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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 0-28118
UNIONBANCAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1234979
(State of Incorporation) (I.R.S. Employer Identification No.)
350 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104-1476
(Address of principal executive offices)
Registrant's telephone number (415) 765-2969
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of January 31, 2000, the aggregate market value of voting and non-voting
common equity held by non-affiliates of the registrant was $2,082,705,864. The
aggregate market value was computed by reference to the last sales price of such
stock.
As of January 31, 2000, the number of shares outstanding of the registrant's
Common Stock was 164,131,465.
DOCUMENTS INCORPORATED BY REFERENCE
INCORPORATED DOCUMENT LOCATION IN FORM 10-K
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Portions of the Proxy Statement for the April 26, 2000 Part III
Annual Meeting of Shareholders
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INDEX
PAGE
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PART I
Item 1. Business.......................................... 2
General................................................. 2
Banking................................................. 2
Subsidiaries............................................ 3
Employees............................................... 3
Competition............................................. 4
Monetary Policy......................................... 4
Supervision and Regulation.............................. 4
Item 2. Properties........................................ 6
Item 3. Legal Proceedings................................. 6
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 6
Executive Officers of the Registrant............... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters..................................... 9
Item 6. Selected Financial Data........................... 10, F-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10, F-1
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................. 10, F-36
Item 8. Financial Statements and Supplementary Data....... 10, F-45
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............... 10
PART III
Item 10. Directors and Executive Officers of the
Registrant.............................................. 10
Item 11. Executive Compensation........................... 10
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 11
Item 13. Certain Relationships and Related Transactions... 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 11
Signatures.................................................. II-1
PART I
ITEM 1. BUSINESS
THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION WHICH IS SUBJECT TO THE
"SAFE HARBOR" CREATED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS, WHICH INVOLVE OUR PLANS, BELIEFS AND GOALS, REFER TO
ESTIMATES OR USE SIMILAR TERMS, INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA,
ADVERSE ECONOMIC CONDITIONS AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN
INTEREST RATES, CONTROLLING INTEREST IN US BY THE BANK OF
TOKYO-MITSUBISHI, LTD., COMPETITION IN THE BANKING INDUSTRY, RESTRICTIONS ON
DIVIDENDS, ADVERSE EFFECTS OF CURRENT AND FUTURE BANKING REGULATIONS,
STRATEGIES, AND RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, DIVESTITURES OR
RESTRUCTURINGS. WE UNDERTAKE NO OBLIGATION TO REVISE OR PUBLICLY RELEASE THE
RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS. SEE ALSO THE
SECTION ENTITLED "CERTAIN BUSINESS RISK FACTORS" ON PAGE F-41.
GENERAL
UnionBanCal Corporation is a commercial bank holding company incorporated in
the State of California in 1952 and is among the oldest banks on the West Coast,
having roots as far back as 1864. We were formed as a result of the combination
of Union Bank with BanCal Tri-State Corporation on April 1, 1996. At
December 31, 1999, Union Bank of California, N.A. our bank subsidiary, was the
third largest commercial bank in California, based on total assets and total
deposits, and one of the 30 largest commercial banks in the United States. At
December 31, 1999, we were 64 percent owned by The Bank of
Tokyo-Mitsubishi, Ltd. and 36 percent owned by other shareholders.
We provide a wide range of financial services to consumers, small
businesses, middle-market companies and major corporations, primarily in
California, Oregon, and Washington, but nationally and internationally as well.
BANKING
Our operations are divided into four primary segments, which are described
more fully in Note 23 of the Consolidated Financial Statements.
THE COMMUNITY BANKING AND INVESTMENT SERVICES GROUP. This group offers its
customers a complete spectrum of financial products under one convenient
umbrella. With a full line of checking and savings, investment, loan and
fee-based banking products, individual and business clients, including
not-for-profit, small and institutional investors, can each have their specific
needs met. These products are offered in 249 full-service branches, primarily in
California, as well as in Oregon, Washington, Guam, and Saipan. In addition, the
group offers international and settlement services, e-banking through our web
site, check cashing services at our Cash & Save-Registered Trademark- locations
and tailored loan investment products to our high net worth consumer customers
through the Private Bank. Institutional customers are offered employee benefit,
401(k) administration, corporate trust, securities lending and custody (global
and domestic) services. The group also includes a registered broker-dealer and a
registered investment advisor, which manages a proprietary fund family.
THE COMMERCIAL FINANCIAL SERVICES GROUP. This group offers a variety of
commercial financial services, including commercial and project loans, real
estate financing, asset-based and leveraged commercial financing, trade finance
and letters of credit, lease financing, customized cash management services and
selected capital markets products. The group's customers include middle-market
companies, large corporations, real estate companies and other more specialized
industry customers. In addition, specialized depository services are offered to
title and escrow companies, retailers, domestic financial institutions and other
customers with significant deposit volumes.
2
THE INTERNATIONAL BANKING GROUP. This group primarily provides
correspondent banking and trade finance-related products and services to
financial institutions worldwide, primarily in Asia. The group also serves
selected foreign firms and U.S. corporate clients in selected countries
worldwide, particularly in Asia. This group has a long and stable history of
providing correspondent and trade-related services to international financial
institutions.
THE GLOBAL MARKETS GROUP. This group, in collaboration with our other
business groups, offers customers a broad range of products. They include a
variety of foreign exchange products and risk management products, such as
interest rate swaps and caps. The group trades money market and fixed income
securities in the secondary market and serves institutional investment needs.
The group manages the market-related risks for us as part of its
responsibilities for asset/liability management, including funding our own
liquidity needs and addressing our interest rate risk.
SUBSIDIARIES
UnionBanCal Corporation has eleven active nonbank subsidiaries that provide
various types of services to us and our customers.
- Bankers Commercial Corporation, UNBC Leasing, Inc. and UnionBanCal Leasing
Corporation engage in equipment leasing and other lease related financing.
- Cal First Properties, Inc. holds and manages various properties used by
us.
- UnionBanCal Venture Corporation is a small business investment company
licensed under the Small Business Investment Act of 1958.
- UnionBanCal Commercial Funding Corporation sells commercial paper and
invests the proceeds in Eurodollar placements with Union Bank of
California, N.A.
- UnionBanCal Equities, Inc. invests in equity securities of other
companies.
- Mills-Ralston, Inc. was established to hold and dispose of problem assets,
including other real estate owned (OREO).
- Stanco Properties, Inc. engages in custodian activities in connection with
tax-deferred exchanges of real property under Section 1031 of the Internal
Revenue Code.
- UnionBanCal Mortgage Corporation acts as trustee under deeds of trust on
behalf of us.
- HighMark Capital Management, Inc. provides investment management and
advice, mutual fund support services and sponsors and underwrites
closed-end funds.
Union Bank of California, N.A. has three active subsidiaries.
- UBOC Investment Services, Inc. (UBOCIS), a registered securities
broker-dealer and member of the National Association of Securities Dealers
(NASD), offers a wide range of investment products. These products include
a wide range of securities, including publicly traded stocks, U.S.
treasury and government agency issues, stock options, corporate and
municipal bonds, and mutual funds. In addition, it provides a wholesale
investment program to other financial institutions.
- Union Bank of California International is an Edge Act subsidiary
supporting Union Bank of California, N.A.'s international correspondent
banking business.
- Inland Property Company is a subsidiary investing in low-income housing
tax credit partnerships.
EMPLOYEES
At January 31, 2000, we had 8,776 full-time-equivalent employees.
3
COMPETITION
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, Oregon, and
Washington, as well as nationally and internationally. Our competitors include a
large number of state and national banks and major foreign-affiliated or foreign
banks, as well as many financial and nonfinancial firms which offer services
similar to those offered by us or our subsidiaries.
We believe that continued emphasis on enhanced services and distribution
systems, an expanded customer base, increased productivity and strong credit
quality, together with an established capital base, will position us to meet the
challenges provided by this competition.
MONETARY POLICY
The operations of bank holding companies and their subsidiaries are affected
by the credit and monetary policies of the Federal Reserve Board (FRB). The FRB
influences the financial performance of bank holding companies and their
subsidiaries through its management of the discount rate, the money supply, and
reserve requirements on bank deposits. Monetary policies of the FRB have had,
and will continue to have, a significant effect on the operating results of
financial institutions, including us.
SUPERVISION AND REGULATION
We and The Bank of Tokyo-Mitsubishi, Ltd., as a result of its ownership in
us, are subject to regulation under the Bank Holding Company Act of 1956 (BHCA),
as amended, which subjects us to FRB reporting and examination requirements.
Generally, the BHCA restricts any investment that we may make to no more than
5 percent of the voting shares of any non-banking entity, and we may not acquire
more than 5 percent of the voting shares of any domestic bank without the prior
approval of the FRB. Our activities are limited, with some exceptions, to
banking, the business of managing or controlling banks, and activities which the
regulatory authorities deem to be so closely related to banking as to be a
"proper incident thereto".
Union Bank of California, N.A. and most of its subsidiaries are regulated by
the Office of the Comptroller of the Currency (OCC). Our subsidiaries are also
subject to extensive regulation, supervision, and examination by various other
federal and state regulatory agencies. In addition, Union Bank of California,
N.A. and its subsidiaries are subject to certain restrictions under the Federal
Reserve Act, including restrictions on affiliate transactions. Dividends payable
by Union Bank of California, N.A. to us are subject to a formula imposed by the
OCC unless express approval is given to deviate from the formula. For more
information regarding restrictions on loans and dividends by Union Bank of
California, N.A. to its affiliates and on transactions with affiliates, see
Notes 17 and 22 to our Consolidated Financial Statements included in this
Form 10-K.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
imposed stricter capital requirements on banks. FDICIA requires federal bank
regulatory authorities to take "prompt corrective action" in dealing with
inadequately capitalized banks. FDICIA established five tiers of capital
measurement ranging from "well capitalized" to "critically undercapitalized". It
is our policy to maintain risk-based capital ratios at or above the required
minimum capital adequacy levels for both Union Bank of California, N.A. and us.
At December 31, 1999, we believe that Union Bank of California, N.A. met the
requirements of a "well capitalized" institution.
Furthermore, the activities of HighMark Capital Management, Inc. and UBOCIS
are subject to the rules and regulations of the Securities and Exchange
Commission as well as state securities regulators. UBOCIS is also subject to the
rules and regulations of the National Association of Securities Dealers, Inc.
There are additional requirements and restrictions in the laws of the United
States and the states of California, Oregon, and Washington, as well as other
states in which Union Bank of California, N.A. and
4
its subsidiaries may conduct operations. These include restrictions on the
amount of loans and the nature and amount of investments, as well as activities
as an underwriter of securities, the opening and closing of branches and the
acquisition of other financial institutions. The Bank is subject to certain fair
lending requirements and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act (CRA) activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit needs of their local communities, including
low and moderate income neighborhoods. In addition to substantive penalties and
corrective measures that may be required for a violation of certain fair lending
laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities.
The international activities of Union Bank of California, N.A. are subject
to the laws and regulations of the jurisdiction where business is being
conducted, which may change from time to time and affect Union Bank of
California, N.A.'s business opportunities and competitiveness in these
jurisdictions. Furthermore, due to the controlling ownership of us by The Bank
of Tokyo-Mitsubishi, Ltd., regulatory requirements adopted or enforced by the
Government of Japan may have an effect on the activities and investments of
Union Bank of California, N.A. and us in the future.
On November 12, 1999 President Clinton signed into law the
Gramm-Leach-Bliley Act (the GLB Act), key portions of which became effective on
March 11, 2000. The GLB Act repeals provisions of the Glass-Steagall Act, which
prohibit commercial banks and securities firms from affiliating with each other
and engaging in each other's businesses. Thus, many of the barriers prohibiting
affiliations between commercial banks and securities firms have been eliminated.
The BHCA is also amended by the GLB Act, to allow new "financial holding
companies" (FHC) to offer banking, insurance, securities and other financial
products to consumers. Specifically, the GLB Act amends section 4 of the BHCA in
order to provide for a framework to engage in new financial activities. Bank
holding companies (BHC) such as we may elect to become a financial holding
company if all of their subsidiary depository institutions are well-capitalized
and well-managed. Under current FRB interpretations, a foreign bank, such as The
Bank of Tokyo-Mitsubishi Ltd., which owns a subsidiary U.S. bank holding
company, must make the election on behalf of itself and its U.S. holding
company. In addition, the foreign bank must be well capitalized and well managed
in accordance with standards comparable to those required of U.S. banks as
determined by the FRB and must have a satisfactory or better CRA rating. We do
not expect that The Bank of Tokyo-Mitsubishi, Ltd. will make a financial holding
company election in the immediate future. Under the GLB Act, national banks (as
well as FDIC-insured state banks, subject to various requirements), such as
Union Bank of California, N.A., are permitted to engage through "financial
subsidiaries" in certain financial activities permissible for affiliates of
FHCs. However, to be able to engage in such activities, the national bank must
also be well-capitalized and well-managed and receive at least a "satisfactory"
rating in its most recent CRA examination. In addition, if the national bank
ranks as one of the top 50 largest insured banks in the United States, as we do,
it must have an issue of outstanding long-term debt rated in one of the 3
highest rating categories by an independent rating agency, which we presently do
not. If the national bank falls within the next group of 50, it must either meet
the debt rating test described above or satisfy a comparable test jointly agreed
to by the FRB and the Treasury Department. No debt rating is required for a
national bank not within the top 100 largest insured banks in the United States.
We cannot be certain of the effect of the foregoing recently enacted
legislation on our business, although there is likely to be consolidation among
financial services institutions and increased competition for us.
Changes in the laws, regulations, or policies that impact Union Bank of
California, N.A. and us cannot necessarily be predicted and may have a material
effect on the business and earnings thereof.
See Consolidated Financial Statements starting on page F-45 for specific
financial information on UnionBanCal Corporation.
5
ITEM 2. PROPERTIES
At December 31, 1999, we operated 240 full service branches in California, 6
full service branches in Oregon and Washington, and 18 overseas branches and
business offices. In addition, we have another 42 limited service branches,
including 5 Cash & Save-Registered Trademark- facilities, and 4 Private Bank
offices. We own the property occupied by 85 of the domestic offices and lease
the remaining properties for periods of five to twenty years.
We own two administrative facilities in San Francisco and three in San
Diego. Other administrative offices in San Francisco, Los Angeles, Portland,
Seattle, and New York operate under long-term leases expiring in one to
twenty-six years.
Rental expense for branches and administrative premises are included in
Note 4 to our Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various pending and threatened legal actions that arise in
the normal course of business. We maintain reserves for losses from legal
actions that are both probable and estimable. In the opinion of management, the
disposition of claims currently pending will not have a material adverse effect
on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information pertains to our executive officers:
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
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Kaoru Hayama............ 65 Mr. Hayama has served as Chairman of UnionBanCal Corporation
and Union Bank of California, N.A. since September 1998. He
served as Deputy President of The Bank of
Tokyo-Mitsubishi, Ltd. from April 1996 to June 1998 and as
Deputy President of the Bank of Tokyo, Ltd. from June 1994
to April 1996. He had previously served as a director of
Union Bank during 1992-1994, while also serving as the Bank
of Tokyo Ltd.'s Senior Managing Director of the Americas and
Chairman and Chief Executive Officer of The Bank of Tokyo
Trust Company. Mr. Hayama has served as a director of
UnionBanCal Corporation since September 1998.
Takahiro Moriguchi...... 55 Mr. Moriguchi has served as President and Chief Executive
Officer of UnionBanCal Corporation and Union Bank of
California, N.A. since May 1997. He served as Vice Chairman
and Chief Financial Officer of UnionBanCal Corporation and
Union Bank of California, N.A. from April 1996 to May 1997.
He served as Vice Chairman and Chief Financial Officer of
Union Bank from June 1993 until March 1996. He served as
General Manager of the former Bank of Tokyo, Ltd.'s Capital
Markets Division 2 from May 1992 to May 1993. He has served
as a director of The Bank of Tokyo-Mitsubishi, Ltd. since
April 1996 and as a director of the Bank of Tokyo, Ltd.
prior thereto. Mr. Moriguchi has served as a director of
UnionBanCal Corporation since June 1993.
6
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- ------------------------- -------- ------------------------------------------------------------
Yoshihiko Someya........ 52 Mr. Someya has served as Deputy Chairman and head of Credit
and Administration for UnionBanCal Corporation and Union
Bank of California, N.A. since July 1998. He served as
Executive Vice President and head of Credit Management and
Support Liaison for UnionBanCal Corporation and Union Bank
of California, N.A. from March 1998 to July 1998. He served
as Deputy General Manager of the Osaka Branch of The Bank of
Tokyo-Mitsubishi Ltd. from May 1996 to March 1998. He served
as General Manager, Financial Institutions Division of
Mitsubishi Bank, Ltd. from May 1995 to May 1996. He served
as Director and General Manager of DC Card Company, Ltd., a
subsidiary of Mitsubishi Bank, Ltd. from May 1993 to
May 1995. Mr. Someya has served as a director of
UnionBanCal Corporation since July 1998.
Richard C. Hartnack..... 54 Mr. Hartnack has served as Vice Chairman and head of the
Community Banking and Investment Services Group since August
1999 and the Community Banking Group for UnionBanCal
Corporation and Union Bank of California, N.A. from
April 1996 to August 1999. He served as Vice Chairman of
Union Bank from June 1991 until March 1996. Mr. Hartnack has
served as a director of UnionBanCal Corporation since
June 1991.
Robert M. Walker........ 58 Mr. Walker has served as Vice Chairman and head of the
Commercial Financial Services Group for UnionBanCal
Corporation and Union Bank of California, N.A. since
April 1996. He served as Vice Chairman in the same position
with Union Bank from July 1992 until March 1996. Mr. Walker
has served as a director of UnionBanCal Corporation since
July 1992.
Linda Betzer............ 53 Ms. Betzer has served as Executive Vice President and head
of the Operations and Customer Services Group for
UnionBanCal Corporation and Union Bank of California, N.A.
since January 2000. She served as Executive Vice President
of Commercial Customer Services from April 1996 to
January 2000 and Senior Vice President of Commercial
Customer Services with Union Bank from 1994 to April 1996.
Peter R. Butcher........ 60 Mr. Butcher has served as Executive Vice President and Chief
Credit Officer of UnionBanCal Corporation and Union Bank of
California, N.A. since July 1998 and as Executive Vice
President, Credit Management and Compliance Group, of
UnionBanCal Corporation and Union Bank of California, N.A.
since April 1996. He served as Executive Vice President and
Chief Credit Officer of the BanCal Tri-State Corporation and
Bank of California, N.A. from July 1993 until March 1996. He
served as Executive Vice President of Society National Bank
from March 1992 to July 1993.
7
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
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Katsuyoshi Hamahashi.... 51 Mr. Hamahashi has served as head of Global Markets Group for
UnionBanCal Corporation and Union Bank of California, N.A.
since October 1998 and as Executive Vice President and
Treasurer of UnionBanCal Corporation and Union Bank of
California, N.A. since April 1996. He served as Executive
Vice President and Treasurer of Union Bank from
February 1996 until March 1996 and Senior Vice President
and Treasurer of Union Bank from February 1993 to
February 1996.
David I. Matson......... 55 Mr. Matson has served as Executive Vice President and Chief
Financial Officer of UnionBanCal Corporation and Union Bank
of California, N.A. since July 1998. He served as Executive
Vice President and Director of Finance of UnionBanCal
Corporation and Union Bank of California, N.A. from
August 1997 to July 1998. He served as Executive Vice
President and head of the Institutional and Deposit Markets
Division from April 1996 until July 1997. He served in the
same capacity at Union Bank from January 1994 until
March 1996. He served as Senior Vice President of Union Bank
for more than five years prior thereto.
Magan C. Patel.......... 62 Mr. Patel has served as Executive Vice President and head of
the International Banking Group for UnionBanCal Corporation
and Union Bank of California, N.A. since April 1996. He
served as Executive Vice President, International Banking
Group, of the BanCal Tri-State Corporation and the Bank of
California, N.A. for more than five years prior thereto.
Charles L. Pedersen..... 56 Mr. Pedersen has served as Executive Vice President and head
of the Systems, Technology and Item Processing Group for
UnionBanCal Corporation and Union Bank of California, N.A.
since April 1996. He served as Executive Vice President and
head of the Bank Operations and Automation Group for Union
Bank from September 1992 until March 1996.
Michael A.C. Spilsbury... 50 Mr. Spilsbury has served as Executive Vice President and
head of e-Business Solutions since January 2000 and of the
Operations and Services Group of UnionBanCal Corporation and
Union Bank of California, N.A. from April 1996 to January
2000. He served as Executive Vice President, Resources and
Services, with the BanCal Tri-State Corporation and the Bank
of California, N.A. from January 1992 through March 1996.
8
EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATIONS FOR THE PAST FIVE YEARS
- ------------------------- -------- ------------------------------------------------------------
Ikuzo Sugiyama.......... 50 Mr. Sugiyama has served as Executive Vice President and head
of the Pacific Rim Corporate Group for UnionBanCal
Corporation and Union Bank of California, N.A., and General
Manager of the Los Angeles Branch of The Bank of
Tokyo-Mitsubishi, Ltd. since July 1997. He served as Chief
Manager, Corporate Banking Division No. 3 under Corporate
Banking Group No. 1 of The Bank of Tokyo-Mitsubishi, Ltd.
from April 1996 to July 1997. From April 1994 to
April 1996, he served as Deputy General Manager of the
Marunouchi Office of the Bank of Tokyo, Ltd. From May 1991
to March 1994, he served as Deputy General Manager of the
Los Angeles Agency of the Bank of Tokyo, Ltd. and as Senior
Vice President of the Japanese Corporate Department-LA of
Union Bank.
Philip M. Wexler........ 61 Mr. Wexler has served as Executive Vice President and head
of the Specialized Lending Group for UnionBanCal Corporation
and Union Bank of California, N.A. since April 1996. He
served as Executive Vice President and General Manager of
the Specialized Lending Group of Union Bank from
October 1987 through March 1996.
The term of office of the executive officer extends until the officer
resigns, is removed, retires, or is otherwise disqualified for service. There is
no family relationship among any such officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
UB. As of January 31, 2000, our common stock was held by approximately 2,222
registered shareholders. At December 31, 1999, The Bank of
Tokyo-Mitsubishi, Ltd. held 64 percent of our common stock. During 1998 and
1999, the average daily trading volume of our common stock was approximately
150,057 shares and 398,925 shares, respectively. At December 31, 1997, 1998 and
1999, our common stock closed at $35.83 per share, $34.06 per share, and $39.44
per share, respectively. The following table presents stock quotations for each
quarterly period for the two years ended December 31, 1999.
1998 1999
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First quarter............................... $35.67 $27.83 $37.88 $30.13
Second quarter.............................. 38.33 29.83 38.88 31.50
Third quarter............................... 34.33 23.63 40.88 35.00
Fourth quarter.............................. 35.25 24.67 46.44 34.69
The following table presents quarterly per share cash dividends declared for
1998 and 1999:
1998 1999
-------- --------
First quarter............................................... $0.14 $0.19
Second quarter.............................................. 0.14 0.19
Third quarter............................................... 0.14 0.19
Fourth quarter.............................................. 0.19 0.25
9
On November 18, 1998, our Board of Directors approved a 36 percent increase
in our quarterly common stock dividend for the fourth quarter of 1998 from $0.14
per share to $0.19 per share. On November 17, 1999 our Board of Directors
approved a 32 percent increase in our quarterly common stock dividend for the
fourth quarter of 1999 from $0.19 per share to $0.25 per share. Future dividends
will depend upon our earnings, financial condition, capital requirements and
other factors as our Board of Directors may deem relevant.
We offer a dividend reinvestment and stock purchase plan that allows
shareholders to reinvest dividends in our common stock at 5 percent below the
market price. The Bank of Tokyo-Mitsubishi, Ltd. did not participate in the plan
during 1998 and 1999. For further information about these plans, see Note 13 to
our Consolidated Financial Statements.
The availability of our retained earnings for the payment of dividends is
affected by certain legal restrictions. See Note 17 to our Consolidated
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
See page F-1 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages F-1 through F-44 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages F-36 through F-39 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-45 through F-91 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to our Proxy Statement for the April 26, 2000 Annual
Meeting of Shareholders for incorporation by reference of information concerning
directors and persons nominated to become directors of UnionBanCal Corporation.
Information concerning our executive officers as of January 31, 2000 is included
in Part I above in accordance with Instruction 3 to Item 401(b) of
Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the text under the caption "Compensation and Other Transactions with
Management and Others" in the Proxy Statement for the April 26, 2000 Annual
Meeting of Shareholders.
10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of the equity stock of UnionBanCal
Corporation by certain beneficial owners and management is incorporated by
reference from page 1 and the text under the caption "Election of Directors" in
the Proxy Statement for the April 26, 2000 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
officers, directors, and The Bank of Tokyo-Mitsubishi, Ltd. is incorporated by
reference from the text under the caption "Transactions with Management and
Others" in the Proxy Statement for the April 26, 2000 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Our Consolidated Financial Statements, the Management Statement, and the
independent auditors' report are set forth on pages F-46 through F-91. (See
index on page F-45).
(a)(2) Financial Statement Schedules
All schedules to our Consolidated Financial Statements are omitted because
of the absence of the conditions under which they are required or because the
required information is included in our Consolidated Financial Statements or
accompanying notes.
11
(a)(3) Exhibits
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1......... Restated Articles of Incorporation of the Registrant, as
amended(1)
3.2......... By-laws of the Registrant, as amended January 27, 1999(2)
10.1......... Management Stock Plan. (As restated effective June 1,
1997)*(3)
10.2......... Union Bank of California Deferred Compensation Plan.
(January 1, 1997, Restatement, as amended November 21,
1996)*(4)
10.3......... Union Bank of California Senior Management Bonus Plan.
(Effective January 1, 1999)*(5)
10.4......... Richard C. Hartnack Employment Agreement. (Effective
January 1, 1998)*(6)
10.5......... Robert M. Walker Employment Agreement. (Effective
January 1, 1998)*(6)
10.6......... Union Bank of California Supplemental Executive Retirement
Plan. (Effective January 1, 1988) (Amended and restated as
of January 1, 1997)*(3)
10.7......... Union Bank Executive Wellness Plan. (Effective January 1,
1994)*(7)
10.8......... Union Bank Financial Services Reimbursement Program.
(Effective January 1, 1996)*(8)
10.9......... Performance Share Plan. (Effective January 1, 1997)*(3)
10.10........ Service Agreement Between Union Bank of California and The
Bank of Tokyo-Mitsubishi Ltd. (Effective October 1,
1997)*(3)
10.11........ Management Stock Plan. (As restated effective January 1,
2000)*(5)
12.1......... Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividend Requirements(9)
21.1......... Subsidiaries of the Registrant(9)
23.1......... Consent of Deloitte & Touche LLP(9)
24.1......... Power of Attorney, dated February 23, 2000(9)
24.2......... Resolution of Board of Directors, dated February 23, 2000(9)
27.1......... Financial Data Schedule(9)
- ------------------------
(1) Incorporated by reference to Form 10-K for the year ended December 31,
1998.
(2) Incorporated by reference to Form 10-Q for the quarter ended March 31,
1999.
(3) Incorporated by reference to Form 10-K for the year ended December 31,
1997.
(4) Incorporated by reference to Form 10-K for the year ended December 31,
1996.
(5) Incorporated by reference to Form 10-Q for the quarter ended June 30, 1999.
(6) Incorporated by reference to Form 10-Q for the quarter ended September 30,
1998.
(7) Incorporated by reference to Form 8-K dated April 1, 1996 (filed as
exhibit 10.12).
(8) Incorporated by reference to Form 8-K dated April 1, 1996 (filed as
exhibit 10.14).
(9) Filed herewith.
* Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K:
We filed a report on Form 8-K on August 19, 1999 under Item 5 to report the
announcement of Mission Excel, a plan to fund significant new business growth as
well as to control costs by streamlining operations.
12
UNIONBANCAL CORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997 1998 1999
- --------------------------------------------- ------------ ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS:
Net interest income(1).................... $ 1,152,777 $ 1,175,302 $ 1,237,010 $ 1,322,655 $ 1,419,019
Provision for credit losses............... 53,250 40,000 -- 45,000 65,000
Noninterest income........................ 395,319 418,676 463,001 533,531 586,759
Noninterest expense....................... 978,101 1,134,904 1,044,665 1,135,218 1,281,973
------------ ------------ ------------ ------------ ------------
Income before income taxes(1)............. 516,745 419,074 655,346 675,968 658,805
Taxable-equivalent adjustment............. 10,444 6,724 5,328 4,432 3,186
Income tax expense........................ 193,359 162,892 238,722 205,075 213,888
------------ ------------ ------------ ------------ ------------
Net income................................ $ 312,942 $ 249,458 $ 411,296 $ 466,461 $ 441,731
============ ============ ============ ============ ============
NET INCOME APPLICABLE TO COMMON STOCK....... $ 301,637 $ 238,152 $ 403,696 $ 466,461 $ 441,731
============ ============ ============ ============ ============
PER COMMON SHARE:
Net income (basic)........................ $ 1.74 $ 1.37 $ 2.31 $ 2.66 $ 2.65
Net income (diluted)...................... 1.73 1.36 2.30 2.65 2.64
Dividends(2).............................. 0.47 0.47 0.51 0.61 0.82
Book value (end of period)................ 13.49 13.53 15.32 17.45 18.18
Common shares outstanding (end of
period)................................. 174,180,493 174,457,603 174,917,674 175,259,919 164,282,622
Weighted average common shares outstanding
(basic)................................. 173,806,300 174,391,048 174,683,338 175,127,487 166,382,074
Weighted average common shares outstanding
(diluted)............................... 174,099,241 174,783,565 175,189,078 175,737,303 167,149,207
BALANCE SHEET (END OF PERIOD):
Total assets.............................. $ 27,546,859 $ 29,234,059 $ 30,585,265 $ 32,276,316 $ 33,684,776
Total loans............................... 20,431,683 21,049,787 22,741,408 24,296,111 25,912,958
Nonperforming assets...................... 246,871 156,784 129,809 89,850 169,780
Total deposits............................ 19,655,043 21,532,960 23,296,374 24,507,879 26,256,607
Subordinated capital notes................ 501,369 382,000 348,000 298,000 298,000
Trust prefered securities................. -- -- -- -- 350,000
Preferred stock........................... 135,000 135,000 -- -- --
Common equity............................. 2,349,092 2,359,933 2,679,299 3,058,244 2,987,468
BALANCE SHEET (PERIOD AVERAGE):
Total assets.............................. $ 25,564,843 $ 27,899,734 $ 29,692,992 $ 30,523,806 $ 32,141,497
Total loans............................... 18,974,540 20,727,577 21,855,911 23,215,504 25,024,777
Earning assets............................ 22,849,129 24,717,326 26,291,822 27,487,390 29,017,122
Total deposits............................ 17,969,972 20,101,544 22,067,155 22,654,714 23,893,045
Common equity............................. 2,197,476 2,325,437 2,514,610 2,845,964 2,939,591
FINANCIAL RATIOS:
Return on average assets.................. 1.22% 0.89% 1.39% 1.53% 1.37%
Return on average common equity........... 13.73 10.24 16.05 16.39 15.03
Efficiency ratio(3)....................... 63.39 71.02 61.53 61.31 63.98
Net interest margin(1).................... 5.05 4.75 4.70 4.81 4.89
Dividend payout ratio..................... 27.01 34.31 22.08 22.93 30.94
Tangible equity ratio..................... 8.20 7.80 8.54 9.30 8.70
Tier 1 risk-based capital ratio........... 9.35 9.08 8.96 9.64 9.94
Total risk-based capital ratio............ 11.70 11.17 11.05 11.61 11.79
Leverage ratio............................ 8.70 8.41 8.53 9.38 10.10
Allowance for credit losses to total
loans................................... 2.72 2.49 1.99 1.89 1.82
Allowance for credit losses to nonaccrual
loans................................... 266.56 408.48 413.12 585.50 281.00
Net loans charged off to average total
loans................................... 0.32 0.34 0.33 0.15 0.22
Nonperforming assets to total loans and
foreclosed assets....................... 1.21 0.74 0.57 0.37 0.66
Nonperforming assets to total assets...... 0.90 0.54 0.42 0.28 0.50
- ------------------------------
(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) Dividends per share reflect dividends declared on UnionBanCal Corporation's
common stock outstanding as of the declaration date. Amounts prior to the
merger are based on Union Bank only and do not include the dividend of $145
million paid to The Mitsubishi Bank Limited in the first quarter of 1996 by
BanCal Tri-State Corporation and The Bank of California, N.A.
(3) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income), as a percentage of net interest income
(taxable-equivalent) and noninterest income. Foreclosed asset expense
(income) was $(3.2) million, $2.9 million, $(1.3) million, $(2.8) million,
and $(1.3) million for 1995 through 1999, respectively.
F-1
THIS DOCUMENT INCLUDES FORWARD-LOOKING INFORMATION WHICH IS SUBJECT TO THE
"SAFE HARBOR" CREATED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE
FORWARD-LOOKING STATEMENTS, WHICH INVOLVE OUR PLANS, BELIEFS AND GOALS, REFER TO
ESTIMATES OR USE SIMILAR TERMS, INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THE FOLLOWING FACTORS: ADVERSE ECONOMIC CONDITIONS IN CALIFORNIA,
ADVERSE ECONOMIC CONDITIONS AFFECTING CERTAIN INDUSTRIES, FLUCTUATIONS IN
INTEREST RATES, CONTROLLING INTEREST IN US BY THE BANK OF
TOKYO-MITSUBISHI, LTD., COMPETITION IN THE BANKING INDUSTRY, RESTRICTIONS ON
DIVIDENDS, ADVERSE EFFECTS OF CURRENT AND FUTURE BANKING REGULATIONS,
STRATEGIES, AND RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, DIVESTITURES OR
RESTRUCTURINGS. WE UNDERTAKE NO OBLIGATION TO REVISE OR PUBLICLY RELEASE THE
RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS. SEE ALSO THE
SECTION ENTITLED "CERTAIN BUSINESS RISK FACTORS" ON PAGE F-41.
You should read the following discussion and analysis of our consolidated
financial position and the results of our operations for the years ended
December 31, 1997, 1998 and 1999 together with our Consolidated Financial
Statements and the Notes to Consolidated Financial Statements included in this
Form 10-K. Averages as presented in the following tables are substantially all
based upon daily average balances.
INTRODUCTION
We are a California-based, commercial bank holding company with consolidated
assets of $33.7 billion at December 31, 1999. At year-end 1999, Union Bank of
California, N.A. was the third largest commercial bank in California, based on
total assets and total deposits in California, and one of the 30 largest
commercial banks in the United States.
UnionBanCal Corporation and its banking subsidiary, Union Bank of
California, N.A., (the Bank) was created on April 1, 1996 by the combination of
Union Bank with BanCal Tri-State Corporation and its banking subsidiary, The
Bank of California, N.A. The combination was accounted for as a reorganization
of entities under common control, similar to a pooling of interests.
Accordingly, all historical financial information has been restated as if the
combination had been in effect for all periods presented.
On March 3, 1999, we completed a secondary offering of 28.75 million shares
of our Common Stock owned by our majority shareholder, The Bank of
Tokyo-Mitsubishi, Ltd. We received no proceeds from this transaction. Concurrent
with the secondary offering, we repurchased 8.6 million shares of our
outstanding Common Stock from The Bank of Tokyo-Mitsubishi, Ltd. and
2.1 million shares owned by Meiji Life Insurance Company with $312 million of
the net proceeds from the issuance of $350 million of 7 3/8 percent capital
securities early in 1999. After the secondary offering and the repurchase, The
Bank of Tokyo-Mitsubishi, Ltd. owns 64 percent of our stock, or 105.6 million
shares, compared with 82 percent prior to the transaction.
SELECTED SUPPLEMENTAL PRO FORMA FINANCIAL DATA
To facilitate the discussion of the results of operations, the following
table includes certain pro forma earnings disclosures and ratios. These
presentations supplement the Consolidated Statements of Income on page F-46
which are prepared in accordance with generally accepted accounting principles,
primarily with respect to the treatment of the restructuring charge, which was
recorded in the third quarter of 1999, and the 1998 reduction of California
Franchise Tax liability, which related to 1997. Management believes that it is
meaningful to understand the operating results and trends excluding these
expenses and,
F-2
therefore, has included information in this table and in the MD&A which follows,
that presents income excluding these items and related pro forma ratio and per
share calculations.
AS OF AND FOR THE YEARS
ENDED
DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1999
- ------------------------------------------------------------ ---------- ----------
INCOME BEFORE INCOME TAXES.................................. $675,968 $658,805
Restructuring charge...................................... -- 85,000
Taxable equivalent adjustment............................. (4,432) (3,186)
Income tax expense(1)(2).................................. (234,325) (243,704)
-------- --------
PRO FORMA EARNINGS(1)(2).................................... $437,211 $496,915
======== ========
PER COMMON SHARE, EXCLUDING RESTRUCTURING CHARGE AND CERTAIN
INCOME TAXES
Pro forma earnings (basic)(1)(2).......................... $ 2.50 $ 2.99
Pro forma earnings (diluted)(1)(2)........................ 2.49 2.97
SELECTED FINANCIAL RATIOS, EXCLUDING RESTRUCTURING CHARGE
AND CERTAIN INCOME TAXES
Pro forma return on average assets(1)(2).................. 1.43% 1.55%
Pro forma return on average common equity(1)(2)........... 15.36 16.83
Pro forma efficiency ratio(3)............................. 61.31 59.74
Pro forma dividend payout ratio(1)(2)..................... 24.40 27.42
- ------------------------
(1) Excludes 3rd Quarter 1998 reduction in California Franchise Tax liability
of $29.250 million (net of federal tax), which related to 1997.
(2) Excludes the income tax expense related to the restructuring charge of
$29.816 million.
(3) The pro forma efficiency ratio is noninterest expense, excluding foreclosed
asset income and restructuring charge, as a percentage of net interest
income (taxable-equivalent) and noninterest income. Foreclosed asset income
was $2.8 million in 1998 and $1.3 million in 1999.
Reported net income was $466.5 million, or $2.65 per diluted common share in
1998, compared with $441.7 million, or $2.64 per diluted common share in 1999.
Excluding the effects of the $85 million restructuring charge ($55.2 million net
of tax), which was recorded in the third quarter of 1999, and the effects of the
$29.3 million in reduced California Franchise Tax liabilities (related to tax
year 1997), recorded in 1998, pro forma net earnings were $437.2 million, or
$2.49 per diluted common share in 1998, compared to $496.9 million, or 2.97 per
diluted common share in 1999. This increase in pro forma diluted earnings per
share of 19 percent in 1999 was due to a $96.4 million, or 7 percent, increase
in net interest income, and a $53.2 million, or 10 percent, increase in
noninterest income, offset by an increase of $20.0 million, or 44 percent in the
provision for credit losses, and a $61.8 million, or 5 percent, increase in
noninterest expense. Other highlights in 1999 include:
- Net interest income, on a taxable-equivalent basis, was $1.4 billion in
1999, an increase of $96.4 million, or 7 percent from 1998. Net interest
margin for 1999 was 4.89 percent, or 8 basis points higher than 1998.
- The provision for credit losses was $65.0 million in 1999, compared with
$45.0 million in 1998.
- Noninterest income was $586.8 million in 1999, an increase of
$53.2 million, or 10 percent from 1998. Excluding a $17.1 million pre-tax
gain ($10.3 million after tax) from the sale of our $253 million credit
card portfolio in April 1998, noninterest income increased $70.3 million,
or 14 percent in 1999.
F-3
- Noninterest expense, excluding the restructuring charge, was $1.2 billion
in 1999, an increase of $61.8 million, or 5 percent over 1998.
- Our pro forma effective tax rate in 1998 was 35 percent (excluding the
effects of the California Franchise Tax liability reduction discussed on
F-3), compared with 33 percent in 1999.
- Reported return on average assets in 1999 was 1.37 percent, while reported
return on average common equity for the same period was 15.03 percent. Our
pro forma return on average assets in 1999 increased to 1.55 percent,
compared to 1.43 percent in 1998. Our pro forma return on average common
equity in 1999 increased to 16.83 percent, compared to 15.36 percent in
1998.
MISSION EXCEL
During the second quarter of 1999 we began a project, which we refer to as
"Mission Excel." Mission Excel is a company-wide initiative to slow the rate of
growth of our expenses, increase sustainable growth in our revenues, and
increase productivity through elimination of unnecessary or duplicate functions.
The goal of this project is to help us achieve an efficiency ratio of 54% to 56%
by the fourth quarter 2000. Project Mission Excel has been a full-time effort on
the part of many of our most senior staff who solicited and reviewed all ideas
submitted.
The first phase of the Mission Excel project was the development of an
implementation plan. The implementation plan was finalized and approved by our
Board of Directors on August 13, 1999. Implementation of the Mission Excel
project, which is being overseen by dedicated senior staff, is expected to be
complete in the first quarter of 2001.
In connection with Mission Excel, we incurred an $85 million restructuring
charge in the third quarter of 1999. The charge consists of $70 million in
personnel expense for approximately 1,400 employees to be terminated under the
plan, $63 million of which relates to direct severance payments to employees.
The remaining $15 million relates to lease termination costs for eight
facilities that will be vacated and professional services cost incurred in
connection with Mission Excel. The projected annualized financial impact
(pre-tax) of Mission Excel will approximate $225 million, which is comprised of
$90 million of additional revenues and $135 million of reduced expenses. No
assurances can be given that these projections will be realized.
At the completion of the plan, we expect to have terminated approximately
1,400 employees, a 15 percent company-wide reduction in employees. From
August 16, 1999 to December 31, 1999, 450 employees were terminated under the
plan. Another 530 positions are scheduled to be eliminated during the first six
months of 2000. Most, if not all of the remaining employees will have been
notified of their termination by June 30, 2000. These terminations are not
concentrated in any one particular group or class of staff.
The terminations arising from Mission Excel will reduce the number of
employees in each business unit as follows:
Community Banking and Investment Services Group............. 17%
Commercial Financial Services Group......................... 16%
International Banking Group................................. 21%
Global Markets Group........................................ 17%
Other....................................................... 11%
F-4
The following table presents the restructuring reserve for the period, the
cash and noncash utilization of the reserve, and the resulting balance as of
December 31, 1999.
(DOLLARS IN THOUSANDS) TOTAL
- ------------------------------------------------------------ --------
Balance at December 31, 1998................................ $ --
Restructuring charge........................................ 85,000
Utilization for the period:
Cash...................................................... 11,950
Noncash................................................... 3,691
-------
Balance at December 31, 1999................................ $69,359
=======
BUSINESS SEGMENTS
We segregate our operations into four primary business units for the purpose
of management reporting, as shown in the table on the following pages. The
results show the financial performance of our major business units.
During 1999, we introduced a new method for measuring the contribution
provided by each of our business units. The Risk Adjusted Return on Capital
(RAROC) methodology seeks to attribute economic capital to business units
consistent with the level of risk they assume. These risks are primarily credit
risk, market risk and operational risk. Credit risk is the potential loss in
economic value due to the likelihood that the obligor will not perform as
agreed. Market risk is the potential loss in fair value due to changes in
interest rates, currency rates and volatilities. Operational risk is the
potential loss due to failures in internal controls, system failures, or
external events.
The following table reflects the condensed income statements, selected
balance sheet items and selected financial ratios for each of our primary
business units. The information presented does not necessarily represent the
business units' financial condition and results of operations as if they were
independent entities. Unlike financial accounting, there is no authoritative
body of guidance for management accounting equivalent to GAAP. Consequently,
reported results are not necessarily comparable with those presented by other
companies.
The significant changes in the RAROC measurement methodology concern the
recognition of credit expense for expected losses arising from credit risk and
the attribution of economic capital related to unexpected losses arising from
credit, market and operational risks. Business unit results are based on an
internal management reporting system used by management to measure the
performance of the units and UnionBanCal Corporation as a whole. The management
reporting system identifies balance sheet and income statement items to each
business unit based on internal management accounting policies. Net interest
income is determined using our internal funds transfer pricing system, which
assigns a cost of funds to assets or a credit for funds to liabilities and
capital, based on their type, maturity or repricing characteristics. Noninterest
income and expense directly or indirectly attributable to a business unit are
assigned to that business.
We have restated the business units' results for the prior periods to
reflect the new RAROC methodology, as well as any reorganizational changes that
have occurred.
F-5
COMMUNITY BANKING
AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL
SERVICES GROUP SERVICES GROUP BANKING GROUP
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ---------------------------- ----------------------------------
1997 1998 1999 1997 1998 1999 1997 1998 1999
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income.... $699,122 $ 698,103 $ 741,007 $404,944 $457,703 $559,498 $ 52,283 $ 56,804 $ 48,236
Noninterest income..... 275,186 327,862 363,997 96,175 105,458 120,390 62,238 65,834 66,830
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Total revenue.......... 974,308 1,025,965 1,105,004 501,119 563,161 679,888 114,521 122,638 115,066
Noninterest
expense(4)........... 697,518 738,338 776,326 220,284 245,248 250,600 64,877 66,967 65,516
Credit expense
(income)............. 73,138 63,718 61,396 60,425 72,532 92,098 18,329 14,665 12,217
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Income (loss) before
income tax expense
(benefit) and
performance center
earnings (expense)... 203,652 223,909 267,282 220,410 245,381 337,190 31,315 41,006 37,333
Performance center
earnings
(expense)(1)......... 8,605 7,888 6,120 3,288 2,728 1,859 (3,156) (4,543) (2,693)
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Income (loss) before
income tax expense
(benefit)............ 212,257 231,797 273,402 223,698 248,109 339,049 28,159 36,463 34,640
Income tax expense
(benefit)............ 85,871 91,583 105,662 88,832 96,268 124,414 11,499 13,684 13,252
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Net income............. $126,386 $ 140,214 $ 167,740 $134,866 $151,841 $214,635 $ 16,660 $ 22,779 $ 21,388
======== ========= ========= ======== ======== ======== ========== ========== ==========
AVERAGE BALANCES
(DOLLARS IN MILLIONS):
Total loans before
performance
centers(2)........... $ 9,904 $ 9,588 $ 9,422 $ 9,327 $ 11,162 $ 13,682 $ 1,637 $ 1,356 $ 1,050
Total assets........... 11,052 10,640 10,529 10,392 12,358 14,971 2,631 2,070 1,590
Total deposits before
performance
centers(2)........... 13,005 13,742 14,557 4,335 5,362 5,585 959 851 814
FINANCIAL RATIOS:
Risk adjusted return on
capital.............. 21% 23% 25% 18% 17% 19% 10% 17% 18%
Return on average
assets(3)............ 1.14 1.32 1.59 1.30 1.23 1.43 0.63 1.10 1.35
Efficiency ratio before
performance
centers.............. 71.6 72.0 70.3 44.0 43.5 36.9 56.7 54.6 56.9
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ---------------------------- ----------------------------------
1997 1998 1999 1997 1998 1999 1997 1998 1999
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income.... $ 14,598 $ 41,972 $ 44,957 $ 60,735 $ 63,641 $ 22,135 $1,231,682 $1,318,223 $1,415,833
Noninterest income..... 21,166 29,854 25,521 8,236 4,523 10,021 463,001 533,531 586,759
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Total revenue.......... 35,764 71,826 70,478 68,971 68,164 32,156 1,694,683 1,851,754 2,002,592
Noninterest
expense(4)........... 22,556 26,718 22,935 39,430 57,947 166,596 1,044,665 1,135,218 1,281,973
Credit expense --)
(income)............. -- -- (151,892 (105,915) (100,711) -- 45,000 65,000
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Income (loss) before
income tax expense
(benefit) and
performance center
earnings (expense)... 13,208 45,108 47,543 181,433 116,132 (33,729) 650,018 671,536 655,619
Performance center
earnings
(expense)(1)......... (10,194) (9,231) (7,350) 1,457 3,158 2,064 -- -- --
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Income (loss) before
income tax expense
(benefit)............ 3,014 35,877 40,193 182,890 119,290 (31,665) 650,018 671,536 655,619
Income tax expense
(benefit)............ 1,206 13,958 15,470 51,314 (10,418) (44,910) 238,722 205,075 213,888
-------- --------- --------- -------- -------- -------- ---------- ---------- ----------
Net income............. $ 1,808 $ 21,919 $ 24,723 $131,576 $129,708 $ 13,245 $ 411,296 $ 466,461 $ 441,731
======== ========= ========= ======== ======== ======== ========== ========== ==========
AVERAGE BALANCES
(DOLLARS IN MILLIONS):
Total loans before
performance
centers(2)........... $ -- $ -- $ -- $ 988 $ 1,110 $ 871 $ 21,856 $ 23,216 $ 25,025
Total assets........... 4,122 4,090 3,888 1,496 1,366 1,163 29,693 30,524 32,141
Total deposits before
performance
centers(2)........... 3,783 2,662 3,051 (15) 38 (114) 22,067 22,655 23,893
FINANCIAL RATIOS:
Risk adjusted return on
capital.............. 2% 13% 15% na na na na na na
Return on average
assets(3)............ 0.04 0.54 0.64 na na na 1.39% 1.53% 1.37%
Efficiency ratio before
performance
centers.............. 63.1 37.2 32.5 na na na 61.7 61.5 64.1
- ----------------------------------
(1) Performance center earnings (expense) represent the allocation of net
interest income, noninterest income and noninterest expense between the
business segments for products and services originated in one segment but
managed by another.
(2) Represents loans and deposits for each business segment before allocation
between the segments of loans and deposits originated in one segment but
managed by another.
(3) The increase in 1998 over the prior year for the Community Banking and
Investment Services Group was partially due to the sale of the credit card
portfolio as discussed on page F-3.
(4) "Other" includes 3rd quarter 1999 restructuring charge of $85.0 million
($55.2 million, net of tax).
na = not applicable
F-6
COMMUNITY BANKING AND INVESTMENT SERVICES GROUP
The Community Banking and Investment Services Group provides its customers
with a full line of checking and savings, investment, trust, loan and fee-based
banking products. During 1999, and as part of the Mission Excel initiatives, we
merged the Community Banking Group with the Trust and Private Financial Services
Group to form the Community Banking and Investment Services Group. The merging
of these two groups under one leadership provides our retail and business client
base with a full range of products and services through one coordinated and
responsive delivery channel. It is expected that when this strategy is fully
implemented, we will improve customer service, increase revenues and lower
expenses.
In 1999, net income increased $27.5 million compared to 1998. Total revenue
increased $79.0 million in 1999 compared to a year ago. Excluding the
$17.1 million gain on the sale of the credit card portfolio in the second
quarter 1998, total revenue increased $96.1 million, or 10 percent from a year
ago. The revenue increases relate to higher net interest income, trust fees,
investment management fees and brokerage commissions. Noninterest expense
increased $38.0 million from the prior year primarily to support the revenue
increase. Credit expense decreased $2.3 million from a year ago primarily due to
the sale of the credit card portfolio.
Organizational changes will continue in the near term as our strategy is
implemented. However, at December 31, 1999, the group was divided into three
major divisions: Community Banking, Wealth Management and Institutional Services
and Asset Management.
COMMUNITY BANKING serves over one million consumer households and businesses
through its 240 full-service branches in California, six full-service branches
in Oregon and Washington, three full-service branches in Guam and Saipan and its
network of over 380 proprietary ATMs. Customers may also access our services
24 hours a day by telephone or personal computer. In addition, the division
offers automated teller and point-of-sale debit services through our founding
membership in the Star System-Registered Trademark-, the largest shared ATM
network in the Western United States.
This division is organized by service delivery method, by markets and by
geography. We serve our customers in the following ways:
- Through community banking branches, which serve consumers and businesses
- Through business banking centers, which serve businesses with sales
between $3 million and $20 million,
- Through in-store branches, which also serve consumers and businesses,
- Through middle market and agricultural lending offices, and
- Through the Consumer Asset Management division, which is responsible for
indirect auto finance, auto leasing and residential real estate lending.
WEALTH MANAGEMENT provides private banking and other specialized financial
services to our affluent clientele as well as brokerage products and services.
- Private Banking focuses primarily on delivering integrated and customized
financial services to high net worth individuals with sophisticated
financial needs. Specific products and services include trust and estate
services, investment account management services, offshore trust services
and customized deposit and credit products. The Private Banking strategy
is to expand its business by increasing its geographic market coverage and
the breadth of its products and services. Through its 4 offices, the
Private Bank sales staff offers all of the bank's available products and
services.
- Our brokerage products and services are provided through Union Bank of
California, N.A. Investment Services, Inc., a registered broker/dealer
offering a full line of investment products to individuals and
institutional clients. Their primary strategy is to further penetrate our
existing client base.
F-7
INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment management
and administration services for a broad range of individuals and institutions.
- HighMark Capital Management, Inc., a registered investment advisor,
manages our proprietary HighMark family of mutual funds. It also provides
investment management services to institutions, pension plans and
individuals, including to clients of other divisions. HighMark Capital
Management's strategy is to expand distribution of its mutual funds by
targeting its marketing efforts at registered investment advisors and
regional broker/dealers. In addition, HighMark Capital Management, Inc. is
working with The Bank of Tokyo-Mitsubishi, Ltd. and other third parties to
establish mutual funds offshore that HighMark will advise and which will
be offered to non-U.S. investors. HighMark also serves as a sub-advisor
for funds managed by Tokyo-Mitsubishi Asset Management, Ltd. in Japan.
- Business Trust provides businesses, government agencies, unions and
non-profit organizations with trustee services, investment management and
401(k) valuation and recordkeeping services. Business Trust's strategy is
to expand its third-party distribution network to include insurance
companies, investment managers, brokers and mutual funds.
- Securities Services is engaged in domestic and global securities custody,
safekeeping, mutual fund accounting, securities lending, and corporate
trust services. Its client base includes financial institutions,
businesses, government agencies, union, investment managers and non-profit
organizations. Securities Services is the only West Coast based provider
of a full range of institutional financial services.
Through alliances with other financial institutions, the group offers
additional products and services, such as credit cards, leasing, and asset-based
and leveraged financing.
The group competes with larger banks by providing service quality superior
to that of its major competitors. We are recognized as among the highest rated
banks in California for customer service quality and satisfaction.
The group's primary means of competing with community banks include its
large and convenient branch network and its reputation for innovative use of
technology to deliver banking services. We have the fifth largest branch network
among depository institutions in California. We also offer convenient banking
hours to consumers through our drive-through banking locations and selected
branches that are open seven days a week.
The group competes with a number of commercial banks, internet banks,
savings associations and credit unions, as well as more specialized financial
service providers such as investment brokerage companies, consumer finance
companies, and residential real estate lenders. The group's primary competitors
are other major depository institutions such as Bank of America, California
Federal, Washington Mutual and Wells Fargo, as well as smaller community banks
in the markets in which we operate.
COMMERCIAL FINANCIAL SERVICES GROUP
The Commercial Financial Services Group offers a variety of commercial
financial services, including:
- commercial and project loans,
- real estate financing,
- commercial financing based on accounts receivable, inventory, or other
short term assets,
- trade financing, which is the short-term extension of credit to support
export/import transactions, including letters of credit,
- lease financing,
- customized cash management services, and
F-8
- selected capital markets products.
The group's customers provide a significant source of opportunities for us
to sell products and services of other units of the bank, including treasury,
trust, and retail banking services. In 1999, net income increased $62.8 million
compared to 1998. Total revenue increased $116.7 million, due to the
$2.5 billion growth in average loans and leases year over year, which
contributed to the significant increase in net interest income accompanied by
increases in fee income. Noninterest expense increased $5.4 million primarily
due to an increase in salaries and employee benefits, as well as additional
expenses incurred to support higher deposit volumes. Credit expense increased
$19.6 million from a year ago, due to the loan growth mentioned above.
The group is divided into the following business units, which serve specific
markets and industries:
- the Commercial Banking Group, which serves California middle-market
companies and larger companies most often headquartered in the Western
United States,
- the Real Estate Industries Group, which serves real estate developers and
real estate investment trusts,
- the Specialized Lending Group, which serves companies operating in various
industries, including oil and gas, utilities, media, communications,
healthcare, finance, and retailing, and
- the Institutional and Deposit Markets Group, which serves title and escrow
companies, domestic financial institutions, retailers, bankruptcy
trustees, and other customers with large pools of deposits.
The Commercial Customer Service Unit supports these business units by
providing centralized customer service support.
The group competes with other banks primarily on the basis of its reputation
as a "business bank," the quality of its relationship managers, and the delivery
of superior customer service. We are recognized in California as having a
superior "business banking" reputation relative to other large banks. We are
also highly rated among financial institutions for our cash management services
and systems.
The group's main strategy is to target industries and companies for which
the group can reasonably expect to be one of a customer's primary banks.
Consistent with its strategy, the group attempts to serve a large part of its
targeted customers' credit and depository needs.
The group competes with a variety of other financial services companies.
Competitors include other major California banks, as well as regional, national
and international banks. In addition, we compete with investment banks,
commercial finance companies, leasing companies, and insurance companies.
INTERNATIONAL BANKING GROUP
The International Banking Group mainly provides correspondent banking and
trade finance-related products and services to international financial
institutions worldwide, primarily in Asia. This includes providing products and
services that facilitate trade finance transactions, including payments,
collection and the extension of short-term credit. The group also serves
selected foreign firms and U.S. corporate clients in selected countries
worldwide, particularly in Asia. In the U.S., the group serves subsidiaries and
affiliates of non-Japanese Asian companies and U.S. branches and agencies of
foreign banks. The group also provides international services to domestic
corporate clients along the West Coast. The group's revenue predominately
relates to foreign customers. In 1999, net income decreased $1.4 million
compared to 1998. Total revenue decreased $7.6 million due to continuing
reductions in credit exposures, narrower credit spreads, and lower market
pricings on those exposures. Noninterest expense decreased $1.5 million
primarily due to personnel expenses. Credit expense decreased $2.4 million from
a year ago, due to the reduction in credit exposures. Expected losses related to
credit risk on foreign exposures have not been finalized and results could
change in the future.
F-9
The group has a long and stable history of providing correspondent and
trade-related services to international financial institutions. We believe that
we have achieved a leading market position and strong customer loyalty in the
Asia/Pacific correspondent banking market because we provide high quality,
customized products, and services at competitive prices. The group maintains
branches in Tokyo, Taipei, Seoul, Manila and Hong Kong, representative offices
in other parts of Asia and Latin America, and an international banking
subsidiary in New York.
One of the group's primary services is international trade finance. Trade
finance is typically short-term, which means it generally has a lower credit
risk. Despite this relatively lower credit risk compared to some other forms of
commercial credit, we have reduced the amount of credit we have extended to our
customers and the average maturity of this portfolio in response to continuing
concern in global markets.
The group's strategy is to improve its global operations by reducing costs
and improving productivity. It competes with both U.S. and foreign banks.
Approximately 25 U.S. banks compete with the group to provide correspondent
banking and trade-related services to Asian banks. The group's primary
competitors include First Union, Bank of New York, Chase Manhattan, Citibank,
Bank of America and Bank of Hawaii.
GLOBAL MARKETS GROUP
The Global Markets Group conducts business activities primarily to support
the previously described business groups and their customers. This group offers
a broad range of risk management products, such as foreign exchange and interest
rate swaps, caps and floors. Additionally, it places debt securities, including
Union Bank of California, N.A.'s own liabilities, with institutional investors
and trades debt instruments in the secondary market. This group also manages our
market-related risks as part of its responsibilities for asset/liability
management. The group is also responsible for maintaining Union Bank of
California, N.A.'s investment securities portfolio. In 1999, net income
increased $2.8 million compared to 1998. Total revenue decreased $1.3 million
primarily due to the decision made earlier in the year to exit the municipal
underwriting and certain capital market activities. Noninterest expense
decreased $3.8 million largely due to personnel expense reductions.
The group manages our securities portfolio, trading operations, wholesale
funding needs, and interest rate and liquidity risk. The group includes products
that support corporate lending, customer interest rate risk management needs and
foreign exchange.
OTHER
"Other" includes the following items:
- Corporate activities that are not directly attributable to one of the four
major business units. Included in this category are goodwill, merger and
integration expense, restructuring charges, certain parent company
non-bank subsidiaries, and the elimination of the fully taxable-equivalent
amounts.
- The adjustment between the credit expense under RAROC and the provision
for credit losses under generally accepted accounting principles, the net
impact of transfer pricing, and earnings associated with unallocated
equity capital.
- The Credit and Compliance Group, which includes $120 million of average
nonperforming assets.
- The Pacific Rim Corporate Group, which offers a range of credit, deposit,
and investment management products and services to companies in the U.S.,
which are affiliated with companies headquartered outside the U.S., mostly
in Japan.
- The residual costs of support groups.
F-10
STRATEGIC INITIATIVES
In connection with our strategic repositioning, during 1999, we developed
long-term financial performance goals. These goals will serve as a tool for
measuring the long-term success of our operating strategies, based on normal
business operations, without including nonrecurring events that may occur from
time to time. Our long-term financial performance goals include:
PERFORMANCE RATIO GOAL
- ------------------------------------------------------------ ------------------------------
- - Return on average common equity.......................... 15% to 17%
- - Earnings per share growth................................ 10% to 12%
- - Efficiency ratio......................................... 54% to 56%
- - Tangible common equity to assets......................... 7.5% to 8.5%
Although we believe these goals are realizable given our proposed operating
strategies and our current asset quality, we cannot assure you that we will
attain these long-term financial performance goals at any particular time. See
paragraph on certain business risk factors on page F-41.
F-11
NET INTEREST INCOME
The table below shows the major components of net interest income and net
interest margin.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1998
----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1)
- ----------------------------------- ----------- ---------- -------- ----------- ---------- --------
ASSETS
Loans:(2)
Domestic......................... $20,332,494 $1,672,006 8.22% $21,890,350 $1,736,847 7.93%
Foreign(3)....................... 1,523,417 92,420 6.07 1,325,154 90,011 6.79
Securities--taxable(4)............. 2,521,339 158,950 6.30 3,056,152 192,404 6.30
Securities--tax-exempt(4).......... 124,174 12,669 10.20 103,097 11,384 11.04
Interest bearing deposits in
banks............................ 968,966 56,748 5.86 260,720 17,080 6.55
Federal funds sold and securities
purchased under resale
agreements....................... 466,321 26,079 5.59 296,285 16,056 5.42
Trading account assets............. 355,111 19,917 5.61 555,632 25,829 4.65
----------- ---------- ----------- ----------
Total earning assets........... 26,291,822 2,038,789 7.75 27,487,390 2,089,611 7.60
---------- ----------
Allowance for credit losses........ (503,126) (471,113)
Cash and due from banks............ 2,006,038 1,919,714
Premises and equipment, net........ 411,302 405,562
Other assets....................... 1,486,956 1,182,253
----------- -----------
Total assets................... $29,692,992 $30,523,806
=========== ===========
LIABILITIES
Domestic deposits:
Interest bearing................. $ 5,340,661 151,768 2.84 $ 5,482,257 153,805 2.81
Savings and consumer time........ 2,970,370 112,808 3.80 3,205,823 120,778 3.77
Large time....................... 4,652,293 256,007 5.50 3,644,732 194,324 5.33
Foreign deposits(3)................ 1,589,303 75,398 4.74 1,704,027 86,221 5.06
----------- ---------- ----------- ----------
Total interest bearing
deposits..................... 14,552,627 595,981 4.10 14,036,839 555,128 3.95
----------- ---------- ----------- ----------
Federal funds purchased and
securities sold under repurchase
agreements....................... 1,097,707 58,544 5.33 1,604,675 84,440 5.26
Subordinated capital notes......... 354,575 22,850 6.44 325,808 20,347 6.24
Commercial paper................... 1,637,070 89,912 5.49 1,631,216 88,358 5.42
Other borrowed funds............... 635,900 34,492 5.42 328,872 18,683 5.68
UnionBanCal Corporation-obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust............................ -- -- -- -- -- --
----------- ---------- ----------- ----------
Total borrowed funds........... 3,725,252 205,798 5.52 3,890,571 211,828 5.44
----------- ---------- ----------- ----------
Total interest bearing
liabilities.................. 18,277,879 801,779 4.39 17,927,410 766,956 4.28
---------- ----------
Noninterest bearing deposits....... 7,514,528 8,617,875
Other liabilities.................. 1,295,728 1,132,557
----------- -----------
Total liabilities.............. 27,088,135 27,677,842
SHAREHOLDERS' EQUITY
Preferred stock.................... 90,247 --
Common equity...................... 2,514,610 2,845,964
----------- -----------
Total shareholders' equity..... 2,604,857 2,845,964
----------- -----------
Total liabilities and
shareholders' equity......... $29,692,992 $30,523,806
=========== ===========
Net interest income/margin
(taxable-equivalent basis)....... 1,237,010 4.70% 1,322,655 4.81%
Less: taxable-equivalent
adjustment....................... 5,328 4,432
---------- ----------
Net interest income............ $1,231,682 $1,318,223
========== ==========
YEARS ENDED DECEMBER 31,
-----------------------------------
1999
-----------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1)
- ----------------------------------- ----------- ---------- --------
ASSETS
Loans:(2)
Domestic......................... $23,931,438 $1,849,174 7.73%
Foreign(3)....................... 1,093,339 69,593 6.37
Securities--taxable(4)............. 3,287,983 205,899 6.26
Securities--tax-exempt(4).......... 78,289 7,852 10.03
Interest bearing deposits in
banks............................ 203,752 12,174 5.97
Federal funds sold and securities
purchased under resale
agreements....................... 156,839 8,108 5.17
Trading account assets............. 265,482 12,293 4.63
----------- ----------
Total earning assets........... 29,017,122 2,165,093 7.46
----------
Allowance for credit losses........ (453,126)
Cash and due from banks............ 2,026,730
Premises and equipment, net........ 435,356
Other assets....................... 1,115,415
-----------
Total assets................... $32,141,497
===========
LIABILITIES
Domestic deposits:
Interest bearing................. $ 5,704,138 143,334 2.51
Savings and consumer time........ 3,368,328 107,974 3.21
Large time....................... 4,107,360 192,724 4.69
Foreign deposits(3)................ 1,600,047 73,829 4.61
----------- ----------
Total interest bearing
deposits..................... 14,779,873 517,861 3.50
----------- ----------
Federal funds purchased and
securities sold under repurchase
agreements....................... 1,489,214 72,083 4.84
Subordinated capital notes......... 298,000 17,100 5.74
Commercial paper................... 1,529,814 77,041 5.04
Other borrowed funds............... 708,625 37,420 5.28
UnionBanCal Corporation-obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust............................ 303,014 24,569 8.11
----------- ----------
Total borrowed funds........... 4,328,667 228,213 5.27
----------- ----------
Total interest bearing
liabilities.................. 19,108,540 746,074 3.90
----------
Noninterest bearing deposits....... 9,113,172
Other liabilities.................. 980,194
-----------
Total liabilities.............. 29,201,906
SHAREHOLDERS' EQUITY
Preferred stock.................... --
Common equity...................... 2,939,591
-----------
Total shareholders' equity..... 2,939,591
-----------
Total liabilities and
shareholders' equity......... $32,141,497
===========
Net interest income/margin
(taxable-equivalent basis)....... 1,419,019 4.89%
Less: taxable-equivalent
adjustment....................... 3,186
----------
Net interest income............ $1,415,833
==========
- ----------------------------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Average balances on loans outstanding include all nonperforming and
renegotiated loans. The amortized portion of net loan origination fees
(costs) is included in interest income on loans, representing an adjustment
to the yield.
(3) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(4) For the purpose of the net interest margin analysis, yields on securities
available for sale are based on fair value.
F-12
Net interest income is interest earned on loans and investments less
interest expense on deposit accounts and borrowings. Primary factors affecting
the level of net interest income include the margin between the yield earned on
interest earning assets and the rate paid on interest bearing liabilities, as
well as the volume and composition of average interest earning assets and
average interest bearing liabilities.
Net interest income, on a taxable-equivalent basis, was $1.3 billion in
1998, compared with $1.4 billion in 1999. The increase of $96.4 million, or
7 percent, was mostly attributable to a $1.5 billion, or 6 percent, increase in
average earning assets largely funded by a $0.5 billion, or 6 percent, increase
in average noninterest bearing deposits. Net interest margin increased 8 basis
points to 4.89%. The favorable impact of the lower interest rate environment
that contributed to lower rates on interest bearing deposits was mostly offset
by lower yields on loans and other average earning assets.
Average earning assets were $27.5 billion in 1998, compared with
$29.0 billion in 1999. This growth was primarily attributable to a
$1.8 billion, or 8 percent, increase in average loans and a $207.0 million, or
7 percent, increase in average securities, partially offset by a $347.1 million
decrease in average interest bearing deposits in banks and average trading
account assets and a $139.4 million decrease in federal funds sold and
securities purchased under resale agreements. The growth in average loans was
attributable to the increase in average commercial, financial and industrial
loans of $1.8 billion, partially offset by the decrease in average consumer
loans of $311.0 million, primarily related to the sale of the credit card
portfolio. See "Loans" on page F-18 for additional commentary on growth in the
loan portfolio.
The $1.5 billion, or 6 percent, growth in average earning assets over 1998
was primarily funded by a $0.5 billion increase in average noninterest bearing
deposits, a $0.5 billion increase in large time deposits and a $0.4 billion
increase in other borrowed funds. The increase in average noninterest bearing
deposits in 1999 was partially due to an influx of new customer relationships,
arising from the merger and acquisition activities of other financial
institutions in the California market during 1998 and 1999.
F-13
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table shows the changes in the components of net interest
income on a taxable-equivalent basis. The changes in net interest income between
periods have been reflected as attributable either to volume or to rate changes.
For purposes of this table, changes that are not solely due to volume or rate
changes are allocated to rate.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 VERSUS 1997 1999 VERSUS 1998
------------------------------ ------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN CHANGE IN
------------------------------ ------------------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
- ------------------------------------------------------ -------- -------- -------- -------- -------- --------
CHANGES IN INTEREST INCOME
Loans:
Domestic............................................ $128,056 $(63,215) $ 64,841 $161,858 $(49,531) $112,327
Foreign(1).......................................... (12,035) 9,626 (2,409) (15,740) (4,678) (20,418)
Securities--taxable 33,693 (239) 33,454 14,605 (1,110) 13,495
Securities--tax-exempt................................ (2,150) 865 (1,285) (2,739) (793) (3,532)
Interest bearing deposits in banks.................... (41,503) 1,835 (39,668) (3,731) (1,175) (4,906)
Federal funds sold and securities purchased under
resale agreements................................... (9,505) (518) (10,023) (7,558) (390) (7,948)
Trading account assets................................ 11,249 (5,337) 5,912 (13,492) (44) (13,536)
-------- -------- -------- -------- -------- --------
Total earning assets.............................. 107,805 (56,983) 50,822 133,203 (57,721) 75,482
-------- -------- -------- -------- -------- --------
CHANGES IN INTEREST EXPENSE
Domestic deposits:
Interest bearing.................................... $ 4,021 $ (1,984) $ 2,037 $ 6,235 $(16,706) $(10,471)
Savings and consumer time........................... 8,947 (977) 7,970 6,126 (18,930) (12,804)
Large time.......................................... (55,416) (6,267) (61,683) 24,658 (26,258) (1,600)
Foreign deposits(1)................................... 5,438 5,385 10,823 (5,261) (7,131) (12,392)
-------- -------- -------- -------- -------- --------
Total interest bearing deposits................... (37,010) (3,843) (40,853) 31,758 (69,025) (37,267)
-------- -------- -------- -------- -------- --------
Federal funds purchased and securities sold under
repurchase agreements............................... 27,021 (1,125) 25,896 (6,073) (6,284) (12,357)
Subordinated capital notes............................ (1,853) (650) (2,503) (1,735) (1,512) (3,247)
Commercial paper...................................... (321) (1,233) (1,554) (5,496) (5,821) (11,317)
Other borrowed funds.................................. (16,641) 832 (15,809) 21,570 (2,833) 18,737
UnionBanCal Corporation-obligated mandatorily
redeemable preferred securities of subsidiary
grantor trust....................................... -- -- -- 24,569 -- 24,569
-------- -------- -------- -------- -------- --------
Total borrowed funds.............................. 8,206 (2,176) 6,030 32,835 (16,450) 16,385
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities................ (28,804) (6,019) (34,823) 64,593 (85,475) (20,882)
-------- -------- -------- -------- -------- --------
Changes in net interest income.................... $136,609 $(50,964) $ 85,645 $ 68,610 $ 27,754 $ 96,364
======== ======== ======== ======== ======== ========
- ------------------------------
(1) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
Interest income on a taxable-equivalent basis increased $75.5 million in
1999, primarily due to growth in interest income from average domestic loans and
average taxable securities of $112.3 million and $13.5 million, respectively,
partially offset by lower interest income from average foreign loans and trading
account assets of $20.4 million and $13.5 million, respectively. These changes
reflected higher average balances outstanding on average domestic loans and
average taxable securities, partially offset by a lower average yield on average
domestic loans and a lower average balance outstanding on average interest
bearing deposits and trading account assets.
Interest expense decreased $20.9 million in 1999 due to lower interest
expense on average interest bearing deposits, primarily reflecting lower average
rates, partially offset by higher average volume. Interest expense on borrowed
funds increased $16.4 million in 1999, reflecting higher volumes and the
F-14
issuance of the Trust Preferred securities in the first quarter of 1999, offset
by a 17 basis point decrease in the average rate paid.
NONINTEREST INCOME
INCREASE (DECREASE)
-----------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
YEARS ENDED DECEMBER 31, 1998 VERSUS 1997 1999 VERSUS 1998
------------------------------ ------------------- -------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999 AMOUNT PERCENT AMOUNT PERCENT
- --------------------------------------------------- -------- -------- -------- -------- -------- -------- --------
Service charges on deposit accounts................ $114,647 $138,847 $172,700 $24,200 21% $ 33,853 24%
Trust and investment management fees............... 107,527 121,226 140,878 13,699 13 19,652 16
International commissions and fees................. 66,122 72,036 70,801 5,914 9 (1,235) (2)
Merchant transaction processing fees............... 57,128 56,929 68,037 (199) -- 11,108 20
Merchant banking fees.............................. 24,924 31,402 38,036 6,478 26 6,634 21
Brokerage commissions and fees..................... 15,569 19,085 27,038 3,516 23 7,953 42
Foreign exchange trading gains, net................ 16,268 19,527 20,430 3,259 20 903 5
Securities gains, net.............................. 2,711 5,686 7,941 2,975 110 2,255 40
Gain on sale of credit card portfolio.............. -- 17,056 -- 17,056 nm (17,056) nm
Other.............................................. 58,105 51,737 40,898 (6,368) (11) (10,839) (21)
-------- -------- -------- ------- --------
Total noninterest income......................... $463,001 $533,531 $586,759 $70,530 15% $ 53,228 10%
======== ======== ======== ======= ========
- ------------------------------
nm = not meaningful
Noninterest income in 1999 was $586.8 million, an increase of
$53.2 million, or 10 percent, over 1998. Included in 1998 noninterest income was
a $17.1 million gain from the sale of the credit card portfolio. Affecting the
net increase were the following:
- Revenue from service charges on deposit accounts of $172.7 million, an
increase of 24 percent over 1998. The increase was primarily attributable
to a 5 percent increase in average deposits coupled with higher ATM
surcharges and the expansion of several products and services.
- Trust and investment management fees of $140.9 million, an increase of
16 percent over 1998. The increase was due to strong growth in trust
accounts and assets under management, which resulted in higher mutual fund
management fees.
- International commissions and fees of $70.8 million, a decrease of
2 percent over 1998. The decrease was primarily due to narrower pricings
on Korean bankers' acceptances than had been experienced during 1998.
- Merchant transaction processing fees of $68.0 million, an increase of
20 percent over 1998. The increase was due to increased volume and an
increase in the merchant discount rate in April 1999.
- Merchant banking fees of $38.0 million, an increase of 21 percent over
1998. The increase was primarily due to increased loan syndication
activities by the Commercial Financial Services Group.
- Brokerage commissions and fees of $27.0 million, an increase of
42 percent over 1998. The increase was primarily attributable to brokerage
commissions on non-proprietary mutual fund sales and growth in corporate
sweep products.
- Other noninterest income of $40.9 million, a decrease of 21 percent from
1998. The decrease was primarily due to a $15.0 million charge related to
auto lease residual valuation adjustments that were recorded in the third
and fourth quarters of 1999, partially offset by higher investment service
fee income of $8.0 million.
F-15
NONINTEREST EXPENSE
INCREASE (DECREASE)
-----------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
YEARS ENDED DECEMBER 31, 1998 VERSUS 1997 1999 VERSUS 1998
------------------------------------ ------------------- -------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999 AMOUNT PERCENT AMOUNT PERCENT
- --------------------------- ---------- ---------- ---------- -------- -------- -------- --------
Salaries and other
compensation............. $ 461,915 $ 501,220 $ 539,056 $39,305 9% $ 37,836 8%
Employee benefits.......... 109,729 116,344 122,288 6,615 6 5,944 5
---------- ---------- ---------- ------- --------
Personnel-related
expense................ 571,644 617,564 661,344 45,920 8 43,780 7
Net occupancy.............. 85,630 90,917 90,162 5,287 6 (755) (1)
Equipment.................. 56,137 56,252 67,095 115 -- 10,843 19
Merchant transaction
processing............... 42,274 43,926 49,435 1,652 4 5,509 13
Communications............. 42,372 41,710 43,179 (662) (2) 1,469 4
Professional services...... 28,075 36,748 38,399 8,673 31 1,651 4
Data processing............ 25,973 28,091 31,811 2,118 8 3,720 13
Advertising and public
relations................ 28,664 31,897 27,163 3,233 11 (4,734) (15)
Software................... 16,562 20,969 24,519 4,407 27 3,550 17
Printing and office
supplies................. 24,098 26,716 22,535 2,618 11 (4,181) (16)
Travel..................... 15,763 18,080 18,548 2,317 15 468 3
Intangible asset
amortization............. 13,352 13,581 13,980 229 2 399 3
Armored car................ 12,209 12,231 12,831 22 -- 600 5
Foreclosed asset income.... (1,268) (2,821) (1,344) (1,553) nm 1,477 nm
Other (excluding
restructuring charge).... 83,180 99,357 97,316 16,177 19 (2,041) (2)
---------- ---------- ---------- ------- --------
Total noninterest expense
(excluding restructuring
charge).................. 1,044,665 1,135,218 1,196,973 90,553 9 61,755 5
Restructuring charge....... -- -- 85,000 -- 85,000 nm
---------- ---------- ---------- ------- --------
Total noninterest
expense................ $1,044,665 $1,135,218 $1,281,973 $90,553 9% $146,755 13%
========== ========== ========== ======= ========
- ------------------------
nm = not meaningful
Noninterest expense, excluding the restructuring charge, in 1999 was
$1.2 billion, an increase of $61.8 million, or 5 percent, over 1998. Affecting
the net increase were the following:
- Personnel-related expense of $661.3 million, an increase of 7 percent over
1998. This increase was primarily due to a $19.6 million increase in
performance-based incentive compensation and a $12.7 million increase in
exempt pay, due to regular merit increases. Decreases in personnel-related
expense due to Mission Excel reductions were offset by a loss of
$6.1 million related to the reduction in staff and the impact on future
post-retirement benefits.
- Equipment expense of $67.1 million, an increase of 19 percent over 1998,
primarily due to higher depreciation expense on personal computers related
to our intranet upgrade and a decrease in the estimated useful lives.
- Merchant transaction processing expense of $49.4 million, an increase of
13 percent over 1998, primarily due to higher merchant volumes.
F-16
YEAR 2000 EXPENSES
We achieved a successful transition to the Year 2000. (See "Year 2000" on
page F-41 for a detailed discussion of our year 2000 program.) We estimate that
the total cost of the year 2000 project will be approximately $45.8 million,
including capital expenditures, which we have capitalized and which are being
depreciated over their estimated useful lives. As of December 31, 1999, we have
spent $40.6 million on the year 2000 project, $2.2 million in 1997,
$21.6 million in 1998 and $16.8 million in 1999. Of the $40.6 million spent as
of December 31, 1999, $6.8 million related to capital expenditures,
$0.8 million in 1997, $5.2 million in 1998, and $0.8 million in 1999. We do not
anticipate any additional capital expenditures related to this project. The
remaining budget of $5.2 million includes $4.9 million for staff and
professional services. We are funding the cost of the year 2000 project with
normal operating cash and are staffing it with external resources as well as
internal staff re-deployed from less time-sensitive assignments.
INCOME TAX EXPENSE
YEARS ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ---------------------------------------------- -------- -------- --------
Income before income taxes.................... $650,018 $671,536 $655,619
Income tax expense............................ 238,722 205,075 213,888
Effective tax rate............................ 37% 31% 33%
Our effective tax rate in 1998 was 31 percent compared with 33 percent in
1999. Our effective tax rate in 1999 was affected by various tax refunds of
$10.7 million. The lower 1998 effective tax rate was due to our ability to file
our 1997 and 1998 California franchise tax returns on a worldwide unitary basis,
incorporating the financial results of The Bank of Tokyo-Mitsubishi, Ltd. and
its worldwide affiliates. As a result, we reduced our state income tax
liabilities by $29 million, net of federal tax, for previously accrued 1997
state tax liabilities, and lowered our 1998 state tax provision by $31 million,
net of federal tax. It is our intention to file our 1999 California franchise
tax returns on a worldwide unitary basis as well. In 1997, we received an
after-tax refund from the California Franchise Tax Board (FTB) of $25 million to
settle litigation, administration, and audit disputes covering the years
1975-1987. Excluding the various tax refunds, the effective tax rates were
36 percent in 1997, 35 percent in 1998, and 34 percent in 1999.
CREDIT RISK MANAGEMENT
Our principal business activity is the extension of credit in the form of
loans or other credit substitutes to individuals and businesses. Our policies
and applicable laws and regulations, governing the extension of credit, require
risk analysis as well as ongoing portfolio and credit management through loan
product diversification, lending limit constraints, credit review and approval
policies, and extensive internal monitoring.
We manage and control credit risk through diversification of the portfolio
by type of loan, industry concentration, dollar limits on multiple loans to the
same borrower, geographic distribution and type of borrower. Geographic
diversification of loans originated through our branch network is generally
within California, Oregon and Washington, which we consider to be our principal
markets. In addition, we will continue to originate and participate in lending
activities outside these states, as well as internationally.
In analyzing our existing loan portfolios, we apply specific monitoring
policies and procedures that vary according to the relative risk profile and
other characteristics of the loans within the various portfolios. Our
residential and consumer loans are relatively homogeneous and no single loan is
individually significant in terms of its size or potential risk of loss.
Therefore, we review our residential and consumer portfolios by analyzing their
performance as a pool of loans. In contrast, our monitoring process for the
commercial, financial and industrial, construction, commercial mortgage, and
foreign loan portfolios includes a periodic review of individual loans. Loans
that are performing but have shown some signs of
F-17
weakness are subjected to more stringent reporting and oversight. We review
these loans to assess the ability of the borrowing entity to continue to service
all of its interest and principal obligations and as a result may adjust the
risk grade accordingly. In the event that we believe that full collection of
principal and interest is not reasonably assured, the loan will be appropriately
downgraded and, if warranted, placed on nonaccrual status, even though the loan
may be current as to principal and interest payments.
We have a Credit Policy Forum, composed of the Chief Credit Officer, senior
credit officers, and appropriate line officers, that establishes policy, credit
quality criteria, portfolio guidelines and other controls. Credit
Administration, together with a series of loan committees, have the
responsibility for administering the credit approval process, as well as the
implementation and administration of our credit policies and lending practices
and procedures. These policies require an extensive evaluation of credit
requests and continuing review of existing credits in order to promptly
identify, monitor, and quantify evidence of deterioration of asset credit
quality or potential loss.
As another part of the control process, an independent internal credit
review and examination function provides quality assurance that loans and
commitments are made and maintained as prescribed by our credit policies and
that the assets are appropriately and timely risk graded. This includes a review
of compliance with our underwriting policies when the loan is initially extended
and subsequent on-site examinations to ensure continued compliance.
LOANS
The following table shows loans outstanding by loan type and as a percentage
of total loans for 1995 through 1999.
DECEMBER 31,
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998 1999
- ----------------------------- ------------- ------------- ------------- ------------- -------------
Domestic:
Commercial, financial and
industrial............... $ 9,684 47% $ 9,496 45% $10,747 47% $13,120 54% $14,177 55%
Construction............... 370 2 358 2 293 1 440 2 648 3
Mortgage:
Residential.............. 2,642 13 2,961 14 2,961 13 2,628 11 2,581 10
Commercial............... 2,143 10 2,598 12 2,952 13 2,975 12 3,572 14
------- ------- ------- ------- -------
Total mortgage......... 4,785 23 5,559 26 5,913 26 5,603 23 6,153 24
Consumer:
Installment.............. 1,812 9 2,063 10 2,091 9 1,985 8 1,922 7
Home equity.............. 1,222 6 1,113 5 993 5 818 4 728 3
Credit card and other
lines of credit........ 309 2 303 1 270 1 -- -- -- --
------- ------- ------- ------- -------
Total consumer......... 3,343 17 3,479 16 3,354 15 2,803 12 2,650 10
Lease financing............ 845 4 800 4 875 4 1,032 4 1,149 4
------- ------- ------- ------- -------
Total loans in domestic
offices.............. 19,027 93 19,692 93 21,182 93 22,998 95 24,777 96
Loans originated in foreign
branches................... 1,405 7 1,358 7 1,559 7 1,298 5 1,136 4
------- ------- ------- ------- -------
Total loans............ $20,432 100% $21,050 100% $22,741 100% $24,296 100% $25,913 100%
======= ======= ======= ======= =======
Our lending activities are predominantly domestic, with such loans
comprising approximately 96 percent of the total loan portfolio at December 31,
1999. Total loans at December 31, 1999 were $25.9 billion, an increase of
$1.6 billion, or 6.7 percent, from one year earlier. The increase from 1998 was
primarily
F-18
attributable to growth in the commercial, financial and industrial loan
portfolio, which increased $1.1 billion, and the commercial mortgage loan
portfolio, which increased $597 million.
COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS
Commercial, financial and industrial loans represent the largest category in
the loan portfolio. These loans are extended principally to major corporations,
middle market businesses, and small businesses, with no industry concentration
exceeding 10 percent of total commercial, financial and industrial loans. This
portfolio has a high degree of geographic diversification based upon our
customer's revenue bases, which lowers our vulnerability to changes in the
economic outlook of any particular region of the U.S.
Our commercial market lending originates primarily through our banking
office network. These offices, which rely extensively on relationship-oriented
banking, provide many services including cash management services, lines of
credit, accounts receivable and inventory financing. Separately, we originate or
participate in a wide variety of financial services to major corporations. These
services include traditional commercial banking and specialized financing
tailored to the needs of each customer's specific industry. Presently, we are
active in the communications, media and entertainment, energy capital services,
technology, healthcare, agribusiness, retailing and financial services
industries.
At December 31, 1999, the commercial, financial and industrial loan
portfolio was $14.2 billion, or 55 percent of the total loan portfolio. The
increase of $1.1 billion, or 8 percent, from the previous year-end was primarily
attributable to loans extended to businesses with revenues exceeding
$20 million. The growth continued to reflect the results of initiatives to
increase participation in larger syndicated loan positions as lead manager and
as agent, especially in the communications, media, and entertainment and energy
capital services industries in which we have developed specialized lending
expertise. The increase in the communications, media, and entertainment
businesses over 1998 was $253 million, or 13 percent, and the increase over 1998
in the energy capital services units was $206 million, or 12 percent.
CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS
We engage in non-residential real estate lending that includes commercial
mortgage loans and construction loans secured by deeds of trust. Construction
loans are made primarily to commercial property developers and to residential
builders.
At December 31, 1999, construction loans were $648 million, or 3 percent of
the total loan portfolio. The increase of $208 million, or 47 percent, from the
previous year-end was primarily attributable to the favorable California real
estate market coupled with the continuing improvement in the West Coast economy.
At December 31, 1999, the commercial real estate mortgage loan portfolio was
$3.6 billion, or 14 percent of the total loan portfolio. Commercial mortgage
loans increased by $597 million, or 20 percent, from December 31, 1998,
reflecting both the favorable California real estate market and the continued
improvement in the West Coast economy.
RESIDENTIAL MORTGAGE LOANS
We originate residential loans, secured by one-to-four family residential
properties, through our branch network in California, Oregon and Washington, and
periodically purchase loans in our market area.
At December 31, 1999, residential mortgage loans were $2.6 billion, or
10 percent of the total loan portfolio. The decrease of $47 million, or
2 percent, from December 31, 1998 was principally due to prepayments arising
from the lower interest rate environment in the early part of 1999.
F-19
CONSUMER LOANS
Through our auto dealer relationships and our branch network, we originate
consumer loans, such as indirect and direct vehicle-secured installment loans,
and home equity lines where advances are generally secured by second deeds of
trust on residential real estate.
At December 31, 1999, consumer loans were $2.7 billion, or 10 percent of the
total loan portfolio. The decrease of $153 million, or 5 percent, from the
previous year-end was attributable to a reduction in home equity loans as
customers refinanced to take advantage of favorable long-term, fixed mortgage
rates. In the second quarter of 1998, we sold our $253 million credit card
portfolio.
LEASE FINANCING
We enter into direct financing and leveraged leases primarily through our
Equipment Leasing Division, and also through an agreement with a subsidiary of
The Bank of Tokyo-Mitsubishi, Ltd. In addition, we originate auto leases through
our Consumer Asset Management division, a part of the Community Banking Group.
At December 31, 1999, lease financing outstandings were $1.1 billion, or
4 percent of the total loan portfolio. During 1998, management created new
initiatives for lending, especially in the lease financing segment. This refocus
on leasing has continued in 1999 and resulted in a $117 million, or 11 percent,
increase in lease financing over the prior year.
LOANS ORIGINATED IN FOREIGN BRANCHES
Our loans originated in foreign branches consist primarily of short-term
extensions of credit to financial institutions located primarily in Asia and to
corporations in Japan, Korea and Taiwan.
At December 31, 1999, loans originated in foreign branches totaled
$1.1 billion, or 4 percent of the total loan portfolio. The decrease of
$162 million, or 12 percent, is primarily attributable to the contraction of our
exposure to key Asian markets, as we continue to monitor the economic situation
in those markets.
CROSS-BORDER OUTSTANDINGS
Our cross-border outstandings reflect certain additional economic and
political risks that are not reflected in domestic outstandings. These risks
include those arising from exchange rate fluctuations and restrictions on the
transfer of funds. The following table sets forth our cross-border outstandings
as of December 31, 1997, 1998 and 1999 for each country where such outstandings
exceeded 1 percent of total assets. The cross-border outstandings were compiled
based upon category and domicile of ultimate risk and are comprised of balances
with banks, trading account assets, securities available for sale, securities
purchased under resale agreements, loans, accrued interest receivable,
acceptances outstanding and investments with foreign entities. The amounts
outstanding for each country exclude local currency
F-20
outstandings. For those individual countries shown in the table below, we do not
have significant local currency outstandings that are not hedged or are not
funded by local currency borrowings.
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
(DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
- -------------------------------------------------- ------------ -------- ------------ ------------
December 31, 1997
Japan........................................... $401 $ -- $438 $839
Korea........................................... 561 10 257 828
Thailand........................................ 320 -- -- 320
December 31, 1998
Japan........................................... $173 $ -- $464 $637
Korea........................................... 448 1 117 566
December 31, 1999
Japan........................................... $ 82 $ -- $339 $421
Korea........................................... 422 -- 53 475
The economic condition and the ability of some countries, to which we have
cross-border exposure, to manage their external debt obligations has been
impacted by the Asian economic crisis that began in the second half of 1997. The
Asian economic crisis appears to have stabilized, though other global markets
may continue to have difficulties. Our exposure in all affected countries
continues to be primarily short-term in nature and substantially related to the
finance of trade. For further discussion on the actions taken by management to
reduce our credit exposure in Asia and Latin America, see "Allowance for Credit
Losses" on the following page.
PROVISION FOR CREDIT LOSSES
We recorded no provision for credit losses in 1997, a $45 million provision
for credit losses in 1998 and a $65 million provision for credit losses in 1999.
Provisions for credit losses are charged to income to bring our allowance for
credit losses to a level deemed appropriate by management based on the factors
discussed under "Allowance for Credit Losses" on the following page. No
provision for credit losses was recorded in 1997 because, based on our review of
such factors, management believed that the allowance for credit losses was
adequate to cover probable losses inherent in the loan portfolio and firm
commitments at each quarter end, including December 31, 1997. We resumed
recording provisions in 1998 in order to bring our allowance for credit losses
to a level deemed appropriate by management based upon management's application
of the allowance methodology.
F-21
ALLOWANCE FOR CREDIT LOSSES
The following table reflects the allowance allocated to each respective loan
category at period end and as a percentage of the total period end balance of
that loan category, as set forth in the "Loans" table on page F-18.
DECEMBER 31,
--------------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997
- -------------------------------------- ----------------- ----------------- ----------------
Domestic:
Commercial, financial, and
industrial........................ $174,146 1.80% $166,100 1.75% $123,610 1.15%
Construction........................ 24,752 6.69 5,700 1.59 3,221 1.10
Mortgage:
Residential....................... 5,466 0.21 4,000 0.14 2,700 0.09
Commercial........................ 59,931 2.80 39,000 1.50 60,680 2.06
-------- -------- --------
Total mortgage.................. 65,397 1.37 43,000 0.77 63,380 1.07
Consumer:
Installment....................... 13,200 0.73 10,400 0.50 11,400 0.55
Home equity....................... 5,532 0.45 4,900 0.44 3,600 0.36
Credit card and other lines of
credit.......................... 32,799 10.61 34,000 11.22 30,500 11.30
-------- -------- --------
Total consumer.................. 51,531 1.54 49,300 1.42 45,500 1.36
Lease financing..................... 1,300 0.15 5,300 0.66 4,862 0.56
-------- -------- --------
Total domestic allowance........ 317,126 1.67 269,400 1.37 240,573 1.14
Foreign allowance..................... 13,968 0.99 9,394 0.69 39,313 2.52
Unallocated........................... 224,055 245,152 171,806
-------- -------- --------
Total allowance for credit
losses........................ $555,149 2.72% $523,946 2.49% $451,692 1.99%
======== ======== ========
F-22
DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS) 1998 1999
- ------------------------------------------------------------ --------------- ---------------
Domestic:
Commercial, financial, and industrial..................... $145,100 1.11% $238,200 1.68%
Construction.............................................. 5,500 1.25 10,000 1.54
Mortgage:
Residential............................................. 1,100 0.04 800 0.03
Commercial.............................................. 17,500 0.59 21,900 0.61
-------- --------
Total mortgage........................................ 18,600 0.33 22,700 0.37
Consumer:
Installment............................................. 20,900 1.05 14,900 0.78
Home equity............................................. 3,800 0.46 900 0.12
-------- --------
Total consumer........................................ 24,700 0.88 15,800 0.60
Lease financing........................................... 3,800 0.37 4,600 0.40
-------- --------
Total domestic allowance.............................. 197,700 0.86 291,300 1.18
Foreign allowance........................................... 47,000 3.62 17,200 1.51
Unallocated................................................. 214,628 161,878
-------- --------
Total allowance for credit losses..................... $459,328 1.89% $470,378 1.82%
======== ========
ALLOWANCE POLICY AND METHODOLOGY
We maintain an allowance for credit losses to absorb losses inherent in the
loan portfolio. The allowance is based on our regular, quarterly assessments of
the probable estimated losses inherent in the loan portfolio, and to a lesser
extent, unused commitments to provide financing. Our methodology for measuring
the appropriate level of the allowance relies on several key elements, which
include the formula allowance, specific allowances for identified problem loans
and portfolio segments and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans, pools of loans, leases and commitments. Changes in risk
grades of both performing and nonperforming loans affect the amount of the
formula allowance. Loss factors are based on our historical loss experience and
may be adjusted for significant factors that, in management's judgment, affect
the collectibility of the portfolio as of the evaluation date. Loss factors are
developed in the following ways:
- Problem graded loan loss factors are derived from a migration model that
tracks historical loss experience over a period we believe is reflective
of a business cycle,
- Pass graded loan loss factors are based on the average annual net
charge-off rate over a period we believe is reflective of a business
cycle,
- Pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs for one year. Pooled loans are loans that are
homogeneous in nature, such as consumer installment and residential
mortgage loans and automobile leases.
We believe that a business cycle is a period in which both upturns and
downturns in the economy have been reflected. The current economic expansion has
required us to extend our historical perspective to capture the highs and lows
of a typical economic cycle.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred. This amount may
be determined either by a method prescribed by Statement of Financial
F-23
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan", or by a method which identifies certain qualitative factors.
The unallocated allowance is composed of two elements. The first element
consists of an amount between 20 percent to 25 percent of the total of the
formula and specific allowances. This element recognizes the model and
estimation risk associated with the formula and specific allowances. The second
element is based upon management's evaluation of various conditions, the effects
of which are not directly measured in the determination of the formula and
specific allowances. The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they are not
identified with specific problem credits or portfolio segments. The conditions
evaluated in connection with the unallocated allowance include the following,
which existed at the balance sheet date:
- General economic and business conditions affecting our key lending areas,
- Credit quality trends (including trends in nonperforming loans expected
to result from existing conditions),
- Collateral values,
- Loan volumes and concentrations,
- Seasoning of the loan portfolio,
- Specific industry conditions within portfolio segments,
- Recent loss experience in particular segments of the portfolio,
- Duration of the current business cycle,
- Bank regulatory examination results, and
- Findings of our internal credit examiners.
Executive management reviews these conditions quarterly in discussion with
our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of such condition
may be reflected as a specific allowance, applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts. Our methodology includes
several features that are intended to reduce the differences between estimated
and actual losses. The loss migration model that is used to establish the loan
loss factors for problem graded loans is designed to be self-correcting by
taking into account our recent loss experience. Similarly, by basing the pass
graded loan loss factors over a period reflective of a business cycle, the
methodology is designed to take our recent loss experience into account. Pooled
loan loss factors are adjusted quarterly based upon the level of net charge-offs
expected by management in the next twelve months. Furthermore, our methodology
permits adjustments to any loss factor used in the computation of the formula
allowance in the event that, in management's judgment, significant factors,
which affect the collectibility of the portfolio as of the evaluation date, are
not reflected in the loss factors. By assessing the probable estimated losses
inherent in the loan portfolio on a quarterly basis, we are able to adjust
specific and inherent loss estimates based upon the most recent information that
has become available.
F-24
COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISON FOR CREDIT LOSSES
At December 31, 1997, our total allowance for credit losses was
$452 million, or 1.99 percent of the total loan portfolio and 413 percent of
total nonaccrual loans. At December 31, 1998, our total allowance for credit
losses was $459 million or 1.89 percent of the total loan portfolio and
586 percent of total nonaccrual loans. At December 31, 1999, our total allowance
for credit losses was $470 million, or 1.82 percent of the total loan portfolio
and 281 percent of total nonaccrual loans. In addition, the allowance
incorporates the results of measuring impaired loans as provided in SFAS
No. 114 and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures". These accounting standards prescribe
the measurement methods, income recognition and disclosures related to impaired
loans. At December 31, 1997, total impaired loans were $108 million, and the
associated impairment allowance was $9 million compared with $78 million and
$11 million, respectively, at December 31, 1998 and $167 million and
$42 million, respectively, at December 31, 1999.
During 1997, 1998 and 1999, there were no changes in estimation methods or
assumptions that affected our methodology for assessing the appropriateness of
the formula and specific allowances for credit losses, except that we adjusted
the periods contained within, what we believe reflects, a business cycle as
explained on page F-23. The impact of these adjustments in the formula allowance
for 1997, 1998 and 1999 increased the formula allowance by $13 million,
$19 million and $28 million, respectively. Changes in estimates and assumptions
regarding the effects of economic and business conditions on borrowers and other
factors, which are described below, also affected the assessment of the
unallocated allowance.
We recorded no provision in 1997, a $45 million provision in 1998 and a
$65 million provision in 1999. Although the level of net charge-offs and the
decline of nonperforming loans during 1998 favorably impacted our asset quality
ratios, the total portfolio of commercial, financial and industrial loans and
commercial mortgage loans has been increasing. Losses inherent in both of these
types of credit are more difficult to assess because historically they have been
more volatile than losses from other credits. During 1999, we experienced
additional growth in these two areas as well as a moderate increase in
nonaccrual loans, primarily in the commercial, financial and industrial
category.
The following table sets forth the allowance for credit losses.
DECEMBER 31,
------------------------------------
(DOLLARS IN MILLIONS) 1997 1998 1999
- ------------------------------------------------------------ -------- -------- --------
Allocated allowance:
Formula................................................... $212 $206 $257
Specific.................................................. 68 38 51
---- ---- ----
Total allocated allowance............................... 280 244 308
Unallocated allowance....................................... 172 215 162
---- ---- ----
Total allowance for credit losses........................... $452 $459 $470
==== ==== ====
CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES
At December 31, 1998, the formula allowance decreased by $6 million from the
prior year, primarily due to a decline in criticized credits, offset by the
extension of the average annual net charge-off rate for pass graded loans. At
December 31, 1999, the formula allowance increased by $51 million from the prior
year, primarily due to increases in criticized credits and downward migration
within the criticized range.
At December 31, 1998, the specific allowance decreased by $30 million from
the prior year primarily due to the sale of real estate notes. At December 31,
1999, the specific allowance increased by $13 million from the prior year due to
the increases in both the level of our impaired loans and the degree of the
F-25
impairment offset by the elimination of the $26 million allowance on Asian
country exposures. This exposure has been captured in the formula allowance.
At December 31, 1997, the allocated portion of the allowance for credit
losses included $108 million related to special mention and classified credits,
compared to $76 million at December 31, 1998 and $145 million at December 31,
1999. Special mention and classified 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
At December 31, 1998, the unallocated allowance increased $43 million from
the previous year-end, primarily the result of certain conditions that adversely
impacted the technology, agriculture and oil and gas industries. At
December 31, 1999, the unallocated allowance declined $53 million from the prior
year because management believed that the inherent losses related to certain
conditions, described on page F-24, considered in its evaluation of the
unallocated allowance at December 31, 1998 had been recognized through
charge-offs, had been reflected in the formula or specific allowance or had
declined.
The following chart identifies the components of the attribution of the
unallocated and the range of inherent loss.
1997 1998 1999
--------------------------------- --------------------------------- ----------------------
CONCENTRATION OUTSTANDING LOW HIGH OUTSTANDING LOW HIGH OUTSTANDING LOW
- ---------------------------- ----------- -------- -------- ----------- -------- -------- ----------- --------
Latin America............... $ 160 $ 5 $ 8 $ 80 $ 10 $ 15 $ 117 $ 4
Asia Pacific................ 1,536 46 94 908 55 80 1,423 18
Technology.................. nm -- -- 913 18 27 729 15
Agriculture................. nm -- -- 541 11 16 572 3
Oil and Gas................. nm -- -- 719 14 22 nm --
Other....................... nm -- -- 806 7 10 3,847 15
Model Imprecision........... 56 70 49 61 62
---- ---- ---- ---- ----
Total Attributed............ $107 $172 $164 $231 $117
==== ==== ==== ==== ====
1999
--------
CONCENTRATION HIGH
- ---------------------------- --------
Latin America............... $ 7
Asia Pacific................ 39
Technology.................. 22
Agriculture................. 6
Oil and Gas................. --
Other....................... 33
Model Imprecision........... 77
----
Total Attributed............ $184
====
- ------------------------
nm = not meaningful for this assessment.
In our assessment as of December 31, 1997, management focused, in
particular, on the following factors:
- With respect to the adverse impact of the Asian financial turmoil, which
could be in the range of $46 million to $94 million.
- With respect to cross-border loans and acceptances to Latin American
countries, management considered the continued effects of the local
financial turmoil, which could be in the range of $5 million to
$8 million.
- With respect to the margin for model and estimation risk, which could be
in the range of $56 million to $70 million.
F-26
In our assessment as of December 31, 1998, management focused, in
particular, on the following factors:
- With respect to oil and gas, we considered the effects of the decline in
oil prices on the cash flows of borrowers in the oil and gas industry,
which could be in the range of $14 million to $22 million.
- With respect to the technology industry, management considered the
effects of export market conditions and cyclical over-capacity on
borrowers in the chip and semiconductor industries, which could be in the
range of $18 million to $27 million.
- With respect to the agricultural industry, we considered the effects of
abnormal weather conditions and export market conditions on agricultural
borrowers, which could be in the range of $11 million to $16 million.
- With respect to cross-border loans and acceptances to certain
Asia/Pacific countries, management considered the improving but
continuing effects of the global financial turmoil, which changed the
range to $55 million to $80 million.
- With respect to cross-border loans and acceptances to Latin American
countries, management considered the continued effects of the global
financial turmoil, which could be in the range of $10 million to
$15 million.
- With respect to the margin for model and estimation risk, which could be
in the range of $49 million to $61 million.
In our assessment as of December 31, 1999, management focused, in
particular, on the following factors:
- With respect to the agriculture industry, we considered the reduction of
the impact of previous years' abnormal weather conditions and improvement
in export market conditions on agricultural borrowers, which has reduced
the exposure to a range of $3 million to $6 million.
- With respect to the technology industry, management considered the
improvements in export market conditions and the reduction in the
cyclical over-capacity on borrowers in the chip and semiconductor
industries, which has reduced the exposure to a range of $15 million to
$22 million.
- With respect to cross-border loans and acceptances to certain
Asia/Pacific countries, management considered the improving but
continuing effects of the global financial turmoil, which has reduced the
exposure to a range of $18 million to $39 million.
- With respect to cross-border loans and acceptances to Latin America,
primarily Brazil, management considered the improving but continuing
effects of the global financial turmoil, which has reduced the exposure
to a range of $4 million to $7 million.
- With respect to oil and gas, management considered the effects of rising
oil prices and the improvement in the cash flows of borrowers in the oil
and gas industry, which no longer required an attribution of the
unallocated allowance.
- With respect to the margin for model and estimation risk, which could be
in the range of $62 million to $77 million.
There can be no assurance that the adverse impact of any of these conditions
on us will not be in excess of the range set forth above. See paragraph on
forward-looking statements on page F-2.
Although in certain instances the downgrading of a loan resulting from these
effects was reflected in the formula allowance, management believed that in most
instances the impact of these events on the collectibility of the applicable
loans was not reflected in the level of nonperforming loans or in the internal
risk grading process with respect of such loans. Accordingly, our evaluation of
the probable losses related to these factors was reflected in the unallocated
allowance. The evaluations of the inherent losses with respect to these factors
were subject to higher degrees of uncertainty because they were not identified
with specific problem credits.
F-27
CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES
The following table sets forth a reconciliation of changes in our allowance
for credit losses.
YEARS ENDED DECEMBER 31,
----------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998 1999
- ------------------------------------------ -------- -------- -------- -------- --------
Balance, beginning of period.............. $563,142 $555,149 $523,946 $451,692 $459,328
Loans charged off:
Commercial, financial and industrial.... 47,524 42,134 58,664 38,219 48,597
Construction............................ 9,401 3,249 120 3 --
Mortgage................................ 29,330 13,483 5,058 6,547 747
Consumer................................ 44,627 56,361 55,336 29,312 15,009
Lease financing......................... 2,422 2,623 3,601 2,709 3,232
Foreign(1).............................. 295 1,250 -- -- 14,100
-------- -------- -------- -------- --------
Total loans charged off............... 133,599 119,100 122,779 76,790 81,685
Recoveries of loans previously charged
off:
Commercial, financial and industrial.... 39,178 22,341 23,371 23,762 17,851
Construction............................ 3,195 132 9,054 3 --
Mortgage................................ 18,500 12,277 3,292 2,857 521
Consumer................................ 10,924 12,906 14,946 14,021 8,356
Lease financing......................... 311 368 351 501 811
Foreign(1).............................. 295 -- -- -- --
-------- -------- -------- -------- --------
Total recoveries of loans previously
charged off......................... 72,403 48,024 51,014 41,144 27,539
-------- -------- -------- -------- --------
Net loans charged off............... 61,196 71,076 71,765 35,646 54,146
Provision for credit losses............... 53,250 40,000 -- 45,000 65,000
Transfer of reserve for trading account
assets.................................. -- -- -- (1,911) --
Foreign translation adjustment and other
net additions (deductions).............. (47) (127) (489) 193 196
-------- -------- -------- -------- --------
Balance, end of period.................... $555,149 $523,946 $451,692 $459,328 $470,378
======== ======== ======== ======== ========
Allowance for credit losses to total
loans................................... 2.72% 2.49% 1.99% 1.89% 1.82%
Provision for credit losses to net loans
charged off............................. 87.02 56.28 nm 126.24 120.05
Recoveries of loans to loans charged off
in the previous year.................... 26.44 35.95 42.83 33.51 35.86
Net loans charged off to average loans
outstanding............................. 0.32 0.34 0.33 0.15 0.22
- ------------------------
(1) Foreign loans are those loans originated in foreign branches.
nm = not meaningful
Loans charged off in 1998 decreased by $46 million, primarily due to a
$20 million decrease in commercial, financial and industrial loans charged off
as portfolio quality improved, and a $26 million decrease in consumer loans
charged off, primarily due to the sale of the credit card portfolio in the
second quarter of 1998. Loans charged off in 1999 increased by $5 million over
1998, primarily due to a $10 million increase in commercial, financial and
industrial loans and a $14 million increase in foreign loans charged off,
partially offset by a $14 million decrease in consumer loans charged off and a
$6 million decrease in mortgage loans charged off. The foreign loan charge-off
consisted of a single Taiwanese credit. Charge-offs reflect the realization of
losses in the portfolio that were recognized previously through
F-28
provisions for credit losses. Recoveries of loans previously charged off in 1998
decreased by $10 million from 1997, and the percentage of current year
recoveries to loans charged off in the previous year decreased from
42.83 percent in 1997 to 33.51 percent in 1998. Recoveries of loans previously
charged off in 1999 decreased by $14 million over 1998, and the percentage of
current year recoveries to loans charged off in the previous year increased from
33.51 percent in 1998 to 35.86 percent in 1999. At December 31, 1999, the
allowance for credit losses exceeded the net loans charged off during 1999,
reflecting management's belief, based on the foregoing analysis, that there were
additional losses inherent in the portfolio.
At December 31, 1997, our average annual net charge-offs for the past five
years were $131 million, compared with $88 million at December 31, 1998 and
$59 million at December 31, 1999. These net charge-offs represent 3.4 years,
5.2 years and 8.0 years of losses based on the level of the allowance for credit
losses at December 31, 1997, 1998 and 1999, respectively. Historical net
charge-offs are not necessarily indicative of the amount of net charge-offs that
we will realize in the future.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, renegotiated loans, and
foreclosed assets. 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.
Renegotiated loans are those accruing loans for which, for reasons related
to the borrower's financial difficulties, we have amended the terms of the
original loan agreement and the borrower is performing according to the
renegotiated terms.
Foreclosed assets include property where we acquired title through
foreclosure or "deed in lieu" of foreclosure. On an ongoing basis, foreclosed
asset values are reviewed and any decline in value is recognized as noninterest
expense in the current period.
The following table sets forth an analysis of nonperforming assets.
DECEMBER 31,
----------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998 1999
- ------------------------------------------ -------- -------- -------- -------- --------
Commercial, financial and industrial...... $ 84,336 $ 56,864 $ 46,392 $ 60,703 $159,479
Construction.............................. 40,026 7,349 4,071 4,359 4,286
Mortgage:
Residential............................. 19,220 11,214 954 -- --
Commercial.............................. 63,836 52,593 57,921 8,254 3,629
-------- -------- -------- -------- --------
Total mortgage........................ 83,056 63,807 58,875 8,254 3,629
Other..................................... 849 247 -- 5,134 --
-------- -------- -------- -------- --------
Total nonaccrual loans................ 208,267 128,267 109,338 78,450 167,394
Renegotiated loans........................ 1,612 -- -- -- --
Foreclosed assets......................... 36,992 28,517 20,471 11,400 2,386
-------- -------- -------- -------- --------
Total nonperforming assets............ 246,871 156,784 129,809 89,850 169,780
======== ======== ======== ======== ========
Allowance for credit losses............... $555,149 $523,946 $451,692 $459,328 $470,378
======== ======== ======== ======== ========
Nonaccrual and renegotiated loans to total
loans................................... 1.03% 0.61% 0.48% 0.32% 0.65%
Allowance for credit losses to nonaccrual
loans................................... 266.56 408.48 413.12 585.50 281.00
Nonperforming assets to total loans and
foreclosed assets....................... 1.21 0.74 0.57 0.37 0.66
Nonperforming assets to total assets...... 0.90 0.54 0.42 0.28 0.50
F-29
The following table sets forth an analysis of loans contractually past due
90 days or more as to interest or principal, but not included in nonaccrual
loans above.
DECEMBER 31,
----------------------------------------------------
(DOLLARS IN THOSUANDS) 1995 1996 1997 1998 1999
- ----------------------------------------------- -------- -------- -------- -------- --------
Commercial, financial and industrial........... $ 3,752 $ 4,527 $ 450 $ 913 $ 2,729
Construction................................... 1,063 -- -- -- --
Mortgage:
Residential.................................. 8,479 8,969 10,170 9,338 5,830
Commercial................................... 3,592 168 1,660 13,955 442
------- ------- ------- ------- -------
Total mortgage............................. 12,071 9,137 11,830 23,293 6,272
Consumer and other............................. 8,854 10,028 7,712 7,292 2,932
------- ------- ------- ------- -------
Total loans 90 days or more past due and
still accruing............................. $25,740 $23,692 $19,992 $31,498 $11,933
======= ======= ======= ======= =======
At December 31, 1999, nonperforming assets totaled $170 million, an increase
of $80 million, or 89 percent, from year-end 1998. The increase was concentrated
among several large credits in different industry sectors. We do not believe
that the magnitude of this increase is indicative of an on-going trend.
Nonaccrual and renegotiated loans as a percentage of total loans were
0.32 percent at December 31, 1998 compared with 0.65 percent at December 31,
1999. Nonperforming assets as a percentage of total loans and foreclosed assets
increased to 0.66 percent at year-end 1999 from 0.37 percent at December 31,
1998. At December 31, 1999, approximately 95 percent of nonaccrual loans were
related to commercial, financial and industrial.
Total loans 90 days or more past due and still accruing were $31 million at
December 31, 1998 compared with $12 million at December 31, 1999.
INTEREST FOREGONE
Interest foregone during 1998 and 1999 for loans that were on nonaccrual
status at December 31, 1998 and 1999 was $4 million and $8 million,
respectively. We recognized less than $1 million in interest income during 1998
and 1999 for loans that were on nonaccrual status at December 31, 1998 and
December 31, 1999, respectively.
SECURITIES
The following tables summarize the composition of the securities portfolio
and the gross unrealized gains and losses within the portfolio.
F-30
SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1998 1999
---------- ------------------------------------------------- -----------------------
GROSS GROSS GROSS
FAIR AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED
(DOLLARS IN THOUSANDS) VALUE COST GAINS LOSSES VALUE COST GAINS
- ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Treasury........ $ 997,997 $ 753,991 $16,341 $ -- $ 770,332 $ 450,238 $ 1,302
Other U.S.
government......... 715,474 856,463 12,364 -- 868,827 974,211 294
Mortgage-backed
securities......... 682,758 1,875,141 9,271 2,634 1,881,778 1,665,317 62
State and municipal... 104,173 72,777 11,469 -- 84,246 55,496 7,786
Corporate debt
securities......... 3,008 8,069 -- -- 8,069 50,058 --
Equity securities.... 29,805 18,149 252 -- 18,401 50,888 1,403
Foreign securities... 5,171 6,799 121 41 6,879 16,597 104
---------- ---------- ------- ------ ---------- ---------- -------
Total securities
available for
sale........... $2,538,386 $3,591,389 $49,818 $2,675 $3,638,532 $3,262,805 $10,951
========== ========== ======= ====== ========== ========== =======
DECEMBER 31,
-----------------------
1999
-----------------------
GROSS
UNREALIZED FAIR
(DOLLARS IN THOUSANDS) LOSSES VALUE
- ---------------------- ---------- ----------
U.S. Treasury........ $ 912 $ 450,628
Other U.S.
government......... 13,621 960,884
Mortgage-backed
securities......... 49,094 1,616,285
State and municipal... -- 63,282
Corporate debt
securities......... 26 50,032
Equity securities.... -- 52,291
Foreign securities... 4 16,697
------- ----------
Total securities
available for
sale........... $63,657 $3,210,099
======= ==========
SECURITIES HELD TO MATURITY
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1997 1998 1999
--------- ---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ---------------------- --------- --------- ---------- ---------- -------- --------- ---------- ---------- --------
U.S. Treasury......... $ 40,092 $ 40,047 $1,050 $ -- $ 41,097 $ -- $ -- $ -- $ --
Other U.S.
government.......... 99,520 89,783 1,392 -- 91,175 19,996 35 -- 20,031
Mortgage-backed
securities.......... 24,477 15,247 1,178 -- 16,425 11,302 577 3 11,876
State and municipal... 24,686 15,436 4 893 14,547 15,228 -- 1,759 13,469
-------- -------- ------ ---- -------- ------- ---- ------ -------
Total securities
held to
maturity........ $188,775 $160,513 $3,624 $893 $163,244 $46,526 $612 $1,762 $45,376
======== ======== ====== ==== ======== ======= ==== ====== =======
Management of the securities portfolio involves the maximization of return
while maintaining prudent levels of quality and liquidity. At December 31, 1999,
approximately 96 percent of total securities were investment grade.
F-31
ANALYSIS OF SECURITIES PORTFOLIO
The following tables show the remaining contractual maturities and expected
yields of the securities portfolio at December 31, 1999.
SECURITIES AVAILABLE FOR SALE
MATURITY
---------------------------------------------------------------------------------------
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR THROUGH THROUGH OVER
OR LESS FIVE YEARS TEN YEARS TEN YEARS
------------------- --------------------- ------------------- -------------------
OVER
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4)
- ---------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
U.S. Treasury............... $204,912 6.69% $ 245,326 6.21% $ -- --% $ -- --%
Other U.S. government....... 264,714 6.56 709,497 6.25 -- -- -- --
Mortgage-backed
securities(1)............. 51,718 6.62 849,029 6.19 155,291 6.20 609,279 5.69
State and municipal(2)...... 2,938 10.61 11,967 10.32 13,921 10.61 26,670 11.07
Corporate debt securities... -- -- -- -- 12,607 13.35 37,451 10.95
Equity securities(3)........ -- -- -- -- -- -- -- --
Foreign securities.......... 9,445 6.61 7,152 1.56 -- -- -- --
-------- ---------- -------- --------
Total securities
available for sale.... $533,727 6.64% $1,822,971 6.22% $181,819 7.03% $673,400 6.20%
======== ========== ======== ========
TOTAL
AMORTIZED COST
---------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4)
- ---------------------------- ---------- --------
U.S. Treasury............... $ 450,238 6.43%
Other U.S. government....... 974,211 6.33
Mortgage-backed
securities(1)............. 1,665,317 6.02
State and municipal(2)...... 55,496 10.77
Corporate debt securities... 50,058 11.55
Equity securities(3)........ 50,888 --
Foreign securities.......... 16,597 4.43
----------
Total securities
available for sale.... $3,262,805 6.33%
==========
SECURITIES HELD TO MATURITY
MATURITY
-------------------------------------------------------------------------------------
OVER ONE YEAR OVER FIVE YEARS
ONE YEAR THROUGH THROUGH OVER
OR LESS FIVE YEARS TEN YEARS TEN YEARS
------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4) AMOUNT YIELD(4)
- ---------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
U.S. Treasury..................... $ -- --% $ -- --% $ -- --% $ -- --%
Other U.S. government............. 19,996 7.69 -- -- -- -- -- --
Mortgage-backed securities(1)..... 6 9.03 615 9.35 10,678 9.00 3 8.76
State and municipal(2)............ -- -- 1,535 6.48 2,676 5.80 11,017 5.77
------- ------ ------- -------
Total securities held to
maturity...................... $20,002 7.69% $2,150 7.30% $13,354 8.36% $11,020 5.77%
======= ====== ======= =======
TOTAL
AMORTIZED COST
-------------------
(DOLLARS IN THOUSANDS) AMOUNT YIELD(4)
- ---------------------------------- -------- --------
U.S. Treasury..................... $ -- --%
Other U.S. government............. 19,996 7.69
Mortgage-backed securities(1)..... 11,302 9.02
State and municipal(2)............ 15,228 5.85
-------
Total securities held to
maturity...................... $46,526 7.41%
=======
- ------------------------------
(1) The remaining contractual maturities of mortgage-backed securities were
allocated assuming no prepayments. The contractual maturity of these
securities is not a reliable indicator of their expected life because
borrowers have the right to repay their obligations at any time.
(2) Yields on tax-exempt municipal securities are presented on a
taxable-equivalent basis using the current federal statutory rate of 35
percent.
(3) Equity securities do not have a stated maturity and are included in the
total column only.
(4) For the purposes of the analysis of the securities portfolio, yields are
based on amortized cost.
F-32
LOAN MATURITIES
The following table presents our loans by maturity.
DECEMBER 31, 1999
----------------------------------------------------
OVER
ONE YEAR
ONE YEAR THROUGH OVER
(DOLLARS IN THOUSANDS) OR LESS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------- ---------- ----------- ----------- -----------
Domestic:
Commercial, financial and industrial..... $5,464,944 $ 6,905,566 $ 1,806,120 $14,176,630
Construction............................. 331,972 310,335 6,171 648,478
Mortgage:
Residential............................ 52,867 233,977 2,294,297 2,581,141
Commercial............................. 773,958 1,770,378 1,028,011 3,572,347
---------- ----------- ----------- -----------
Total mortgage....................... 826,825 2,004,355 3,322,308 6,153,488
Consumer:
Installment............................ 474,756 969,771 477,631 1,922,158
Home equity............................ 114,831 354,807 258,138 727,776
---------- ----------- ----------- -----------
Total consumer....................... 589,587 1,324,578 735,769 2,649,934
Lease financing.......................... 353,098 795,444 -- 1,148,542
---------- ----------- ----------- -----------
Total loans in domestic offices...... 7,566,426 11,340,278 5,870,368 24,777,072
Loans originated in foreign branches....... 1,098,855 19,541 17,490 1,135,886
---------- ----------- ----------- -----------
Total loans.......................... $8,665,281 $11,359,819 $ 5,887,858 $25,912,958
========== =========== ===========
Allowance for credit losses........ 470,378
-----------
Loans, net........................... $25,442,580
===========
Total fixed rate loans due after one
year..................................... $ 4,656,873
Total variable rate loans due after one
year..................................... 12,590,804
-----------
Total loans due after one year....... $17,247,677
===========
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
The following table presents domestic certificates of deposit of $100,000
and over by maturity.
DECEMBER 31,
(DOLLARS IN THOUSANDS) 1999
- ------------------------------------------------------------ ------------
Three months or less........................................ $3,139,646
Over three months through six months........................ 890,837
Over six months through twelve months....................... 765,989
Over twelve months.......................................... 136,899
----------
Total domestic certificates of deposit of $100,000 and
over...................................................... $4,933,371
==========
We offer certificates of deposit of $100,000 and over at market rates of
interest. Many of these certificates are issued to customers, both public and
private, who have done business with us for an extended period. Based on our
historical experience, we expect that as these deposits come due, the majority
will continue to be renewed at market rates of interest.
Substantially all of our deposits in foreign branches are certificates of
deposit of $100,000 and over and mature in less than one year.
F-33
BORROWED FUNDS
The following table presents information on our borrowed funds.
DECEMBER 31,
------------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- --------------------------------------------------------- ---------- ---------- ----------
Federal funds purchased and securities sold under
repurchase agreements with weighted average interest
rates of 5.38%, 4.88% and 5.09% at December 31, 1997,
1998 and 1999, respectively............................ $1,335,884 $1,307,744 $1,156,799
Commercial paper, with weighted average interest rates of
5.64%, 5.01% and 5.45% at December 31, 1997, 1998 and
1999, respectively..................................... 966,575 1,444,745 1,108,258
Other borrowed funds, with weighted average interest
rates of 6.23%, 5.35% and 5.91% at December 31, 1997,
1998 and 1999, respectively............................ 476,010 331,165 540,496
---------- ---------- ----------
Total borrowed funds................................... $2,778,469 $3,083,654 $2,805,553
========== ========== ==========
Federal funds purchased and securities sold under
repurchase agreements:
Maximum outstanding at any month end................... $1,575,930 $2,058,610 $1,786,594
Average balance during the year........................ 1,097,707 1,604,675 1,489,214
Weighted average interest rate during the year......... 5.33% 5.26% 4.84%
Commercial paper:
Maximum outstanding at any month end................... $1,876,135 $1,918,700 $1,737,265
Average balance during the year........................ 1,637,070 1,631,216 1,529,814
Weighted average interest rate during the year......... 5.49% 5.42% 5.04%
Other borrowed funds:
Maximum outstanding at any month end................... $ 851,694 $ 438,151 $ 993,550
Average balance during the year........................ 635,900 328,872 708,625
Weighted average interest rate during the year......... 5.42% 5.68% 5.28%
CAPITAL ADEQUACY AND DIVIDENDS
Our principal capital objectives are to support future growth, to protect
depositors, to absorb any unanticipated losses and to comply with various
regulatory requirements. Management believes that we have retained our capital
at a level that supports our risk structure, as well as providing for
anticipated growth of current business activities and strategic expansion.
Total shareholders' equity was $3.0 billion at December 31, 1999, a decrease
of $71 million from year-end 1998. This change was primarily a result of
$442 million of net income for 1999, offset by dividends on common stock of
$135 million, repurchases of our common stock of $329 million, and net
unrealized losses on securities available for sale of $62 million. Of the
$329 million repurchases of our common stock, $312 million related to
repurchases from The Bank of Tokyo-Mitsubishi, Ltd. and Meiji Life Insurance
Company and $17 million related to planned repurchases under the $100 million
stock repurchase program announced in November 1999.
We offer a dividend reinvestment plan that allows shareholders to reinvest
dividends in our common stock at 5 percent below the market price. During 1999,
The Bank of Tokyo-Mitsubishi, Ltd. did not participate in the plan.
Capital adequacy depends on a variety of factors including asset quality and
risk profile, liquidity, earnings stability, competitive and economic
conditions, and management. We believe that the current
F-34
level of profitability, coupled with a prudent dividend policy, is adequate to
support normal growth in operations while meeting regulatory capital guidelines.
The following table summarizes our risk-based capital, risk-weighted assets,
and risk-based capital ratios.
DECEMBER 31, MINIMUM
------------------------------------------------------------------- REGULATORY
(DOLLARS IN THOUSANDS) 1995 1996 1997 1998 1999 REQUIREMENT
- -------------------------- ----------- ----------- ----------- ----------- ----------- -----------
CAPITAL COMPONENTS
Tier 1 capital............ $ 2,355,057 $ 2,395,580 $ 2,587,071 $ 2,965,865 $ 3,308,912
Tier 2 capital............ 591,266 551,074 601,102 604,938 616,772
----------- ----------- ----------- ----------- -----------
Total risk-based
capital................. $ 2,946,323 $ 2,946,654 $ 3,188,173 $ 3,570,803 $ 3,925,684
=========== =========== =========== =========== ===========
Risk-weighted assets...... $25,179,489 $26,390,288 $28,862,340 $30,753,030 $33,288,167
=========== =========== =========== =========== ===========
Quarterly average
assets.................. $27,073,158 $28,496,355 $30,334,507 $31,627,022 $32,765,347
=========== =========== =========== =========== ===========
CAPITAL RATIOS
Total risk-based
capital................. 11.70% 11.17% 11.05% 11.61% 11.79% 8.0%
Tier 1 risk-based
capital................. 9.35 9.08 8.96 9.64 9.94 4.0
Leverage ratio(1)......... 8.70 8.41 8.53 9.38 10.10 4.0
- ------------------------------
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
We and Union Bank of California, N.A. are subject to various regulations of
the federal banking agencies, including minimum capital requirements. We and
Union Bank of California, N.A. are required to maintain minimum ratios of total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly
average assets (the leverage ratio).
Compared with December 31, 1998, our Tier 1 risk-based capital ratio at
December 31, 1999 increased 30 basis points to 9.94 percent, our total
risk-based capital ratio increased 18 basis points to 11.79 percent, and our
leverage ratio increased 72 basis points to 10.10 percent. The increase in our
capital ratios was primarily attributable to retained earnings growing faster
than both risk-weighted assets and average assets.
As of December 31, 1999, management believed the capital ratios of Union
Bank of California, N.A. met all regulatory requirements of a "well-capitalized"
institution.
COMPARISON OF FINANCIAL RESULTS OF 1997 TO 1998
Net income in 1997 was $411 million, compared to $466 million in 1998. Net
income applicable to common stock was $404 million, or $2.30 per diluted common
share, in 1997, compared with $466 million, or $2.65 per diluted common share,
in 1998. This increase in diluted earnings per share of 15 percent over 1997 was
due to a 7 percent increase in net interest income, a 15 percent increase in
noninterest income, and a decline in the effective income tax rate of
6 percentage points, partially offset by a $45 million increase in the provision
for credit losses and a 9 percent increase in noninterest expense. Other
highlights for 1998 include:
- Net interest income, on a taxable-equivalent basis, was $1.3 billion in
1998, an increase of $86 million, or 7 percent, over 1997. Net interest
margin in 1998 was 4.81 percent, an increase of 11 basis points over 1997.
- No provision for credit losses was recorded in 1997, compared with
$45 million in 1998. This resulted from management's regular assessment of
overall credit quality, loan growth and economic conditions in relation to
the level of the allowance for credit losses. The allowance for credit
losses was $452 million, or 413% of total nonaccrual loans, at
December 31, 1997, compared with
F-35
$459 million, or 586% of total nonaccrual loans, at December 31, 1998. Net
loans charged off for 1998 were $36 million.
- Noninterest income was $534 million in 1998, an increase of $71 million,
or 15 percent, over 1997. This increase includes the $17 million gain from
the sale of the credit card portfolio in the second quarter of 1998.
Service charges on deposit accounts grew $24 million, or 21 percent; trust
and investment management fees increased $14 million, or 13 percent;
international commissions and fees increased $6 million, or 9 percent;
merchant banking fees increased $6 million, or 26 percent; and securities
gains, net, increased $3 million.
- Noninterest expense was $1.1 billion in 1998, an increase of $91 million,
or 9 percent, over 1997. Personnel-related expense increased $46 million,
or 8 percent; other noninterest expense increased $16 million, or
19 percent; and professional services increased $9 million, or
31 percent.
- The effective tax rate for 1997 was 37 percent, compared with 31 percent
for 1998. The effective tax rate for 1997 was favorably affected by an
after-tax refund of $25 million from the FTB for tax years 1975-1987. The
primary reason for the lower 1998 effective tax rate was the filing of our
1997, and our intention to file our 1998, California franchise tax returns
on a worldwide unitary basis, which incorporates the results of The Bank
of Tokyo-Mitsubishi, Ltd. and its worldwide affiliates. Excluding the FTB
refund in 1997 and the $60 million state tax reduction in 1998, the
effective tax rates would have been 41 percent and 40 percent,
respectively.
- The return on average assets for 1998 increased to 1.53 percent, compared
to 1.39 percent for 1997. The return on average common equity for 1998
increased to 16.39 percent, compared to 16.05 percent for 1997.
- Total loans at December 31, 1998 were $24.3 billion, an increase of
$1.6 billion, or 7 percent, over year-end 1997.
- At December 31, 1998, our Tier 1 risk-based capital ratio was
9.64 percent and our total risk-based capital ratio was 11.61 percent,
exceeding the minimum regulatory guidelines for bank holding companies of
4 percent and 8 percent, respectively. The Tier 1 and total risk-based
capital ratios for Union Bank of California, N.A. at December 31, 1998
exceeded the regulatory guidelines for "well-capitalized" banks. Our
leverage ratio was 9.38 percent at December 31, 1998, exceeding the
minimum regulatory guideline for bank holding companies.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices, and other market changes that affect market risk sensitive
instruments. Market risk is attributed to all market risk sensitive financial
instruments, including securities, loans, deposits, and borrowings, as well as
derivative instruments. Our exposure to market risk is a function of our asset
and liability management activities, our trading activities for our own account,
and our role as a financial intermediary in customer-related transactions. The
objective of market risk management is to avoid excessive exposure of our
earnings and equity to loss and to reduce the volatility inherent in certain
financial instruments.
The management of market risk is governed by policies reviewed and approved
annually by our Board of Directors (Board). The Board delegates responsibility
for market risk management to the Asset & Liability Management Committee (ALCO),
which reports quarterly to the Finance and Capital Committee of the Board on
activities related to the management of market risk. As part of the management
of our market risk, ALCO may direct changes in the mix of assets and liabilities
and the use of derivative
F-36
instruments such as interest rate swaps, caps and floors. ALCO also reviews and
approves market risk-management programs and market risk limits. The ALCO
Chairman is responsible for the company-wide management of market risk. The
Treasurer is responsible for implementing funding, investment, and hedging
strategies designed to manage this risk. On a day-to-day basis, the oversight of
market risk management takes place at a centralized level within the Risk
Monitoring Unit (RMU). The RMU is responsible for measuring risks to ensure
compliance with all market risk limits and guidelines incorporated within the
policies and procedures established by ALCO. The RMU reports monthly to ALCO on
the effectiveness of our hedging activities, on trading risk exposures, and on
compliance with policy limits. In addition, periodic reviews by internal audit,
regulators and independent accountants provide further evaluation of controls
over the risk management process.
We have separate and distinct methods for managing the market risk
associated with our trading activities and our asset and liability management
activities, as described below.
INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING)
We engage in asset and liability management activities with the objective of
reducing adverse changes in earnings as a result of changes in interest rates.
The management of interest rate risk relates to the timing and magnitude of the
repricing of assets compared to liabilities and has, as its objective, the
control of risks associated with movements in interest rates.
The Asset & Liability Management (ALM) Policy approved by the Board requires
monthly monitoring of interest rate risk by ALCO. As part of the management of
our interest rate risk, ALCO may direct changes in the composition of the
balance sheet and the extent to which we utilize off-balance sheet derivative
instruments such as interest rate swaps, floors, and caps.
Our unhedged balance sheet is inherently "asset-sensitive", which means that
assets generally reprice more often than liabilities. Since an asset-sensitive
balance sheet tends to reduce net interest income when interest rates decline
and to increase net interest income when interest rates rise, off-balance sheet
hedges and the securities portfolio are used to manage this interest rate risk.
One method of measuring interest rate risk is by measuring the interest rate
sensitivity gap, which is the difference between earning assets and liabilities
maturing or repricing within specified periods. The table on page F-40 presents
such an analysis, which reflects certain assumptions as to the rate sensitivity
of deposits without contractual maturities or repricing dates. These include
demand deposits, money market demand accounts, and savings deposits. Additional
assumptions such as prepayment estimates for residential mortgages and
mortgage-backed securities are made to reflect the probable behavior of those
assets. The section of the table on page F-40 entitled "Interest Rate Risk
Management Positions" presents the effects of the securities portfolio and of
derivatives used for hedging, such as interest rate swaps and floors, in
reducing the interest rate sensitivity gap primarily for LIBOR-based loans.
Gap analysis has significant limitations as a method for measuring interest
rate risk since changes in interest rates do not affect all categories of assets
and liabilities in the same way. To address these limitations, we use a
simulation model to quantify the impact of changing interest rates on net
interest income (NII). A frequency distribution of simulated 12-month NII
outcomes based on rate scenarios produced through a Monte Carlo rate generation
process is prepared monthly to statistically determine the mean NII. The amount
of Earnings at Risk (EaR), defined as the potential negative change in NII, is
measured at a 97.5 percent confidence level and is managed within the limit
established in the Board's
F-37
ALM Policy at 5 percent of mean NII. The following table summarizes our EaR and
EaR as a percentage of NII.
DECEMBER 31,
-------------------
(DOLLARS IN MILLIONS) 1998 1999
- ------------------------------------------------------------ -------- --------
EaR......................................................... $25.5 $53.9
EaR as a percentage of mean NII............................. 1.97% 3.69%
During 1999, our EaR increased significantly from the previous year because
we allowed our asset sensitivity to rise, thus increasing interest income during
the rising rate environment. With an asset-sensitive balance sheet, EaR measures
the potential risk to earnings during a falling rate environment.
An additional limit established by the Board's ALM Policy is that under
single interest rate shock scenarios, up or down 200 basis points, the
difference between the lower simulated NII and the mean NII must be no more than
8 percent of the mean NII. The following table sets forth the change in
simulated NII for both an upward and downward shock scenario of 200 basis
points.
DECEMBER 31,
-------------------
(DOLLARS IN MILLIONS) 1998 1999
- ------------------------------------------------------------ -------- --------
+200 basis points........................................... $ 23.4 $ 48.6
as a percentage of mean NII................................. 1.81% 3.33%
- -200 basis points........................................... $(52.2) $(81.2)
as a percentage of mean NII................................. 4.03% 5.57%
During 1999, our mean NII increased significantly from the previous year,
largely due to the fact that we allowed our asset sensitivity to rise, thereby
increasing net interest income. In addition, mean NII increased as a result of
the $1.5 billion increase in average earning assets.
TRADING ACTIVITIES
We enter into trading account activities primarily as a financial
intermediary for customers, and, to a lesser extent, for our own account. By
acting as a financial intermediary, we are able to provide our customers with
access to a wide range of products from the securities, foreign exchange, and
derivatives markets. In acting for our own account, we may take positions in
some of these instruments with the objective of generating trading profits.
These activities expose us to two primary types of market risk: interest rate
and foreign currency exchange risk.
In order to manage interest rate and foreign currency exchange risk
associated with our trading activities, we utilize a variety of non-statistical
methods including: position limits for each trading activity, daily marking of
all positions to market, daily profit and loss statements, position reports, and
independent verification of all inventory pricing. Additionally, the RMU reports
positions and profits and losses daily to the Treasurer and trading managers and
weekly to the ALCO Chairman. ALCO is provided reports on a monthly basis. We
believe that these procedures, which stress timely communication between the RMU
and senior management, are the most important elements of the risk management
process.
We use a form of Value at Risk (VaR) methodology to measure the overall
market risk inherent in our trading account activities. Under this methodology,
management statistically calculates, with 97.5 percent confidence, the potential
loss in fair value that we might experience if an adverse shift in market prices
were to occur within a period of 5 business days. The amount of VaR is managed
within limits well below the maximum limit established by Board policy at
0.5 percent of shareholders' equity. The VaR model incorporates a number of key
assumptions, including assumed holding period and historical volatility based
F-38
on 3 years of historical market data updated quarterly. The following table sets
forth the average, high and low VaR during the year for our trading activities.
DECEMBER 31,
---------------------------------------------------------------
1998 1999
------------------------------ ------------------------------
AVERAGE HIGH LOW AVERAGE HIGH LOW
(DOLLARS IN THOUSANDS) VAR VAR VAR VAR VAR VAR
- ---------------------------------------------------------- -------- -------- -------- -------- -------- --------
Foreign exchange.......................................... $103 $389 $ 20 $260 $730 $ 78
Securities................................................ 410 873 222 249 741 62
The VaRs for foreign exchange trading increased during 1999 due to higher
volumes of foreign exchange activities as well as higher approved trading
limits. While the VaRs are significantly greater that the previous year, they
are well within the limits established by our trading policy. The VaRs for
securities trading declined significantly during 1999, reflecting the decision
we made earlier this year to exit the municipal underwriting and certain other
capital markets businesses.
Our interest rate derivative contracts include $2.9 billion of derivative
contracts entered into as an accommodation for customers. We act as an
intermediary and match these contracts at a profit with contracts with The Bank
of Tokyo-Mitsubishi, Ltd. or other dealers, thus neutralizing the related market
risk. We maintain responsibility for the credit risk associated with these
contracts.
LIQUIDITY RISK
Liquidity risk represents the potential for loss as a result of limitations
on our ability to adjust our future cash flows to meet the needs of depositors
and borrowers and to fund operations on a timely and cost-effective basis. The
ALM Policy approved by the Board requires quarterly reviews of our liquidity by
the ALCO, which is composed of bank senior executives. Our liquidity management
draws upon the strengths of our extensive retail and commercial market business
franchise, coupled with the ability to obtain funds for various terms in a
variety of domestic and international money markets. Liquidity is managed
through the funding and investment functions of the Global Markets Group.
Core deposits provide us with a sizable source of relatively stable and
low-cost funds. Our average core deposits, which include demand deposits, money
market demand accounts, and savings and consumer time deposits, combined with
average common shareholders' equity, funded 66 percent of average total assets
of $32.1 billion for the year ended December 31, 1999. Most of the remaining
funding was provided by short-term borrowings in the form of negotiable
certificates of deposit, foreign deposits, federal funds purchased and
securities sold under repurchase agreements, commercial paper and other
borrowings. In 1999, we issued $350 million in trust preferred securities the
proceeds of which were utilized to repurchase our common stock.
Liquidity may also be provided by the sale or maturity of assets. Such
assets include interest bearing deposits in banks, federal funds sold and
securities purchased under resale agreements, and trading account securities.
The aggregate of these assets averaged $0.6 billion during 1999. Additional
liquidity may be provided by investment securities available for sale that
amounted to $3.2 billion at December 31, 1999, and by loan maturities. At
December 31, 1999, $8.7 billion of loans were scheduled to mature within one
year.
F-39
The following table summarizes our interest rate sensitivity based on
expected repricings in the time frames indicated for the balance sheet and
interest rate derivatives as of December 31, 1999. This table shows that assets
that are rate sensitive within one year exceeded liabilities within that same
period by $5.6 billion at December 31, 1999. Adjusted for the effects of the
securities portfolio and derivatives used for hedging, this cumulative gap was
$5.7 billion. At December 31, 1998, our assets that were rate sensitive within
one year exceeded liabilities within that same period by $5.0 billion. Adjusted
for the effects of the securities portfolio and derivatives used for hedging,
this cumulative gap was reduced to $3.7 billion.
DECEMBER 31, 1999
-----------------------------------------------------
AMOUNTS MATURING OR REPRICING IN
-----------------------------------------------------
0-12 >1-5 AFTER 5
(DOLLARS IN THOUSANDS) MONTHS YEARS YEARS TOTAL
- ---------------------- ----------- ----------- ----------- -----------
ASSETS
Federal funds sold and securities purchased under resale
agreements............................................. $ 833,450 $ -- $ -- $ 833,450
Interest bearing deposits in banks....................... 182,719 -- -- 182,719
Trading account assets................................... 179,935 -- -- 179,935
Loans(1)................................................. 19,886,896 4,213,285 1,812,777 25,912,958
Other assets(1)(2)....................................... 904,575 1,499,400 915,114 3,319,089
----------- ----------- ----------- -----------
Total assets (except securities)..................... $21,987,575 $ 5,712,685 $ 2,727,891 $30,428,151
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing checking(1)(3)........................ $ 190,172 $ 1,331,201 $ -- $ 1,521,373
Money market demand accounts(1)(3)..................... 1,125,152 3,375,457 -- 4,500,609
Savings(1)(3).......................................... 190,724 1,335,071 -- 1,525,795
Other time deposits(1)................................... 8,595,167 384,125 8,198 8,987,490
Federal funds purchased and securities sold under
repurchase agreements.................................. 1,156,799 -- -- 1,156,799
Other borrowed funds(1).................................. 1,648,678 3 73 1,648,754
Subordinated capital notes............................... 298,000 -- -- 298,000
UnionBanCal Corporation-obligated mandatorily redeemable
preferred securites of subsidiary grantor trust........ -- -- 350,000 350,000
Noninterest bearing deposit accounts(1)(4)............... 2,916,430 6,804,910 -- 9,721,340
Other liabilities(1)(2).................................. 259,340 -- 727,808 987,148
Shareholders' equity(2).................................. -- -- 2,987,468 2,987,468
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity............... $16,380,462 $13,230,767 $ 4,073,547 $33,684,776
=========== =========== =========== ===========
Gap before risk management positions..................... $ 5,607,113 $(7,518,082) $(1,345,656) $(3,256,625)
Cumulative gap before risk management positions.......... $ 5,607,113 $(1,910,969) $(3,256,625)
INTEREST RATE RISK MANAGEMENT POSITIONS
Securities(1).......................................... 903,758 1,934,946 417,921 3,256,625
Interest rate swaps(6)................................. (500,000) 500,000 -- --
Interest rate floors(5)(6)............................. (300,000) 300,000 -- --
----------- ----------- ----------- -----------
Gap adjusted for risk management positions............... $ 5,710,871 $(4,783,136) $ (927,735) $ --
=========== =========== =========== ===========
Cumulative gap adjusted for risk management positions.... $ 5,710,871 $ 927,735 $ -- $ --
=========== =========== =========== ===========
- ------------------------------
(1) Certain balance sheet classifications used for interest rate sensitivity
analysis do not conform to the Consolidated Balance Sheets on F-47.
(2) Items that neither reprice nor mature are included in the "After 5 years"
column.
(3) Interest rate sensitivity of non-maturity deposit accounts are based on
assumptions for a declining interest rate scenario since our balance sheet
is asset-sensitive.
(4) 70 percent of the demand deposit account balance is assumed to be "core"
deposits, which are not sensitive to interest rate changes.
(5) Floors purchased affect interest rate sensitivity in a declining interest
rate scenario.
(6) Floors and swaps that mature within the same period are excluded.
F-40
YEAR 2000
The Year 2000 problem exists because many computer programs use only the
last two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the year 1900, rather than as the year 2000.
Another issue is that the year 2000 is a leap year and some programs may not
properly provide for February 29, 2000.
We achieved a successful transition to the Year 2000. Considering the
complexity of our operations and the breadth of our technology, few problems
occurred. None were more serious than the occasional problems that occur from
time to time in normal ongoing banking operations, and all were dealt with
satisfactorily. In addition, no problems with vendors or customers have yet been
identified or experienced.
We have largely completed the extensive Year 2000 Program that made the
successful transition possible. The principal tasks remaining are to perform
tests of quarter-end processing and monitoring ongoing operations for problems
that may occur in the months ahead. See page F-17 for information on the cost of
the Year 2000 Program.
CERTAIN BUSINESS RISK FACTORS
ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS
A substantial majority of our assets and deposits are generated in
California. As a result, poor economic conditions in California may cause us to
incur losses associated with higher default rates and decreased collateral
values in our loan portfolio. In the early 1990's, the California economy
experienced an economic recession that resulted in increases in the level of
delinquencies and losses for us and many of the state's other financial
institutions. If California were to experience another recession, it is expected
that our level of problem assets would increase accordingly. The current
economic crisis in Asia is expected to continue to negatively impact the
economic conditions in California, which could adversely affect our business.
ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD HAVE AN ADVERSE
EFFECT ON OUR CUSTOMERS AND THEIR ABILITY TO MAKE PAYMENTS TO US
We are also subject to certain industry-specific economic factors. For
example, a portion of our total loan portfolio is related to real estate
obligations, and a portion of our recent growth has been fueled by the general
real estate recovery in California. Accordingly, a downturn in the real estate
industry in California could have an adverse effect on our operations.
Similarly, a portion of our total loan portfolio is to borrowers in the
agricultural industry. Adverse weather conditions, combined with low commodity
prices, may adversely affect the agricultural industry and, consequently, may
impact our business negatively.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS
Significant increases in market interest rates, or the perception that an
increase may occur, could adversely affect both our ability to originate new
loans and our ability to grow. Conversely, a decrease in interest rates could
result in an acceleration in the prepayment of loans. In addition, changes in
market interest rates, or changes in the relationships between short-term and
long-term market interest rates, or changes in the relationships between
different interest rate indices, could affect the interest rates charged on
interest earning assets differently than the interest rates paid on interest
bearing liabilities. This difference could result in an increase in interest
expense relative to interest income. An increase in market interest rates also
could adversely affect the ability of our floating-rate borrowers to meet their
higher payment obligations. If this occurred, it could cause an increase in
nonperforming assets and charge-offs, which could adversely affect our business.
F-41
SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD.
A majority of our directors are not officers or employees of UnionBanCal
Corporation or any of our affiliates, including The Bank of Tokyo-Mitsubishi.
However, because of The Bank of Tokyo-Mitsubishi's control over the election of
our directors, The Bank of Tokyo-Mitsubishi could change the composition of our
Board of Directors so that the Board would not have a majority of outside
directors. The Bank of Tokyo-Mitsubishi, Ltd. owns a majority of the outstanding
shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi can elect
all of our directors and, as a result, can control the vote on all matters,
including determinations such as: approval of mergers or other business
combinations; sales of all or substantially all of our assets; any matters
submitted to a vote of our shareholders; issuance of any additional common stock
or other equity securities; incurrence of debt other than in the ordinary course
of business; the selection and tenure of our Chief Executive Officer; payment of
dividends with respect to common stock or other equity securities; and matters
that might be favorable to The Bank of Tokyo-Mitsubishi. The Bank of
Tokyo-Mitsubishi's ability to prevent an unsolicited bid for us or any other
change in control could have an adverse effect on the market price for our
common stock.
THE BANK OF TOKYO-MITSUBISHI'S FINANCIAL CONDITION COULD ADVERSELY AFFECT
OUR OPERATIONS
Although we fund our operations independently of The Bank of
Tokyo-Mitsubishi and believe our business is not necessarily closely related to
The Bank of Tokyo-Mitsubishi's business or outlook, The Bank of
Tokyo-Mitsubishi's credit ratings may affect our credit ratings. The Bank of
Tokyo-Mitsubishi's credit ratings were downgraded in October 1998 by Standard
and Poor's Corporation and are currently on Moody's Investors Service, Inc.'s
credit watch with negative implications. Any future downgrading of The Bank of
Tokyo-Mitsubishi's credit rating could adversely affect our credit ratings.
Therefore, as long as The Bank of Tokyo-Mitsubishi maintains a majority interest
in us, deterioration in The Bank of Tokyo-Mitsubishi's financial condition could
result in an increase in our borrowing costs and could impair our access to the
public and private capital markets. The Bank of Tokyo-Mitsubishi is also subject
to regulatory oversight and review. Our business operations and expansion plans
could be negatively affected by regulatory concerns related to the Japanese
financial system and The Bank of Tokyo-Mitsubishi.
POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD.
COULD ADVERSELY AFFECT US
As part of The Bank of Tokyo-Mitsubishi's normal risk management processes,
The Bank of Tokyo-Mitsubishi manages global credit exposures and concentrations
on an aggregate basis, including us. Therefore, at certain levels, our ability
to approve certain credits and categories of customers is subject to concurrence
by The Bank of Tokyo-Mitsubishi. We may wish to extend credit to the same
customer as The Bank of Tokyo-Mitsubishi. Our ability to do so may be limited
for various reasons, including The Bank of Tokyo-Mitsubishi's aggregate credit
exposure and marketing policies. Certain directors' and officers' ownership
interests in The Bank of Tokyo-Mitsubishi's common stock or service as a
director or officer or other employee of both us and The Bank of
Tokyo-Mitsubishi could create or appear to create potential conflicts of
interest, especially since both of us compete in the United States banking
industry.
SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY
AFFECT US
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, as well as
nationally and internationally. Our competitors include a large number of state
and national banks, thrift institutions and major foreign-affiliated or foreign
banks, as well as many financial and non-financial firms that offer services
similar to those offered by us. Some of our competitors are community banks that
have strong local market positions. Other competitors include large financial
institutions (such as Bank of America, California Federal, Washington Mutual,
and Wells Fargo) that have substantial capital, technology and marketing
resources. Such large financial institutions may have greater access to capital
at a lower cost than us, which may adversely affect our ability to compete
effectively. In addition, there have been a number of recent mergers involving
financial institutions located
F-42
in California. Some of the merged banks, such as Norwest/Wells Fargo, employ a
strong community-based banking model of doing business that may increase
competition with our distinctive combination of traditional community bank
service coupled with a large branch network.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS
PAYABLE TO US
A substantial portion of our cash flow typically comes from dividends our
bank and nonbank subsidiaries pay to us. Various statutory provisions restrict
the amount of dividends our subsidiaries can pay to us without regulatory
approval. In addition, if any of our subsidiaries liquidates, that subsidiary's
creditors will be entitled to receive distributions from the assets of that
subsidiary to satisfy their claims against it before we, as a holder of an
equity interest in the subsidiary, will be entitled to receive any of the assets
of the subsidiary. If, however, we are a creditor of the subsidiary with
recognized claims against it, we would be in the same position.
ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS
COULD ADVERSELY AFFECT US
We are subject to significant federal and state regulation and supervision,
which is primarily for the benefit and protection of our customers and not for
the benefit of investors. In the past, our business has been materially affected
by these regulations. This trend is likely to continue in the future. Laws,
regulations or policies currently affecting us and our subsidiaries may change
at any time. Regulatory authorities may also change their interpretation of
these statutes and regulations. Therefore, our business may be adversely
affected by any future changes in laws, regulations, policies or
interpretations. Additionally, our international activities may be subject to
the laws and regulations of the jurisdiction where business is being conducted.
International laws, regulations and policies affecting us and our subsidiaries
may change at any time and affect our business opportunities and competitiveness
in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi's controlling
ownership of us, laws, regulations and policies adopted or enforced by the
Government of Japan may adversely affect our activities and investments and
those of our subsidiaries in the future. Under long-standing policy of the Board
of Governors of the Federal Reserve System, a bank holding company is expected
to act as a source of financial strength for its subsidiary banks. As a result
of that policy, we may be required to commit financial and other resources to
our subsidiary bank in circumstances where we might not otherwise do so.
POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD
ADVERSELY AFFECT THE MARKET FOR OUR STOCK
Although The Bank of Tokyo-Mitsubishi has announced its intention to
maintain its majority ownership in us, The Bank of Tokyo-Mitsubishi may sell
shares of our common stock in compliance with the federal securities laws. By
virtue of The Bank of Tokyo-Mitsubishi's current control of us, The Bank of
Tokyo-Mitsubishi could sell large amounts of shares of our common stock by
causing us to file a registration statement that would allow them to sell shares
more easily. In addition, The Bank of Tokyo-Mitsubishi could sell shares of our
common stock without registration pursuant to Rule 144 under the Securities Act.
Although we can make no prediction as to the effect, if any, that such sales
would have on the market price of our common stock, sales of substantial amounts
of our common stock, or the perception that such sales could occur, could
adversely affect our market price. If The Bank of Tokyo-Mitsubishi sells or
transfers shares of our common stock as a block, another person or entity could
become our controlling shareholder.
STRATEGIES
In connection with our strategic repositioning, we have developed long-term
financial performance goals, which we expect to result from successful
implementation of our operating strategies. We cannot assure you that we will be
successful in achieving these long-term goals or that our operating strategies
will
F-43
be successful. Achieving success in these areas is dependent on a number of
factors, many of which are beyond our direct control.
Factors that may adversely affect our ability to attain our long-term
financial performance goals include:
- deterioration of our asset quality,
- our inability to reduce noninterest expenses,
- our inability to increase noninterest income,
- our inability to decrease reliance on asset revenues,
- our ability to sustain loan growth,
- regulatory and other impediments associated with making acquisitions,
- deterioration in general economic conditions, especially in our core
markets,
- decreases in net interest margins,
- increases in competition,
- adverse regulatory developments,
- unexpected increases in costs related to potential acquisitions, and
- unexpected increased costs associated with implementation of our
efficiency improvement project.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR
RESTRUCTURING
We may acquire or invest in companies, technologies, services or products
that complement our business. In addition, we continue to evaluate performance
of all of our businesses and business lines and may sell a business or business
lines. Any acquisitions, divestitures or restructuring may result in potentially
dilutive issuance of equity securities, significant write-offs, the amortization
of expenses related to goodwill and other intangible assets and/or the
incurrence of debt, any of which could have a material adverse effect on our
business, financial condition and results of operations. Acquisitions,
divestitures or restructuring could involve numerous additional risks including
difficulties in the assimilation or separation of operations, services, products
and personnel, the diversion of management's attention from other business
concerns, the disruption of our business and the potential loss of key
employees. There can be no assurance that we would be successful in overcoming
these or any other significant risks encountered.
F-44
UNIONBANCAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998, and 1999......................... F-46
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-47
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1998, and 1999..... F-48
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998, and 1999......................... F-49
Notes to Consolidated Financial Statements.................. F-50
Management Statement........................................ F-90
Independent Auditors' Report................................ F-91
F-45
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1998 1999
- ------------------------------------------------------------ ---------- ---------- ----------
INTEREST INCOME
Loans....................................................... $1,763,277 $1,826,096 $1,918,283
Securities.................................................. 167,440 200,337 211,192
Interest bearing deposits in banks.......................... 56,748 17,080 12,174
Federal funds sold and securities purchased under resale
agreements................................................ 26,079 16,056 8,108
Trading account assets...................................... 19,917 25,610 12,150
---------- ---------- ----------
Total interest income..................................... 2,033,461 2,085,179 2,161,907
---------- ---------- ----------
INTEREST EXPENSE
Domestic deposits........................................... 520,583 468,907 444,032
Foreign deposits............................................ 75,398 86,221 73,829
Federal funds purchased and securities sold under repurchase
agreements................................................ 58,544 84,440 72,083
Commercial paper............................................ 89,912 88,358 77,041
Subordinated capital notes.................................. 22,850 20,347 17,100
UnionBanCal Corporation-obligated mandatorily redeemable
preferred securities of subsidiary grantor trust.......... -- -- 24,569
Other borrowed funds........................................ 34,492 18,683 37,420
---------- ---------- ----------
Total interest expense.................................... 801,779 766,956 746,074
---------- ---------- ----------
NET INTEREST INCOME......................................... 1,231,682 1,318,223 1,415,833
Provision for credit losses................................. -- 45,000 65,000
---------- ---------- ----------
Net interest income after provision for credit losses..... 1,231,682 1,273,223 1,350,833
---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts......................... 114,647 138,847 172,700
Trust and investment management fees........................ 107,527 121,226 140,878
International commissions and fees.......................... 66,122 72,036 70,801
Merchant transaction processing fees........................ 57,128 56,929 68,037
Merchant banking fees....................................... 24,924 31,402 38,036
Securities gains, net....................................... 2,711 5,686 7,941
Other....................................................... 89,942 107,405 88,366
---------- ---------- ----------
Total noninterest income.................................. 463,001 533,531 586,759
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits.............................. 571,644 617,564 661,344
Net occupancy............................................... 85,630 90,917 90,162
Equipment................................................... 56,137 56,252 67,095
Foreclosed asset income..................................... (1,268) (2,821) (1,344)
Restructuring charge........................................ -- -- 85,000
Other....................................................... 332,522 373,306 379,716
---------- ---------- ----------
Total noninterest expense................................. 1,044,665 1,135,218 1,281,973
---------- ---------- ----------
Income before income taxes.................................. 650,018 671,536 655,619
Income tax expense.......................................... 238,722 205,075 213,888
---------- ---------- ----------
NET INCOME.................................................. $ 411,296 $ 466,461 $ 441,731
========== ========== ==========
NET INCOME APPLICABLE TO COMMON STOCK....................... $ 403,696 $ 466,461 $ 441,731
========== ========== ==========
NET INCOME PER COMMON SHARE--BASIC.......................... $ 2.31 $ 2.66 $ 2.65
========== ========== ==========
NET INCOME PER COMMON SHARE--DILUTED........................ $ 2.30 $ 2.65 $ 2.64
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC........... 174,683 175,127 166,382
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED......... 175,189 175,737 167,149
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-46
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
(DOLLARS IN THOUSANDS) 1998 1999
- ------------------------------------------------------------ ----------- -----------
ASSETS
Cash and due from banks..................................... $ 2,135,380 $ 2,141,964
Interest bearing deposits in banks.......................... 209,568 182,719
Federal funds sold and securities purchased under resale
agreements................................................ 333,530 833,450
----------- -----------
Total cash and cash equivalents......................... 2,678,478 3,158,133
Trading account assets...................................... 267,718 179,935
Securities available for sale............................... 3,638,532 3,210,099
Securities held to maturity (fair value: 1998, $163,244;
1999, $45,376)............................................ 160,513 46,526
Loans (net of allowance for credit losses: 1998, $459,328;
1999, $470,378)........................................... 23,836,783 25,442,580
Due from customers on acceptances........................... 489,480 259,340
Premises and equipment, net................................. 421,091 425,021
Other assets................................................ 783,721 963,142
----------- -----------
Total assets............................................ $32,276,316 $33,684,776
=========== ===========
LIABILITIES
Domestic deposits:
Noninterest bearing....................................... $ 9,919,316 $ 9,395,925
Interest bearing.......................................... 12,609,565 14,274,310
Foreign deposits:
Noninterest bearing....................................... 260,089 325,415
Interest bearing.......................................... 1,718,909 2,260,957
----------- -----------
Total deposits.......................................... 24,507,879 26,256,607
Federal funds purchased and securities sold under repurchase
agreements................................................ 1,307,744 1,156,799
Commercial paper............................................ 1,444,745 1,108,258
Other borrowed funds........................................ 331,165 540,496
Acceptances outstanding..................................... 489,480 259,340
Other liabilities........................................... 839,059 727,808
Subordinated capital notes.................................. 298,000 298,000
UnionBanCal Corporation-obligated mandatorily redeemable
preferred securities of subsidiary grantor trust.......... -- 350,000
----------- -----------
Total liabilities....................................... 29,218,072 30,697,308
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares, no shares issued or
outstanding at December 31, 1998 or 1999................ -- --
Common stock--no stated value:
Authorized 300,000,000 shares, issued 175,259,919 shares
in 1998 and 164,282,622 shares in 1999.................. 1,725,619 1,404,155
Retained earnings........................................... 1,314,915 1,625,263
Accumulated other comprehensive income (loss)............... 17,710 (41,950)
----------- -----------
Total shareholders' equity.............................. 3,058,244 2,987,468
----------- -----------
Total liabilities and shareholders' equity.............. $32,276,316 $33,684,776
=========== ===========
See accompanying notes to consolidated financial statements.
F-47
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ----------------------------------------------- --------------------- --------------------- ---------------------
PREFERRED STOCK
Balance, beginning of year..................... $ 135,000 $ -- $ --
Redemption of preferred stock.................. (135,000) -- --
---------- ---------- ----------
Balance, end of year......................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, beginning of year..................... $1,703,838 $1,714,209 $1,725,619
Dividend reinvestment plan..................... (37) 28 50
Deferred compensation--restricted stock
awards....................................... 3,757 5,744 (221)
Stock options exercised........................ 6,651 5,638 7,369
Common stock repurchased....................... -- -- (328,662)
---------- ---------- ----------
Balance, end of year......................... $1,714,209 $1,725,619 $1,404,155
---------- ---------- ----------
RETAINED EARNINGS
Balance, beginning of year..................... $ 645,214 $ 957,662 $1,314,915
Net income(1).................................. 411,296 $411,296 466,461 $466,461 441,731 $441,731
Dividends on common stock(2)................... (89,848) (106,932) (134,992)
Dividends on preferred stock................... (7,600) -- --
Deferred compensation--restricted stock
awards....................................... (1,400) (2,276) 3,609
---------- ---------- ----------
Balance, end of year......................... $ 957,662 $1,314,915 $1,625,263
---------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year..................... $ 10,881 $ 7,428 $ 17,710
Unrealized holding gains (losses) arising
during the year on securities available for
sale, net of tax expense (benefit) of $4,370
in 1997, $6,672 in 1998, and $(35,155) in
1999......................................... 7,538 12,734 (56,753)
Less: reclassification adjustment for gains on
securities available for sale included in net
income, net of tax expense of $995 in 1997,
$2,175 in 1998, and $3,037 in 1999........... (1,716) (3,511) (4,904)
-------- -------- --------
Net unrealized gains (losses) on securities
available for sale........................... 5,822 9,223 (61,657)
Foreign currency translation adjustment, net of
tax expense (benefit) of $(5,377) in 1997,
$1,739 in 1998, and $581 in 1999............. (9,275) 2,807 938
Minimum pension liability adjustment, net of
tax expense (benefit) of $(1,083) in 1998 and
$427 in 1999................................. -- (1,748) 1,059
-------- -------- --------
Other comprehensive income (loss).............. (3,453) (3,453) 10,282 10,282 (59,660) (59,660)
---------- -------- ---------- -------- ---------- --------
Total comprehensive income..................... $407,843 $476,743 $382,071
======== ======== ========
Balance, end of year......................... $ 7,428 $ 17,710 $ (41,950)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY................. $2,679,299 $3,058,244 $2,987,468
========== ========== ==========
- ------------------------------
(1) Includes dividends applicable to preferred shareholders of $7.6 million in
1997.
(2) Dividends per share were $0.51 in 1997, $0.61 in 1998, and $0.82 in 1999.
See accompanying notes to consolidated financial statements.
F-48
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
(DOLLARS INTHOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 411,296 $ 466,461 $ 441,731
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses............................. -- 45,000 65,000
Depreciation, amortization and accretion................ 65,469 67,640 79,795
Provision (benefit) for deferred income taxes........... 59,814 28,097 (10,529)
Gain on sales of securities available for sale.......... (2,711) (5,686) (7,941)
Merger and integration costs less utilization........... (31,414) (12,388) (767)
Restructuring charge in excess of utilization........... -- -- 69,359
Net decrease in trading account assets.................. 52,743 126,595 87,783
Other, net.............................................. 173,706 (117,258) (291,297)
----------- ----------- -----------
Total adjustments..................................... 317,607 132,000 (8,597)
----------- ----------- -----------
Net cash provided by operating activities................. 728,903 598,461 433,134
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale...... 171,629 418,477 209,920
Proceeds from matured and called securities available for
sale.................................................... 587,034 259,465 827,595
Purchases of securities available for sale................ (1,112,080) (1,528,281) (697,023)
Proceeds from matured and called securities held to
maturity................................................ 79,828 28,540 114,168
Purchases of premises and equipment....................... (60,829) (82,880) (72,020)
Net increase in loans..................................... (1,788,179) (1,625,149) (1,711,391)
Other, net................................................ 4,245 12,466 (1,893)
----------- ----------- -----------
Net cash used by investing activities..................... (2,118,352) (2,517,362) (1,330,644)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.................................. 1,763,414 1,211,505 1,748,728
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements............. 13,230 (28,140) (150,945)
Net increase (decrease) in commercial paper and other
borrowed funds.......................................... (797,464) 333,325 (127,156)
Common stock repurchased.................................. -- -- (328,662)
Maturity and redemption of subordinated debt.............. (234,000) (50,000) --
Proceeds from issuance of subordinated debt............... 200,000 -- --
Proceeds from issuance of trust preferred securities...... -- -- 350,000
Payments of cash dividends................................ (93,303) (98,160) (127,119)
Redemption of preferred stock............................. (135,000) -- --
Other, net................................................ (2,661) 8,473 (3,677)
----------- ----------- -----------
Net cash provided by financing activities................. 714,216 1,377,003 1,361,169
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ (675,233) (541,898) 463,659
Cash and cash equivalents at beginning of year.............. 3,937,697 3,199,455 2,678,478
Effect of exchange rate changes on cash and cash
equivalents............................................... (63,009) 20,921 15,996
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 3,199,455 $ 2,678,478 $ 3,158,133
=========== =========== ===========
CASH PAID DURING THE YEAR FOR:
Interest.................................................. $ 820,355 $ 784,023 $ 702,880
Income taxes.............................................. 113,588 234,895 145,279
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Loans transferred to foreclosed assets (OREO)............. $ 23,114 $ 17,260 $ 6,979
Dividends declared but unpaid............................. 24,528 33,300 41,172
See accompanying notes to consolidated financial statements.
F-49
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
INTRODUCTION
UnionBanCal Corporation, a commercial bank holding company, and subsidiaries
(the Company) was created on April 1, 1996 by the combination of Union Bank with
BanCal Tri-State Corporation and its banking subsidiary, The Bank of California,
N.A. (the Bank). The combination was accounted for as a reorganization of
entities under common control (similar to a business combination under the
pooling of interests method). Information pertaining to merger and integration
expense is presented in Note 8.
On March 3, 1999, the Company completed a secondary offering of
28.75 million shares of its Common Stock owned by The Bank of
Tokyo-Mitsubishi, Ltd. (BTM). The Company received no proceeds from this
transaction. Concurrent with the secondary offering, the Company repurchased
8.6 million shares of its outstanding Common Stock from BTM and 2.1 million
shares owned by Meiji Life Insurance Company with $312 million of the net
proceeds from the issuance of $350 million of 7 3/8 percent trust preferred
securities that occurred on February 19, 1999. After the secondary offering and
the repurchase, BTM owns 64 percent of the Company, or 105.6 million shares,
compared with 82 percent prior to the transaction.
The Company provides a wide range of financial services to consumers, small
businesses, middle market companies and major corporations, primarily in
California, Oregon, and Washington, but also nationally and internationally.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of the Company conform to generally
accepted accounting principles (GAAP) and general practice within the banking
industry. Those policies that materially affect the determination of financial
position, results of operations, and cash flows are summarized below.
The Consolidated Financial Statements include the accounts of the Company.
All material intercompany transactions and balances have been eliminated. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain amounts for prior periods have been reclassified to conform with current
financial statement presentation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest bearing deposits in banks, and federal funds sold
and securities purchased under resale agreements, substantially all of which
have maturities less than 90 days.
TRADING ACCOUNT ASSETS
Trading account assets are those financial instruments that management
acquires with the intent to hold for short periods of time in order to take
advantage of anticipated changes in market values. Substantially all of these
assets are securities with a high degree of liquidity and a readily determinable
market value. Interest earned, paid, or accrued on trading account assets is
included in interest income using a method that generally produces a level
yield. Realized gains and losses from the close out of
F-50
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
trading account positions and unrealized market value adjustments are recognized
in noninterest income. The reserve for derivative and foreign exchange contracts
is presented as an offset to trading account assets. Changes in the reserve as a
result of changes in the positive replacement cost of those contracts are
provided as an offset to trading gains and losses.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The Company's securities portfolios consist of debt and equity securities
that are classified either as securities available for sale or securities held
to maturity.
Debt securities for which the Company has the positive intent and ability to
hold until maturity are classified as securities held to maturity and carried at
amortized cost.
Debt securities and equity securities with readily determinable market
values that are not classified as either securities held to maturity or trading
account assets are classified as securities available for sale and carried at
fair value, with the unrealized gains or losses reported net of taxes as a
component of accumulated other comprehensive income (loss) in shareholders'
equity until realized.
Realized gains and losses arising from the sale of securities are based upon
the specific identification method and included in noninterest income as
securities gains (losses), net.
Interest income on debt securities includes the amortization of premiums and
the accretion of discounts using the effective interest method and is included
in interest income on securities. Dividend income on equity securities is
included in noninterest income.
LOANS
Loans are reported at the principal amounts outstanding, net of unamortized
nonrefundable loan fees and related direct loan origination costs. Deferred net
fees and costs are recognized in interest income over the loan term using a
method that generally produces a level yield on the unpaid loan balance.
Nonrefundable fees and direct loan origination costs related to loans held for
sale are deferred and recognized as a component of the gain or loss on sale.
Interest income is accrued principally on a simple interest basis.
Nonaccrual loans are those for which management has discontinued accrual of
interest because there exists significant uncertainty as to the full and timely
collection of either principal or interest or such loans have become
contractually past due 90 days with respect to principal or interest.
Interest accruals are continued for certain small business loans that are
processed centrally, consumer loans, and one-to-four family residential mortgage
loans. These loans are charged off or written down to their net realizable value
based on delinquency time frames that range from 120 to 270 days, depending on
the type of credit that has been extended. Interest accruals are also continued
for loans that are both well-secured and in the process of collection. For this
purpose, loans are considered well-secured if they are collateralized by
property having a net realizable value in excess of the amount of principal and
accrued interest outstanding or are guaranteed by a financially responsible and
willing party. Loans are considered "in the process of collection" if collection
is proceeding in due course either through legal action or other actions that
are reasonably expected to result in the prompt repayment of the debt or in its
restoration to current status.
F-51
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
When a loan is placed on nonaccrual, all previously accrued but uncollected
interest is reversed against current period operating results. All subsequent
payments received are first applied to unpaid principal and then to uncollected
interest. Interest income is accrued at such time as the loan is brought fully
current as to both principal and interest, and, in management's judgment, such
loans are considered to be fully collectible. However, Company policy also
allows management to continue the recognition of interest income on certain
loans designated as nonaccrual. This portion of the nonaccrual portfolio is
referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans
that are well secured and in management's judgment are considered to be fully
collectible. Although the accrual of interest is suspended, any payments
received may be applied to the loan according to its contractual terms and
interest income recognized when cash is received.
Loans are considered impaired when, based on current information, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including interest payments.
Impaired loans are carried at the lower of the recorded investment in the loan,
the estimated present value of total expected future cash flows, discounted at
the loan's effective rate, or the fair value of the collateral, if the loan is
collateral dependent. Additionally, some impaired loans with commitments of less
than $1 million are aggregated for the purpose of measuring impairment using
historical loss factors as a means of measurement. Excluded from the impairment
analysis are large groups of smaller balance homogeneous loans such as consumer,
installment, residential mortgage loans, and automobile leases.
Renegotiated loans are those in which the Company has formally restructured
a significant portion of the loan. The remaining portion is normally charged
off, with a concession either in the form of below market rate financing, or
debt forgiveness on the charged off portion. Loans that have been renegotiated
and have not met specific performance standards for payment are classified as
renegotiated loans within the classification of nonperforming assets. Upon
payment performance, such loans may be transferred from nonperforming status to
accrual status.
The Company offers primarily two types of leases to customers: 1) direct
financing leases where the assets leased are acquired without additional
financing from other sources, and 2) leveraged leases where a substantial
portion of the financing is provided by debt with no recourse to the Company.
Direct financing leases are carried net of unearned income, unamortized
nonrefundable fees and related direct costs associated with the origination or
purchase of leases. Leveraged leases are carried net of nonrecourse debt.
ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. The allowance is based on ongoing, quarterly
assessments of the probable estimated losses inherent in the loan portfolio, and
to a lesser extent, unused commitments to provide financing. The allowance is
increased by the provision for credit losses, which is charged against current
period operating results and decreased by the amount of charge-offs, net of
recoveries. The Company's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula allowance,
specific allowances and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments. Loss factors are based on the Company's
historical loss experience and may be adjusted for significant factors that, in
management's judgement, affect the collectibility of the portfolio as of the
F-52
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
evaluation date. The Company derives the loss factors for problem graded loans
from a loss migration model, for pass graded loans by using historical average
net charge-offs during a business cycle, and for pooled loans by using expected
net charge-offs for one year. Pooled loans are homogeneous in nature and include
consumer installment, residential mortgage, automobile leases and other loans
and leases.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is composed of two elements. The first element
recognizes the model and estimation risk associated with the formula and
specific allowances. The second element is based upon management's evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. The conditions evaluated in connection with the
unallocated allowance may include existing general economic and business
conditions affecting the key lending areas of the Company, credit quality
trends, collateral values, loan volumes and concentrations, seasoning of the
loan portfolio, specific industry conditions within portfolio segments, recent
loss experience in particular segments of the portfolio, duration of the current
business cycle, bank regulatory examination results and findings of the
Company's internal credit examiners.
The allowance also incorporates the results of measuring impaired loans as
provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures".
These accounting standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans. A loan is considered impaired when
management determines that it is probable that the Company will be unable to
collect all amounts due according to the original contractual terms of the loan
agreement. Impairment is measured by the difference between the recorded
investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount) and the estimated present value of
total expected future cash flows, discounted at the loan's effective rate, or
the fair value of the collateral, if the loan is collateral dependent. In
addition, the impairment allowance may include amounts related to certain
qualitative factors that have yet to manifest themselves in the other
measurements. Impairment is recognized by adjusting an allocation of the
existing allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful life of each asset. Lives of
premises range from ten to forty years; lives of furniture, fixtures and
equipment range from three to eight years. Leasehold improvements are amortized
over the term of the respective lease or 10 years, whichever is shorter.
OTHER ASSETS
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of acquired companies and is reported as intangible
assets. Goodwill is amortized using the straight-line method, generally over
15 years.
F-53
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
Other real estate owned (OREO) represents the collateral acquired through
foreclosure in full or partial satisfaction of the related loan. OREO is
recorded at the lower of the loan's unpaid principal balance or its fair value
as established by a current appraisal, adjusted for disposition costs. Any
write-down at the date of transfer is charged to the allowance for credit
losses. OREO values, recorded in other assets, are reviewed on an ongoing basis
and any decline in value is recognized as foreclosed asset expense in the
current period. The net operating results from these assets are included in the
current period in noninterest expense as foreclosed asset expense (income).
DERIVATIVE INSTRUMENTS HELD FOR TRADING OR CUSTOMER ACCOMMODATION
The Company enters into a variety of interest rate derivative contracts,
primarily swaps, options and foreign exchange contracts, either for trading
purposes, based on management's intent at inception, or as an accommodation to
customers.
Derivatives held or issued for trading or customer accommodation are carried
at fair value, with realized and unrealized changes in fair values on contracts
included in noninterest income in the period in which the changes occur.
Unrealized gains and losses are reported gross and included in trading account
assets and other liabilities, respectively. Cash flows are reported net as
operating activities.
DERIVATIVE INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company enters into a variety of derivative contracts as a means of
reducing the Company's interest rate and foreign exchange exposures. At
inception these contracts are evaluated in order to determine if they qualify
for hedge accounting treatment and are accounted for either on a deferral,
accrual or market value basis, depending on the nature of the Company's hedge
strategy and the method used to account for the hedged item. Hedge criteria
include demonstrating the manner in which the hedge will reduce risk,
identifying the specific asset, liability or firm commitment being hedged, and
citing the time horizon being hedged. A monthly evaluation is performed to
ensure that continuing correlation exists between the hedge and the item being
hedged.
Net interest settlements on interest rate swap, cap and floor agreements are
recognized on an accrual basis as interest income or interest expense of the
related asset or liability over the lives of the agreements. Premiums paid or
received for interest rate caps and floors are amortized either to interest
income or to interest expense of the related asset or liability over the lives
of the agreements. If an agreement is terminated early, any resulting gain or
loss is deferred and amortized as interest income or interest expense of the
related asset or liability over the remaining life of the original agreement.
Net settlement amounts are reported gross as other assets and other liabilities.
Cash flows are reported net as operating activities.
FOREIGN CURRENCY TRANSLATION
Assets, liabilities and results of operations for foreign branches are
recorded based on the functional currency of each branch. Since the functional
currency of the branches is the local currency, the net assets are remeasured
into U.S. dollars using a combination of current and historical exchange rates.
The resulting gains or losses are included in shareholders' equity, as a
component of accumulated other comprehensive income (loss), on a net of tax
basis.
F-54
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
INCOME TAXES
The Company files consolidated federal and combined state income tax
returns. Amounts provided for income tax expense are based on income reported
for financial statement purposes and do not necessarily represent amounts
currently payable under tax laws. Deferred taxes, which arise principally from
temporary differences between the period in which certain income and expenses
are recognized for financial accounting purposes and the period in which they
affect taxable income, are included in the amounts provided for income taxes.
Under this method, the computation of the net deferred tax liability or asset
gives current recognition to changes in the tax laws.
NET INCOME PER COMMON SHARE
Basic earnings per share (EPS) is computed by dividing net income after
preferred dividends by the weighted average number of common shares outstanding
during the period. Diluted EPS incorporates the dilutive effect of common stock
equivalents outstanding on an average basis during the period. Stock options
(see Note 14) are a common stock equivalent. Also see Note 19.
EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company provides a variety of benefit and incentive compensation plans
for eligible employees and retirees. Provisions for the costs of these employee
benefit and incentive plans and postretirement benefit plans are accrued and
charged to expense when the benefit is earned.
STOCK-BASED COMPENSATION
As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company has chosen to continue to recognize compensation
expense using the intrinsic value-based method of valuing stock options
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations. Under the intrinsic
value-based method, compensation cost is measured as the amount by which the
quoted market price of the Company's stock at the date of grant exceeds the
stock option exercise price.
Compensation cost associated with the Company's unvested restricted stock
issued under the management stock plan is measured based on the market price of
the stock at the grant date and is expensed over the vesting period.
SEGMENT REPORTING
Business unit results are based on an internal management reporting system
used by management to measure the performance of the units and the Company as a
whole. The management reporting system identifies balance sheet and income
statement items to each business unit based on internal management accounting
policies. Net interest income is determined using the Company's internal funds
transfer pricing system, which assigns a cost of funds to assets or a credit for
funds to liabilities and capital based on their type, maturity or repricing
characteristics. Noninterest income and expense directly or indirectly
attributable to a business unit are assigned to that business. Economic capital
is attributed to each business units using a Risk Adjusted Return on Capital
(RAROC) methodology, which seeks to allocate capital to each business unit
consistent with the level of risk they assume. These risks are primarily credit
risk, market risk
F-55
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
and operational risk. Credit risk is the potential loss in economic value due to
the likelihood that the obligor will not perform as agreed. Market risk is the
potential loss in fair value due to changes in interest rates, currency rates
and volatilities. Operational risk is the potential loss due to failures in
internal controls, system failures, or external events.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
GRANTOR TRUST
Company-obligated mandatorily redeemable preferred securities of subsidiary
grantor trust (trust preferred securities) are accounted for as a liability on
the balance sheet. Dividends (or distributions) on trust preferred securities
are treated as interest expense on an accrual basis.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. SFAS No. 133 requires that derivative instruments used to
hedge be identified specifically to assets, liabilities, firm commitments or
anticipated transactions and measured as to effectiveness and ineffectiveness
when hedging changes in fair value or cash flows. Derivative instruments that do
not qualify as either a fair value or cash flow hedge will be valued at fair
value with the resultant gain or loss recognized in current earnings. Changes in
the effective portion of fair value hedges will be recognized in current
earnings along with the change in fair value of the hedged item. Changes in the
effective portion of the fair value of cash flow hedges will be recognized in
other comprehensive income (loss) until realization of the cash flows of the
hedged item through current earnings. Any ineffective portion of hedges will be
recognized in current earnings. In June 1999, the FASB issued SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133", to defer for one
year the effective date of implementation of SFAS No. 133. SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000, with earlier application encouraged. Management believes that, depending
upon the accumulated net gain or loss of the effective portion of cash flow
hedges at the date of adoption, the impact of SFAS No. 133 could have a material
impact on other comprehensive income (loss). However, management believes that
any ineffective portion of cash flow hedges or any other hedges will not have a
material impact on the Company's financial position or results of operations.
The Company expects to adopt SFAS No. 133 as of January 1, 2001.
F-56
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 2--SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of securities are presented below.
SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1999
------------------------------------------------- -------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Treasury............. $ 753,991 $16,341 $ -- $ 770,332 $ 450,238 $ 1,302 $ 912 $ 450,628
Other U.S. government..... 856,463 12,364 -- 868,827 974,211 294 13,621 960,884
Mortgage-backed
securities.............. 1,875,141 9,271 2,634 1,881,778 1,665,317 62 49,094 1,616,285
State and municipal....... 72,777 11,469 -- 84,246 55,496 7,786 -- 63,282
Corporate debt
securities.............. 8,069 -- -- 8,069 50,058 -- 26 50,032
Equity securities......... 18,149 252 -- 18,401 50,888 1,403 -- 52,291
Foreign securities........ 6,799 121 41 6,879 16,597 104 4 16,697
---------- ------- ------ ---------- ---------- ------- ------- ----------
Total securities
available for sale.... $3,591,389 $49,818 $2,675 $3,638,532 $3,262,805 $10,951 $63,657 $3,210,099
========== ======= ====== ========== ========== ======= ======= ==========
SECURITIES HELD TO MATURITY
DECEMBER 31,
-----------------------------------------------------------------------------------------------
1998 1999
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -------------------------------- --------- ---------- ---------- -------- --------- ---------- ---------- --------
U.S. Treasury................... $ 40,047 $1,050 $ -- $ 41,097 $ -- $ -- $ -- $ --
Other U.S. government........... 89,783 1,392 -- 91,175 19,996 35 -- 20,031
Mortgage-backed securities...... 15,247 1,178 -- 16,425 11,302 577 3 11,876
State and municipal............. 15,436 4 893 14,547 15,228 -- 1,759 13,469
-------- ------ ---- -------- ------- ---- ------ -------
Total securities held to
maturity.................... $160,513 $3,624 $893 $163,244 $46,526 $612 $1,762 $45,376
======== ====== ==== ======== ======= ==== ====== =======
The amortized cost and fair value of securities, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations, with or
without call or prepayment penalties.
F-57
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 2--SECURITIES (CONTINUED)
MATURITY SCHEDULE OF SECURITIES
SECURITIES SECURITIES
AVAILABLE FOR SALE(1) HELD TO MATURITY(1)
----------------------- --------------------
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- -------------------------------------------------- ---------- ---------- --------- --------
Due in one year or less........................... $ 533,727 $ 534,326 $20,002 $20,037
Due after one year through five years............. 1,822,971 1,798,648 2,150 2,133
Due after five years through ten years............ 181,819 180,390 13,354 13,659
Due after ten years............................... 673,400 644,444 11,020 9,547
Equity securities................................. 50,888 52,291 -- --
---------- ---------- ------- -------
Total securities................................ $3,262,805 $3,210,099 $46,526 $45,376
========== ========== ======= =======
- ------------------------
(1) The remaining contractual maturities of mortgage-backed securities are
classified without regard to prepayments. The contractual maturity of these
securities is not a reliable indicator of their expected life since
borrowers have the right to repay their obligations at any time.
During the years ended 1997, 1998 and 1999, there were no sales or transfers
from the securities held to maturity portfolio.
In 1997, proceeds from sales of securities available for sale were
$172 million with gross realized gains of $3 million and no gross realized
losses. In 1998, proceeds from sales of securities available for sale were
$418 million with gross realized gains of $6 million and no gross realized
losses. In 1999, proceeds from sales of securities available for sale were
$210 million with gross realized gains of $8 million and no gross realized
losses.
F-58
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES
A summary of loans, net of unearned interest and fees of $126 million and
$120 million, at December 31, 1998 and 1999, respectively, is as follows:
DECEMBER 31,
-------------------------
(DOLLARS IN THOUSANDS) 1998 1999
- ------------------------------------------------------------ ----------- -----------
Domestic:
Commercial, financial and industrial...................... $13,119,534 $14,176,630
Construction.............................................. 439,806 648,478
Mortgage:
Residential............................................. 2,627,668 2,581,141
Commercial.............................................. 2,975,484 3,572,347
----------- -----------
Total mortgage........................................ 5,603,152 6,153,488
Consumer:
Installment............................................. 1,984,941 1,922,158
Home equity............................................. 818,199 727,776
----------- -----------
Total consumer........................................ 2,803,140 2,649,934
Lease financing........................................... 1,032,148 1,148,542
----------- -----------
Total loans in domestic offices....................... 22,997,780 24,777,072
Loans originated in foreign branches........................ 1,298,331 1,135,886
----------- -----------
Total loans........................................... 24,296,111 25,912,958
Allowance for credit losses........................... 459,328 470,378
----------- -----------
Loans, net............................................ $23,836,783 $25,442,580
=========== ===========
Changes in the allowance for credit losses were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ --------- -------- --------
Balance, beginning of year.................................. $ 523,946 $451,692 $459,328
Loans charged off........................................... (122,779) (76,790) (81,685)
Recoveries of loans previously charged off.................. 51,014 41,144 27,539
--------- -------- --------
Total net loans charged off............................... (71,765) (35,646) (54,146)
Provision for credit losses................................. -- 45,000 65,000
Transfer of reserve for trading account assets.............. -- (1,911) --
Foreign translation adjustment and other net additions
(deductions).............................................. (489) 193 196
--------- -------- --------
Balance, end of year........................................ $ 451,692 $459,328 $470,378
========= ======== ========
In 1998, the Company reclassified a $1.9 million previously established
reserve for credit losses related to interest rate derivatives and foreign
exchange contracts from the unallocated portion of the allowance for credit
losses. The reserve for derivative and foreign exchange contracts is presented
as an offset to trading account assets.
F-59
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 3--LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Nonaccrual loans totaled $78 million and $167 million at December 31, 1998
and 1999, respectively. There were no renegotiated loans at December 31, 1998
and 1999. Interest foregone on loans designated as nonaccrual at December 31,
1997, 1998 and 1999 was $6 million, $4 million and $8 million, respectively.
LOAN IMPAIRMENT
Impaired loans of the Company include commercial, financial and industrial,
construction and commercial mortgage loans designated as nonaccrual. When the
value of an impaired loan is less than the recorded investment in the loan, a
portion of the Company's allowance for credit losses is allocated as an
impairment allowance.
The Company's policy for recognition of interest income, charge-offs of
loans, and application of payments on impaired loans is the same as the policy
applied to nonaccrual loans.
The following table sets forth information about the Company's impaired
loans.
DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ -------- -------- --------
Impaired loans with an allowance............................ $ 59,351 $49,741 $128,575
Impaired loans without an allowance(1)...................... 49,033 28,709 38,818
-------- ------- --------
Total impaired loans(2)................................... $108,384 $78,450 $167,393
======== ======= ========
Allowance for impaired loans................................ $ 9,418 $11,219 $ 42,429
Average balance of impaired loans during the year........... $120,096 $91,233 $128,403
Interest income recognized on nonaccrual loans during the
year...................................................... $ 2,506 $ 274 $ 23
- ------------------------
(1) These loans do not require an allowance for credit losses since the fair
values of the impaired loans equal or exceed the recorded investments in
the loans
(2) This amount was evaluated for impairment using three measurement methods as
follows: $27 million, $53 million, and $141 million was evaluated using the
present value of the expected future cash flows at December 31, 1997, 1998
and 1999, respectively; $53 million, $8 million, and $6 million was
evaluated using the fair value of the collateral at December 31, 1997, 1998
and 1999, respectively; and $28 million, $17 million, and $21 million was
evaluated using historical loss factors at December 31, 1997, 1998 and 1999,
respectively.
RELATED PARTY LOANS
In some cases, the Company makes loans to related parties including its
directors, executive officers, and their affiliated companies. At December 31,
1998, related party loans outstanding to individuals who served as directors or
executive officers at anytime during the year totaled $138 million, as compared
to $133 million at December 31, 1999. In the opinion of management, these
related party loans were made on substantially the same terms, including
interest rates and collateral requirements, as those terms prevailing at the
date these loans were made. During 1998 and 1999, there were no loans to related
parties which were charged off. Additionally, at December 31, 1998 and 1999,
there were no loans to related parties which were nonperforming.
F-60
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 4--PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. As of December 31, 1998 and 1999, the amounts were:
DECEMBER 31,
-------------------------------------------------------------------------------
1998 1999
-------------------------------------- --------------------------------------
ACCUMULATED ACCUMULATED
DEPRECIATION AND NET BOOK DEPRECIATION AND NET BOOK
(DOLLARS IN THOUSANDS) COST AMORTIZATION VALUE COST AMORTIZATION VALUE
- ------------------------------ -------- ---------------- -------- -------- ---------------- --------
Land.......................... $ 68,598 $ -- $ 68,598 $ 67,532 $ -- $ 67,532
Premises...................... 261,271 108,114 153,157 265,156 103,948 161,208
Leasehold improvements........ 143,810 84,767 59,043 155,409 101,526 53,883
Furniture, fixtures and
equipment................... 442,914 302,621 140,293 473,371 330,973 142,398
-------- -------- -------- -------- -------- --------
Total..................... $916,593 $495,502 $421,091 $961,468 $536,447 $425,021
======== ======== ======== ======== ======== ========
Rental and depreciation and amortization expenses were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ -------- -------- --------
Rental expense of premises.................................. $46,556 $51,695 $49,719
Less: rental income......................................... 11,049 12,161 13,900
------- ------- -------
Net rental expense........................................ $35,507 $39,534 $35,819
======= ======= =======
Other net rental expense (income), primarily for
equipment................................................. $ 298 $ (374) $ (821)
======= ======= =======
Depreciation and amortization of premises and equipment..... $53,652 $56,490 $68,090
======= ======= =======
Future minimum lease payments are as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 1999
- ------------------------------------------------------------ -----------------
Years ending December 31,
2000...................................................... $ 46,626
2001...................................................... 46,666
2002...................................................... 35,706
2003...................................................... 32,318
2004...................................................... 26,101
Later years............................................... 100,268
--------
Total minimum operating lease payments...................... $287,685
========
Minimum rental income due in the future under noncancellable
subleases................................................. $ 48,006
========
Included in other liabilities in the accompanying December 31, 1999
Consolidated Balance Sheet is $13.5 million of future operating lease payments
accrued in connection with the merger and the restructuring charge (also see
Notes 7 and 8).
F-61
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 4--PREMISES AND EQUIPMENT (CONTINUED)
A majority of the leases provide for the payment of taxes, maintenance,
insurance, and certain other expenses applicable to the leased premises. Many of
the leases contain extension provisions, escalation clauses, and purchase
options. There are no restrictions on paying dividends, incurring additional
debt or negotiating additional leases under the terms of the present lease
agreements.
NOTE 5--DEPOSITS
At December 31, 1999, the Company had $417 million in domestic interest
bearing time deposits with a remaining term of greater than one year, of which
$137 million exceeded $100,000. Maturity information for all domestic interest
bearing time deposits with a remaining term of greater than one year is
summarized below.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1999
- ------------------------------------------------------------ -----------------
Due after one year through two years........................ $236,470
Due after two years through three years..................... 98,633
Due after three years through four years.................... 38,816
Due after four years through five years..................... 34,381
Due after five years........................................ 8,945
--------
Total..................................................... $417,245
========
Substantially all of the foreign interest bearing time deposits exceeding
$100,000 mature in less than one year.
NOTE 6-- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
RETIREMENT PLANS
The Company maintains the Union Bank of California, N.A. Retirement Plan
(the Plan), which is a noncontributory defined benefit plan covering
substantially all of the employees of the Company. The Plan provides retirement
benefits based on years of credited service and the final average compensation
amount, as defined in the Plan. Employees become eligible for this plan after
one year of service and become fully vested after five years of service. The
Company's funding policy is to make contributions equal to the maximum
deductible amount as allowed by the Internal Revenue Code. Contributions are
intended to provide not only for benefits attributed to services to date, but
also for those expected to be earned in the future. Plan assets are invested in
U.S. government securities, corporate bonds, and commingled investment funds.
OTHER POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for its
retired employees. The health care cost is shared between the Company and the
retiree. The life insurance plan is noncontributory. The accounting for the
health care plan anticipates future cost-sharing changes to the written plan
that are consistent with the Company's intent to maintain a level of
cost-sharing at approximately 25 percent. Assets set aside to cover such
obligations are primarily invested in mutual funds.
F-62
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 6-- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following table sets forth the funded status of the Company's defined
benefit pension plan and its other postretirement benefit plans.
PENSION BENEFITS OTHER BENEFITS
-------------------- -------------------
YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -------------------
(DOLLARS IN THOUSANDS) 1998 1999 1998 1999
- ---------------------------------------------------- -------- --------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year............... $400,958 $ 489,378 $ 79,308 $ 83,029
Service cost........................................ 22,697 25,107 3,067 3,450
Interest cost....................................... 28,475 31,295 5,068 5,552
Plan participants' contributions.................... -- -- 919 1,033
Amendments.......................................... -- -- -- (855)
Actuarial (gain) loss............................... 49,433 (91,285) (258) 10,237
Benefits paid....................................... (12,185) (14,587) (5,075) (6,190)
-------- --------- -------- --------
Benefit obligation, end of year..................... 489,378 439,908 83,029 96,256
-------- --------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year........ 460,501 537,087 31,136 39,468
Actual return on plan assets........................ 65,537 63,814 3,428 2,390
Employer contribution............................... 23,234 15,212 9,060 9,964
Plan participants' contributions.................... -- -- 919 1,033
Benefits paid....................................... (12,185) (14,586) (5,075) (6,189)
-------- --------- -------- --------
Fair value of plan assets, end of year.............. 537,087 601,527 39,468 46,666
-------- --------- -------- --------
Funded status....................................... 47,709 161,619 (43,561) (49,590)
Unrecognized transition amount...................... (60) -- 55,826 44,918
Unrecognized net actuarial gain..................... (23,505) (144,845) (20,314) (8,339)
Unrecognized prior service cost..................... 9,740 7,725 -- --
-------- --------- -------- --------
Prepaid (accrued) benefit cost...................... $ 33,884 $ 24,499 $ (8,049) $(13,011)
======== ========= ======== ========
The following table summarizes the assumptions used in computing the present
value of the projected benefit obligation and the net pension expense.
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
Discount rate in determining expense..................... 7.50% 7.00% 6.50% 7.50% 7.00% 6.50%
Discount rate in determining benefit obligations at year
end.................................................... 7.00 6.50 7.75 7.00 6.50 7.75
Rate of increase in future compensation levels for
determining expense.................................... 5.50 5.00 5.00 -- -- --
Rate of increase in future compensation levels for
determining benefit obligations at year end............ 5.00 5.00 5.00 -- -- --
Expected return on plan assets........................... 8.25 8.25 8.25 8.00 8.00 8.00
F-63
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 6-- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
The following table sets forth the components of postretirement benefit
expense.
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999 1997 1998 1999
- ------------------------------------------- -------- -------- -------- -------- -------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................... $ 20,667 $ 22,697 $ 25,107 $ 3,123 $ 3,067 $ 3,450
Interest cost.............................. 25,049 28,475 31,295 5,150 5,068 5,552
Expected return on plan assets............. (27,119) (31,648) (36,194) (1,736) (2,491) (3,317)
Amortization of prior service cost......... 3,175 3,175 2,016 -- -- --
Amortization of transition amount.......... (149) (149) (61) 3,987 3,987 3,987
Recognized net actuarial (gain) loss....... -- 1,330 2,435 (1,870) (2,000) (878)
-------- -------- -------- ------- ------- -------
Net periodic benefit cost................ 21,623 23,880 24,598 8,654 7,631 8,794
Loss due to curtailment.................... -- -- -- -- -- 6,132
-------- -------- -------- ------- ------- -------
Total benefit cost for year.............. 21,623 23,880 24,598 8,654 7,631 14,926
-------- -------- -------- ------- ------- -------
For 1997, the Company assumed a 9 percent annual rate of increase in the per
capita cost of postretirement medical benefits for the indemnity plan and a
4 percent annual rate of increase for the health maintenance organization (HMO)
plan. For future periods, the assumed rate for the indemnity plan gradually
decreased from 9 percent to 5.5 percent in 2007 and will remain level
thereafter. The rate of change on the HMO plan was expected to increase after
one year of being at a low rate and then gradually decrease to 5.5 percent in
2007 and thereafter.
For 1998, the Company assumed a 9 percent annual rate of increase in the per
capita cost of postretirement medical benefits for the indemnity plan and a
7 percent annual rate of increase for the HMO plan. For future periods, the rate
for the indemnity plan was expected to gradually decrease from 9 percent to
5.5 percent in 2007 and remain at that level thereafter. The rate for the HMO
plan was expected to gradually decrease to 5.5 percent in 2007 and thereafter.
For 1999, the Company assumed an 11 percent annual rate of increase in the
per capita cost of postretirement medical benefits for the indemnity plan and an
8.5 percent annual rate of increase for the HMO plan. For future periods, the
rate for the indemnity plan was expected to gradually decrease from 11 percent
to 5 percent in 2007 and will remain at that level thereafter. The rate for the
HMO plan was expected to gradually decrease from 8.5 percent to 5.0 percent in
2007 and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects.
1-PERCENTAGE- 1-PERCENTAGE-
(DOLLARS IN THOUSANDS) POINT INCREASE POINT DECREASE
- ------------------------------------------------------------ -------------- --------------
Effect on total of service and interest cost components..... $ 1,303 $(1,068)
Effect on postretirement benefit obligation................. 10,598 (8,904)
F-64
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 6-- EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS
(CONTINUED)
EXECUTIVE SUPPLEMENTAL BENEFIT PLANS
The Company has several Executive Supplemental Benefit Plans (ESBP) which
provide eligible employees with supplemental retirement benefits. The plans are
unfunded. The accrued liability for ESBP's included in other liabilities in the
Consolidated Balance Sheets was $28 million at December 31, 1998 and
$25 million at December 31, 1999. The Company's expense relating to the ESBP's
was $3 million for each of the years ended December 31, 1997, 1998, and 1999.
SECTION 401(k) SAVINGS PLANS
The Company has a defined contribution plan authorized under Section 401(k)
of the Internal Revenue Code. All benefits-eligible employees with at least one
year of service are eligible to participate in the plan. Employees may
contribute up to 16 percent of their pre-tax covered compensation or up to
10 percent of their after-tax covered compensation through salary deductions.
The Company contributes 50 percent of every pre-tax dollar an employee
contributes up to the first 6 percent of the employee's pre-tax covered
compensation. Effective January 1, 1997, employees are fully vested in the
employer's contributions immediately. In addition, the Company may make a
discretionary annual profit-sharing contribution up to 2.5 percent of an
employee's pay. This profit-sharing contribution is for all eligible employees,
regardless of whether an employee is participating in the 401(k) plan, and
depends on the Bank's annual financial performance. All employer contributions
are tax deductible by the Company. The Company's combined matching contribution
expense was $13 million, $12 million and $17 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
NOTE 7--RESTRUCTURING CHARGE
A restructuring charge of $85 million was recorded in the third quarter of
1999. The restructuring charge was incurred in connection with a company-wide
project referred to as "Mission Excel". Mission Excel is an initiative to slow
the rate of growth of expenses, increase sustainable growth in revenues, and
increase productivity through elimination of unnecessary or duplicate functions.
The restructuring charge includes only direct and incremental costs associated
with the program.
The table, which follows, provides details of the restructuring related
reserve.
OCCUPANCY
(DOLLARS IN THOUSANDS) PERSONNEL AND OTHER TOTAL
- ------------------------------------------------------------ --------- --------- --------
Balances at January 1, 1999................................. $ -- $ -- $ --
Restructuring charge........................................ 70,000 15,000 85,000
Cash........................................................ 6,859 5,091 11,950
Noncash..................................................... 3,616 75 3,691
------- ------- -------
Total utilization......................................... 10,475 5,166 15,641
------- ------- -------
Balances at December 31, 1999............................... $59,525 $ 9,834 $69,359
======= ======= =======
Personnel expense consists of severance and related benefits to be paid
under the Company's enhanced severance plans. At the completion of Mission
Excel, the Company expects to have terminated approximately 1,400 employees.
From August 16, 1999 to December 31, 1999, 450 employees were
F-65
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 7--RESTRUCTURING CHARGE (CONTINUED)
terminated under the plan. Occupancy and other consists of lease termination
costs and professional services costs incurred during the assessment phase of
the project.
NOTE 8--OTHER EXPENSES
The detail of other expenses is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ -------- -------- --------
Software.................................................... $ 16,562 $ 20,969 $ 24,519
Travel...................................................... 15,763 18,080 18,548
Intangible asset amortization............................... 13,352 13,581 13,980
Armored car................................................. 12,209 12,231 12,831
Other....................................................... 274,636 308,445 309,838
-------- -------- --------
Total other expenses...................................... $332,522 $373,306 $379,716
======== ======== ========
In connection with the merger, which occurred in 1996, the Company incurred
merger and integration expense of $6 million in 1997, none for the year ended
1998, and $2 million in 1999 as summarized in the following table.
YEARS ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ -------- -------- --------
Balance, accrued merger and integration expense, beginning
of year................................................... $54,344 $22,930 $10,542
Provision for merger and integration costs.................. 6,037 -- 2,081
Utilization:
Cash...................................................... 35,809 2,890 2,334
Noncash................................................... 1,642 9,498 514
------- ------- -------
Total utilization....................................... 37,451 12,388 2,848
------- ------- -------
Balance, accrued merger and integration expense, end of
year...................................................... $22,930 $10,542 $ 9,775
======= ======= =======
Total merger and integration expense of $126 million was recorded to cover
$38 million of personnel expense for severance, retention, and other employee
related costs, $56 million for facilities expense related to redundant banking
facilities, and $32 million in professional services and other expense. At
December 31, 1999, the liability balance included amounts primarily for
operating lease payments related to banking facilities that have been vacated,
that are continuing over the expected term of the leases. As of December 31,
1999, the merger and integration liability has been eliminated and future
operating lease payments will be paid from other liabilities.
F-66
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 9--INCOME TAXES
The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ -------- -------- --------
Taxes currently payable:
Federal................................................... $168,375 $218,949 $217,713
State..................................................... 8,441 (44,731) 5,140
Foreign................................................... 2,092 2,760 1,564
-------- -------- --------
Total currently payable................................. 178,908 176,978 224,417
-------- -------- --------
Taxes deferred:
Federal................................................... 49,437 25,458 (7,600)
State..................................................... 10,499 2,152 (2,040)
Foreign................................................... (122) 487 (889)
-------- -------- --------
Total deferred.......................................... 59,814 28,097 (10,529)
-------- -------- --------
Total income tax expense................................ $238,722 $205,075 $213,888
======== ======== ========
The components of the net deferred tax balances of the Company were as
follows:
DECEMBER 31,
-------------------
(DOLLARS IN THOUSANDS) 1998 1999
- ------------------------------------------------------------ -------- --------
Deferred tax assets:
Allowance for credit losses............................... $178,161 $184,377
Accrued merger, integration and restructuring expenses.... 10,410 41,782
Accrued income and expense................................ 33,434 34,114
Unrealized loss on securities available for sale.......... -- 20,273
Net operating loss carryforwards.......................... 14,974 14,974
Deferred state taxes...................................... 4,910 3,406
Other..................................................... 4,861 6,745
Valuation allowance....................................... (14,974) (14,974)
-------- --------
Total deferred tax assets............................... 231,776 290,697
-------- --------
Deferred tax liabilities:
Leasing................................................... 329,263 365,169
Depreciation.............................................. 11,108 3,345
Unrealized gain on securities available for sale.......... 18,033 --
-------- --------
Total deferred tax liabilities.......................... 358,404 368,514
-------- --------
Net deferred tax liability............................ $126,628 $ 77,817
======== ========
During 1998, a valuation allowance was established to offset deferred tax
assets related to state income tax net operating loss carryforwards. The
carryforwards expire on December 31, 2002, and are subject to various conditions
and limitations. In the opinion of management, the Company may not meet the
conditions necessary to realize the benefits of such carryforwards.
F-67
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 9--INCOME TAXES (CONTINUED)
The following table is an analysis of the effective tax rate:
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Federal income tax rate..................................... 35% 35% 35%
Net tax effects of:
State income taxes, net of federal income tax benefit..... 6 (4) --
Tax credits............................................... -- -- (1)
Amortization of intangibles............................... 1 1 1
Net refunds from tax audits............................... (4) -- (2)
Other..................................................... (1) (1) --
-- -- --
Effective tax rate...................................... 37% 31% 33%
== == ==
During 1997, the Company received a refund from the State of California
Franchise Tax Board of approximately $25 million, net of federal tax, in
settlement of litigation, administration, and audit disputes covering the years
1975-1987. During 1999, the Company recognized tax benefits of $10.7 million
from federal and California audit settlements covering the years 1986 to 1994.
The Company has filed its 1997 and 1998 and intends to file its 1999,
California franchise tax returns on a worldwide unitary basis, incorporating the
financial results of BTM and its worldwide affiliates. As a result, during 1998,
the Company reduced its state income tax liabilities by $29 million, net of
federal tax, for previously accrued 1997 state tax liabilities.
Federal and state tax returns for several years are under or subject to
examination by the respective taxing authorities. Although the ultimate outcome
of such examinations cannot be determined at this time, management believes that
the resolution of issues that have been or may be raised will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
F-68
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 10--BORROWED FUNDS
The following is a summary of the major categories of borrowed funds:
DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1998 1999
- ------------------------------------------------------------ ---------- ----------
Federal funds purchased and securities sold under repurchase
agreements with weighted average interest rates of 4.88%
and 5.09% at December 31, 1998 and 1999, respectively..... $1,307,744 $1,156,799
Commercial paper, with weighted average interest rates of
5.01% and 5.45% at December 31, 1998 and 1999,
respectively.............................................. 1,444,745 1,108,258
Other borrowed funds, with weighted average interest rates
of 5.35% and 5.91% at December 31, 1998 and 1999,
respectively.............................................. 331,165 540,496
---------- ----------
Total borrowed funds........................................ $3,083,654 $2,805,553
========== ==========
Federal funds purchased and securities sold under repurchase
agreements:
Maximum outstanding at any month end...................... $2,058,610 $1,786,594
Average balance during the year........................... 1,604,675 1,489,214
Weighted average interest rate during the year............ 5.26% 4.84%
Commercial paper:
Maximum outstanding at any month end...................... $1,918,700 $1,737,265
Average balance during the year........................... 1,631,216 1,529,814
Weighted average interest rate during the year............ 5.42% 5.04%
Other borrowed funds:
Maximum outstanding at any month end...................... $ 438,151 $ 993,550
Average balance during the year........................... 328,872 708,625
Weighted average interest rate during the year............ 5.68% 5.28%
NOTE 11--SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK
The following is a summary of capital notes that are subordinated to other
obligations of the Company.
DECEMBER 31,
-------------------
(DOLLARS IN THOUSANDS) 1998 1999
- ------------------------------------------------------------ -------- --------
Floating rate notes due June 2007. These notes bear interest
at 0.325% above 3-month London Interbank Offered Rate
(LIBOR) and are payable to BTM............................ $200,000 $200,000
Floating rate notes due July 2000. These notes bear interest
at 0.30% above 3-month LIBOR.............................. 98,000 98,000
-------- --------
Total subordinated capital notes............................ $298,000 $298,000
======== ========
All of the above notes qualify as Tier 2 risk-based capital under the
Federal Reserve guidelines for assessing regulatory capital. For the total
risk-based capital ratio, the amount of notes that qualify as capital is reduced
as the notes approach maturity. At December 31, 1998 and 1999, $220 million and
$200 million, respectively, of the notes qualified as risk-based capital.
F-69
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 11--SUBORDINATED CAPITAL NOTES AND PREFERRED STOCK (CONTINUED)
Provisions of several of the notes restrict the use of the Company's
property as security for borrowings, and place limitations on leases,
indebtedness, distributions to shareholders, mergers, sales of certain assets,
transactions with affiliates, and changes in majority stock ownership of the
Company.
The following table presents the maturities of subordinated capital notes.
(DOLLARS IN THOUSANDS) DECEMBER 31, 1999
- ------------------------------------------------------------ -----------------
Year ending December 31, 2000............................... $ 98,000
Years after 2004............................................ 200,000
--------
Total..................................................... $298,000
========
On September 3, 1997, the Company redeemed all 1.35 million outstanding
shares of its 8 3/8 percent Noncumulative Preferred Stock, Series A, (Preferred
Stock) reducing shareholders' equity by $135 million. The redemption price was
equal to the stated value of $100 per share of Preferred Stock (equivalent to
$25 per depositary share), plus $2 million in accrued and unpaid dividends to
the redemption date. The redemption was funded by proceeds from the issuance of
$200 million in subordinated capital notes in June 1997.
NOTE 12-- UNIONBANCAL CORPORATION--OBLIGATED MANDITORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY GRANTOR TRUST
In February 1999, UnionBanCal Finance Trust I issued $350 million preferred
securities to the public and $10,824,750 common securities to the Company. The
proceeds of such issuances were invested by UnionBanCal Finance Trust I in
$360,824,750 aggregate principal amount of the Company's 7 3/8percent debt
securities due May 15, 2029 (the Trust Notes). The Trust Notes represent the
sole asset of UnionBanCal Finance Trust I. The Trust Notes mature on May 15,
2029, bear interest at the rate of 7 3/8 percent, payable quarterly, and are
redeemable by the Company beginning on or after February 19, 2004 at
100 percent of the principal amount thereof, plus any accrued and unpaid
interest to the redemption date.
Holders of the preferred securities and common securities are entitled to
cumulative cash distributions at an annual rate of 7 3/8 percent of the
liquidation amount of $25 per security. The preferred securities are subject to
mandatory redemption upon repayment of the Trust Notes and are callable by the
Company at 100 percent of the liquidation amount beginning on or after
February 19, 2004. The Trust exists for the sole purpose of issuing the
preferred securities and investing the proceeds in the Trust Notes issued by the
Company.
The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the preferred securities (the Guarantee). The Guarantee, when
taken together with the Company's obligations under the Trust Notes and in the
indenture pursuant to which the Trust Notes were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
subsidiary trust, provide a full and unconditional guarantee of amounts due on
the Trust Preferred securities.
The grantor trust is a wholly owned subsidiary of UnionBanCal Corporation.
The Trust Notes and related trust investment in the Trust Notes have been
eliminated in consolidation and the preferred securities are reflected as
outstanding in the accompanying financial statements.
F-70
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 13--DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has a dividend reinvestment and stock purchase plan for
shareholders. The plan allows shareholders to automatically reinvest all or part
of their dividends in additional shares of the Company's common stock at a cost
of 5 percent below the market price. Participating shareholders also have the
option of purchasing additional shares at the full market price with cash
payments of $25 to $3,000 per quarter. The Company obtains shares required for
reinvestment through open market purchases or through the issuance of new shares
from its authorized but unissued stock. During 1997, 1998, and 1999, 131,127,
and 83,727 and 101,570 shares, respectively, were required for dividend
reinvestment purposes, of which 3,687, 5,166 and 6,407 shares were considered
new issuances during 1997, 1998, and 1999, respectively. BTM did not participate
in the plan in 1997, 1998 or 1999.
NOTE 14--MANAGEMENT STOCK PLAN
The Company has a management stock plan (the Stock Plan) which has
6.6 million shares of the Company's common stock authorized to be awarded to key
employees and outside directors of the Company at the discretion of the
Executive Compensation and Benefits Committee of the Board of Directors (the
Committee). Committee members and employees on rotational assignment from BTM
are not eligible for stock awards.
The Committee determines the term of each stock option grant, up to a
maximum of ten years from the date of grant. The exercise price of the options
issued under the Stock Plan shall not be less than the fair market value on the
date the option is granted. Unvested restricted stock issued under the Stock
Plan is shown as a reduction to retained earnings. The value of the restricted
shares at the date of grant is amortized to compensation expense over its
vesting period. All cancelled or forfeited options and restricted stock become
available for future grants.
In 1997, 1998 and 1999, the Company granted options to various key
employees, including principal officers, under the Stock Plan. The stock options
vest pro rata on each anniversary of the grant date and become fully exercisable
three years from the grant date, provided that the employee has completed the
specified continuous service requirement. They vest earlier if the employee
dies, is permanently and totally disabled, or retires under certain grant, age,
and service conditions.
The following is a summary of stock option transactions under the Stock
Plan.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
Options outstanding, beginning
of year...................... 1,263,807 $12.13 1,397,178 $15.41 1,740,081 $21.47
Granted.................... 441,900 22.13 533,850 35.08 1,747,750 $34.31
Exercised.................. (289,029) 10.84 (169,995) 13.34 (157,007) $14.65
Forfeited.................. (19,500) 22.13 (20,952) 30.63 (49,551) $33.04
--------- --------- ---------
Options outstanding, end of
year......................... 1,397,178 $15.41 1,740,081 $21.47 3,281,273 $28.46
========= ========= =========
Options exercisable, end of
year......................... 712,107 $11.50 894,432 $13.77 1,266,976 $20.01
========= ========= =========
The weighted-average fair value of options granted was $6.94 during 1997,
$11.99 during 1998, and $9.77 during 1999.
F-71
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED)
The following table summarizes information about stock options outstanding.
OPTIONS OUTSTANDING AT DECEMBER 31, 1999 OPTIONS EXERCISABLE AT
------------------------------------------------- DECEMBER 31, 1999
WEIGHTED-AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 6.67--9.08 154,308 3.1 years $ 8.51 154,308 $ 8.51
11.25--12.83 369,753 4.0 11.77 369,753 11.77
18.29--22.13 539,212 6.1 20.81 433,383 20.48
34.13--44.56 2,218,000 8.7 34.49 309,532 34.94
--------- ---------
3,281,273 1,266,976
========= =========
In 1997, 1998 and 1999, the Company also granted 178,320, 184,935 and 1,050
shares, respectively, of restricted stock to key officers, including executive
officers, under the Stock Plan. The awards of restricted stock vest pro rata on
each anniversary of the grant date and become fully vested four years from the
grant date, provided that the employee has completed the specified continuous
service requirement. They vest earlier if the employee dies, is permanently and
totally disabled, or retires under certain grant, age, and service conditions.
Restricted shareholders have the right to vote their restricted shares and
receive dividends.
The following is a summary of restricted stock transactions under the Stock
Plan.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1998 1999
----------------------------- ----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER OF GRANT DATE NUMBER OF GRANT DATE NUMBER OF GRANT DATE
SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE
---------- ---------------- ---------- ---------------- ---------- ----------------
Restricted stock
awards outstanding,
beginning of year... 1,166,820 $10.04 1,337,217 $11.59 1,504,302 $14.12
Granted............. 178,320 22.18 184,935 33.43 1,050 32.88
Cancelled........... (7,923) 20.08 (17,850) 24.58 (9,246) 27.60
--------- --------- ---------
Restricted stock
awards outstanding,
end of year......... 1,337,217 $11.59 1,504,302 $14.12 1,496,106 $14.05
========= ========= =========
Restricted stock
awards vested, end
of year............. 942,738 $ 9.17 1,115,229 $10.18 1,290,900 $11.84
========= ========= =========
At December 31, 1997, 1998 and 1999, 3,365,586, 2,685,603, and 989,811
shares, respectively, were available for future grants as either stock options
or restricted stock under the Stock Plan.
The Company follows the intrinsic value based method in accounting for its
employee stock-based compensation plan. Accordingly, no compensation cost has
been recognized for its stock option grants. Had compensation cost for the
Company's stock-based plan been determined based on the fair value at the grant
dates for awards under that plan consistent with the method of SFAS No. 123,
"Accounting for Stock-
F-72
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 14--MANAGEMENT STOCK PLAN (CONTINUED)
Based Compensation", the Company's net income and net income per share would
have decreased to the pro forma amounts indicated in the following table.
YEARS ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1998 1999
- -------------------------------------------------------------- -------- -------- --------
Net income As reported $411,296 $466,461 $441,731
Pro forma 410,068 463,998 435,766
Net income applicable to common stock As reported $403,696 $466,461 $441,731
Pro forma 402,468 463,998 435,766
Net income per share--basic As reported $ 2.31 $ 2.66 $ 2.65
Pro forma 2.30 2.65 2.62
Net income per share--diluted As reported $ 2.30 $ 2.65 $ 2.64
Pro forma 2.30 2.64 2.61
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants made in 1997, 1998 and 1999: risk-free interest
rates of 6.6 percent in 1997, 5.8 percent in 1998, and 5.2 percent in 1999;
expected volatility of 26 percent in 1997, 29 percent in 1998, and 30 percent in
1999; expected lives of 6, 6, and 5 years for 1997, 1998, and 1999,
respectively; and expected dividend yields of 2.1 percent in 1997, 1.5 percent
in 1998, and 2.2 percent in 1999.
Effective January 1, 1997, the Company established a Performance Share Plan.
Eligible participants may earn performance share awards to be redeemed in cash
three years after the date of grant. Performance shares are linked to
shareholder value in two ways: (1) the market price of the Company's common
stock, and (2) return on asset, in 1997 and 1998, and return on equity in 1999,
performance measures closely linked to value creation. Eligible participants
generally receive grants of performance shares annually. The total number of
performance shares granted under the plan cannot exceed 600,000. The Company
granted 14,400 shares in 1997, 24,900 shares in 1998 and 22,000 shares in 1999.
In 1998, 2,400 performance shares were forfeited. No performance shares were
forfeited in 1999. The value of a performance share is equal to the market price
of the Company's common stock. All cancelled or forfeited performance shares
become available for future grants.
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. All of the fair values presented
below are as of their respective period ends and have been made under this
definition of fair value unless otherwise disclosed.
It is management's belief that the fair values presented below are
reasonable based on the valuation techniques and data available to the Company
as of December 31, 1998 and 1999, as more fully described below. It should be
noted that the operations of the Company are managed on a going concern basis
and not on a liquidation basis. As a result, the ultimate value realized for the
financial instruments presented could be substantially different when actually
recognized over time through the normal course of operations. Additionally, a
substantial portion of an institution's inherent value is its capitalization and
F-73
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
franchise value. Neither of these components has been given consideration in the
presentation of fair values that follow.
The table below presents the carrying value and fair value of the specified
assets and liabilities held by the Company.
DECEMBER 31,
-----------------------------------------------------
1998 1999
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) VALUE VALUE VALUE VALUE
- ------------------------------------------ ----------- ----------- ----------- -----------
ASSETS
Cash and cash equivalents............... $ 2,678,478 $ 2,678,478 $ 3,158,133 $ 3,158,133
Trading account assets.................. 267,718 267,718 179,935 179,935
Securities available for sale........... 3,638,532 3,638,532 3,210,099 3,210,099
Securities held to maturity............. 160,513 163,244 46,526 45,376
Loans, net of allowance for credit
losses(1)............................. 22,808,435 22,568,873 24,298,638 24,016,569
LIABILITIES
Deposits:
Noninterest bearing................... 10,179,405 10,179,405 9,721,340 9,721,340
Interest bearing...................... 14,328,474 14,343,972 16,535,267 16,536,770
----------- ----------- ----------- -----------
Total deposits...................... 24,507,879 24,523,377 26,256,607 26,258,110
Borrowed funds.......................... 3,083,654 3,081,418 2,805,553 2,805,125
Subordinated capital notes.............. 298,000 298,000 298,000 298,000
UnionBanCal Corporation-obligated
mandatorily redeemable preferred
securities of subsidiary grantor
trust................................. -- -- 350,000 280,000
- ------------------------
(1) Excludes lease financing.
The Company is also a party to financial instruments that are not reflected
on the balance sheet but represent obligations of the Company in the normal
course of business. For information regarding the fair value of off-balance
sheet financial instruments, see Note 16.
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value.
CASH AND CASH EQUIVALENTS: The book value of cash and cash equivalents is
considered a reasonable estimate of fair value.
TRADING ACCOUNT ASSETS: Trading account assets are short term in nature and
valued at market based on quoted market prices or dealer quotes. If a quoted
market price is not available, the recorded amounts are estimated using quoted
market prices for similar securities. Thus, carrying value is considered a
reasonable estimate of fair value for these financial instruments.
SECURITIES: The fair value of securities is based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
F-74
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Securities available for sale are carried at their aggregate fair value, while
securities held to maturity are carried at amortized cost.
LOANS: The fair value for performing fixed and non-reference rate loans was
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
similar remaining maturities and, where available, discount rates were based on
current market rates.
The fair value of performing loans tied to the Company's reference rate with
normal credit risk is assumed to approximate their book value. The fair value
for these floating rate loans with increasing credit risk was estimated by
calculating their present value using a yield the Company would currently
require for loans with similar terms to borrowers with similar credit quality.
Loans that are on nonaccrual status were not included in the loan valuation
methods discussed previously. The fair value of these assets was estimated
assuming these loans were sold at their carrying value less their impairment
allowance.
The fair value of performing mortgage loans was based on quoted market
prices for loans with similar credit and interest rate risk characteristics.
The fair value of credit lines is assumed to approximate their book value.
NONINTEREST BEARING DEPOSITS: The fair value of noninterest bearing
deposits is the amount payable on demand at the reporting date. The fair value
of the demand deposit intangible has not been estimated.
INTEREST BEARING DEPOSITS: The fair value of savings accounts and certain
money market accounts is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit was estimated using rates
currently being offered on certificates with similar maturities.
BORROWED FUNDS: The book values of federal funds purchased and securities
sold under repurchase agreements and other short-term borrowed funds are assumed
to approximate their fair value due to their limited duration characteristics.
The fair value for commercial paper and term federal funds purchased was
estimated using market quotes.
SUBORDINATED CAPITAL NOTES: The book values for variable-rate subordinated
capital notes are assumed to approximate fair market value.
TRUST PREFERRED SECURITIES: The fair value of fixed-rate trust preferred
securities was estimated using market quotes.
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Company is a party to certain derivative and other financial instruments
that are not reflected on the balance sheet but represent obligations or assets
of the Company in the normal course of business. These financial instruments are
used for trading activities of the Company, to meet the needs of customers, and
to reduce the impact on the Company's operating results due to market
fluctuations in currency or interest rates.
F-75
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
These financial instruments involve, to varying degrees, elements of credit
and market risk which are not recognized on the balance sheet. 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. Market risk is the possibility that
future changes in market conditions may make the financial instrument less
valuable.
DERIVATIVE INSTRUMENTS
The fair value of the derivative financial instruments was calculated based
on quoted market prices where available. If quoted market prices were not
available, the Company used the estimated amount it would receive or pay to
offset or terminate the agreements at December 31, 1998 and 1999 based upon the
terms of such contracts relative to prevailing interest rates.
TRADING ACTIVITIES IN DERIVATIVE INSTRUMENTS
The following table reflects the Company's positions relating to trading
activities in derivative instruments. Trading activities include both activities
for the Company's own account and for customers. At December 31, 1998 and 1999,
the majority of the Company's derivative transactions for customers are hedged
with essentially offsetting contracts with other counterparties. The average
fair value of derivatives held or written for trading purposes during the year
is not significant. The notional amount of derivative instruments reflects the
extent of the Company's involvement in these instruments. For interest rate
swap, cap and floor agreements, notional amounts do not represent exposure to
credit or market risk. Notional amounts are not exchanged, but serve as a point
of reference for calculating payments.
F-76
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
The following is a summary of derivative instruments held or written for trading
purposes.
DECEMBER 31,
-----------------------------------------------------------------------
1998 1999
---------------------------------- ----------------------------------
NOTIONAL CREDIT ESTIMATED NOTIONAL CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS RISK(1) FAIR VALUE AMOUNTS RISK(1) FAIR VALUE
- --------------------------------------- ---------- -------- ---------- ---------- -------- ----------
HELD OR WRITTEN FOR TRADING PURPOSES
AND CUSTOMER ACCOMMODATIONS
Foreign exchange forward contracts:
Commitments to purchase.............. $ 451,123 $22,297 $20,675 $ 422,614 $21,914 $20,520
Commitments to sell.................. 553,351 1,878 (21,599) 560,357 2,725 (19,951)
Foreign exchange OTC options:
Options purchased.................... 3,000 1 1 104,370 204 204
Options written...................... 3,000 -- (1) 104,370 -- (204)
Currency swap agreements:
Commitments to pay................... 36,725 1,546 1,546 36,725 5,338 5,338
Commitments to receive............... 36,725 -- (1,436) 36,725 -- (5,250)
Interest rate contracts:
Caps purchased....................... 1,031,599 1,453 1,453 1,111,622 3,311 3,311
Floors purchased..................... 186,564 926 926 579,610 110 110
Caps written......................... 1,031,599 -- (1,453) 1,111,622 -- (3,311)
Floors written....................... 186,564 -- (926) 579,610 -- (110)
Swap contracts:
Pay variable/receive variable...... 58,000 306 -- 40,000 88 --
Pay fixed/receive variable......... 1,040,042 1,049 (41,593) 1,107,472 13,815 7,983
Pay variable/receive fixed......... 1,040,042 44,360 43,430 1,107,472 6,316 (6,402)
- ------------------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
ASSET AND LIABILITY MANAGEMENT DERIVATIVE INSTRUMENTS
Derivative positions are integral components of the Company's designated
asset and liability management activities. Therefore, the Company does not
believe it is meaningful to separately analyze the derivative components of its
risk management activities in isolation from related positions. The Company uses
interest rate derivative instruments as part of its management of asset and
liability positions. Derivatives are used to manage interest rate risk relating
to specified groups of assets and liabilities, including LIBOR based commercial
loans, deposit liabilities, certain subordinated capital notes and trust
preferred securities. The Company uses foreign currency forward contracts as a
means of managing foreign exchange rate risk associated with assets or
liabilities denominated in foreign currencies.
The following table reflects summary information on derivative contracts
used to hedge or modify the Company's risk as of December 31, 1998 and 1999.
Amounts included in the fair value column do not include gains or losses from
changes in the value of the underlying asset or liability being hedged. Notional
F-77
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
amounts are not exchanged, but serve as a point of reference for calculating
payments. For interest rate swap, cap and floor agreements, notional amounts do
not represent exposure to credit or market risk.
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1999
------------------------------------------------- -------------------------------------------------
UNAMORTIZED UNAMORTIZED
PREMIUM PREMIUM
NOTIONAL PAID CREDIT ESTIMATED NOTIONAL PAID CREDIT ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNTS (RECEIVED) RISK(1) FAIR VALUE AMOUNTS (RECEIVED) RISK(1) FAIR VALUE
- -------------------------- ---------- ------------ -------- ---------- ---------- ------------ -------- ----------
HELD FOR ASSET AND
LIABILITY MANAGEMENT
PURPOSES
Foreign exchange forward
contracts:
Commitments to
purchase.............. $ 233,380 $ -- $ 2,185 $ 989 $ 213,025 $ -- $ 1,468 $ 401
Commitments to sell..... 53,607 -- 235 145 32,832 -- 98 48
Currency swap agreements:
Commitments to pay...... 25,432 -- -- (1,104) 24,464 -- -- (3,960)
Interest rate contracts:
Caps purchased.......... -- -- -- -- -- -- --
Floors purchased........ 2,350,000 5,737 24,303 24,303 2,300,000 3,576 1,084 (2,491)
Caps written............ -- -- -- -- -- -- -- --
Floors written.......... 1,350,000 -- -- (3,740) 1,450,000 -- -- (65)
Swap contracts:
Pay variable/receive
fixed............... 525,000 -- 9,755 9,755 900,000 -- 106 (10,165)
- ------------------------------
(1) Credit risk amounts reflect the replacement cost for those contracts in a
gain position in the event of nonperformance by counterparties.
OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
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 payment of a fee or maintenance of compensatory balances. Such
fees are deferred and, upon partial or full exercise of the commitment,
amortized over the life of the loan or, if exercise is deemed remote, amortized
over the commitment period. Since many of the commitments are expected to expire
without being drawn upon, the contractual amounts do not necessarily represent
future cash requirements. With respect to commitments to extend credit and
letters of credit, the Company's exposure to credit risk in the event of
nonperformance by customers is represented by the contractual amount of those
instruments.
Standby letters of credit are provided to customers to assure their
performance to a third party, generally in the production of goods and services
or under contractual commitments in the financial markets. Commercial letters of
credit are issued to customers to facilitate foreign or domestic trade
transactions. The Company charges fees for the issuance of standby and
commercial letters of credit. The majority of these types of commitments have
terms of one year or less and any fees charged are recognized as noninterest
income upon extension of the commitment. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers and is represented by
F-78
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 16-- DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK (CONTINUED)
the contractual amount of those instruments. When deemed necessary, the Company
holds appropriate collateral supporting those commitments.
The Company uses the same credit underwriting policies in granting or
accepting such commitments or contingent obligations as it does for on-balance
sheet instruments, by evaluating customers' credit worthiness. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's evaluation of the customer. The nature of the
collateral varies but may include deposits held in financial institutions,
marketable securities, accounts receivable, inventory, property and equipment,
and real estate. The Company also provides for probable losses from either
commitments to extend credit or standby letters of credit as a component of its
evaluation in determining the adequacy of its allowance for credit losses and
resulting level of provision charged against current period earnings.
The Company's pricing of these financial instruments is based on the credit
quality and other covenants or requirements. Management believes that the
current fees assessed on these off-balance sheet items represent market rates
that would be charged for similar agreements. Based on this belief, the Company
feels that the carrying amounts are reasonable estimates of the fair value of
these financial instruments. At December 31, 1998 and 1999, fair value
represents management's estimate of the unamortized fee income associated with
these instruments. The following is a summary of other financial instruments
with off-balance sheet risk.
DECEMBER 31,
-----------------------------------------------
1998 1999
---------------------- ----------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR
(DOLLARS IN THOUSANDS) AMOUNTS VALUE AMOUNTS VALUE
- --------------------------------- ----------- -------- ----------- --------
Commitments to extend credit..... $14,850,571 $36,592 $16,022,479 $62,947
Standby letters of credit........ 2,215,476 8,523 2,422,032 7,761
Other letters of credit.......... 305,842 -- 352,499 --
The Company conducts securities lending transactions for institutional
customers as a fully disclosed agent, and, at times, indemnifies its customers
against counterparty default. All lending transactions are collateralized,
primarily by cash. The amount of securities lent with indemnification was
$1,259 million and $1,023 million at December 31, 1998 and 1999, respectively.
The market value of the associated collateral was $1,284 million and
$1,043 million at December 31, 1998 and 1999, respectively.
F-79
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 17--RESTRICTIONS ON CASH AND DUE FROM BANKS, SECURITIES, LOANS AND
DIVIDENDS
Federal Reserve Board regulations require the Bank to maintain reserve
balances based on the types and amounts of deposits received. Average reserve
balances were approximately $229 million and $202 million for the years ended
December 31, 1998 and 1999, respectively.
As of December 31, 1998 and 1999, securities carried at $1.7 billion and
$1.7 billion and loans of $2.5 billion and $6.9 billion, respectively, were
pledged as collateral for borrowings, to secure public and trust department
deposits, and for repurchase agreements as required by contract or law.
The Federal Reserve Act restricts the extension of credit by the Bank to BTM
and affiliates and to the Company and its non-bank subsidiaries and requires
that such loans be secured by certain types of collateral. At December 31, 1999,
$129.0 million remained outstanding on six Bankers Commercial Corporation notes
payable to the Bank. The respective notes were fully collateralized with
equipment leases pledged by Bankers Commercial Corporation.
The payment of dividends by the Bank to the Company is subject to the
approval of the Office of the Comptroller of the Currency (OCC) if the total of
all dividends declared in any calendar year exceeds certain calculated amounts.
The payment of dividends is also limited by minimum capital requirements imposed
on national banks by the OCC. At December 31, 1999, the Bank could have declared
dividends aggregating $597 million without prior regulatory approval.
NOTE 18--REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and the Bank's prompt
corrective action classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. Prompt
corrective action provisions are not applicable to Bank Holding Companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to quarterly average assets (as defined). Management believes, as of
December 31, 1998 and 1999, that the Company and the Bank met all capital
adequacy requirements to which they are subject.
On February 19, 1999, the Company issued $350 million of trust preferred
securities, which qualify as Tier 1 capital. See Note 12 for a complete
description of these securities.
As of December 31, 1998 and 1999, the most recent notification from the OCC
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized", the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank's category.
F-80
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 18--REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Company's and the Bank's capital amounts and ratios are presented in the
following tables.
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
--------------------- ----------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------ ---------- -------- ------------------- ------------
CAPITAL RATIOS FOR THE COMPANY:
As of December 31, 1998:
Total capital (to risk-weighted assets)............... $3,570,803 11.61% > or = to $2,460,243 > or = to 8.0%
Tier 1 capital (to risk-weighted assets).............. 2,965,865 9.64 > or = to 1,230,122 > or = to 4.0
Tier 1 capital (to quarterly average assets)(1)....... 2,965,865 9.38 > or = to 1,265,081 > or = to 4.0
As of December 31, 1999
Total capital (to risk-weighted assets)............... $3,925,684 11.79% > or = to $2,663,054 > or = to 8.0%
Tier 1 capital (to risk-weighted assets).............. 3,308,912 9.94 > or = to 1,331,527 > or = to 4.0
Tier 1 capital (to quarterly average assets)(1)....... 3,308,912 10.10 > or = to 1,310,614 > or = to 4.0
- ------------------------
(1) Excludes certain intangible assets.
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
--------------------- -----------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- -------------------------------------- ---------- -------- ------------------- -------------
CAPITAL RATIOS FOR THE BANK:
As of December 31, 1998:
Total capital (to risk-weighted
assets)............................. $3,396,596 11.16% > or = to $2,433,917 > or = to 8.0
Tier 1 capital (to risk-weighted
assets)............................. 2,895,757 9.52 > or = to 1,216,959 > or = to 4.0
Tier 1 capital (to quarterly average
assets)(1).......................... 2,895,757 9.21 > or = to 1,257,875 > or = to 4.0
As of December 31, 1999
Total capital (to risk-weighted
assets)............................. $3,614,651 11.00% > or = to $2,628,046 > or = to 8.0
Tier 1 capital (to risk-weighted
assets)............................. 3,103,324 9.45 > or = to 1,314,023 > or = to 4.0
Tier 1 capital (to quarterly average
assets)(1).......................... 3,103,324 9.55 > or = to 1,300,283 > or = to 4.0
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
ACTION PROVISIONS
-----------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO
- -------------------------------------- ------------------- -------------
CAPITAL RATIOS FOR THE BANK:
As of December 31, 1998:
Total capital (to risk-weighted
assets)............................. > or = to $3,042,396 > or = to 10.0
Tier 1 capital (to risk-weighted
assets)............................. > or = to 1,825,438 > or = to 6.0
Tier 1 capital (to quarterly average
assets)(1).......................... > or = to 1,572,343 > or = to 5.0
As of December 31, 1999
Total capital (to risk-weighted
assets)............................. > or = to $3,285,058 > or = to 10.0
Tier 1 capital (to risk-weighted
assets)............................. > or = to 1,971,035 > or = to 6.0
Tier 1 capital (to quarterly average
assets)(1).......................... > or = to 1,625,354 > or = to 5.0
- ------------------------
(1) Excludes certain intangible assets.
NOTE 19--EARNINGS PER SHARE
Basic EPS is computed by dividing net income after preferred dividends by
the weighted average number of common shares outstanding during the period.
Diluted EPS is computed based on the weighted average number of common shares
outstanding adjusted for common stock equivalents, which include
F-81
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 19--EARNINGS PER SHARE (CONTINUED)
stock options. The following table presents a reconciliation of basic and
diluted EPS for the years ended December 31, 1997, 1998 and 1999:
DECEMBER 31,
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED
- --------------------------------------------- -------- -------- -------- -------- -------- --------
Net income................................ $411,296 $411,296 $466,461 $466,461 $441,731 $441,731
Less: Dividends on preferred stock........ (7,600) (7,600) -- -- -- --
-------- -------- -------- -------- -------- --------
Income available to common shareholders... $403,696 $403,696 $466,461 $466,461 $441,731 $441,731
======== ======== ======== ======== ======== ========
Weighted average common shares outstanding... 174,683 174,683 175,127 175,127 166,382 166,382
Additional shares due to:
Assumed conversion of dilutive stock
options............................... -- 506 -- 610 -- 767
-------- -------- -------- -------- -------- --------
Adjusted weighted average common shares
outstanding............................. 174,683 175,189 175,127 175,737 166,382 167,149
======== ======== ======== ======== ======== ========
Net income per share...................... $ 2.31 $ 2.30 $ 2.66 $ 2.65 $ 2.65 $ 2.64
======== ======== ======== ======== ======== ========
There were no anti-dilutive options in 1997. Options to 519,600 shares of
common stock at $35 per share were outstanding but not included in the
computation of diluted EPS in 1998. Options to purchase 1,500 shares of common
stock at $39.25 per share and options to purchase 23,000 shares of common stock
at $44.56 per share were outstanding but not included in the computation of
diluted EPS in 1999.
NOTE 20--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the components of accumulated other
comprehensive income (loss):
FOREIGN NET UNREALIZED GAINS (LOSSES)
CURRENCY TRANSLATION ON SECURITIES AVAILABLE FOR SALE
------------------------------ ---------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ---------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999 1997 1998 1999
- ------------------------------------- -------- -------- -------- --------- --------- ---------
Beginning balance.................... $ (3,183) $(12,458) $(9,651) $14,064 $19,886 $ 29,109
Change during the year............... (9,275) 2,807 938 5,822 9,223 (61,657)
-------- -------- ------- ------- ------- --------
Ending balance....................... $(12,458) $ (9,651) $(8,713) $19,886 $29,109 $(32,548)
======== ======== ======= ======= ======= ========
MINIMUM PENSION ACCUMULATED OTHER
LIABILITY ADJUSTMENT COMPREHENSIVE INCOME (LOSS)
------------------------------ ------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999 1997 1998 1999
- --------------------------------------- -------- -------- -------- -------- -------- --------
Beginning balance...................... $ -- $ -- $(1,748) $10,881 $ 7,428 $ 17,710
Change during the year................. -- (1,748) 1,059 (3,453) 10,282 (59,660)
------- ------- ------- ------- ------- --------
Ending balance......................... $ -- $(1,748) $ (689) $ 7,428 $17,710 $(41,950)
======= ======= ======= ======= ======= ========
F-82
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 21--CONTINGENCIES
The Company is subject to various pending and threatened legal actions that
arise in the normal course of business. The Company maintains reserves for
losses from legal actions that are both probable and estimable. In the opinion
of management, the disposition of claims currently pending will not have a
material adverse effect on the Company's financial position or results of
operations.
NOTE 22--TRANSACTIONS WITH AFFILIATES
The Company had, and expects to have in the future, banking transactions and
other transactions in the ordinary course of business with BTM and with its
affiliates and associates. During 1997, 1998 and 1999, such transactions
included, but were not limited to, origination, participation, servicing and
remarketing of loans and leases, purchase and sale of acceptances, interest rate
derivatives and foreign exchange transactions, funds transfers, custodianships,
electronic data processing, investment advice and management, deposits and
credit examination, and trust services. In the opinion of management, such
transactions were made at prevailing rates, terms, and conditions and do not
involve more than the normal risk of collectibility or present other unfavorable
features. In addition, some compensation for services rendered to the Company is
paid to the expatriate officers from BTM, and reimbursed by the Company to BTM
under a services agreement.
NOTE 23--BUSINESS SEGMENTS
The Company is organized based on the products and services that it offers
and operates in four principal areas:
- The Community Banking and Investment Services Group provides loan products
and deposit services primarily to consumers and small businesses, as well
as fiduciary, private banking, investment and asset management services
for individuals and institutions.
- The Commercial Financial Services Group provides a wide variety of banking
services, principally loans, to commercial customers.
- The International Banking Group provides trade-finance products to banks,
and extends primarily short-term credit to corporations engaged in
international business. The group's revenue predominately relates to
foreign customers.
- The Global Markets Group manages the Company's securities portfolio,
trading operations, wholesale funding needs, and interest rate and
liquidity risk.
The information, set forth in the table on page F-84, reflects the condensed
income statements and a selected balance sheet item by business unit. The
information presented does not necessarily represent the business units'
financial condition and results of operations as if they were independent
entities. Unlike financial accounting, there is no authoritative body of
guidance for management accounting equivalent to generally accepted accounting
principles. Consequently, reported results are not necessarily comparable with
those presented by other companies.
The information in this table is derived from the internal management
reporting system used by management to measure the performance of the segments
and the Company overall. The management reporting system assigns balance sheet
and income statement items to each segment based on internal management
accounting policies. Net interest income is determined by the Company's internal
funds
F-83
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 23--BUSINESS SEGMENTS (CONTINUED)
transfer pricing system, which assigns a cost of funds or a credit for funds to
assets or liabilities based on their type, maturity or repricing
characteristics. Noninterest income and expense directly attributable to a
segment are assigned to that business, other than restructuring charges.
Indirect costs, such as overhead, operations, and technology expense, are
allocated to the segments based on studies of billable unit costs for product or
data processing. With the Company's adoption of a risk-adjusted return on
capital (RAROC) methodology, credit expense is charged to businesses based upon
expected losses arising from credit risk. In addition, the attribution of
economic capital is related to unexpected losses arising from credit, market and
operational risks. Depreciation and capital expenditures are not used by
management when measuring the performance of the segments.
"Other" is comprised of goodwill, merger and integration expense,
restructuring charge, certain parent company non-bank subsidiaries, the
elimination of the fully taxable-equivalent amounts, the unallocated allowance
and related provision for credit losses, the net impact of transfer pricing, the
earnings associated with the unallocated equity capital, and the residual costs
of support groups. In addition, it includes two units, the Credit and Compliance
Group, which manages nonperforming assets, and the Pacific Rim Group, which
offers financial products to Asian-owned subsidiaries located in the U.S. On an
individual basis, none of the items in "Other" are significant to the Company's
business.
COMMUNITY BANKING COMMERCIAL FINANCIAL INTERNATIONAL
AND INVESTMENT SERVICES GROUP SERVICES GROUP BANKING GROUP
---------------------------------- ------------------------------ ------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
---------------------------------- ------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999 1997 1998 1999
-------- ---------- ---------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income...... $699,122 $ 698,103 $ 741,007 $404,944 $457,703 $559,498 $ 52,283 $ 56,804 $ 48,236
Noninterest income....... 275,186 327,862 363,997 96,175 105,458 120,390 62,238 65,834 66,830
-------- ---------- ---------- -------- -------- -------- -------- -------- --------
Total revenue............ 974,308 1,025,965 1,105,004 501,119 563,161 679,888 114,521 122,638 115,066
Noninterest expense(2)... 697,518 738,338 776,326 220,284 245,248 250,600 64,877 66,967 65,516
Credit expense
(income)............... 73,138 63,718 61,396 60,425 72,532 92,098 18,329 14,665 12,217
-------- ---------- ---------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit) and
performance center
earnings (expense)..... 203,652 223,909 267,282 220,410 245,381 337,190 31,315 41,006 37,333
Performance center
earnings
(expense)(1)........... 8,605 7,888 6,120 3,288 2,728 1,859 (3,156) (4,543) (2,693)
-------- ---------- ---------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit).............. 212,257 231,797 273,402 223,698 248,109 339,049 28,159 36,463 34,640
Income tax expense
(benefit).............. 85,871 91,583 105,662 88,832 96,268 124,414 11,499 13,684 13,252
-------- ---------- ---------- -------- -------- -------- -------- -------- --------
Net income (loss)........ $126,386 $ 140,214 $ 167,740 $134,866 $151,841 $214,635 $ 16,660 $ 22,779 $ 21,388
======== ========== ========== ======== ======== ======== ======== ======== ========
Total assets (DOLLARS IN
MILLIONS).............. $ 11,066 $ 10,604 $ 9,139 $ 11,172 $ 13,543 $ 16,874 $ 2,657 $ 1,717 $ 1,353
======== ========== ========== ======== ======== ======== ======== ======== ========
F-84
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 23--BUSINESS SEGMENTS (CONTINUED)
GLOBAL
MARKETS GROUP OTHER
------------------------------ ---------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ---------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- --------- --------- ---------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income........ $ 14,598 $41,972 $44,957 $ 60,735 $ 63,641 $ 22,135
Noninterest income......... 21,166 29,854 25,521 8,236 4,523 10,021
-------- ------- ------- --------- --------- ---------
Total revenue.............. 35,764 71,826 70,478 68,971 68,164 32,156
Noninterest expense(2)..... 22,556 26,718 22,935 39,430 57,947 166,596
Credit expense (income).... -- -- -- (151,892) (105,915) (100,711)
-------- ------- ------- --------- --------- ---------
Income (loss) before income
tax expense (benefit) and
performance center
earnings (expense)....... 13,208 45,108 47,543 181,433 116,132 (33,729)
Performance center earnings
(expense)(1)............. (10,194) (9,231) (7,350) 1,457 3,158 2,064
-------- ------- ------- --------- --------- ---------
Income (loss) before income
tax expense (benefit).... 3,014 35,877 40,193 182,890 119,290 (31,665)
Income tax expense
(benefit)................ 1,206 13,958 15,470 51,314 (10,418) (44,910)
-------- ------- ------- --------- --------- ---------
Net income (loss).......... $ 1,808 $21,919 $24,723 $ 131,576 $ 129,708 $ 13,245
======== ======= ======= ========= ========= =========
Total assets (DOLLARS IN
MILLIONS)................ $ 3,961 $ 4,479 $ 3,973 $ 1,729 $ 1,933 $ 2,346
======== ======= ======= ========= ========= =========
UNIONBANCAL
CORPORATION
------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS):
Net interest income........ $1,231,682 $1,318,223 $1,415,833
Noninterest income......... 463,001 533,531 586,759
---------- ---------- ----------
Total revenue.............. 1,694,683 1,851,754 2,002,592
Noninterest expense(2)..... 1,044,665 1,135,218 1,281,973
Credit expense (income).... -- 45,000 65,000
---------- ---------- ----------
Income (loss) before income
tax expense (benefit) and
performance center
earnings (expense)....... 650,018 671,536 655,619
Performance center earnings
(expense)(1)............. -- -- --
---------- ---------- ----------
Income (loss) before income
tax expense (benefit).... 650,018 671,536 655,619
Income tax expense
(benefit)................ 238,722 205,075 213,888
---------- ---------- ----------
Net income (loss).......... $ 411,296 $ 466,461 $ 441,731
========== ========== ==========
Total assets (DOLLARS IN
MILLIONS)................ $ 30,585 $ 32,276 $ 33,685
========== ========== ==========
- ------------------------------
(1) Performance center earnings (expense) represent the allocation of net
interest income, noninterest income and noninterest expense between the
business segments for products and services originated in one segment but
managed by another.
(2) "Other" includes 3rd quarter 1999 restructuring charge of $85.0 million
($55.2 million, net of tax).
na = not applicable
F-85
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1998 1999
- ------------------------------------------------------------ ---------- ----------
ASSETS
Cash and due from banks................................... $ 123,976 $ 167,171
Investment in and advances to subsidiaries................ 3,264,207 3,510,326
Other assets.............................................. 5,252 17,072
---------- ----------
Total assets............................................ $3,393,435 $3,694,569
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper.......................................... $ 99,958 $ 97,985
Other liabilities......................................... 35,233 48,291
Subordinated capital notes................................ 200,000 200,000
Junior subordinated debt payable to subsidiary grantor
trust................................................... -- 360,825
---------- ----------
Total liabilities....................................... 335,191 707,101
Shareholders' equity...................................... 3,058,244 2,987,468
---------- ----------
Total liabilities and shareholders' equity.............. $3,393,435 $3,694,569
========== ==========
F-86
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ------------------------------------------------------------ -------- -------- --------
INCOME:
Dividends from bank subsidiary............................ $ 85,660 $ 98,159 $227,099
Dividends from nonbank subsidiaries....................... -- 23,000 --
Interest income on advances to subsidiaries and deposits
in bank................................................. 12,217 11,744 15,120
Other income.............................................. 1,040 404 1,292
-------- -------- --------
Total income.......................................... 98,917 133,307 243,511
-------- -------- --------
EXPENSE:
Interest expense.......................................... 11,174 15,573 41,736
Other expense, net........................................ 1,583 2,706 3,203
-------- -------- --------
Total expense......................................... 12,757 18,279 44,939
-------- -------- --------
Income before income taxes and equity in undistributed net
income of subsidiaries.................................. 86,160 115,028 198,572
Income tax expense (benefit).............................. 204 (2,346) (11,266)
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries............................................ 85,956 117,374 209,838
Equity in undistributed net income (loss) of subsidiaries:
Bank subsidiary......................................... 314,739 360,738 208,699
Nonbank subsidiaries(1)................................. 10,601 (11,651) 23,194
-------- -------- --------
NET INCOME.................................................. $411,296 $466,461 $441,731
======== ======== ========
- ------------------------
(1) In 1998, the amount represents dividends distributed by nonbank
subsidiaries in excess of their 1998 net income.
F-87
UNIONBANCAL CORPORATION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 24--CONDENSED UNIONBANCAL CORPORATION UNCONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN THOUSANDS) 1997 1998 1999
- ---------------------------------------------------------- --------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 411,296 $ 466,461 $ 441,731
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net (income) loss of
subsidiaries........................................ (325,340) (349,087) (231,893)
Other, net............................................ 1,059 (6,007) 839
--------- --------- -----------
Net cash provided by operating activities........... 87,015 111,367 210,677
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to subsidiaries................................ (130,805) (34,747) (79,370)
Repayment of advances to subsidiaries................... 76,104 18,088 8,766
--------- --------- -----------
Net cash provided (used) by investing activities.... (54,701) (16,659) (70,604)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term borrowings........ -- 99,958 (1,973)
Maturity and redemption of subordinated capital notes
and long term debt.................................... (50,000) (50,000) --
Proceeds from issuance of junior subordinated debt
payable to subsidiary grantor trust................... -- -- 360,825
Proceeds from issuance of subordinated capital notes.... 200,000 -- --
Payments of cash dividends.............................. (93,303) (98,160) (127,119)
Redemption of preferred stock........................... (135,000) -- --
Repurchase of common stock.............................. -- -- (328,662)
Other, net.............................................. 9,119 10,598 51
--------- --------- -----------
Net cash used by financing activities............... (69,184) (37,604) (96,878)
--------- --------- -----------
Net increase (decrease) in cash and due from banks........ (36,870) 57,104 43,195
Cash and due from banks at beginning of year.............. 103,742 66,872 123,976
--------- --------- -----------
Cash and due from banks at end of year.................... $ 66,872 $ 123,976 $ 167,171
========= ========= ===========
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest................................................ $ 9,814 $ 16,056 $ 35,828
Income taxes............................................ 1,148 (4,836) 137
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Dividends declared but unpaid........................... $ 24,528 $ 33,300 $ 41,172
F-88
UNIONBANCAL CORPORATION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NOTE 25--SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Certain amounts in the following unaudited quarterly financial information
have been reclassified to conform with current presentation. In the opinion of
management, all adjustments necessary to fairly present the results of
operations have been made.
1998 QUARTERS ENDED
------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------- -------- -------- ------------ -----------
Interest income.................................. $508,653 $511,996 $535,973 $528,557
Interest expense................................. 191,203 186,440 199,340 189,973
-------- -------- -------- --------
Net interest income.............................. 317,450 325,556 336,633 338,584
Provision for credit losses...................... 20,000 15,000 10,000 --
Noninterest income............................... 128,030 147,994 123,925 133,582
Noninterest expense.............................. 268,475 277,325 290,378 299,040
-------- -------- -------- --------
Income before income taxes....................... 157,005 181,225 160,180 173,126
Income tax expense............................... 61,428 72,704 11,913 59,030
-------- -------- -------- --------
Net income....................................... $ 95,577 $108,521 $148,267 $114,096
======== ======== ======== ========
Net income per common share--basic............... $ 0.55 $ 0.62 $ 0.85 $ 0.65
======== ======== ======== ========
Net income per common share--diluted............. $ 0.54 $ 0.62 $ 0.84 $ 0.65
======== ======== ======== ========
Dividends per share(1)........................... $ 0.14 $ 0.14 $ 0.14 $ 0.19
======== ======== ======== ========
1999 QUARTERS ENDED
------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------- -------- -------- ------------ -----------
Interest income.................................. $517,093 $525,838 $547,006 $571,970
Interest expense................................. 177,272 178,675 186,993 203,134
-------- -------- -------- --------
Net interest income.............................. 339,821 347,163 360,013 368,836
Provision for credit losses...................... 5,000 10,000 20,000 30,000
Noninterest income............................... 139,308 144,798 148,349 154,304
Noninterest expense.............................. 301,164 305,229 384,298 291,282
-------- -------- -------- --------
Income before income taxes....................... 172,965 176,732 104,064 201,858
Income tax expense............................... 54,470 62,005 32,483 64,930
-------- -------- -------- --------
Net income....................................... $118,495 $114,727 $ 71,581 $136,928
======== ======== ======== ========
Net income per common share--basic............... $ 0.69 $ 0.70 $ 0.43 $ 0.83
======== ======== ======== ========
Net income per common share--diluted............. $ 0.69 $ 0.69 $ 0.43 $ 0.83
======== ======== ======== ========
Dividends per share(1)........................... $ 0.19 $ 0.19 $ 0.19 $ 0.25
======== ======== ======== ========
- ------------------------
(1) Dividends per share are based on the Company's common stock outstanding as
of the declaration date.
F-89
UNIONBANCAL CORPORATION AND SUBSIDIARIES
MANAGEMENT STATEMENT
The management of UnionBanCal Corporation is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgments
and estimates made by management.
We maintain a system of internal accounting controls to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and recorded properly to permit the
preparation of financial statements in accordance with generally accepted
accounting principles. Management recognizes that even a highly effective
internal control system has inherent risks, including the possibility of human
error and the circumvention or overriding of controls, and that the
effectiveness of an internal control system can change with circumstances.
However, management believes that the internal control system provides
reasonable assurance that errors or irregularities that could be material to the
financial statements would be prevented or detected on a timely basis and
corrected through the normal course of business. As of December 31, 1999,
management believes that the internal controls are in place and operating
effectively.
The Audit and Examining Committee of the Board of Directors is comprised
entirely of outside directors who are independent of our management; it includes
members with banking or related financial management expertise and who are not
large customers of Union Bank of California, N.A. The Audit and Examining
Committee has access to outside counsel. The Audit and Examining Committee is
responsible for recommending to the Board of Directors the selection of
independent auditors. It meets periodically with management, the independent
auditors, and the internal auditors to ensure that they are carrying out their
responsibilities. The Audit and Examining Committee is also responsible for
performing an oversight role by reviewing and monitoring our financial,
accounting, and auditing procedures in addition to reviewing our financial
reports. The independent auditors and internal auditors have full and free
access to the Audit and Examining Committee, with or without the presence of
management, to discuss the adequacy of the internal control structure for
financial reporting and any other matters which they believe should be brought
to the attention of the Audit and Examining Committee.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, who were given unrestricted access to all financial
records and related data, including minutes of all meetings of shareholders, the
Board of Directors and committees of the Board. Management believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The independent auditors' report is presented on page F-91.
/s/ TAKAHIRO MORIGUCHI
------------------------------------------------
Takahiro Moriguchi
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ YOSHIHIKO SOMEYA
------------------------------------------------
Yoshihiko Someya
DEPUTY CHAIRMAN OF THE BOARD
/s/ DAVID I. MATSON
------------------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
/s/ DAVID A. ANDERSON
------------------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
F-90
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
UnionBanCal Corporation:
We have audited the accompanying consolidated balance sheets of UnionBanCal
Corporation and subsidiaries (the "Company") as of December 31, 1998 and 1999,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of UnionBanCal Corporation and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Francisco, California
January 28, 2000
F-91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, UnionBanCal Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION
(Registrant)
By: /s/ TAKAHIRO MORIGUCHI
-----------------------------------------
Takahiro Moriguchi
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ DAVID I. MATSON
-----------------------------------------
David I. Matson
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
By: /s/ DAVID A. ANDERSON
-----------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
Date: March 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of UnionBanCal
Corporation and in the capacities and on the date indicated below.
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director
Richard D. Farman
*
------------------------------------------- Director
Stanley F. Farrar
*
------------------------------------------- Director
Herman E. Gallegos
*
------------------------------------------- Director
Jack L. Hancock
II-1
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director
Richard C. Hartnack
*
------------------------------------------- Director
Kaoru Hayama
------------------------------------------- Director
Satoru Kishi
*
------------------------------------------- Director
Harry W. Low
*
------------------------------------------- Director
Mary S. Metz
*
------------------------------------------- Director
Raymond E. Miles
*
------------------------------------------- Director
Takahiro Moriguchi
------------------------------------------- Director
J. Fernando Niebla
*
------------------------------------------- Director
Sidney R. Petersen
*
------------------------------------------- Director
Carl W. Robertson
*
------------------------------------------- Director
Yoshihiko Someya
*
------------------------------------------- Director
Henry T. Swigert
*
------------------------------------------- Director
Robert M. Walker
II-2
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director
Hiroshi Watanabe
------------------------------------------- Director
Kenji Yoshizawa
*By /s/ JOHN H. MCGUCKIN JR.
--------------------------------------
John H. McGuckin Jr.
ATTORNEY-IN-FACT
Dated: March 15, 2000
II-3