrowers repayment ability. The proposed rule also would limit prepayment penalties and impose lengthened record retention requirements on banks making residential mortgage loans. If a bank violated the ability-to-pay requirement, a borrower could pursue broad legal remedies against the bank. We expect these recent and proposed amendments to increase our regulatory compliance and legal burdens and expenses and possibly negatively impact residential mortgage originations, either or both of which could have an adverse impact on our residential mortgage lending business.
Fluctuations in interest rates on deposits or other funding sources could adversely affect our margin spread
Changes in market interest rates on deposits or other funding sources, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact, and has in past years impacted, our net interest margin, 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. This impact could result in a decrease in our interest income relative to interest expense. Changes in interest rates can also affect the level of loan refinancing activity, which impacts the amount of prepayment penalty income we receive on loans we hold. Recently, the banking industry has operated in an extremely low interest rate environment relative to historical averages and the Federal Reserves current monetary policies are expected to encourage the continuation of persistently low short-term and long-term interest rates, which would place downward pressure on our net interest margin.
Substantial competition could adversely affect us
Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, Oregon, Washington, and Texas as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions, credit unions, finance companies, mortgage banks and major foreign-affiliated or foreign banks, as well as many financial and nonfinancial firms that offer services similar to those offered by us, including many large securities firms and financial services subsidiaries of commercial and manufacturing companies. Some of our competitors are insurance companies or community or regional banks that have strong local market positions. Other competitors include large financial institutions that have substantial capital, technology and marketing resources, which are well in excess of ours. Competition in our industry may further intensify as a result of the recent and increasing level of consolidation of financial services companies, particularly in our principal markets resulting from adverse economic and market conditions. Larger financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. In addition, some of our current commercial banking customers may seek alternative banking sources if they develop credit needs larger than we may be able to accommodate. Many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. Additionally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and payment systems. We also experience competition, especially for deposits, from internet-based banking institutions and other financial companies, which do not always have a physical presence in our market footprint and have grown rapidly in recent years. Competition in our principal markets may further intensify as a result of the Dodd-Frank Act, which, among other things, permits out of state de novo branching by national banks, state banks and foreign banks from other states.
The continuing war on terrorism, overseas military conflicts and unrest in other countries could adversely affect U.S. and global economic conditions
Acts or threats of terrorism and actions taken by the U.S. or other governments as a result of such acts or threats and other international hostilities, as well as political unrest in various regions, including the Middle East, may result in a disruption of U.S. and global economic and financial conditions and increases in energy costs and could adversely affect business, economic and financial conditions in the U.S. and globally and in our principal markets.
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Company Factors
Adverse economic factors affecting certain industries we serve could adversely affect our business
We are subject to certain industry-specific economic factors. For example, a significant portion of our total loan portfolio is related to residential real estate, especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on our operations by depressing new mortgage loan originations, and could negatively impact our title and escrow deposit levels. Additionally, a continued or further downturn in the residential real estate and housing industries in California could have an adverse effect on our operations and the quality of our real estate loan portfolio. These factors could adversely impact the quality of our residential construction and residential mortgage portfolios in various ways, including by decreasing the value of the collateral for our mortgage loans. These factors could also negatively affect the economy in general and thereby our overall loan portfolio.
The temporary upper limit of $729,750 for a residential mortgage loan that may be purchased by the government sponsored enterprises Fannie Mae and Freddie Mac expired on September 30, 2011, and the high balance loan limit was reduced to $625,500. This limit applied to high cost areas where the median home price exceeded the conforming loan limit, including many areas within our markets. This reduction could result in higher mortgage rates for borrowers purchasing homes that exceed the new limit, which, in turn, could reduce the pool of eligible buyers for high value homes, reduce mortgage originations and negatively impact the collateral value of homes in high cost areas. Any of these results could have an adverse impact on our residential mortgage lending business.
The mortgage industry is in the midst of unprecedented change triggered by the significant economic downturn. Lawmakers are being urged to establish national servicing standards to protect borrowers and establish a common framework for response to residential mortgage customers, especially related to default and foreclosure. A recent legal settlement between the Attorneys General of ten states and the 14 largest U.S. residential mortgage loan servicers includes a number of business practice modifications which could significantly increase the costs of residential mortgage loan servicing. The OCC issued supervisory guidance to national banks, such as Union Bank, on this subject on June 30, 2011. This guidance on mortgage foreclosure activities was issued by the OCC in response to the April 2011 review of foreclosure processing at 14 federally regulated mortgage servicers by the federal banking regulators. This review found critical weaknesses in servicers foreclosure governance and documentation processes, and oversight and monitoring of third party vendors, and established new foreclosure management standards. These new standards address foreclosure management governance, suspension of foreclosure proceedings for successfully performing trial period modifications where the bank may do so under servicing contracts, enhanced documentation practices and improved oversight of third party vendors. The OCC also stated that detailed mortgage servicing requirements and guidance regarding broader issues related to working with troubled borrowers will be issued at a later date. The new guidance and any further increased standards and restrictions may impact the overall mortgage loan servicing industry in general, increase the cost of residential mortgage lending and have an adverse impact on our residential lending business.
We provide financing to businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors and are impacting the performance of our commercial real estate and commercial and industrial portfolios. The commercial real estate industry in the U.S., and in California in particular, has been increasingly adversely impacted by the recessionary environment and lack of liquidity in the financial markets. The home building and mortgage industry in California has been especially adversely impacted by the deterioration in residential real estate markets. Poor economic conditions and financial access for commercial real estate developers and homebuilders could continue to adversely affect property values, resulting in higher nonperforming assets and charge offs in this sector. Our commercial and industrial portfolio, and the communications and media industry, the retail industry, the energy industry and the technology industry in particular, are also being impacted by recessionary market conditions. Continued volatility in fuel prices and energy costs could adversely affect businesses in several of these industries. Conditions and credit markets remain uncertain and could produce elevated levels of charge-offs. 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 and a slowing of growth or reduction in our loan portfolio.
Union Bank provides banking services, including credit facilities, to a number of businesses that may depend on other businesses that are based in or conduct business in Thailand. The flooding in Thailand, which started in July 2011, could have adverse financial consequences for these customers, including their ability to repay their obligations to Union Bank.
Adverse California economic conditions could adversely affect our business
The government of the State of California currently faces economic and fiscal challenges, the long-term impact of which on the States economy cannot be predicted with any certainty. Economic conditions in California are subject to various challenges at this time, including significant deterioration in the residential real estate sector and the California state governments budgetary and fiscal difficulties. California continues to have a high unemployment rate. Also, California markets have experienced among the worst
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property value declines in the U.S. Recently, California energy markets have experienced substantial increases in energy prices which, if such increases continue or intensify, could have negative consequences for the California economy. Additionally, California is a major trading partner with Japan which, earlier in 2011, experienced a severe earthquake, tsunami, leakage of radioactive materials from a nuclear power facility and electrical shortages in parts of the country. The long-term effect of such developments on businesses in California cannot be predicted at this time.
For the past several years, the State government of California has experienced budget shortfalls or deficits which have led to protracted negotiations between the Governor and the State Legislature over how to address the budget gap. This challenging situation is likely to continue for the foreseeable future. In addition, municipalities and other governmental units within California have been experiencing budgetary difficulties. Concerns also have arisen regarding the outlook for the State of Californias governmental obligations, as well as those of California municipalities and other governmental units.
A substantial majority of our assets, deposits and interest and fee income is 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. If the budgetary and fiscal difficulties of the California State government and California municipalities and other governmental units continue or economic conditions in California decline further, we expect that our level of problem assets could increase and our prospects for growth could be impaired.
The Bank of Tokyo-Mitsubishi UFJs and Mitsubishi UFJ Financial Groups credit ratings and financial or regulatory condition could adversely affect our operations
Adverse changes to our credit ratings, reputation or creditworthiness could have a negative effect on our operations. We generally fund our operations independently of BTMU and MUFG and believe our business is not necessarily closely related to the business or outlook of BTMU or MUFG. However, if BTMU and MUFGs credit ratings or financial condition or prospects were to decline, this could adversely affect our credit rating or harm our reputation or perceived creditworthiness. In February 2011, Moodys Japan K.K. changed the outlook for the Government of Japans bond ratings to negative from stable and consequently changed the outlook to negative from stable for the long-term debt credit ratings of Japans three largest banks, including BTMU, noting that a downgrade in the government rating would result in a downgrade in the banks ratings, absent a material improvement in their standalone credit quality.
On March 11, 2011, a large earthquake and tsunami occurred in Japan causing widespread destruction. Thereafter, there occurred leakage of radioactive material from a nuclear power plant in northern Japan which was badly damaged in the earthquake and tsunami as well as electrical shortages in certain areas of the country. The ultimate impact of this natural disaster on the economy of Japan and its government debt credit ratings and the credit ratings of Japans three largest banks, including BTMU, cannot be predicted at this time. On April 26, 2011, Standard and Poor's, while affirming its long-term sovereign credit rating on Japanese government debt, changed its outlook to negative from stable citing concerns about anticipated increases in Japanese government debt due to reconstruction costs in the aftermath of the natural disaster and lack of plans to deal with such increases. In August 2011, Moodys downgraded Japans credit rating one step to Aa3, in line with Standard & Poors rating, and announced related ratings downgrades for most major Japanese banks, including BTMU. Rating agency Fitch recently lowered its outlook for Japan to negative from stable and warned of a possible downgrade of Japans sovereign credit rating.
At this time, we cannot predict further actions, if any, which the rating agencies may take regarding the Government of Japan, MUFG or BTMU, nor the ultimate effect of these developments on our credit rating.
BTMU and MUFG are also subject to regulatory oversight, review and supervisory action (which can include fines or penalties) by Japanese and U.S. regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns or supervisory action in the U.S. and in Japan against BTMU or MUFG.
Risks associated with potential acquisitions or divestitures or restructurings may adversely affect us
We have in the past, and may in the future, seek to expand our business by acquiring other businesses which we believe will enhance our business. We cannot predict the frequency, size or timing of our acquisitions, as this will depend on the availability of prospective target opportunities at valuation levels we find attractive and the competition for such opportunities from other parties. There can be no assurance that our acquisitions will have the anticipated positive results, including results related to: the total cost of integration; the retention of key personnel; the time required to complete the integration; the amount of longer-term cost savings; continued growth; or the overall performance of the acquired company or combined entity. We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we acquire. Acquisitions may also lead us to enter geographic and product markets in which we have limited or no direct prior experience.
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Our purchase and assumption and loss share agreements with the FDIC relating to our Frontier Bank and Tamalpais Bank transactions in 2010 have specific compliance, servicing, notification and reporting requirements. Any failure to comply with the requirements of the loss share agreements, or to properly service the loans and other real estate owned (OREO) covered by any loss share arrangement, may cause individual loans or loan pools to lose their eligibility for loss share payments from the FDIC, potentially resulting in material losses that are currently not anticipated.
Integration of an acquired business can be complex and costly. If we are not able to integrate successfully past or future acquisitions, there is a risk that results of operations could be adversely affected.
In addition, we continue to evaluate the performance of all of our businesses and may sell or restructure a business. Any divestitures or restructurings may result in significant expenses and write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition and may involve additional risks, including difficulties in obtaining any required regulatory approvals, the diversion of managements attention from other business concerns, the disruption of our business and the potential loss of key employees.
We may not be successful in addressing these or any other significant risks encountered in connection with any acquisition, divestiture or restructuring we might make.
We rely on third parties for important products and services
Third-party vendors provide key components of our business infrastructure such as internet connections, network access and mutual fund distribution and we do not control their actions. Among other services provided by these vendors, third-party vendors have played and will continue to play a key role in the implementation of our technology enhancement projects. Any problems caused by these third parties, including those as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers, implement our technology enhancement projects and otherwise to conduct our business and could result in disputes with such vendors over their performance of their services to us. Replacing these third-party vendors on economically feasible terms may not always be possible or within our control and could also entail significant delay and expense.
Significant legal or regulatory proceedings could subject us to substantial uninsured liabilities
We are from time to time subject to claims and proceedings related to our present or previous operations including claims by customers and our employees and our contractual counterparties. These claims, which could include supervisory or enforcement actions by bank regulatory authorities, or criminal proceedings by prosecutorial authorities, could involve demands for large monetary amounts, including civil money penalties or fines imposed by government authorities, and significant defense costs. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by government authorities and may not cover all other claims that have been or might be brought against us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition.
Our credit ratings are important in order to maintain liquidity
Major credit rating agencies regularly evaluate the securities of UnionBanCal Corporation and the securities and deposits of Union Bank. Their ratings of our long-term debt and other securities, and also of our short-term obligations, are based on a number of factors including our financial strength, ability to generate earnings, and other factors, some of which are not entirely within our control, such as conditions affecting the financial services industry and the economy. In light of the difficulties in the financial services industry, the financial markets and the economy, there can be no assurance that we will maintain our current long-term and short-term ratings. In addition, Moodys Investors Service and Fitch, Inc. have announced that the ratings of a number of large U.S. banks, not including Union Bank, may be negatively affected because the passage of the Dodd-Frank Act makes it less likely that the government would step in to rescue a troubled bank. It is unclear whether other rating agencies will respond in a similar way or whether perceived reduction in systemic support could lead or contribute to negative downward pressure on our credit ratings.
If our long-term or short-term credit ratings suffer downgrades, such downgrades could adversely affect access to liquidity and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of commercial depositors, investors and counterparties willing to lend to us, thereby curtailing our business operations and reducing our ability to generate income.
Certain of our derivative instruments contain provisions that require us to maintain a specified credit rating. If our credit rating were to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions.
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Adverse changes in the credit ratings, operations or prospects of our parent companies, BTMU and MUFG, could also adversely impact our credit ratings. For additional information, refer to the discussion appearing above under the caption The Bank of Tokyo-Mitsubishi UFJs and Mitsubishi UFJ Financial Groups credit ratings and financial and regulatory condition could adversely affect our operations.
We are subject to operational risks, including cybersecurity risks
We are subject to many types of operational risks throughout our organization. Operational risk is the potential loss from our operations due to factors, such as failures in internal control, systems failures, cybersecurity risks or external events, that do not fall into the market risk or credit risk categories described in Managements Discussion and Analysis of Financial Condition and Results of Operations Business Segments. Operational risk includes execution risk related to operational initiatives, including implementation of our technology enhancement projects, reputational risk, legal and compliance risk, the risk of fraud or theft by employees, customers or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. A discussion of risks associated with regulatory compliance appears above under the caption The effects of changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
Our operations rely on the secure processing, storage, transmission and reporting of personal, confidential and other sensitive information in our computer systems, networks and business applications. Although we take protective measures, our computer systems may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code, and other events that could have significant negative consequences to us. Such events could result in interruptions or malfunctions in our or our customers operations, interception, misuse or mishandling of personal or confidential information, or processing of unauthorized transactions or loss of funds. These events could result in litigation and financial losses that are either not insured against or not fully covered by our insurance, regulatory consequences or reputational harm, any of which could harm our competitive position, operating results and financial condition. These types of incidents can remain undetected for extended periods of time, thereby increasing the associated risks. We may also be required to expend significant resources to modify our protective measures or to investigate and remediate vulnerabilities or exposures arising from cybersecurity risks.
We depend on the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and our employees in our day-to-day and ongoing operations. Our dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. With regard to the physical infrastructure that supports our operations, we have taken measures to implement backup systems and other safeguards, but our ability to conduct business may be adversely affected by any disruption to that infrastructure. Failures in our internal control or operational systems, security breaches or service interruptions could impair our ability to operate our business and result in potential liability to customers, reputational damage and regulatory intervention, any of which could harm our operating results and financial condition.
We may also be subject to disruptions of our operating systems arising from other events that are wholly or partially beyond our control, such as electrical, internet or telecommunications outages or unexpected difficulties with the implementation of our technology enhancement projects, which may give rise to disruption of service to customers and to financial loss or liability. Our business recovery plan may not work as intended or may not prevent significant interruptions of our operations.
Negative public opinion could damage our reputation and adversely impact our business and revenues
As a financial institution, our business and revenues are subject to risks associated with negative public opinion. The reputation of the financial services industry in general has been damaged as a result of the financial crisis and other matters affecting the financial services industry, including mortgage foreclosure issues. Most recently, negative public opinion concerning the financial services industry has been evidenced by the Occupy Wall Street demonstration that has spawned similar protests in major cities and communities throughout the U.S. and worldwide. Negative public opinion about us could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our customers expectations or applicable regulatory requirements, governmental enforcement actions, corporate governance and acquisitions, or from actions taken by regulators and community organizations in response to those activities. We generally fund our operations independently of BTMU and MUFG and believe our business is not necessarily closely related to the business or outlook of BTMU or MUFG. However, negative public opinion could also result from regulatory concerns regarding, or supervisory or other governmental actions in the U.S. or Japan against, us or Union Bank, or BTMU or MUFG. Negative public opinion can adversely affect our ability to keep and attract and/or retain lending and deposit customers and employees and can expose us to litigation and regulatory action and increased liquidity risk. Actual or alleged conduct by one of our businesses can result in negative public opinion about our other businesses.
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Our framework for managing risks may not be effective in mitigating risk and loss to our company
Our risk management framework is made up of various processes and strategies to manage our risk exposure. Types of risk to which we are subject include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal risk, compliance risk, reputation risk, fiduciary risk and private equity risk, among others. Our framework to manage risk, including the frameworks underlying assumptions, such as our modeling methodologies, may not be effective under all conditions and circumstances. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition, results of operations or prospects could be materially adversely affected.
No. | Description | |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) | |
31.2 | Certification of the Chief Financial Officer 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) | |
101 | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Changes in Stockholders Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Financial Statements. (2) |
(1) | Filed herewith. |
(2) | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and is not otherwise subject to liability under those sections. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION (Registrant) | ||||||
Date: November 10, 2011 | By: | /S/ MASASHI OKA | ||||
Masashi Oka | ||||||
President and Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
Date: November 10, 2011 | By: | /S/ JOHN F. WOODS | ||||
John F. Woods | ||||||
Vice Chairman and Chief Financial Officer | ||||||
(Principal Financial Officer) | ||||||
Date: November 10, 2011 | By: | /S/ DAVID A. ANDERSON | ||||
David A. Anderson | ||||||
Executive Vice President and Controller | ||||||
(Principal Accounting Officer) |
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EXHIBIT INDEX
No. | Description | |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1) | |
31.2 | Certification of the Chief Financial Officer 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) | |
101 | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, is formatted in XBRL interactive data files: (i) Consolidated Statements of Income; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Changes in Stockholders Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Financial Statements. (2) |
(1). | Filed herewith |
(2) | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and is not otherwise subject to liability under those sections. |
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CERTIFICATION | Exhibit 31.1 |
I, Masashi Oka, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of UnionBanCal Corporation (the Registrant); |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and 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 report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the Registrants 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; and |
d) | disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
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 Registrants 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 Registrants internal control over financial reporting. |
Date: November 10, 2011
By: | /S/ MASASHI OKA | |
Masashi Oka | ||
President and Chief Executive Officer |
CERTIFICATION | Exhibit 31.2 |
I, John F. Woods, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of UnionBanCal Corporation (the Registrant); |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and 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 report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the Registrants 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; and |
d) | disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
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 Registrants 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 Registrants internal control over financial reporting. |
Date: November 10, 2011
By: | /S/ JOHN F. WOODS | |
John F. Woods | ||
Vice Chairman and Chief Financial Officer |
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 ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Masashi Oka, 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: November 10, 2011
By: | /S/ MASASHI OKA | |
Masashi Oka | ||
Chief Executive Officer |
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 ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John F. Woods, 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: November 10, 2011
By: | /S/ JOHN F. WOODS | |
John F. Woods | ||
Chief Financial Officer |
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $) In Millions, except Share data | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Assets | ||
Interest bearing deposits in banks | $ 2,757 | $ 217 |
Trading account assets pledged as collateral | 6 | 43 |
Securities available for sale pledged as collateral | 0 | 10 |
Fair Value of Securities held to maturity | 1,474 | 1,560 |
Other asset | 3,520 | 3,499 |
Liabilities | ||
Long-term debt | 7,064 | 5,598 |
Other liabilities | 1,925 | 1,024 |
UNBC Stockholder's Equity: | ||
Preferred Stock, Shares Authorized | 5,000,000 | 5,000,000 |
Preferred Stock, Shares Issued | ||
Preferred Stock, Shares Outstanding | ||
Common Stock: | ||
Common Stock, Par or Stated Value Per Share | $ 1 | $ 1 |
Common Stock, Shares Authorized | 300,000,000 | 300,000,000 |
Common Stock, Shares, Issued | 136,330,829 | 136,330,829 |
Variable Interest Entity, Not Primary Beneficiary | ||
Assets | ||
Interest bearing deposits in banks | 7 | 11 |
Other asset | 290 | 283 |
Liabilities | ||
Long-term debt | 8 | 8 |
Other liabilities | $ 3 | $ 2 |
Document and Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Oct. 31, 2011 | |
Document and Entity Information [Abstract] | ||
Entity Registrant Name | UNIONBANCAL CORP | |
Entity Central Index Key | 0001011659 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2011 | |
Amendment Flag | false | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Current Fiscal Year End Date | --12-31 | |
Entity Well-known Seasoned Issuer | No | |
Entity Voluntary Filers | No | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Common Stock, Shares Outstanding | 136,330,830 |
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Variable Interest Entities, Private Capital and Other Investments | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Variable Interest Entities, Private Capital and Other Investments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Variable Interest Entities, Private Capital and Other Investments |
Note 6 - Variable Interest Entities, Private Capital and Other Investments The Company is involved in various structures that are considered to be VIEs. Generally, a VIE is a corporation, partnership, trust or any other legal structure that has equity investors that: 1) do not have sufficient equity at risk for the entity to independently finance its activities; 2) lack the power to direct the activities that significantly impact the entity’s economic success; and/or 3) do not have an obligation to absorb the entity’s losses or the right to receive the entity’s returns. The Company’s investments in VIEs primarily consist of equity investments in low income housing credit (LIHC) structures and renewable energy projects, which are designed to generate a return primarily through the realization of federal tax credits, and private capital investments. For further information related to the Company’s consolidated VIEs and those that were not consolidated, see Note 7 to the consolidated financial statements in the Company’s 2010 Form 10-K. Consolidated VIEs At September 30, 2011, assets of $297 million and liabilities of $11 million were consolidated by the Company on its consolidated balance sheet related to two LIHC investment fund structures because the Company sponsors, manages and syndicates the funds. The assets are included in other assets as well as interest bearing deposits in banks, the liabilities are primarily included in long-term debt, and third-party investor interests are included in stockholder’s equity as noncontrolling interests. Neither creditors nor equity investors in the LIHC investments have any recourse to the general credit of the Company, and the Company’s creditors do not have any recourse to the assets of the consolidated LIHC investments. For the three months and nine months ended September 30, 2011, the Company recorded $6 million and $18 million of expenses related to its consolidated VIEs, respectively. For the three months and nine months ended September 30, 2010, the Company recorded $6 million and $17 million of expenses related to its consolidated VIEs, respectively. These expenses are included in other noninterest expense on the Company’s consolidated statements of income.
Unconsolidated VIEs in which the Company has a Variable Interest The following table presents the Company’s carrying amounts related to the unconsolidated VIEs and location on the consolidated balance sheet at September 30, 2011. The table also presents the Company’s maximum exposure to loss resulting from its involvement with these VIEs. The maximum exposure to loss represents the carrying value of the Company’s involvement plus any legally binding unfunded commitments in the unlikely event that all of the assets in the VIEs become worthless.
Private Capital and Other Investments The following table shows the balances of private capital and other investments as of September 30, 2011 and December 31, 2010.
The Company evaluates these investments periodically for other-than-temporary impairment. During the nine months ended September 30, 2011, the Company did not record any impairment related to these investments. For further information on the Company’s private capital and other investments, see Note 8 to the consolidated financial statements in the Company’s 2010 Form 10-K. |
Derivative Instruments and Other Financial Instruments Used For Hedging | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Derivative Instruments and Other Financial Instruments Used For Hedging [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Other Financial Instruments Used For Hedging |
Note 11 – Derivative Instruments and Other Financial Instruments Used For Hedging The Company is a party to certain derivative and other financial instruments that are entered into for the purpose of trading, meeting the needs of customers, and changing the impact on the Company’s operating results due to market fluctuations in currency rates, interest rates or commodity prices.
Credit and market risks are inherent in derivative instruments. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract, which exceeds the value of the existing collateral, if any. The Company utilizes master netting and collateral support annex (CSA) agreements in order to reduce its exposure to credit risk. Additionally, the Company considers the potential loss in the event of counterparty default in estimating the fair value amount of the derivative instrument. Market risk is defined as the risk of loss arising from an adverse change in the market value of financial instruments caused by fluctuations in market prices or rates. Derivatives are used to manage exposure to interest rate, commodity and foreign currency risk, generate profits from proprietary trading and to assist customers with their risk management objectives. The Company designates derivative instruments as those used for hedge accounting purposes, and those for trading or economic hedge purposes. All derivative instruments are recognized as assets or liabilities on the consolidated balance sheet at fair value. The tables below present the notional amounts, and the location and fair value amounts of the Company’s derivative instruments reported on the consolidated balance sheet, segregated between derivative instruments designated and qualifying as hedging instruments and all other derivative instruments as of September 30, 2011 and December 31, 2010. Asset and liability values are presented gross, excluding the impact of legally enforceable master netting and CSA agreements.
Certain of the Company’s derivative instruments contain provisions that require the Company to maintain a specified credit rating. If the Company’s credit rating was to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions. At September 30, 2011, the aggregate fair value (including net interest payable/receivable) of all derivative instruments with credit-risk mitigated contingent features that are in a liability position was $9 million. At September 30, 2011, the Company had not pledged any collateral to secure these obligations. If all of the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2011, the Company would have been required to provide collateral of $9 million to settle these contracts. Derivatives Used in Asset and Liability Management The Company uses interest rate derivatives to manage the financial impact on the Company from changes in market 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, borrowings, and future debt issuances. The following describes the significant hedging strategies of the Company. Cash Flow Hedges Hedging Strategies for Variable Rate Loans, Borrowings and Certificates of Deposit and Other Time Deposits The Company engages in several types of cash flow hedging strategies related to forecasted future interest payments, with the hedged risk being the changes in cash flows attributable to changes in the designated benchmark rate (i.e., U.S. dollar LIBOR). In these strategies, the hedging instruments are matched with groups of similar variable rate instruments such that the reset tenor of the variable rate instruments and that of the hedging instrument are identical at inception. Cash flow hedging instruments currently being utilized include purchased caps and interest rate swaps. At September 30, 2011, the weighted average remaining life of the currently active cash flow hedges was approximately 2.1 years. In the first quarter of 2011, the Company terminated $1.0 billion notional amount of interest rate swaps concurrent with the issuance of $1.0 billion of fixed rate debt. The swaps were accounted for as a cash flow hedge and were used to mitigate the changes in cash flows on the forecasted fixed rate debt. At termination, the Company had a related unrealized gain of $14 million, which is being amortized into interest expense over the life of the debt. The hedge ineffectiveness that was recognized in earnings upon the termination of the interest rate swap was not significant. The Company used purchased interest rate caps with a notional amount of $1.0 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed borrowings. Payments received under the cap contract offset the increase in borrowing interest expense if the relevant LIBOR index rises above the cap’s strike rate. The Company used interest rate swaps with a notional amount of $1.2 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed other borrowings and long-term debt. Payments received (or paid) under the swap contract offset fluctuations in other borrowings and long-term debt interest expense caused by changes in the relevant LIBOR index. The Company used purchased interest rate caps with a notional amount of $3 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate component of forecasted issuances of short-term, fixed rate certificates of deposit (CDs). Net payments to be received under the cap contract offset increases in interest expense if the relevant LIBOR index rises above the cap’s strike rate. The Company used interest rate swaps with a notional amount of $1.5 billion to hedge the risk of changes in cash flows attributable to changes in the designated benchmark interest rate on LIBOR indexed loans. Payments received (or paid) under the swap contract offset fluctuations in interest income on loans caused by changes in the relevant LIBOR index. Hedging transactions are structured at inception so that the notional amounts of the hedging instruments are matched to an equal principal amount of loans, CDs, or borrowings, the index and repricing frequencies of the hedging instruments match those of the loans, CDs, or borrowings and the period in which the designated hedged cash flows occurs is equal to the term of the hedge instruments. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedging instruments versus those of the loans, CDs or borrowings.
For cash flow hedges, the effective portion of the gain or loss on the hedging instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged cash flows are recognized in net interest income. Gains and losses representing hedge ineffectiveness and any non qualifying hedge components are recognized in noninterest expense in the period in which they arise. At September 30, 2011, the Company expects to reclassify approximately $2 million of income from accumulated other comprehensive income to net interest income during the twelve months ending September 30, 2012. This amount could differ from amounts actually realized due to changes in interest rates and the addition of other hedges subsequent to September 30, 2011. The following table presents the amount and location of the net gains and losses recorded in the Company’s consolidated statements of income and changes in stockholder’s equity for derivatives designated as cash flow hedges for the three and nine months ended September 30, 2011 and 2010.
(1) For the three and nine months ended September 30, 2010, the amount recognized was less than less than $1 million. Trading Derivatives Derivative instruments classified as trading include both derivatives entered into for the Company’s own account and as an accommodation for customers. Trading derivatives are included in trading assets or trading liabilities with changes in fair value reflected in income from trading account activities. The majority of the Company’s derivative transactions for customers were essentially offset by contracts with third parties that reduce or eliminate market risk exposures. The Company offers market-linked certificates of deposit, which allow the client to earn the higher of either a minimum fixed rate of interest or a return tied to either equity, commodity or currency indices. The Company hedges its exposure to the embedded derivative contained in market-linked CDs with a perfectly matched over-the-counter option. Both the embedded derivative and hedge options are recorded at fair value with the realized and unrealized changes in fair value recorded in noninterest income within trading account activities.
The following table presents the amount and location of the net gains and losses reported in the consolidated statement of income for derivative instruments classified as trading for the three and nine months ended September 30, 2011 and 2010.
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Recently Issued Accounting Pronouncements That Are Not Yet Adopted | 9 Months Ended |
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Sep. 30, 2011 | |
Recently Issued Accounting Pronouncements That Are Not Yet Adopted [Abstract] | |
Recently Issued Accounting Pronouncements That Are Not Yet Adopted |
Note 2 - Recently Issued Accounting Pronouncements That Are Not Yet Adopted Goodwill- Impairment testing In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), which provides an option of performing a qualitative approach to determine whether further impairment testing is necessary. ASU 2011-08 permits an entity to first assess qualitatively whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, an entity must perform step one of the two-step goodwill impairment test. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Earlier adoption is permitted. Management does not expect the adoption of this guidance to impact the Company’s financial position and results of operations. Presentation of Comprehensive Income In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05), which removes the option of presenting comprehensive income in the Consolidated Statements of Changes in Stockholder’s Equity. ASU 2011-05 provides entities with an option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (OCI) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, entities must display adjustments for items that are reclassified from OCI to net income in both net income and OCI. This guidance does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income. This guidance, related only to disclosures, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted.
Fair Value Measurement and Disclosures In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between US GAAP and International Financial Reporting Standards. While many of the amendments to US GAAP are not expected to have a significant effect on practice, the new guidance changes some fair value measurement principles and disclosure requirements. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. Management is currently assessing the impact of this guidance on the Company’s financial position and results of operations. Reconsideration of Effective Control for Repurchase Agreements In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The update removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. This guidance is effective prospectively for transactions, or modifications of existing transactions, that occur on or after the first interim or annual period beginning on or after December 15, 2011. Management is currently assessing the impact of this guidance on the Company’s financial position and results of operations. |
Commercial Paper and Other Short-Term Borrowings | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Paper and Other Short-Term Borrowings [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Paper and Other Short-Term Borrowings |
Note 8 - Commercial Paper and Other Short-Term Borrowings The following is a summary of the Company’s commercial paper and other short-term borrowings:
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Commitments, Contingencies and Guarantees | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||
Commitments, Contingencies and Guarantees [Abstract] | |||||||||||||||||||||||||||||||||||||||||
Commitments, Contingencies and Guarantees |
Note 13 – Commitments, Contingencies and Guarantees The following table summarizes the Company’s commitments.
Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. Additionally, the Company enters into risk participations in bankers’ acceptances wherein a fee is received to guarantee a portion of the credit risk on an acceptance of another bank. The majority of these types of commitments have terms of one year or less. At September 30, 2011, the carrying value of the Company’s risk participations in bankers’ acceptances and standby and commercial letters of credit totaled $5 million. Estimated exposure to loss related to these commitments is covered by the allowance for losses on off-balance sheet commitments. The carrying value of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the consolidated balance sheet. The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on management’s credit assessment of the customer. Principal investments include direct investments in private and public companies and indirect investments in private equity funds. The Company issues commitments to provide equity and mezzanine capital financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately-held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate. The Company invests in either guaranteed or unguaranteed LIHC investments. The guaranteed LIHC investments carry a minimum rate of return guarantee by a creditworthy entity. The unguaranteed LIHC investments carry partial guarantees covering the timely completion of projects, availability of tax credits and operating deficit thresholds from the issuer. For these LIHC investments, the Company has committed to provide additional funding as stipulated by its investment participation. The Company is a fund manager for limited liability companies issuing LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees a minimum rate of return throughout the investment term of over a twelve-year weighted average period. Additionally, the Company receives guarantees, which include the timely completion of projects, availability of tax credits and operating deficit thresholds, from the limited liability partnerships/corporations issuing the LIHC investments that reduce the Company’s ultimate exposure to loss. As of September 30, 2011, the Company’s maximum exposure to loss under these guarantees was limited to a return of investor capital and minimum investment yield, or $189 million. The risk that the Company would be required to pay investors for a yield deficiency is low, based on the continued satisfactory performance of the underlying properties. At September 30, 2011, the Company had a reserve of $7 million recorded related to these guarantees, which represents the remaining unamortized fair value of the guarantee fees that were recognized at inception. For information on the Company’s LIHC investments that were consolidated, refer to Note 6 to these consolidated financial statements. The Company guarantees its subsidiaries’ leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease transactions, the Company does not have any material obligation to be satisfied. As of September 30, 2011, we had no exposure to loss for these agreements. The Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $1.5 billion at September 30, 2011 and the market value of the associated collateral was $1.5 billion. As of September 30, 2011, the Company had no exposure that would require it to pay under this securities lending indemnification, since the collateral market value exceeded the securities lent. The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of September 30, 2011, the current exposure to loss under these contracts totaled $30 million, and the maximum potential exposure to loss in the future was estimated at $35 million. The Company is subject to various pending and threatened legal actions that arise in the normal course of business. Liabilities for losses from legal actions are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. Management believes that the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material adverse effect, either individually or in the aggregate, on the Company’s consolidated financial condition, operating results or liquidity. |
Long-Term Debt | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Paper and Other Short-Term Borrowings [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-Term Debt |
Note 9 - Long-Term Debt The following is a summary of the Company’s long-term debt:
Senior Debt On June 6, 2011, the Bank issued $300 million in aggregate principal amount of Senior Floating Rate Notes due 2014 (2014 Notes). The 2014 Notes were issued at par and bear interest at a rate equal to three-month LIBOR plus 0.95 percent per annum and will mature on June 6, 2014. Interest payments are due on the 6 th of March, June, September and December of each year, with the first interest payment on September 6, 2011. On June 6, 2011, the Bank also issued $700 million in aggregate principal amount of 3.00 percent Senior Bank Notes due 2016 (2016 Notes). The 2016 Notes were issued to purchasers at a price of 99.733 percent, resulting in proceeds to the Bank, after dealer discount, of $698 million. The 2016 Notes bear interest of 3.00 percent per annum payable on the 6th of June and December of each year, with the first interest payment on December 6, 2011. These notes mature on June 6, 2016. Both the 2014 Notes and 2016 Notes are not redeemable at the option of the Bank prior to maturity or subject to repayment at the option of the holders prior to maturity. The net proceeds from the sale of these notes were used by the Bank for general corporate purposes in the ordinary course of its business. These notes were issued as part of a $4 billion Bank Note Program under which the Bank may issue, from time to time, senior unsecured debt obligations with maturities of more than one year from their respective dates of issue and subordinated debt obligations with maturities of five years or more from their respective dates of issue. After issuing these notes, there was $1.2 billion available for issuance under the program at September 30, 2011. |
Employee Pension and Other Postretirement Benefits | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee Pension and Other Postretirement Benefits [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee Pension and Other Postretirement Benefits |
Note 7 - Employee Pension and Other Postretirement Benefits The following table summarizes the components of net periodic benefit cost for the three and nine months ended September 30, 2011 and 2010.
(1) Supplemental Executives Retirement Plan (SERP). (2) Executive Supplemental Benefit Plans (ESBP). |
Business Combinations | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Business Combinations [Abstract] | |
Business Combinations |
Note 3 - Business Combinations On April 30, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain liabilities of Frontier Bank, a Washington state-chartered commercial bank headquartered in Everett, Washington (Frontier). Additionally, on April 16, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain liabilities of Tamalpais Bank of San Rafael, California (Tamalpais). For further information related to the Tamalpais and Frontier acquisitions, see Note 2 to the consolidated financial statements in the Company’s 2010 Form 10-K. In the first quarter of 2011, the Company recorded an adjustment, which reduced goodwill by $9 million, related to the value of expected interest income on the acquired loans and FDIC indemnification assets. For further information related to goodwill and intangibles, see Note 5 to the consolidated financial statements in the Company’s 2010 Form 10-K. |
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