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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
COMMISSION FILE NUMBER 1-15081
UNIONBANCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-1234979
(State of Incorporation) (I.R.S. Employer Identification No.)
400 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104-1302
(Address and zip code of principal executive offices)
Registrant's telephone number: (415) 765-2969
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Number of shares of Common Stock outstanding at April 29, 2005: 144,716,690
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UNIONBANCAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I
FINANCIAL INFORMATION
Consolidated Financial Highlights........................................ 2
Item 1. Financial Statements:
Condensed Consolidated Statements of Income............................ 3
Condensed Consolidated Balance Sheets.................................. 4
Condensed Consolidated Statements of Changes in Stockholders' Equity... 5
Condensed Consolidated Statements of Cash Flows........................ 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Introduction........................................................... 21
Executive Overview..................................................... 21
Critical Accounting Policies........................................... 22
Financial Performance.................................................. 23
Net Interest Income.................................................... 25
Noninterest Income..................................................... 27
Noninterest Expense.................................................... 27
Income Tax Expense..................................................... 28
Loans.................................................................. 28
Cross-Border Outstandings.............................................. 30
Provision for Loan Losses.............................................. 30
Allowance for Credit Losses............................................ 30
Nonperforming Assets................................................... 34
Loans 90 Days or More Past Due and Still Accruing...................... 35
Quantitative and Qualitative Disclosures About Market Risk............. 35
Liquidity Risk......................................................... 37
Regulatory Capital..................................................... 38
Business Segments...................................................... 38
Regulatory Matters..................................................... 46
Factors That May Affect Future Results................................. 46
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 52
Item 4. Controls and Procedures............................................ 52
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................ 53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 53
Item 4. Submission of Matters to a Vote of Security Holders.............. 54
Item 6. Exhibits......................................................... 55
Signatures............................................................... 56
PART I. FINANCIAL INFORMATION
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
AS OF AND FOR THE
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31, PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2005 CHANGE
- -------------------------------------------------------------- ------------ ------------ -------
RESULTS OF OPERATIONS:
Net interest income(1)...................................... $ 401,223 $ 441,854 10.13%
(Reversal of) provision for loan losses..................... (5,000) (8,000) 60.00
Noninterest income.......................................... 211,205 222,761 5.47
Noninterest expense(2)...................................... 373,106 407,467 9.21
------------ ------------
Income before income taxes(1)............................... 244,322 265,148 8.52
Taxable-equivalent adjustment............................... 802 1,055 31.55
Income tax expense.......................................... 86,033 82,116 (4.55)
------------ ------------
Net income.................................................. $ 157,487 $ 181,977 15.55
============ ============
PER COMMON SHARE:
Net income--basic........................................... $ 1.07 $ 1.24 15.89%
Net income--diluted......................................... 1.05 1.21 15.24
Dividends(3)................................................ 0.31 0.36 16.13
Book value (end of period).................................. 27.12 28.41 4.76
Common shares outstanding (end of period)(4)................ 147,474,843 144,575,615 (1.97)
Weighted average common shares outstanding--basic(4)........ 147,400,298 146,997,649 (0.27)
Weighted average common shares outstanding--diluted(4)...... 149,952,021 149,915,503 (0.02)
BALANCE SHEET (END OF PERIOD):
Total assets................................................ $ 46,102,177 $ 49,432,871 7.22%
Total loans................................................. 26,036,305 31,365,540 20.47
Nonaccrual loans............................................ 256,741 101,904 (60.31)
Nonperforming assets........................................ 262,894 107,136 (59.25)
Total deposits.............................................. 39,005,555 41,711,266 6.94
Medium and long-term debt................................... 836,023 803,233 (3.92)
Junior subordinated debt.................................... 16,243 15,677 (3.48)
Stockholders' equity........................................ 3,999,061 4,107,223 2.70
BALANCE SHEET (PERIOD AVERAGE):
Total assets................................................ $ 43,051,182 $ 48,277,736 12.14%
Total loans................................................. 26,141,856 31,302,779 19.74
Earning assets.............................................. 38,876,228 43,461,399 11.79
Total deposits.............................................. 35,939,525 39,668,832 10.38
Stockholders' equity........................................ 3,949,922 4,208,650 6.55
FINANCIAL RATIOS:
Return on average assets(5)................................. 1.47% 1.53%
Return on average stockholders' equity(5)................... 16.04 17.54
Efficiency ratio(6)......................................... 60.84 60.80
Net interest margin(1)...................................... 4.14 4.09
Dividend payout ratio....................................... 28.97 29.03
Tangible equity ratio....................................... 7.92 7.36
Tier 1 risk-based capital ratio............................. 10.29 9.06
Total risk-based capital ratio.............................. 13.06 11.41
Leverage ratio.............................................. 8.24 7.79
Allowance for credit losses to total loans(7)............... 2.00 1.56
Allowance for credit losses to nonaccrual loans(7).......... 202.97 480.46
Net loans charged off (recovered) to average total loans(5). 0.19 (0.07)
Nonperforming assets to total loans and foreclosed assets... 1.01 0.34
Nonperforming assets to total assets........................ 0.57 0.22
- ---------------------------
(1) Amounts are on a taxable-equivalent basis using the federal statutory tax
rate of 35 percent.
(2) Included in noninterest expense at March 31, 2005 was $3 million of
provision for losses on off-balance sheet commitments.
(3) Dividends per share reflect dividends declared on UnionBanCal Corporation's
common stock outstanding as of the declaration date.
(4) Common shares outstanding reflects common shares issued less treasury
shares.
(5) Annualized.
(6) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income) and the provision for losses on off-balance sheet
commitments, as a percentage of net interest income (taxable-equivalent
basis) and noninterest income.
(7) The allowance for credit losses ratios include the allowance for losses on
off-balance sheet commitments.
2
ITEM 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2005
- --------------------------------------------------------------- -------- --------
INTEREST INCOME
Loans........................................................ $335,329 $415,765
Securities................................................... 105,846 100,769
Interest bearing deposits in banks........................... 908 2,102
Federal funds sold and securities purchased under
resale agreements.......................................... 1,959 2,373
Trading account assets....................................... 557 842
-------- --------
Total interest income...................................... 444,599 521,851
-------- --------
INTEREST EXPENSE
Domestic deposits............................................ 33,610 54,562
Foreign deposits............................................. 2,132 6,176
Federal funds purchased and securities sold under
repurchase agreements...................................... 681 7,455
Commercial paper............................................. 1,135 4,560
Medium and long-term debt.................................... 3,139 6,532
Trust notes.................................................. 2,181 238
Other borrowed funds......................................... 1,300 1,529
-------- --------
Total interest expense..................................... 44,178 81,052
-------- --------
NET INTEREST INCOME............................................ 400,421 440,799
(Reversal of) provision for loan losses(1)................... (5,000) (8,000)
-------- --------
Net interest income after (reversal of) provision
for loan losses........................................... 405,421 448,799
-------- --------
NONINTEREST INCOME
Service charges on deposit accounts.......................... 81,096 80,455
Trust and investment management fees......................... 35,822 41,963
Insurance commissions........................................ 21,735 22,017
International commissions and fees........................... 17,545 17,674
Brokerage commissions and fees............................... 8,297 8,972
Foreign exchange gains, net.................................. 8,344 8,940
Merchant banking fees........................................ 7,467 6,266
Card processing fees, net.................................... 8,792 5,607
Securities gains, net........................................ 1,622 344
Other........................................................ 20,485 30,523
-------- --------
Total noninterest income................................... 211,205 222,761
-------- --------
NONINTEREST EXPENSE
Salaries and employee benefits............................... 219,423 239,480
Net occupancy................................................ 31,582 33,525
Equipment.................................................... 17,271 17,733
Software..................................................... 12,995 14,628
Professional services........................................ 11,303 13,710
Communications............................................... 13,410 12,775
Foreclosed asset expense..................................... 519 406
Provision for losses on off-balance sheet
commitments(1)............................................. -- 3,000
Other........................................................ 66,603 72,210
-------- --------
Total noninterest expense.................................. 373,106 407,467
-------- --------
Income before income taxes................................... 243,520 264,093
Income tax expense........................................... 86,033 82,116
-------- --------
NET INCOME..................................................... $157,487 $181,977
======== ========
NET INCOME PER COMMON SHARE--BASIC............................. $ 1.07 $ 1.24
======== ========
NET INCOME PER COMMON SHARE--DILUTED........................... $ 1.05 $ 1.21
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC.............. 147,400 146,998
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED............ 149,952 149,916
======== ========
- ------------------------------
(1) For the quarter ended March 31, 2005, the net change in the allowance for
losses on off-balance sheet commitments is recognized separately from the
change in the allowance for loan losses. Prior periods have not been
restated.
See accompanying notes to condensed consolidated financial statements.
3
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED)
MARCH 31, DECEMBER 31, MARCH 31,
(DOLLARS IN THOUSANDS) 2004 2004 2005
- ---------------------------------------------------- ----------- ------------ -----------
ASSETS
Cash and due from banks............................. $ 2,154,170 $ 2,111,185 $ 1,962,503
Interest bearing deposits in banks.................. 243,585 491,905 297,697
Federal funds sold and securities purchased under
resale agreements................................. 3,517,500 944,950 1,695,835
----------- ------------ -----------
Total cash and cash equivalents................. 5,915,255 3,548,040 3,956,035
Trading account assets.............................. 285,305 236,331 236,058
Securities available for sale:
Securities pledged as collateral.................. 97,040 144,240 251,657
Held in portfolio................................. 11,496,366 11,000,754 10,980,823
Loans (net of allowance for loan losses: March 31,
2004, $521,111; December 31, 2004, $407,156;
March 31, 2005, $404,231)(1)...................... 25,515,194 30,309,800 30,961,309
Due from customers on acceptances................... 50,554 55,914 55,872
Premises and equipment, net......................... 523,197 530,431 523,920
Intangible assets................................... 61,181 61,737 56,751
Goodwill............................................ 314,994 450,961 450,125
Other assets........................................ 1,843,091 1,759,813 1,960,321
----------- ------------ -----------
Total assets.................................... $46,102,177 $ 48,098,021 $49,432,871
=========== ============ ===========
LIABILITIES
Domestic deposits:
Noninterest bearing............................... $18,736,656 $ 19,205,596 $20,554,303
Interest bearing.................................. 18,238,967 19,480,868 19,449,197
Foreign deposits:
Noninterest bearing............................... 661,004 435,999 397,765
Interest bearing.................................. 1,368,928 1,053,373 1,310,001
----------- ------------ -----------
Total deposits.................................. 39,005,555 40,175,836 41,711,266
Federal funds purchased and securities sold under
repurchase agreements............................. 325,238 587,249 400,570
Commercial paper.................................... 478,039 824,887 1,042,795
Other borrowed funds................................ 204,681 172,549 126,662
Acceptances outstanding............................. 50,554 55,914 55,872
Other liabilities(1)................................ 1,186,783 1,157,439 1,169,573
Medium and long-term debt........................... 836,023 816,113 803,233
Junior subordinated debt payable to subsidiary
grantor trust..................................... 16,243 15,790 15,677
----------- ------------ -----------
Total liabilities............................... 42,103,116 43,805,777 45,325,648
----------- ------------ -----------
Commitments and contingencies--See Note 9
STOCKHOLDERS' EQUITY
Preferred stock:
Authorized 5,000,000 shares, no shares issued or
outstanding as of March 31, 2004, December 31,
2004, and March 31, 2005........................ -- -- --
Common stock, par value $1 per share at March 31,
2004, December 31, 2004 and March 31, 2005:
Authorized 300,000,000 shares, issued 148,546,543
shares as of March 31, 2004, 152,191,818 shares
as of December 31, 2004, and 152,530,458 shares
as of March 31, 2005............................. 148,547 152,192 152,530
Additional paid-in capital.......................... 688,231 881,928 896,855
Treasury stock--1,071,700 shares as of March 31,
2004, 3,831,900 shares as of December 31, 2004
and 7,954,843 shares as of March 31, 2005......... (56,932) (223,361) (463,527)
Retained earnings................................... 3,111,464 3,526,312 3,656,187
Accumulated other comprehensive income (loss)....... 107,751 (44,827) (134,822)
----------- ------------ -----------
Total stockholders' equity...................... 3,999,061 4,292,244 4,107,223
----------- ------------ -----------
Total liabilities and stockholders' equity...... $46,102,177 $ 48,098,021 $49,432,871
=========== ============ ===========
- ----------------------------
(1) On December 31, 2004, UnionBanCal Corporation transferred the allowance
related to off-balance sheet commitments of $83 million from allowance for
loan losses to other liabilities. At March 31, 2005, the allowance related
to off-balance sheet commitments was $86 million. Periods prior to December
31, 2004 have not been restated.
See accompanying notes to condensed consolidated financial statements.
4
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK-
(IN THOUSANDS, EXCEPT NUMBER COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE HOLDERS'
SHARES) OF SHARES STOCK CAPITAL STOCK EARNINGS INCOME (LOSS) EQUITY
- ------------------------------ ----------- -------- ---------- --------- ---------- ------------- ----------
BALANCE DECEMBER 31, 2003..... 146,000,156 $146,000 $ 555,156 $ (12,846) $2,999,884 $ 52,242 $3,740,436
-------- ---------- --------- ---------- ------------- ----------
Comprehensive income
Net income--For the three
months ended March 31,
2004...................... 157,487 157,487
Other comprehensive income,
net of tax:
Net change in unrealized
gains on cash flow
hedges.................. 10,237 10,237
Net change in unrealized
gains on securities
available for sale...... 44,658 44,658
Foreign currency transla-
tion adjustment......... 614 614
----------
Total comprehensive income.... 212,996
Dividend reinvestment plan.... 144 9 9
Deferred compensation -
restricted stock awards..... 64 64
Stock options exercised....... 537,524 538 20,497 21,035
Stock issued in acquisitions.. 2,008,719 2,009 112,569 114,578
Common stock repurchased(1)... (44,086) (44,086)
Dividends declared on common
stock, $0.31 per share(2)... (45,971) (45,971)
-------- ---------- --------- ---------- ------------- ----------
Net change.................... 2,547 133,075 (44,086) 111,580 55,509 258,625
----------- -------- ---------- --------- ---------- ------------- ----------
BALANCE MARCH 31, 2004........ 148,546,543 $148,547 $ 688,231 $ (56,932) $3,111,464 $ 107,751 $3,999,061
=========== ======== ========== ========= ========== ============= ==========
BALANCE DECEMBER 31, 2004..... 152,191,818 $152,192 $ 881,928 $(223,361) $3,526,312 $ (44,827) $4,292,244
-------- ---------- --------- ---------- ------------- ----------
Comprehensive income
Net income--For the three
months ended March 31,
2005...................... 181,977 181,977
Other comprehensive income,
net of tax:
Net change in unrealized
losses on cash flow
hedges.................. (23,894) (23,894)
Net change in unrealized
losses on securities
available for sale...... (66,382) (66,382)
Foreign currency transla-
tion adjustment......... 297 297
Minimum pension liability
adjustment.............. (16) (16)
----------
Total comprehensive income.... 91,982
Dividend reinvestment plan.... --
Deferred compensation -
restricted stock awards..... 100 100
Stock options exercised....... 338,640 338 14,927 15,265
Common stock repurchased(1)... (240,166) (240,166)
Dividends declared on common
stock, $0.36 per share(2)... (52,202) (52,202)
-------- ---------- --------- ---------- ------------- ----------
Net change.................... 338 14,927 (240,166) 129,875 (89,995) (185,021)
----------- -------- ---------- --------- ---------- ------------- ----------
BALANCE MARCH 31, 2005........ 152,530,458 $152,530 $ 896,855 $(463,527) $3,656,187 $ (134,822) $4,107,223
=========== ======== ========== ========= ========== ============= ==========
- ------------------
(1) Common stock repurchased includes commission costs.
(2) Dividends are based on UnionBanCal Corporation's shares outstanding as of
the declaration date.
See accompanying notes to condensed consolidated financial statements.
5
UNIONBANCAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
(DOLLARS IN THOUSANDS) 2004 2005
- --------------------------------------------------------------------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 157,487 $ 181,977
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
(Reversal of) provision for loan losses.......................... (5,000) (8,000)
Provision for losses on off-balance sheet commitments............ -- 3,000
Depreciation, amortization and accretion......................... 32,269 34,898
Provision for deferred income taxes.............................. 29,638 37,605
Gains on securities available for sale........................... (1,622) (344)
Net increase in prepaid expenses................................. (79,954) (135,457)
Net (increase) decrease in fees and other charges
receivable..................................................... (61,338) 30,648
Net increase (decrease) in accrued expenses...................... 38,738 (42,887)
Net increase (decrease) in other liabilities..................... 122,371 32,988
Net (increase) decrease in other assets, net of
acquisitions................................................... 208,457 (107,856)
Net (increase) decrease in trading account assets................ (32,376) 273
Loans originated for resale...................................... (93,286) (35,640)
Net proceeds from sale of loans originated for resale............ 72,471 114,823
Other, net....................................................... (2,208) (7,093)
----------- ----------
Total adjustments................................................ 228,160 (83,042)
----------- ----------
Net cash provided by (used in) operating activities................ 385,647 98,935
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale............... 9,751 24,958
Proceeds from matured and called securities available for
sale............................................................. 833,531 353,201
Purchases of securities available for sale, net of
acquisitions..................................................... (1,558,943) (580,877)
Net (increase) decrease in loans, net of acquisitions.............. 340,447 (711,990)
Net cash provided by (paid in) acquisitions........................ (2,287) --
Other, net......................................................... (35,540) (15,327)
----------- ----------
Net cash provided by (used in) investing activities.............. (413,041) (930,035)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits, net of acquisitions........... 2,892,915 1,535,430
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements...................... 44,270 (186,679)
Net increase (decrease) in commercial paper and other
borrowed funds................................................... (71,638) 172,021
Repayment of junior subordinated debt.............................. (360,825) --
Common stock repurchased........................................... (44,086) (240,166)
Payments of cash dividends......................................... (45,158) (53,548)
Other, net......................................................... 21,658 15,562
----------- ----------
Net cash provided by (used in) financing activities.............. 2,437,136 1,242,620
----------- ----------
Net increase (decrease) in cash and cash equivalents................. 2,409,742 411,520
Cash and cash equivalents at beginning of period..................... 3,499,005 3,548,040
Effect of exchange rate changes on cash and cash equivalents......... 6,508 (3,525)
----------- ----------
Cash and cash equivalents at end of period........................... $ 5,915,255 $3,956,035
=========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest........................................................... $ 26,465 $ 59,740
Income taxes....................................................... 17,753 41,325
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisitions:
Fair value of assets acquired.................................... $ 803,713 $ --
Purchase price:
Cash........................................................... (21,772) --
Stock issued................................................... (114,578) --
----------- ----------
Liabilities assumed.............................................. $ 667,363 $ --
=========== ==========
Loans transferred to foreclosed assets (OREO) and/or
distressed loans held for sale................................... $ 967 $ --
See accompanying notes to condensed consolidated financial statements.
6
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The unaudited condensed consolidated financial statements of UnionBanCal
Corporation and subsidiaries (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X of the Rules and Regulations of the Securities and
Exchange Commission (SEC). However, they do not include all of the disclosures
necessary for annual financial statements in conformity with US GAAP. The
results of operations for the period ended March 31, 2005 are not necessarily
indicative of the operating results anticipated for the full year. Accordingly,
these unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004. The
preparation of financial statements in conformity with US GAAP also requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
UnionBanCal Corporation is a commercial bank holding company and has, as
its major subsidiary, a banking subsidiary, Union Bank of California, N.A. (the
Bank). The Company provides a wide range of financial services to consumers,
small businesses, middle-market companies and major corporations, primarily in
California, Oregon, and Washington, but also nationally and internationally.
Since November 1999 through March 31, 2005, the Company has announced stock
repurchase plans totaling $700 million, and as of March 31, 2005, the Company
was authorized to repurchase $51 million of the Company's common stock under
these repurchase plans. The Company repurchased $58 million, $210 million, and
$40 million of common stock in 2003, 2004 and the first quarter of 2005,
respectively, as part of these repurchase plans (amounts exclude commission
costs). Under a separate stock repurchase agreement, the Company repurchased
$200 million of its common stock in February 2005, from its majority owner, The
Bank of Tokyo-Mitsubishi, Ltd. (BTM), which is a wholly-owned subsidiary of
Mitsubishi Tokyo Financial Group, Inc. At March 31, 2005, BTM owned
approximately 61 percent of the Company's outstanding common stock.
Certain amounts for prior periods have been reclassified to conform to
current financial statement presentation.
STOCK-BASED COMPENSATION
As allowed under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended,
the Company has chosen to continue to recognize compensation expense using the
intrinsic value-based method of valuing stock options prescribed in Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations. Under the intrinsic value-based method,
compensation cost is measured as the amount by which the quoted market price of
the Company's stock at the date of grant exceeds the stock option exercise
price.
At March 31, 2005, the Company had two stock-based employee compensation
plans. For further discussion concerning our stock-based employee compensation
plans see Note 15 of the Notes to Consolidated Financial Statements included in
the Annual Report on Form 10-K for the year ended December 31, 2004. The value
of the restricted stock awards issued under the plans has been reflected in
7
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS (CONTINUED)
compensation expense. Options granted under the plans had an exercise price
equal to the market value of the underlying common stock on the date of grant
and, therefore, were not included in compensation expense as allowed by current
US GAAP.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
(DOLLARS IN THOUSANDS) 2004 2005
- ------------------------------------------------- -------- --------
AS REPORTED NET INCOME........................... $157,487 $181,977
Stock option-based employee compensation expense
(determined under fair value based method for
all awards, net of taxes)...................... (6,532) (5,544)
-------- --------
Pro forma net income, after stock option-based
employee compensation expense.................. $150,955 $176,433
======== ========
EARNINGS PER SHARE--BASIC
As reported.................................. $ 1.07 $ 1.24
Pro forma.................................... $ 1.02 $ 1.20
EARNINGS PER SHARE--DILUTED
As reported.................................. $ 1.05 $ 1.21
Pro forma.................................... $ 1.01 $ 1.18
Compensation cost associated with the Company's unvested restricted stock
issued under the management stock plan is measured based on the market price of
the stock at the grant date and is expensed over the vesting period.
Compensation expense related to restricted stock awards for the three months
ended March 31, 2004 and 2005 were not significant.
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS
In December 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 132R, a revision of SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits, an amendment of FASB Statements No.
87, 88, and 106." The Statement expands the disclosure requirements of SFAS No.
132 to include information describing types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit costs of defined pension plans and other defined benefit
postretirement plans. The Statement was effective for financial statements with
fiscal years ending after December 15, 2003, with additional disclosure of
expected benefits to be paid in each of the next five years and in the aggregate
for the five years thereafter required for fiscal years ending after June 15,
2004. The disclosures required under SFAS No. 132R are contained in Note 10 of
these condensed consolidated financial statements.
8
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
ACCOUNTING FOR SHARE-BASED PAYMENTS
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment", a
revision of SFAS No. 123. This Statement requires that compensation costs
related to share-based payment transactions be recognized in the financial
statements. Measurement of the cost of employee service will be based on the
grant-date fair value of the equity or liability instruments issued. That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award. Additionally, liability awards will
be remeasured each reporting period. Statement 123R replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". This Statement requires adoption
using a modified prospective application or a modified retrospective
application. The Statement is effective for interim periods beginning after June
15, 2005. However, on April 14, 2005, the SEC issued rule 2005-57, which allows
companies to delay implementation of the Statement to the beginning of the next
fiscal year. The Company has not yet concluded on the method of adoption allowed
by the Statement and is currently evaluating the impact of this accounting
guidance on its financial condition and results of operations. Disclosure
required under SFAS No. 123 is shown in Note 1 of these condensed consolidated
financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 provides guidance on how
to identify a variable interest entity (VIE), and when the assets, liabilities,
noncontrolling interests and results of operations of a VIE need to be included
in a company's consolidated financial statements. A VIE exists when either the
total equity investment at risk is not sufficient to permit the entity to
finance its activities by itself, or the equity investors lack a controlling
financial interest or they have voting rights that are not proportionate to
their economic interest. A company that holds variable interests in an entity
will need to consolidate that entity if the company's interest in the VIE is
such that the company will absorb a majority of the VIE's expected losses and/or
receive a majority of the VIE's expected residual returns, if they occur. FIN 46
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders.
In December 2003, the FASB issued FIN 46R, a revision of FIN 46. FIN 46R
clarifies that only the holder of a variable interest can ever be a VIE's
primary beneficiary. FIN 46R delays the effective date of FIN 46 for all
entities created subsequent to January 31, 2003 and non-SPE's (special-purpose
entities) created prior to February 1, 2003 to reporting periods ending after
March 15, 2004. Entities created prior to February 1, 2004 and defined as SPE's
must apply either the provisions of FIN 46 or early adopt the provisions of FIN
46R by the first reporting period ending after December 15, 2003. The adoption
of FIN 46R on January 1, 2004 did not have a material impact on the Company's
financial position or results of operations.
ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER
In December 2003, under clearance of the FASB, the Accounting Standards
Executive Committee (AcSEC) of the AICPA issued Statement of Position (SOP)
03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer."
This SOP establishes accounting standards for discounts on purchased loans when
the discount is attributable to credit quality. The SOP requires that the loan
discount, rather than contractual amounts, establishes the investor's estimate
of undiscounted expected future principal
9
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
and interest cash flows as a benchmark for yield and impairment measurements.
The SOP prohibits the carryover or creation of a valuation allowance in the
initial accounting for these loans. This SOP is effective for loans acquired in
years beginning after December 15, 2004. At adoption, there was no impact on the
Company's financial position or results of operations.
NOTE 3--EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS incorporates the dilutive effect of common stock equivalents outstanding on
an average basis during the period. Stock options are a common stock equivalent.
The following table presents a reconciliation of basic and diluted EPS for the
three months ended March 31, 2004 and 2005.
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2004 2005
-------------------- ---------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED
- ----------------------------------------------------- -------- -------- -------- --------
Net Income........................................... $157,487 $157,487 $181,977 $181,977
======== ======== ======== ========
Weighted average common shares outstanding........... 147,400 147,400 146,998 146,998
Additional shares due to:
Assumed conversion of dilutive stock options......... -- 2,552 -- 2,918
-------- -------- -------- --------
Adjusted weighted average common shares outstanding.. 147,400 149,952 146,998 149,916
======== ======== ======== ========
Net income per share................................. $ 1.07 $ 1.05 $ 1.24 $ 1.21
======== ======== ======== ========
10
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the components of other comprehensive income
(loss) and the related tax effect allocated to each component.
BEFORE
TAX TAX NET OF
(DOLLARS IN THOUSANDS) AMOUNT EFFECT TAX
- --------------------------------------------------- --------- -------- --------
FOR THE THREE MONTHS ENDED MARCH 31, 2004:
Cash flow hedge activities:
Unrealized net gains on hedges arising during
the period..................................... $ 40,087 $(15,333) $ 24,754
Reclassification adjustment for net gains on
hedges included in net income.................. (23,509) 8,992 (14,517)
--------- -------- --------
Net change in unrealized gains on hedges........... 16,578 (6,341) 10,237
--------- -------- --------
Securities available for sale:
Unrealized holding gains arising during the
period on securities available for sale........ 73,943 (28,283) 45,660
Reclassification adjustment for net gains on
securities available for sale included in
net income..................................... (1,622) 620 (1,002)
--------- -------- --------
Net change in unrealized gains on securities
available for sale............................... 72,321 (27,663) 44,658
--------- -------- --------
Foreign currency translation adjustment............ 994 (380) 614
--------- -------- --------
Net change in accumulated other comprehensive
income (loss).................................... $ 89,893 $(34,384) $ 55,509
========= ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 2005:
Cash flow hedge activities:
Unrealized net losses on hedges arising during
the period..................................... $ (32,277) $ 12,346 $(19,931)
Reclassification adjustment for net gains on
hedges included in net income.................. (6,418) 2,455 (3,963)
--------- -------- --------
Net change in unrealized losses on hedges.......... (38,695) 14,801 (23,894)
--------- -------- --------
Securities available for sale:
Unrealized holding losses arising during the
period on securities available for sale........ (107,158) 40,988 (66,170)
Reclassification adjustment for net gains on
securities available for sale included in
net income..................................... (344) 132 (212)
--------- -------- --------
Net change in unrealized losses on securities
available for sale............................... (107,502) 41,120 (66,382)
--------- -------- --------
Foreign currency translation adjustment............ 481 (184) 297
--------- -------- --------
Minimum pension liability adjustment............... (26) 10 (16)
--------- -------- --------
Net change in accumulated other comprehensive
income (loss).................................... $(145,742) $ 55,747 $(89,995)
========= ======== ========
11
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED)
The following table presents accumulated other comprehensive income (loss)
balances.
NET
NET UNREALIZED
UNREALIZED GAINS (LOSSES) FOREIGN MINIMUM ACCUMULATED
GAINS (LOSSES) ON SECURITES CURRENCY PENSION OTHER
ON CASH AVAILABLE TRANSLATION LIABILITY COMPREHENSIVE
(DOLLARS IN THOUSANDS) FLOW HEDGES FOR SALE ADJUSTMENT ADJUSTMENT INCOME (LOSS)
- ------------------------------- -------------- -------------- ----------- ---------- -------------
BALANCE, DECEMBER 31, 2003..... $43,786 $22,535 $(10,293) $(3,786) $52,242
Change during the period....... 10,237 44,658 614 -- 55,509
-------------- -------------- ----------- ---------- -------------
BALANCE, MARCH 31, 2004........ $54,023 $67,193 $(9,679) $(3,786) $107,751
============== ============== =========== ========== =============
BALANCE, DECEMBER 31, 2004..... $1,429 $(31,696) $(7,870) $(6,690) $(44,827)
Change during the period....... (23,894) (66,382) 297 (16) (89,995)
-------------- -------------- ----------- ---------- -------------
BALANCE, MARCH 31, 2005........ $(22,465) $(98,078) $(7,573) $(6,706) $(134,822)
============== ============== =========== ========== =============
NOTE 5--BUSINESS COMBINATIONS
The following describes the Company's most recent acquisitions:
On January 16, 2004, the Company completed its acquisition of Business Bank
of California, a commercial bank headquartered in San Bernardino, California,
with $704 million in assets and fifteen full-service branches in the Southern
California Inland Empire and the San Francisco Bay Area. The core deposit
intangibles are being amortized on an accelerated basis over an estimated life
of 6 years.
On August 1, 2004, the Company completed its acquisition of the business
portfolio of CNA Trust Company (CNAT). The Company acquired total assets and
assumed total liabilities of $173 million, each. CNAT, based in Costa Mesa,
California, was a subsidiary of Chicago-based CNA Financial Corporation. The
identifiable intangibles are being amortized on an accelerated basis over an
estimated life of 7 years.
On October 28, 2004, the Company completed its acquisition of Jackson
Federal Bank, a savings bank headquartered in Brea, California. The Company
acquired approximately $1.4 billion in total assets and fourteen branches. The
core deposit intangibles are being amortized on an accelerated basis over an
estimated life of 7 years.
12
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill and intangible assets for
2004 and the three months ended March 31, 2005 are reflected in the table below.
IDENTIFIABLE INTANGIBLE ASSETS
-------------------------------------------------------
CORE DEPOSIT RIGHTS-TO- TOTAL IDENTIFIABLE
DOLLARS IN THOUSANDS GOODWILL INTANGIBLES EXPIRATION OTHER INTANGIBLE ASSETS
- ------------------------------------------- -------- ------------ ---------- ------ ------------------
Balance, December 31, 2003................. $226,556 $22,117 $27,475 $ -- $49,592
Amounts recorded during the year......... 224,405 29,516 -- 2,100 31,616
Amortization expense..................... -- (14,272) (4,942) (257) (19,471)
-------- ------------ ---------- ------ -------
Balance, December 31, 2004................. $450,961 $37,361 $22,533 $1,843 $61,737
Amounts recorded during the three months
ended March 31, 2005................... -- -- -- -- --
Net adjustment arising during contingent
period................................. (836) -- -- -- --
Amortization expense..................... -- (3,775) (1,085) (126) (4,986)
-------- ------------ ---------- ------ -------
Balance, March 31, 2005.................... $450,125 $33,586 $21,448 $1,717 $56,751
======== ============ ========== ====== =======
Estimated amortization expense for the
years ending:
Remaining 2005........................... $11,321 $3,226 $378 $14,925
2006..................................... 9,571 3,672 389 13,632
2007..................................... 5,471 3,113 299 8,883
2008..................................... 3,245 2,622 231 6,098
2009..................................... 1,764 2,188 178 4,130
2010..................................... 807 1,805 138 2,749
thereafter............................... 1,407 4,822 104 6,334
------------ ---------- ------ -------
Total amortization expense after
March 31, 2005......................... $33,586 $21,448 $1,717 $56,751
============ ========== ====== =======
NOTE 7--BUSINESS SEGMENTS
The Company is organized based on the products and services that it offers
and operates in four principal areas:
o The Community Banking and Investment Services Group offers a range of
banking services, primarily to individuals and small businesses,
delivered generally through a tri-state (California, Washington and
Oregon) network of branches and ATMs. These services include
mortgages, home equity lines of credit, consumer and commercial loans,
deposit services and cash management as well as fiduciary, private
banking, investment and asset management services for individuals and
institutions, and risk management and insurance products for
businesses and individuals. At March 31, 2004 and 2005, this Group had
$313.2 million and $325.7 million, respectively, of goodwill assigned
to its businesses.
o The Commercial Financial Services Group provides credit and cash
management services to large corporate and middle-market companies.
Services include commercial and project loans, real estate
13
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--BUSINESS SEGMENTS (CONTINUED)
financing, asset-based financing, trade finance and letters of credit,
lease financing, customized cash management services and selected
capital markets products. At March 31, 2004, this Group had no
goodwill assigned to its businesses compared to $124.4 million of
goodwill assigned to its businesses at March 31, 2005.
o The International Banking Group primarily provides correspondent
banking and trade-finance products and services to international
financial institutions. The Group's revenue predominantly relates to
foreign customers.
o The Global Markets Group manages the Company's wholesale funding
needs, securities portfolio, and interest rate and liquidity risks.
The Group also offers a broad range of risk management and trading
products to institutional and business clients of the Company through
the businesses described above.
The information, set forth in the table on the following page, reflects
selected income statement and balance sheet items by business segment. The
information presented does not necessarily represent the business units'
financial condition and results of operations were they independent entities.
Unlike financial accounting, there is no authoritative body of guidance for
management accounting equivalent to US GAAP. Consequently, reported results are
not necessarily comparable with those presented by other companies. Included in
the table within total assets are the amounts of goodwill for each business
segment as of March 31, 2004 and 2005.
The information in this table is derived from the internal management
reporting system used by management to measure the performance of the business
segments and the Company overall. The management reporting system assigns
balance sheet and income statement items to each business segment based on
internal management accounting policies. Net interest income is determined by
the Company's internal funds transfer pricing system, which assigns a cost of
funds or a credit for funds to assets or liabilities based on their type,
maturity or repricing characteristics. Noninterest income and expense directly
attributable to a business segment are assigned to that business. Certain
indirect costs, such as operations and technology expense, are allocated to the
segments based on studies of billable unit costs for product or data processing.
Other indirect costs, such as corporate overhead, are allocated to the business
segments based on a predetermined percentage of usage. Under the Company's
risk-adjusted return on capital (RAROC) methodology, credit expense is charged
to business segments based upon expected losses arising from credit risk. In
addition, the attribution of economic capital is related to unexpected losses
arising from credit, market and operational risks.
"Other" is comprised of certain parent company non-bank subsidiaries, the
elimination of the fully taxable-equivalent basis amount, the amount of the
provision for loan losses over/(under) the RAROC expected loss for the period,
the earnings associated with the unallocated equity capital and allowances for
credit losses, and the residual costs of support groups. In addition, it
includes the Pacific Rim Corporate Group, which offers financial products to
Japanese-owned subsidiaries located in the U.S. On an individual basis, none of
the items in "Other" are significant to the Company's business.
14
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--BUSINESS SEGMENTS (CONTINUED)
The business units' results for the prior periods have been restated to
reflect changes in the transfer pricing methodology and any reorganization
changes that may have occurred.
COMMUNITY BANKING AND
INVESTMENT SERVICES COMMERCIAL FINANCIAL INTERNATIONAL
GROUP SERVICES GROUP BANKING GROUP
--------------------- -------------------- ------------------
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------
2004 2005 2004 2005 2004 2005
- --------------------------------- -------- -------- -------- -------- ------- -------
RESULTS OF OPERATIONS (DOLLARS
IN THOUSANDS):
Net interest income (expense).... $174,713 $220,822 $157,487 $198,136 $ 7,575 $ 7,471
Noninterest income............... 116,600 133,433 69,627 64,793 18,189 17,658
-------- -------- -------- -------- ------- -------
Total revenue.................... 291,313 354,255 227,114 262,929 25,764 25,129
Noninterest expense.............. 218,956 256,782 104,627 108,862 15,683 18,345
Credit expense (income).......... 7,786 8,910 31,226 23,667 605 436
-------- -------- -------- -------- ------- -------
Income (loss) before income tax
expense (benefit).............. 64,571 88,563 91,261 130,400 9,476 6,348
Income tax expense (benefit)..... 24,698 33,875 28,303 43,080 3,625 2,428
-------- -------- -------- -------- ------- -------
Net income (loss)................ $ 39,873 $ 54,688 $ 62,958 $ 87,320 $ 5,851 $ 3,920
======== ======== ======== ======== ======= =======
TOTAL ASSETS, END OF PERIOD
(dollars in millions): $ 13,414 $ 16,235 $ 14,048 $ 17,983 $ 2,134 $ 2,024
======== ======== ======== ======== ======= =======
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
--------------------- -------------------- -------------------
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
2004 2005 2004 2005 2004 2005
- --------------------------------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS (DOLLARS
IN THOUSANDS):
Net interest income (expense).... $ 38,440 $ (6,253) $ 22,206 $ 20,623 $400,421 $440,799
Noninterest income............... 1,541 839 5,248 6,038 211,205 222,761
-------- -------- -------- -------- -------- --------
Total revenue.................... 39,981 (5,414) 27,454 26,661 611,626 663,560
Noninterest expense.............. 6,427 4,183 27,413 19,295 373,106 407,467
Credit expense (income).......... 50 55 (44,667) (41,068) (5,000) (8,000)
-------- -------- -------- -------- -------- --------
Income (loss) before income tax
expense (benefit).............. 33,504 (9,652) 44,708 48,434 243,520 264,093
Income tax expense (benefit)..... 12,815 (3,692) 16,592 6,425 86,033 82,116
-------- -------- -------- -------- -------- --------
Net income (loss)................ $ 20,689 $ (5,960) $ 28,116 $ 42,009 $157,487 $181,977
======== ======== ======== ======== ======== ========
TOTAL ASSETS, END OF PERIOD
(dollars in millions):......... $ 15,461 $ 12,053 $ 1,045 $ 1,138 $ 46,102 $ 49,433
======== ======== ======== ======== ======== ========
NOTE 8--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
Derivative positions are integral components of the Company's designated
asset and liability management activities. The Company uses interest rate
derivatives to manage the sensitivity of the Company's net interest income to
changes in interest rates. These instruments are used to manage interest rate
risk relating to specified groups of assets and liabilities, primarily
LIBOR-based commercial loans, certificates of deposit, medium-term notes and
subordinated debt.
15
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
CASH FLOW HEDGES
HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT
The Company engages in several types of cash flow hedging strategies for
which the hedged transactions are forecasted future loan interest payments, and
the hedged risk is the variability in those payments due to changes in the
designated benchmark rate, e.g., U.S. dollar LIBOR. In these strategies, the
hedging instruments are matched with groups of variable rate loans such that the
tenor of the variable rate loans and that of the hedging instrument are aligned.
Cash flow hedging strategies include the utilization of purchased floor, cap,
corridor options and interest rate swaps. At March 31, 2005, the weighted
average remaining life of the currently active (excluding any forward positions)
cash flow hedges was approximately 1.3 years.
The Company uses purchased interest rate floors to hedge the variable cash
flows associated with 1-month to 6-month LIBOR indexed loans. Payments received
under the floor contract offset the decline in loan interest income caused by
the relevant LIBOR index falling below the floor's strike rate.
The Company uses interest rate floor corridors to hedge the variable cash
flows associated with 1-month to 6-month LIBOR indexed loans. Net payments to be
received under the floor corridor contracts offset the decline in loan interest
income caused by the relevant LIBOR index falling below the corridor's upper
strike rate, but only to the extent the index falls to the lower strike rate.
The corridor will not provide protection from declines in the relevant LIBOR
index to the extent it falls below the corridor's lower strike rate.
The Company uses interest rate collars to hedge the variable cash flows
associated with 1-month to 6-month LIBOR indexed loans. Net payments to be
received under the collar contract offset the decline in loan interest income
caused by the relevant LIBOR index falling below the collar's floor strike rate
while net payments to be paid will reduce the increase in loan interest income
caused by the LIBOR index rising above the collar's cap strike rate.
The Company uses interest rate swaps to hedge the variable cash flows
associated with 1-month to 6-month LIBOR indexed loans. Payments to be received
(or paid) under the swap contract will offset the fluctuations in loan interest
income caused by changes in the relevant LIBOR index. As such, these instruments
hedge all fluctuations in the loans' interest income caused by changes in the
relevant LIBOR index.
The Company uses purchased interest rate caps to hedge the variable
interest cash flows associated with the forecasted issuance and rollover of
short-term, fixed rate, negotiable certificates of deposit (CDs). In these
hedging relationships, the Company hedges the LIBOR component of the CD rates,
which is 1-month to 6-month LIBOR, based on the CDs' original term to maturity,
which reflects their repricing frequency. Net payments to be received under the
cap contract offset the increase in interest expense caused by the relevant
LIBOR index rising above the cap's strike rate.
The Company uses interest rate cap corridors to hedge the variable cash
flows associated with the forecasted issuance and rollover of short-term, fixed
rate, negotiable CDs. In these hedging relationships, the Company hedges the
LIBOR component of the CD rates, either 1-month LIBOR, 3-month LIBOR, or 6-month
LIBOR, based on the original term to maturity of the CDs, which reflects their
repricing frequency. Net payments to be received under the cap corridor contract
offset the increase in deposit
16
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
interest expense caused by the relevant LIBOR index rising above the corridor's
lower strike rate, but only to the extent the index rises to the upper strike
rate. The corridor will not provide protection from increases in the relevant
LIBOR index to the extent it rises above the corridor's upper strike rate.
Hedging transactions are structured at inception so that the notional
amounts of the hedge are matched with an equal principal amount of loans or CDs,
the index and repricing frequencies of the hedge matches those of the loans or
CDs, and the period in which the designated hedged cash flows occurs is equal to
the term of the hedge. As such, most of the ineffectiveness in the hedging
relationship results from the mismatch between the timing of reset dates on the
hedge versus those of the loans or CDs. In the first quarter of 2005, the
Company recognized a net loss of $0.1 million due to ineffectiveness, which is
recognized in noninterest expense, compared to a net loss of $1.5 million in the
first quarter of 2004.
FAIR VALUE HEDGES
HEDGING STRATEGY FOR "MARKETPATH" CERTIFICATES OF DEPOSIT
The Company engages in a hedging strategy in which interest bearing CDs
issued to customers, which are tied to the changes in the Standard and Poor's
500 index, are exchanged for a fixed rate of interest. The Company accounts for
the embedded derivative in the CDs at fair value. A total return swap that
encompasses the value of a series of options that had individually hedged each
CD is valued at fair value and any ineffectiveness resulting from the hedge and
the hedged item are recognized in noninterest expense.
HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--JUNIOR SUBORDINATED DEBT
PAYABLE TO SUBSIDIARY GRANTOR TRUST (TRUST NOTES)
On February 19, 2004, the Company terminated its fair value hedge and
called its Trust Notes. Prior to this date, the Company engaged in an interest
rate hedging strategy in which an interest rate swap was associated with a
specific interest bearing liability, UnionBanCal Corporation's Trust Notes, in
order to convert the liability from a fixed rate to a floating rate instrument.
This strategy mitigated the changes in fair value of the hedged liability caused
by changes in the designated benchmark interest rate, U.S. dollar LIBOR. At the
termination date, the Company recognized a net gain of $1.6 million of hedge
ineffectiveness.
HEDGING STRATEGY FOR MEDIUM-TERM NOTES
The Company engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specified interest bearing liability,
UnionBanCal Corporation's five-year, medium-term debt issuance, in order to
convert the liability from a fixed rate to a floating rate instrument. This
strategy mitigates the changes in fair value of the hedged liability caused by
changes in the designated benchmark interest rate, U.S. dollar LIBOR.
The fair value hedging transaction for the medium-term notes was structured
at inception to mirror all of the provisions of the medium-term notes, which
allows the Company to assume that no ineffectiveness exists.
17
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING
(CONTINUED)
HEDGING STRATEGY FOR SUBORDINATED DEBT
The Company engages in an interest rate hedging strategy in which an
interest rate swap is associated with a specified interest bearing liability,
UnionBanCal Corporation's ten-year, subordinated debt issuance, in order to
convert the liability from a fixed rate to a floating rate instrument. This
strategy mitigates the changes in fair value of the hedged liability caused by
changes in the designated benchmark interest rate, U.S. dollar LIBOR.
The fair value hedging transaction for the subordinated debt was structured
at inception to mirror all of the provisions of the subordinated debt, which
allows the Company to assume that no ineffectiveness exists.
OTHER
The Company uses To-Be-Announced (TBA) contracts to fix the price and yield
of anticipated purchases or sales of mortgage-backed securities that will be
delivered at an agreed upon date. This strategy hedges the risk of variability
in the cash flows to be paid or received upon settlement of the TBA contract.
NOTE 9--GUARANTEES
Standby and commercial letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. Standby letters of
credit generally are contingent upon the failure of the customer to perform
according to the terms of the underlying contract with the third party, while
commercial letters of credit are issued specifically to facilitate foreign or
domestic trade transactions. The majority of these types of commitments have
terms of one year or less. Collateral may be obtained based on management's
credit assessment of the customer. As of March 31, 2005, the Company's maximum
exposure to loss for standby and commercial letters of credit was $3.1 billion
and $196.2 million, respectively. At March 31, 2005, the carrying value of the
Company's standby and commercial letters of credit totaled $6.4 million.
Exposure to loss related to these commitments are covered by the allowance for
off-balance sheet commitments. Both of these amounts are included in other
liabilities on the consolidated balance sheet.
Principal investments include direct investments in private and public
companies and indirect investments in private equity funds. The Company issues
commitments to provide equity and mezzanine capital financing to private and
public companies through either direct investments in specific companies or
through investment funds and partnerships. The timing of future cash
requirements to fund such commitments is generally dependent on the investment
cycle. This cycle, the period over which privately-held companies are funded by
private equity investors and ultimately sold, merged, or taken public through an
initial offering, can vary based on overall market conditions as well as the
nature and type of industry in which the companies operate. At March 31, 2005,
the Company had commitments to fund principal investments of $69.7 million.
The Company has contingent consideration agreements that guarantee
additional payments to acquired insurance agencies' stockholders based on the
agencies' future performance in excess of established revenue and/or earnings
before interest, taxes, depreciation and amortization (EBITDA) thresholds. If
the insurance agencies' future performance exceeds these thresholds during a
three-year
18
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--GUARANTEES (CONTINUED)
period, the Company will be liable to make payments to those former
stockholders. As of March 31, 2005, the Company had a maximum exposure of $6.4
million for these agreements, the last of which expire in December 2006.
The Company is fund manager for limited liability corporations issuing
low-income housing credit (LIHC) investments. LIHC investments provide tax
benefits to investors in the form of tax deductions from operating losses and
tax credits. To facilitate the sale of these LIHC investments, the Company
guarantees the timely completion of projects and delivery of tax benefits
throughout the investment term. Guarantees may include a minimum rate of return,
the availability of tax credits, and operating deficit thresholds over a
ten-year average period. Additionally, the Company receives project completion
and tax credit guarantees from the limited liability corporations issuing the
LIHC investments that reduce the Company's ultimate exposure to loss. As of
March 31, 2005, the Company's maximum exposure to loss under these guarantees
was limited to a return of investor capital and minimum investment yield, or
$141.4 million. The Company maintains a reserve of $5.9 million for these
guarantees.
The Company has guarantees that obligate it to perform if its affiliates
are unable to discharge their obligations. These obligations include guarantee
of commercial paper obligations and leveraged lease transactions. Guarantees
issued by the Bank for an affiliate's commercial paper program are done in order
to facilitate their sale. As of March 31, 2005, the Bank had a maximum exposure
to loss under these guarantees, which have an average term of less than one
year, of $1.1 billion. The Bank's guarantee is fully collateralized by a pledged
deposit. UnionBanCal Corporation guarantees its subsidiaries' leveraged lease
transactions, which have terms ranging from 15 to 30 years. Following the
original funding of the leveraged lease transactions, UnionBanCal Corporation
has no material obligation to be satisfied. As of March 31, 2005, UnionBanCal
Corporation had no material exposure to loss under these guarantees.
The Company conducts securities lending transactions for institutional
customers as a fully disclosed agent. At times, securities lending
indemnifications are issued to guarantee that a security lending customer will
be made whole in the event the borrower does not return the security subject to
the lending agreement and collateral held is insufficient to cover the market
value of the security. All lending transactions are collateralized, primarily by
cash. The amount of securities lent with indemnifications was $2.0 billion at
March 31, 2005. The market value of the associated collateral was $2.1 billion
at March 31, 2005.
19
UNIONBANCAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--PENSION AND OTHER POSTRETIREMENT BENEFITS
The following tables summarize the components of net periodic benefit costs
for the three months ended March 31, 2004 and 2005.
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- --------------------
(DOLLARS IN THOUSANDS) 2004 2005 2004 2005
- ------------------------------------------- -------- ------- ------- ------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................... $ 9,318 $11,392 $ 1,568 $ 1,549
Interest cost.............................. 12,602 14,320 2,772 2,228
Expected return on plan assets............. (20,787) (23,905) (2,097) (2,599)
Amortization of prior service cost......... 267 267 (24) (24)
Amortization of transition amount.......... -- -- 637 509
Recognized net actuarial loss.............. 2,822 6,101 1,586 968
-------- ------- ------- -------
Total net periodic benefit cost............ $ 4,222 $ 8,175 $ 4,442 $ 2,631
======== ======= ======= =======
In 2004, the Company recorded a $6.1 million reduction in employee benefit
expense associated with the remeasurement of postretirement benefits as a result
of the Medicare Prescription Drug, Improvement and Modernization Act of 2003
("The Act"). The reduction is attributable to a federal subsidy provided by The
Act to employers that sponsor retiree health care plans with drug benefits that
are equivalent to those offered under Medicare Part D. The effect of the subsidy
on the measurement of net periodic postretirement benefit cost has been
recognized since the effective date of The Act, July 1, 2004. As a result, there
was no impact recognized in the first quarter 2004.
NOTE 11--SUBSEQUENT EVENTS
On April 20, 2005, the Company's Board of Directors declared a quarterly
cash dividend of $0.41 per share of common stock. The dividend will be paid on
July 1, 2005 to stockholders of record as of June 3, 2005.
On April 20, 2005, the Company's Board of Directors authorized the
repurchase of an additional $200 million of the Company's common stock. When
combined with the $51 million remaining on its previous repurchase
authorizations, the Company has $251 million available for repurchase.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT INCLUDES FORWARD LOOKING STATEMENTS, WHICH INCLUDE FORECASTS OF
OUR FINANCIAL RESULTS AND CONDITION, EXPECTATIONS FOR OUR OPERATIONS AND
BUSINESS, AND OUR ASSUMPTIONS FOR THOSE FORECASTS AND EXPECTATIONS. DO NOT RELY
UNDULY ON FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS MIGHT DIFFER SIGNIFICANTLY
FROM OUR FORECASTS AND EXPECTATIONS. PLEASE REFER TO "FACTORS THAT MAY AFFECT
FUTURE RESULTS" FOR A DISCUSSION OF SOME FACTORS THAT MAY CAUSE RESULTS TO
DIFFER.
You should read the following discussion and analysis of our consolidated
financial position and results of our operations for the period ended March 31,
2005 in this quarterly report on Form 10-Q together with our Consolidated
Financial Statements and the Notes to Consolidated Financial Statements included
in our Annual Report on Form 10-K for the year ended December 31, 2004.
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 $49.4 billion at March 31, 2005. At March 31, 2005, The
Bank of Tokyo-Mitsubishi, Ltd., our majority owner, owned approximately 61
percent of our outstanding common stock.
EXECUTIVE OVERVIEW
We are providing you with an overview of what we believe are the most
significant factors and developments that impacted our first quarter 2005
results and that could impact our future results. We ask that you carefully read
the rest of this document for more detailed information that will complete your
understanding of trends, events and uncertainties that impact us.
In the first quarter 2005 we returned a significant amount of capital in
the form of common stock repurchases, which included a $200 million repurchase
from our majority shareholder, The Bank of Tokyo-Mitsubishi, Ltd. In addition on
April 20, 2005, we announced an increase of 14 percent in our quarterly dividend
effective with our next dividend payment on July 1, 2005.
Overall credit quality in the commercial lending area continued its
improving trend during the first quarter 2005. Our nonaccrual loan portfolio
totaled $102 million at March 31, 2005 compared to $157 million at December 31,
2004 and $257 million at March 31, 2004. Loan payoffs, loan sales, and a low
level of new inflows contributed to the decline in nonaccrual loans. We reversed
$5 million of our provision for credit losses (an $8 million reversal related to
loans and a $3 million provision for losses on off-balance sheet commitments) in
the first quarter 2005 compared with a reversal of $5 million in the first
quarter 2004.
In the first quarter 2005 our net interest margin grew to 409 basis points
from 403 basis points at December 31, 2004, reflecting the impact of higher
interest rates and increased average balances from the Jackson Federal Bank
acquisition in October 2004, offset by lower income from our derivative hedges.
Gradual increases in interest rates and growth in our commercial loan portfolio
will continue to positively impact our net interest margin in 2005.
Noninterest income grew 5.5 percent in the first quarter 2005 compared with
the first quarter 2004 primarily from higher trust and investment management
fees and private capital income. This increase was offset by lower card
processing fees as we sold our merchant card portfolio in the second quarter
2004.
Noninterest expense grew in the first quarter 2005 compared with the first
quarter 2004, primarily from the investments we made in bank acquisitions, de
novo branches and technology in 2004. We believe that these investments will
bring opportunities for growth in our business by increasing our customer base
and expanding the services we provide.
21
Our effective tax rate declined to 31 percent in the first quarter 2005
from 35 percent during 2004 as we reversed approximately $10 million of
previously recognized amounts payable to the Internal Revenue Service (IRS)
primarily related to the tax treatment of certain leveraged lease transactions.
We believe that we are appropriately reserved for any payments that may be owed
to the IRS upon final resolution of the tax issues surrounding these leases and
that payments for any income taxes will not impact our liquidity.
CRITICAL ACCOUNTING POLICIES
UnionBanCal Corporation's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America (US GAAP) and the general practices of the banking industry.
The financial information contained within our statements is, to a
significant extent, financial information that is based on approximate measures
of the financial effects of transactions and events that have already occurred.
A variety of factors could affect the ultimate value that is obtained either
when earning income, recognizing an expense, recovering an asset or relieving a
liability. In many instances, we use a discount factor to determine the present
value of assets and liabilities. A change in the discount factor could increase
or decrease the values of those assets and liabilities and such a change would
result in either a beneficial or adverse impact to our financial results. We use
historical loss factors, adjusted for current conditions, to determine the
inherent loss that may be present in our loan and lease portfolio. Actual losses
could differ significantly from the loss factors that we use. Other estimates
that we use are employee turnover factors for pension purposes, residual values
in our leasing portfolio, fair value of our derivatives and securities, expected
useful lives of our depreciable assets and assumptions regarding our effective
income tax rates. We enter into derivative contracts to accommodate our
customers and for our own risk management purposes. The derivative contracts are
generally foreign exchange, interest rate swap and interest rate option
contracts, and energy-related derivatives to accommodate our customers in the
oil and gas industry. We value these contracts at fair value, using either
readily available, market quoted prices or from information that can be
extrapolated to approximate a market price. We have not historically entered
into derivative contracts for our customers or for ourselves, which relate to
credit, commodity or weather-related indices. We are subject to US GAAP that may
change from one previously acceptable method to another method. Although the
economics of our transactions would be the same, the timing of events that would
impact our transactions could change. Our most significant estimates are
approved by our Chief Executive Officer (CEO) Forum, which is comprised of our
most senior executives. At each financial reporting period, a review of these
estimates is then presented to the Audit Committee of our Board of Directors.
Understanding our accounting policies is fundamental to understanding our
consolidated financial position and consolidated results of operations.
Accordingly, except for an update to our pension obligations accounting policy
below, our significant accounting policies are discussed in detail in Note 1 in
the "Notes to Consolidated Financial Statements" in our 2004 Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
In addition to information provided in our "Critical Accounting Policies"
in our 2004 Annual Report, we are providing the following information with
respect to our discount rate for determining our obligations for pension and
other post-retirement benefits. The discount rate assumed in measuring the plan
obligations is determined by selecting high quality investments rated Aa or
higher by a recognized rating agency corresponding to each year's future benefit
payments for the next 30 years. The discount rate is calculated based on the
weighted average investment yields as of December 31 and rounded to the nearest
..25 percent. The reduction in the discount rate from 6.25 percent at December
31, 2003 to 5.75 percent at December 31, 2004 reported in our 2004 Annual Report
reflects the annual evaluation of our discount rate assumptions.
22
FINANCIAL PERFORMANCE
SUMMARY OF FINANCIAL PERFORMANCE
FOR THE THREE MONTHS INCREASE (DECREASE)
ENDED MARCH 31, 2005 VERSUS 2004
-------------------- ------------------
(DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT
- ----------------------------------------------- -------- -------- ------- -------
RESULTS OF OPERATIONS
Net interest income(1)......................... $400,421 $440,799 $40,378 10.1%
Noninterest income
Service charges on deposit accounts.......... 81,096 80,455 (641) (0.8)
Trust and investment management fees......... 35,822 41,963 6,141 17.1
Insurance commissions........................ 21,735 22,017 282 1.3
International commissions and fees........... 17,545 17,674 129 0.7
Brokerage commissions and fees............... 8,297 8,972 675 8.1
Card processing fees, net.................... 8,792 5,607 (3,185) (36.2)
Other noninterest income..................... 37,918 46,073 8,155 21.5
-------- -------- -------
Total noninterest income....................... 211,205 222,761 11,556 5.5
Total revenue.................................. 611,626 663,560 51,934 8.5
(Reversal of) provision for loan losses........ (5,000) (8,000) (3,000) 60.0
Noninterest expense
Salaries and employee benefits............... 219,423 239,480 20,057 9.1
Net occupancy................................ 31,582 33,525 1,943 6.2
Software..................................... 12,995 14,628 1,633 12.6
Professional services........................ 11,303 13,710 2,407 21.3
Data processing.............................. 7,625 9,527 1,902 24.9
Provision for losses on off-balance sheet
commitments(2)............................. -- 3,000 3,000 nm
Other noninterest expense.................... 90,178 93,597 3,419 3.8
-------- -------- -------
Total noninterest expense...................... 373,106 407,467 34,361 9.2
Income before income tax....................... 243,520 264,093 20,573 8.4
Income tax..................................... 86,033 82,116 (3,917) (4.6)
-------- -------- -------
Net income..................................... $157,487 $181,977 $24,490 15.6%
======== ======== =======
- -------------------------------
(1) Net interest income does not include any adjustments for fully taxable
equivalence.
(2) For the quarter ended March 31, 2005, the change in the allowance for
losses on off-balance sheet commitments is recognized separately from the
change in the allowance for loan losses. Prior periods have not been
restated.
nm = not meaningful
THE PRIMARY CONTRIBUTORS TO OUR FINANCIAL PERFORMANCE FOR THE FIRST QUARTER
OF 2005 COMPARED TO THE FIRST QUARTER OF 2004 ARE PRESENTED BELOW.
o The reversal of our provision for loan losses in first quarter of 2005
is partially attributable to net recoveries for the quarter. Credit
quality continued to improve in our commercial loan portfolio
evidenced by reductions in nonperforming assets. However, this trend
is balanced by increasing uncertainty in the economic outlook coupled
with indications that the improvement in credit quality could be
reaching its peak. (See our discussion under "Allowance for Credit
Losses.")
o Our net interest income was favorably influenced by higher earning
asset volumes (including a higher mix of residential mortgages and
commercial loans), higher average yields on our earning
23
assets and strong deposit growth (including an attractive mix of
average noninterest bearing deposits to total deposits). Offsetting
these positive influences to our net interest margin were higher
interest expense on interest bearing liabilities and lower hedge
income (See our discussion under "Net Interest Income.")
o The increase in our noninterest income was attributable to several
factors:
o Trust and investment management fees increased from the first
quarter 2004 primarily due to continued strong sales, solid
organic growth and the acquisition of the business portfolio of
CNA Trust Company (renamed TruSource) and the corporate trust
business of BTM Trust Company, New York. Managed assets increased
by approximately 6 percent and non-managed assets increased by
approximately 37 percent from the first quarter 2004 to the first
quarter 2005. Total assets under administration increased by
approximately 33 percent, to $207.4 billion, for the same period;
o Card processing fees, net, decreased primarily due to the sale of
our merchant card portfolio to NOVA Information Systems (NOVA) in
the second quarter 2004; and
o Other income in the first quarter 2005 included higher Private
Capital investment gains of $4.6 million, an auto lease residual
reserve reversal of $1.7 million, and a $1.6 million
reclassification of COLI income (previously reported as employee
benefits expense in the prior year), partly offset by a $1.3
million decrease in securities gains, net.
o Our higher noninterest expense was attributable to several factors:
o Salaries and employee benefits increased primarily as a result
of:
o acquisitions and new branch openings, which accounted for 25
percent of the increase in our salaries and other
compensation;
o higher performance-related incentive expense from goal
achievements;
o annual merit increases; and
o higher employee benefits expense mainly attributable to the
impact of the lower discount rate we used to calculate our
future pension and other postretirement liabilities (reduced
from 6.25 percent at December 31, 2003 to 5.75 percent at
December 31, 2004);
o Net occupancy expense increased mainly from acquisitions, new
branch openings and the impact of lower rental income from
non-bank tenants due to bank employee occupancy as we migrate our
operations into fewer downtown San Francisco locations;
o Software expense increased mainly resulting from the purchase and
development of software to support key technology initiatives;
o Professional services expenses increased mainly as a result of
higher compliance-related expenses;
o Data processing increased mainly due to higher transaction
volumes for both trust operations and MasterMoney card;
o Provision for losses on off-balance sheet commitments, which was
previously included in the provision for loan losses; and
o Other noninterest expense rose primarily as a result of higher
vendor billings stemming from a higher earnings credit rate in
the first quarter of 2005 related to title, escrow and government
balances, higher acquisition-related expenses, including
amortization of intangibles, partly offset by lower reserve
expenses for litigations.
24
NET INTEREST INCOME
The following table shows the major components of net interest income and
net interest margin.
FOR THE THREE MONTHS ENDED
--------------------------------- --------------------------------- INCREASE (DECREASE) IN
MARCH 31, 2004 MARCH 31, 2005 ----------------------------------
--------------------------------- --------------------------------- AVERAGE INCOME/
INTEREST AVERAGE INTEREST AVERAGE BALANCE EXPENSE(1)
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ ------------------ --------------
(DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1)(2) BALANCE EXPENSE(1) RATE(1)(2) AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ------- ------- -------
ASSETS
Loans:(3)
Domestic.................. $24,532,402 $ 327,933 5.38% $29,521,537 $ 402,626 5.51% $4,989,135 20.3% $74,693 22.8%
Foreign(4)................ 1,609,454 7,678 1.92 1,781,242 13,633 3.10 171,788 10.7 5,955 77.6
Securities--taxable......... 11,396,654 104,993 3.69 11,123,106 99,939 3.59 (273,548) (2.4) (5,054) (4.8)
Securities--tax-exempt...... 65,813 1,335 8.11 67,144 1,325 7.89 1,331 2.0 (10) (0.7)
Interest bearing deposits
in banks.................. 207,854 908 1.76 359,399 2,102 2.37 151,545 72.9 1,194 131.5
Federal funds sold and
securities purchased
under resale agreements... 786,994 1,959 1.00 377,291 2,373 2.55 (409,703) (52.1) 414 21.1
Trading account assets...... 277,057 595 0.86 231,680 908 1.59 (45,377) (16.4) 313 52.6
----------- ---------- ----------- ---------- ---------- -------
Total earning assets.... 38,876,228 445,401 4.60 43,461,399 522,906 4.85 4,585,171 11.8 $77,505 17.4%
---------- ---------- ---------- -------
Allowance for loan
losses(5)................. (534,171) (411,428) 122,743 (23.0)
Cash and due from banks..... 2,276,055 2,294,369 18,314 0.8
Premises and equipment,
net....................... 519,962 528,132 8,170 1.6
Other assets................ 1,913,108 2,405,264 492,156 25.7
----------- ----------- ----------
Total assets................ $43,051,182 $48,277,736 $5,226,554 12.1%
=========== =========== ==========
LIABILITIES
Domestic deposits:
Interest bearing.......... $11,390,393 16,556 0.58 $12,255,178 25,468 0.84 $ 864,785 7.6% $8,912 53.8%
Savings and consumer
time.................... 4,136,695 8,719 0.85 4,778,965 13,047 1.11 642,270 15.5 4,328 49.6
Large time................ 2,432,602 8,335 1.38 2,765,524 16,047 2.35 332,922 13.7 7,712 92.5
Foreign deposits(4)......... 1,227,223 2,132 0.70 1,174,857 6,176 2.13 (52,366) (4.3) 4,044 189.7
----------- ---------- ----------- ---------- ---------- -------
Total interest bearing
deposits.............. 19,186,913 35,742 0.75 20,974,524 60,738 1.17 1,787,611 9.3 24,996 69.9
----------- ---------- ----------- ---------- ---------- -------
Federal funds purchased
and securities sold under
repurchase agreements..... 395,466 681 0.69 1,279,862 7,455 2.36 884,396 223.6 6,774 994.7
Commercial paper............ 542,853 1,135 0.84 865,460 4,560 2.14 322,607 59.4 3,425 301.8
Other borrowed funds........ 187,829 1,300 2.78 180,541 1,529 3.44 (7,288) (3.9) 229 17.6
Medium and long-term debt... 806,062 3,139 1.57 808,846 6,532 3.27 2,784 0.3 3,393 108.1
Trust notes................. 203,022 2,181 4.30 15,733 238 6.06 (187,289) (92.3) (1,943) (89.1)
----------- ---------- ----------- ---------- ---------- -------
Total borrowed funds.... 2,135,232 8,436 1.59 3,150,442 20,314 2.61 1,015,210 47.5 11,878 140.8
----------- ---------- ----------- ---------- ---------- -------
Total interest bearing
liabilities........... 21,322,145 44,178 0.83 24,124,966 81,052 1.36 2,802,821 13.1 $36,874 83.5%
---------- ---------- ---------- -------
Noninterest bearing
deposits.................. 16,752,612 18,694,308 1,941,696 11.6
Other liabilities........... 1,026,503 1,249,812 223,309 21.8
----------- ----------- ----------
Total liabilities........... 39,101,260 44,069,086 4,967,826 12.7
STOCKHOLDERS' EQUITY
Common equity............... 3,949,922 4,208,650 258,728 6.6
----------- ----------- ----------
Total stockholders'
equity................ 3,949,922 4,208,650 258,728 6.6
----------- ----------- ----------
Total liabilities and
stockholders' equity.. $43,051,182 $48,277,736 $5,226,554 12.1%
=========== =========== ==========
Net interest income/margin
(taxable-equivalent
basis)................... 401,223 4.14% 441,854 4.09%
Less: taxable-equivalent
adjustment................ 802 1,055
---------- ----------
Net interest income..... $ 400,421 $ 440,799
========== ==========
- ----------------------
(1) Yields and interest income are presented on a taxable-equivalent basis
using the federal statutory tax rate of 35 percent.
(2) Annualized.
(3) Average balances on loans outstanding include all nonperforming loans. The
amortized portion of net loan origination fees (costs) is included in
interest income on loans, representing an adjustment to the yield.
(4) Foreign loans and deposits are those loans and deposits originated in
foreign branches.
(5) The average allowance related to off-balance sheet commitments was included
in other liabilities for the quarters ended December 31, 2004 and March 31,
2005. Periods prior to December 31, 2004 have not been restated.
25
Net interest income in the first quarter 2005, on a taxable-equivalent
basis, increased 10 percent, from the first quarter 2004. Our results were
primarily attributable to the following:
o The growth in average earning assets was primarily attributable to an
increase in average loans. The increase in average loans was largely
due to a $2.4 billion increase in average residential mortgages, a
$1.5 billion increase in average commercial loans and a $1.1 billion
increase in average commercial mortgages;
o Deposit growth contributed favorably to net interest margin in the
first quarter 2005. Average noninterest bearing deposits were higher
in the first quarter 2005, compared to the first quarter 2004, mainly
attributable to higher average business demand deposits of $1.5
billion, including demand deposits from our title and escrow clients
which increased less than $0.2 billion, and higher consumer demand
deposit growth;
o Yields on our earning assets were favorably impacted by the increasing
interest rate environment, resulting in a higher average yield of 25
basis points on average earning assets, despite being negatively
impacted by lower hedge income of $18.6 million; and
o In the first quarter 2005, we continued to take advantage of our
ability to attract lower cost of funds interest-bearing core and
noninterest-bearing deposit balances, which represented approximately
47.1 percent and 46.6 percent of total deposits, in the first quarter
2005 and 2004, respectively. However, our cost of funds on interest
bearing liabilities was negatively impacted by the increasing rate
environment, resulting in a higher average cost of interest-bearing
liabilities of 53 basis points, which included lower hedge income of
$4.1 million.
As a result of these changes, our net interest margin decreased by 5 basis
points.
We use derivatives to hedge expected changes in the yields on our variable
rate loans and term certificates of deposit (CDs), and to convert our long-term,
fixed-rate borrowings to floating rate. During 2005, these derivative positions
will provide less in net interest income than in 2004, as positions mature and,
to a lesser extent, as interest rates rise. However, we expect the declines in
hedge income to be partially offset by increased yields on the underlying
variable rate loans. For the quarters ended March 31, 2004 and 2005, we had
hedge income of $32.2 million and $9.5 million, respectively.
26
NONINTEREST INCOME
FOR THE THREE
MONTHS ENDED
----------------------- INCREASE (DECREASE)
MARCH 31, MARCH 31, ------------------
(DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT
- -------------------------------------------- --------- --------- ------- -------
Service charges on deposit accounts......... $ 81,096 $ 80,455 $ (641) (0.8)%
Trust and investment management fees........ 35,822 41,963 6,141 17.1
Insurance commissions....................... 21,735 22,017 282 1.3
International commissions and fees.......... 17,545 17,674 129 0.7
Brokerage commissions and fees.............. 8,297 8,972 675 8.1
Foreign exchange gains, net................. 8,344 8,940 596 7.1
Merchant banking fees....................... 7,467 6,266 (1,201) (16.1)
Card processing fees, net................... 8,792 5,607 (3,185) (36.2)
Securities gains, net....................... 1,622 344 (1,278) (78.8)
Gain on private capital investments, net.... 3,314 7,935 4,621 nm
Other....................................... 17,171 22,588 5,417 31.5
--------- --------- -------
Total noninterest income.................. $ 211,205 $ 222,761 $11,556 5.5%
========= ========= =======
- ----------------------
nm--not meaningful
NONINTEREST EXPENSE
FOR THE THREE
MONTHS ENDED
----------------------- INCREASE (DECREASE)
MARCH 31, MARCH 31, ------------------
(DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT
- -------------------------------------------- --------- --------- ------- -------
Salaries and other compensation............. $ 170,430 $ 185,194 $14,764 8.7%
Employee benefits........................... 48,993 54,286 5,293 10.8
Salaries and employee benefits............ 219,423 239,480 20,057 9.1
Net occupancy............................. 31,582 33,525 1,943 6.2
Equipment................................. 17,271 17,733 462 2.7
Software.................................. 12,995 14,628 1,633 12.6
Professional services..................... 11,303 13,710 2,407 21.3
Communications............................ 13,410 12,775 (635) (4.7)
Outside services.......................... 9,962 10,124 162 1.6
Data processing........................... 7,625 9,527 1,902 24.9
Advertising and public relations.......... 8,727 7,750 (977) (11.2)
Intangible asset amortization............. 4,221 4,986 765 18.1
Foreclosed asset expense.................. 519 406 (113) (21.8)
Provision for losses on off-balance
sheet commitments(1).................... -- 3,000 3,000 nm
Other..................................... 36,068 39,823 3,755 10.4
--------- --------- -------
Total noninterest expense.............. $ 373,106 $ 407,467 $34,361 9.2%
========= ========= =======
- -----------------------
(1) For the quarter ended March 31, 2005, the net change in the allowance for
losses on off-balance sheet commitments is recognized separately from the
change in the allowance for loan losses. Prior periods have not been
restated.
nm--not meaningful
27
INCOME TAX EXPENSE
Income tax expense in the first quarter of 2005 resulted in a 31 percent
effective income tax rate compared with an effective tax rate of 35 percent for
the first quarter of 2004. The decrease in the effective tax rate was due
primarily to a reduction in reserves of $10.0 million in the first quarter of
2005 for estimated amounts owed to the Internal Revenue Service with respect to
certain leveraged leasing transactions.
For further information regarding income tax expenses, see our Annual
Report on Form 10-K for the year ended December 31, 2004.
LOANS
The following table shows loans outstanding by loan type.
INCREASE (DECREASE)
MARCH 31, 2005 FROM:
--------------------------------------
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31,
2004 2004 2005 2004 2004
----------- ------------ ----------- ------------------- -----------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT
- --------------------------- ---------- ------- -------- -------
Domestic:
Commercial, financial and
industrial............. $ 8,717,052 $ 9,761,096 $ 9,798,791 $1,081,739 12.4% $ 37,695 0.4%
Construction............. 1,058,414 1,130,070 1,189,273 130,859 12.4 59,203 5.2
Mortgage:
Residential............ 7,502,675 9,538,150 10,121,033 2,618,358 34.9 582,883 6.1
Commercial............. 4,348,537 5,409,029 5,448,741 1,100,204 25.3 39,712 0.7
----------- ------------ ----------- ---------- --------
Total mortgage....... 11,851,212 14,947,179 15,569,774 3,718,562 31.4 622,595 4.2
Consumer:
Installment............ 781,731 767,767 777,986 (3,745) (0.5) 10,219 1.3
Revolving lines of
credit............... 1,279,651 1,581,866 1,612,039 332,388 26.0 30,173 1.9
----------- ------------ ----------- ---------- --------
Total consumer....... 2,061,382 2,349,633 2,390,025 328,643 15.9 40,392 1.7
Lease financing.......... 637,504 609,090 596,331 (41,173) (6.5) (12,759) (2.1)
----------- ------------ ----------- ---------- --------
Total loans in
domestic offices... 24,325,564 28,797,068 29,544,194 5,218,630 21.5 747,126 2.6
Loans originated in foreign
branches................. 1,707,535 1,801,988 1,787,129 79,594 4.7 (14,859) (0.8)
----------- ------------ ----------- ---------- --------
Total loans held to
maturity........... 26,033,099 30,599,056 31,331,323 5,298,224 20.4 732,267 2.4
Total loans held for
sale............... 3,206 117,900 34,217 31,011 nm (83,683) (71.0)
----------- ------------ ----------- ---------- --------
Total loans........ $26,036,305 $ 30,716,956 $31,365,540 $5,329,235 20.5% $648,584 2.1%
=========== ============ =========== ========== ========
- ------------
nm--not meaningful
Commercial, financial and industrial loans represent one of the largest
categories in the loan portfolio. These loans are extended principally to
corporations, middle-market businesses, and small businesses, with no industry
concentration exceeding 10 percent of total loans. This portfolio has a high
degree of geographic diversification based upon our customers' revenue bases,
which we believe lowers our vulnerability to changes in the economic outlook of
any particular region of the U.S.
Our commercial market lending originates primarily through our commercial
banking offices. These offices, which rely extensively on relationship-oriented
banking, provide a variety of services including depository and 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, among other sectors, the oil and gas,
entertainment, retailing, power and utilities and financial services industries.
28
The commercial, financial and industrial loan portfolio increase in the
first quarter of 2005 from the first quarter of 2004 was mainly attributable to
increased loan demand in the California middle market and specialty segments,
which reflected the improving economy in those markets and an increase in
loans extended to our title company clients.
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.
The construction loan portfolio increase in the first quarter of 2005 from
the first quarter of 2004 was attributable to increased demand for new
single-family homes, as well as apartment, retail building and REIT financing.
This growth occurred despite continued high office vacancy rates in our markets,
which was a factor that impacted the level of development and construction
projects we financed.
The commercial mortgage loan portfolio consists of loans on commercial and
industrial projects primarily in California. The commercial mortgages increase
in the first quarter of 2005 from the first quarter of 2004 was mainly
attributable to our acquisitions of Business Bank of California in the first
quarter of 2004 and Jackson Federal Bank in the fourth quarter of 2004, offset
by substantial commercial mortgage refinancings with other lenders.
RESIDENTIAL MORTGAGE LOANS
We originate residential mortgage loans, secured by one-to-four family
residential properties, through our multiple channel network (including
branches, mortgage brokers, and loan-by-phone) throughout California, Oregon and
Washington, and we periodically purchase loans in our market area.
The increase in residential mortgages was driven by purchase money
transactions, which accounted for approximately 50 percent of the increase in
volume. In addition, contributing to the increase were very attractive mortgage
rates and higher home prices. While we hold most of the loans we originate, we
sell most of our 30-year, fixed rate, non-Community Reinvestment Act (CRA)
residential mortgage loans.
CONSUMER LOANS
We originate consumer loans, such as auto loans and home equity loans and
lines, through our branch network. The primary driver of the increase in
consumer loans was our "Flex Equity Line/Loan" product. The "Flex Equity
Line/Loan" allows our customers the flexibility to manage a line of credit and
as many as four fixed rate loans under a single product.
LEASE FINANCING
We primarily offer two types of leases to our customers: direct financing
leases, where the assets leased are acquired without additional financing from
other sources; and leveraged leases, where a substantial portion of the
financing is provided by debt with no recourse to us. The lease financing
decrease from March 31, 2004 was attributable to the run-off of our discontinued
auto leasing activity. At March 31, 2005, our auto lease portfolio had declined
to $14.5 million and will fully mature by mid-year 2006. Included in our lease
portfolio are leveraged leases of $573 million, which are net of non-recourse
debt of approximately $1.2 billion. We utilize a number of special purpose
entities for our leveraged leases. These entities serve legal and tax purposes
and do not function as vehicles to shift liabilities to other parties or to
deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP
and by law, the gross lease receivable is offset by the qualifying non-recourse
debt. In leveraged lease transactions, the third-party lender may only look to
the collateral value of the leased assets for repayment.
29
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
energy-related lending in Canada.
CROSS-BORDER OUTSTANDINGS
Our cross-border outstandings reflect certain additional economic and
political risks that are not reflected in domestic outstandings. These risks
include those arising from exchange rate fluctuations and restrictions on the
transfer of funds. The following table sets forth our cross-border outstandings
as of March 31, 2004, December 31, 2004 and March 31, 2005, for any country
where such outstandings exceeded 1 percent of total assets. The cross-border
outstandings were compiled based upon category and domicile of ultimate risk and
are comprised of balances with banks, trading account assets, securities
available for sale, securities purchased under resale agreements, loans, accrued
interest receivable, acceptances outstanding and investments with foreign
entities. For any country shown in the table below, any significant local
currency outstandings are either hedged or funded by local currency borrowings.
PUBLIC CORPORATIONS
FINANCIAL SECTOR AND OTHER TOTAL
(DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS
- ---------------------------- ------------ -------- ------------ ------------
March 31, 2004
Korea....................... $640 $-- $12 $652
December 31, 2004
Korea....................... $615 $-- $3 $618
March 31, 2005
Korea....................... $679 $-- $6 $685
PROVISION FOR LOAN LOSSES
We recorded a reversal of provision for loan losses of $8 million in the
first quarter of 2005, compared with a reversal of provision for loan losses of
$5 million in the first quarter of 2004. Provisions for loan losses are charged
to income to bring our allowance for loan losses to a level deemed appropriate
by management based on the factors discussed under "Allowances for Credit
Losses" below. Beginning with first quarter 2005, changes in the allowance for
losses related to off-balance sheet commitments are recognized in noninterest
expense. The change in the allowance for losses on off-balance sheet commitments
in the first quarter 2005 was a provision of $3 million.
ALLOWANCE FOR CREDIT LOSSES
ALLOWANCE POLICY AND METHODOLOGY
We maintain allowances for credit losses to absorb losses inherent in the
loan portfolio as well as for leases and off-balance sheet commitments.
Understanding our policies on allowance for credit losses is fundamental to
understanding our consolidated financial position and consolidated results of
operations. Accordingly, our significant policies and methodology on allowance
for credit losses are discussed in detail in Note 1 in the "Notes to
Consolidated Financial Statements" and in the section "Allowance for Credit
Losses" included in our "Management's Discussion and Analysis of Financial
Condition and Results of Operation" in our 2004 Annual Report on Form 10-K,
which was filed with the Securities and Exchange Commission.
COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES
FROM DECEMBER 31, 2004
At March 31, 2005, our total allowance for credit losses was $490 million,
which consisted of $404 million related to loans and $86 million related to
off-balance sheet commitments. The allowance for
30
loan losses consisted of $396 million and $94 million of allocated and
unallocated allowance, respectively. At March 31, 2005, our allowance for credit
loss coverage ratios were 1.56 percent of total loans and 480 percent of total
nonaccrual loans. At December 31, 2004, our total allowance for credit losses
was at $490 million, or 1.59 percent of the total loan portfolio and 313 percent
of total nonaccrual loans.
In addition, the allowance incorporates the results of measuring impaired
loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." These accounting standards prescribe
the measurement methods, income recognition and disclosures related to impaired
loans. At March 31, 2005, total impaired loans were $47 million, and the
associated impairment allowance was $11 million, compared with $102 million and
$32 million, respectively, at December 31, 2004.
At March 31, 2005 and December 31, 2004, the allowance for losses related
to off-balance sheet commitments, which is included within our total allowance
for credit losses, was $86 million and $83 million, respectively. In determining
the adequacy of our allowance for credit losses, we consider both the allowance
for loan losses and for losses on off-balance sheet commitments.
During the first quarter of 2005, there were no material changes in
estimation methods or assumptions that affected our methodology for assessing
the appropriateness of the formula and specific allowances for credit losses.
As a result of management's assessment of factors, including improvements
in the quality of our loan portfolio, the continued improvement in the U.S.
economy, improving conditions in the power industry and other sectors in
domestic markets in which we operate, and growth and changes in the composition
of the loan portfolio, offset by the adverse impact of increasing fuel costs
across the whole economy, we recorded a net reversal of our provision for credit
losses of $5 million in the first quarter 2005.
CHANGES IN THE ALLOCATED (FORMULA AND SPECIFIC) ALLOWANCE
At March 31, 2005, the formula allowance increased to $367 million,
compared to $361 million at December 31, 2004. The increase was due primarily to
the impact of slight increases in both the loss factors and growth in our
pass-graded and homogeneous pooled loans.
At March 31, 2005, the specific allowance decreased to $29 million,
compared to $46 million at December 31, 2004. This decrease is primarily
reflective of lower impaired loans.
CHANGES IN THE UNALLOCATED ALLOWANCE
At March 31, 2005, the unallocated allowance increased to $94 million from
$83 million at December 31, 2004, reflecting the heightened uncertainties
surrounding the economy and some signs of slowing improvements in credit
quality. Additionally, the reasons for which an unallocated allowance is
warranted are detailed below.
In our assessment as of March 31, 2005, management focused, in particular,
on the factors and conditions set out below. There can be no assurance that the
adverse impact of any of these conditions on us will not be in excess of the
ranges set forth.
Although in certain instances the downgrading of a loan resulting from the
effects of the conditions described below has been reflected in the formula
allowance, management believes that the impact of these events on the
collectibility of the applicable loans may not have been reflected in the level
of nonperforming loans or in the internal risk grading process with respect to
such loans. In addition, our formula allowance does not take into consideration
sector-specific changes in the severity of losses that are expected to arise
from current economic conditions compared with our historical losses.
Accordingly, our evaluation of the probable losses related to the impact of
these factors was reflected in the unallocated
31
allowance. The evaluations of the inherent losses with respect to these factors
are subject to higher degrees of uncertainty because they are not identified
with specific problem credits.
The following describes the specific conditions we considered.
o With respect to fuel prices, we considered the high and increasing
prices of oil and petroleum products, and the impact across virtually
all sectors of the economy, which could be in the range of $10 million
to $39 million.
o With respect to leasing, we considered the weak situation for some
electric service providers, combined with continued weakness in the
airline industry, which could be in the range of $15 million to $26
million.
o With respect to commercial real estate, we considered slightly
improved vacancy rates and stagnant rent growth being experienced
nationally, with specific weakness in Northern California, which could
be in the range of $10 million to $22 million.
o With respect to cross-border exposures in certain foreign countries,
we considered the improving economic performances in many countries of
our key international markets, the results of our customers, as well
as the positive effect that the inflow of funds and reconstruction
efforts resulting from the December 26, 2004 tsunami are having on
certain Southeast Asian economies, which could be in the range of $3
million to $5 million.
o With respect to power companies/utilities, we considered the effects
of lower excess capacity and evidence that a slow recovery is
beginning in this industry, which could be in the range of $2 million
to $5 million.
Accordingly, our evaluation of the probable losses related to the impact of
these factors was reflected in the unallocated allowance.
32
CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES
The following table sets forth a reconciliation of changes in our allowance
for credit losses:
FOR THE THREE MONTHS
ENDED MARCH 31, INCREASE (DECREASE)
-------------------- -------------------
(DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT
- ---------------------------------------------- -------- -------- --------- -------
Balance, beginning of period.................. $532,970 $407,156 $(125,814) (23.6)%
Loans charged off:
Commercial, financial and industrial........ 19,788 12,500 (7,288) (36.8)
Construction................................ -- 118 118 nm
Commercial mortgage......................... -- 1,296 1,296 nm
Consumer.................................... 1,815 1,083 (732) (40.3)
Lease financing............................. 358 131 (227) (63.4)
-------- -------- ---------
Total loans charged off................... 21,961 15,128 (6,833) (31.1)
Recoveries of loans previously charged off:
Commercial, financial and industrial........ 8,819 19,600 10,781 122.2
Commercial mortgage......................... -- 23 23 nm
Consumer.................................... 435 590 155 35.6
Lease financing............................. 73 17 (56) (76.7)
-------- -------- ---------
Total recoveries of loans previously
charged off............................. 9,327 20,230 10,903 116.9
-------- -------- ---------
Net loans charged off (recovered)....... 12,634 (5,102) (17,736) (140.4)
(Reversal of) provision for loan losses....... (5,000) (8,000) (3,000) 60.0
Foreign translation adjustment and other net
additions (deductions)(1)................... 5,775 (27) (5,802) (100.5)
-------- -------- ---------
Ending balance of allowance for loan
losses(2)................................... $521,111 $404,231 $(116,880) (22.4)
Allowance for losses on off-balance sheet
commitments(2).............................. -- 85,374 85,374 nm
-------- -------- ---------
Allowance for credit losses................... $521,111 $489,605 $ (31,506) (6.0)%
======== ======== =========
Allowance for credit losses to total loans.... 2.00% 1.56%
(Reversal of) provision for loan losses to
net loans charged off (recovered).......... nm 156.80
Net loans charged off (recovered) to average
loans outstanding for the period(3)......... 0.19 (0.07)
- --------------------------
(1) Includes a transfer of $5.7 million related to the Business Bank of
California acquisition in the first quarter of 2004.
(2) On December 31, 2004, UnionBanCal Corporation transferred the allowance
related to off-balance sheet commitments of $83 million from allowance for
loan losses to other liabilities. At March 31, 2005, the allowance related
to off-balance commitments was $86 million. Periods prior to December 31,
2004 have not been restated.
(3) Annualized.
nm--not meaningful
Total loans charged off in the first quarter 2005 decreased from the first
quarter 2004, primarily attributable to improvements in loan quality.
Charge-offs reflect the realization of losses in the portfolio that were
recognized previously through provisions for credit losses. In addition, first
quarter 2005 recoveries of loans previously charged off increased from the first
quarter of 2004. Such fluctuations in loan recoveries from year-to-year are due
to variability in timing of recoveries and tend to trail the periods in which
charge-offs are recorded
At March 31, 2005, the allowance for credit losses exceeded the annualized
net loans charged off during the first quarter of 2005, reflecting management's
belief, based on the foregoing analysis, that there
33
are additional losses inherent in the portfolio. Historical net charge-offs are
not necessarily indicative of the amount of net charge-offs that we will realize
in the future.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, distressed loans held for
sale, 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 in our 2004 Annual Report on
Form 10-K, which was filed with the Securities and Exchange Commission.
Distressed loans held for sale are loans, which would otherwise be included
in nonaccrual loans, but that have been identified for accelerated disposition.
Disposition of these assets is contemplated within a short period of time, not
to exceed one year.
Foreclosed assets include property where we acquired title through
foreclosure or "deed in lieu" of foreclosure.
The following table sets forth an analysis of nonperforming assets.
INCREASE (DECREASE)
MARCH 31, 2005 FROM:
--------------------------------------
MARCH 31, DECEMBER 31,
2004 2004
MARCH 31, DECEMBER 31, MARCH 31, --------------------------------------
(DOLLARS IN THOUSANDS) 2004 2004 2005 AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------- --------- ------------ --------- --------- ------- -------- -------
Commercial, financial and
industrial................ $ 177,636 $ 72,600 $ 35,999 $(141,637) (79.7)% $(36,601) (50.4)%
Construction................ -- 2,622 1,425 1,425 nm (1,197) (45.7)
Commercial mortgage......... 27,354 26,520 9,587 (17,767) (65.0) (16,933) (63.8)
Lease financing............. 51,121 54,894 54,893 3,772 7.4 (1) (0.0)
Loan originated in foreign
branches.................. 630 -- -- (630) (100.0) -- nm
--------- ------------ --------- --------- --------
Total nonaccrual loans.. 256,741 156,636 101,904 (154,837) (60.3) (54,732) (34.9)
Foreclosed assets........... 6,153 7,282 5,232 (921) (15.0) (2,050) (28.2)
--------- ------------ --------- --------- --------
Total nonperforming assets $ 262,894 $ 163,918 $ 107,136 $(155,758) (59.2) $(56,782) (34.6)
========= ============ ========= ========= ========
Allowances for credit
losses(1)................. $ 521,111 $ 489,531 $ 489,605 $(31,506) (6.0)% $ 74 0.0 %
========= ============ ========= ========= ========
Nonaccrual loans to total
loans..................... 0.99% 0.51% 0.32%
Allowances for credit losses
to nonaccrual loans....... 202.97 312.53 480.46
Nonperforming assets to
total loans and foreclosed
assets.................. 1.01 0.53 0.34
Nonperforming assets to
total assets.............. 0.57 0.34 0.22
- -----------------
(1) Includes allowance for losses related to off-balance sheet commitments.
nm--not meaningful
At March 31, 2005, our nonperforming assets included approximately $54.9
million in aircraft leases and $11.8 million in acquired syndicated loans. The
decrease in nonaccrual loans was primarily due to pay-downs, charge-offs, and
loan sales, coupled with significantly reduced inflows. During the first quarter
2005, we sold approximately $35 million of nonperforming loans compared to
approximately $4 million in the first quarter 2004, which reduced our credit
exposures. Losses from these sales were reflected in our charge-offs.
34
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
INCREASE (DECREASE)
MARCH 31, 2005 FROM:
--------------------------------------
MARCH 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31,
2004 2004 2005 2004 2004
--------- ------------ --------- ------------------- -----------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------- --------- ------- -------- -------
Commercial, financial and
industrial................. $ 401 $ 1,315 $ 271 $ (130) (32.4)% $ (1,044) (79.4)%
Construction................. 1,318 -- 629 (689) (52.3) 629 nm
Mortgage:
Residential................ 5,421 1,385 1,580 (3,841) (70.9) 195 14.1
Commercial................. 118 -- 878 760 644.1 878 nm
--------- ------------ --------- --------- --------
Total mortgage........... 5,539 1,385 2,458 (3,081) (55.6) 1,073 77.5
Consumer and other........... 1,665 1,157 616 (1,049) (63.0) (541) (46.8)
--------- ------------ --------- --------- --------
Total loans 90 days or more
past due and still accruing $ 8,923 $ 3,857 $ 3,974 $ (4,949) (55.5)% $ 117 3.0%
========= ============ ========= ========= ========
- --------------
nm = not meaningful
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk exists primarily in interest rate risk in our
non-trading balance sheet and to a much lesser degree in price risk in our
trading portfolio for our customer-focused trading and sales activities. The
objective of market risk management is to mitigate an undue adverse impact on
earnings and capital arising from changes in interest rates and other market
variables. This risk management objective supports our broad objective of
preserving shareholder value, which encompasses earnings growth over time and
capital stability.
The Board of Directors, through its Finance and Capital Committee, approves
our Asset-Liability Management (ALM) Policy, which governs the management of
market risk and liquidity. In the administration of market risk management, the
Chief Executive Officer Forum (CEO Forum) provides broad and strategic guidance
and, as appropriate, specific direction to the Asset & Liability Management
Committee (ALCO) whose voting members are comprised of senior executives. ALCO
is responsible for ongoing management of interest rate and price risks as well
as liquidity risk, including formulation of risk management strategies, in
accordance with the CEO Forum's directives. The Treasurer is primarily
responsible for the implementation of risk management strategies approved by
ALCO and for operating management of market risk through the funding,
investment, derivatives hedging, and trading activities of the Global Markets
Group (GMG).
The Market Risk Monitoring (MRM) unit is responsible for the measurement
and monitoring of market risk, including ensuring that ALCO, our senior
management and the Board are kept fully informed as to our market risk profile
and compliance with applicable limits, guidelines and policies. MRM functions
independently of all operating and management units and reports directly to the
ALCO Chairman.
We have separate and distinct methods for managing the market risk
associated with our asset and liability management activities and our trading
activities, as described below.
INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING)
During the first quarter 2005, our asset-sensitivity continued to increase,
reflecting several factors. There were some further modeling enhancements,
although their effect on measured rate-sensitivity was
35
not significant. More importantly, changes in the actual and projected balance
sheet tended to produce greater asset-sensitivity, as did the strategic decision
to allow maturing ALM securities and derivative positions to run-off; for
additional information see--"ALM Activities" section below.
The increase in our asset-sensitivity is evidenced in the table below. A
+200 basis points parallel rate shift at March 31, 2005 would have produced an
estimated 1.93 percent increase in Economic NII (net interest income), while a
- -200 basis points shift would have lowered Economic NII by an estimated 2.58
percent. This compares with an estimated 0.60 percent and 1.39 percent,
respectively, at December 31, 2004. Economic NII adjusts our reported NII for
the effect of certain non-interest, DDA-related, fee and expense items. Those
adjustment items are innately liability-sensitive, meaning that reported NII is
more asset-sensitive than is Economic NII.
ECONOMIC NII
DECEMBER 31, MARCH 31,
(DOLLARS IN MILLIONS) 2004 2005
- ------------------------------------------------- ------------ ---------
+200 basis points................................ $10.9 $36.4
as a percentage of base case NII................. 0.60% 1.93%
- -200 basis points................................ $(25.0) $(48.6)
as a percentage of base case NII................. 1.39% 2.58%
In the case of non-parallel yield curve changes, we remain asset-sensitive
to changes in long-term rates (with short-term rates held constant). However,
the changes indicated above that caused increased asset-sensitivity to parallel
rate shifts also had the effect of extinguishing our previous short-rate
liability-sensitivity. Economic NII now shows rough neutrality to short-term
rate changes (with long-term rates held constant), while reported NII is now
very modestly short-rate asset-sensitive.
ALM ACTIVITIES
In general, our unhedged, core balance sheet is asset sensitive, meaning
that our loans generally re-price more quickly than our core deposits. In
managing the interest sensitivity of our balance sheet, we use the ALM
securities portfolio and derivatives positions as our primary tools. During the
quarter we continued to allow maturations in our relatively short duration ALM
securities to help support loan growth. Together with the continued maturation
of our existing derivative hedges, this had the effect of modestly increasing
our asset-sensitivity during the course of the first quarter.
ALM INVESTMENTS
At March 31, 2005, our securities available for sale portfolio included
$10.2 billion of securities for ALM purposes, unchanged from the December 31,
2004 level. During the first quarter 2005, we allowed our ALM fixed rate
portfolio to run-off as part of our strategy to allow our core asset sensitivity
to increase. The overall portfolio size remained relatively constant by making
new investments in floating rate securities. The estimated effective duration of
the ALM portfolio was managed within a range of 2.0 to 2.8. The estimated ALM
portfolio effective duration was 2.2 at March 31, 2005, compared to 2.3 at
December 31, 2004. Effective duration is a measure of price sensitivity of a
bond portfolio to immediate parallel shifts in interest rates. An effective
duration of 2.2 suggests an expected price change of approximately minus 2.2
percent for an immediate one percent rise in interest rates.
ALM DERIVATIVES
We also continued to allow our ALM derivatives to mature and reduced the
net level of interest rate derivatives by $1.2 billion during the quarter. This
strategy further contributed to our rising core asset-sensitivity. For
additional discussion of derivative instruments and our hedging strategies, see
Note 8 to our
36
Consolidated Financial Statements included in this report and Note 18 to our
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2004.
TRADING ACTIVITIES
Effective January 1, 2005, the Securities Trading and Institutional Sales
department, which serves the fixed-income needs of our institutional clients,
was combined with the retail brokerage operations of our broker/dealer
subsidiary, UnionBanc Investment Services LLC. The vast majority of our
securities trading income comes from customer-related transactions. UnionBanc
Investment Services LLC's trading risk is closely monitored and tightly
controlled using the existing Value-at-Risk methodology.
We began marketing energy derivatives contracts to existing energy industry
customers, primarily oil and gas producers, in late 2004, in order to meet their
hedging needs. Volume increased from $42 million in notional amount of contracts
outstanding as of December 31, 2004 to $440 million as of March 31, 2005.
Consistent with our customer interest rate derivatives business, all
transactions are fully matched to remove market risk, with income produced from
the credit spread earned.
For additional information about our market risk, please see "Quantitative
and Qualitative Disclosures about Market Risk" in "Management Discussion and
Analysis of Financial Condition and Results of Operation" in our Annual Report
on Form 10-K for the year ended December 31, 2004.
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 Finance and Capital Committee of the Board requires
regular reviews of our liquidity by ALCO. ALCO conducts monthly ongoing reviews
of our liquidity situation as well as regular updates to our CEO Forum, which
approves our Liquidity Contingency Plan. Liquidity is managed through this ALCO
coordination process on an entity-wide basis, encompassing all major business
units. The operating management of liquidity is implemented through the funding
and investment functions of the Global Markets Group. Our liquidity management
draws upon the strengths of our extensive retail and commercial core deposit
franchise, coupled with the ability to obtain funds for various terms in a
variety of domestic and international money markets. Our securities portfolio
represents a significant source of additional liquidity.
Core deposits provide us with a sizable source of relatively stable and
low-cost funds. Our average core deposits, which include demand deposits, money
market demand accounts, and savings and consumer time deposits, combined with
average common stockholders' equity, funded 83 percent of average total assets
of $48.3 billion in the first quarter 2005. Most of the remaining funding was
provided by short-term borrowings in the form of negotiable certificates of
deposit, large time deposits, foreign deposits, federal funds purchased,
securities sold under repurchase agreements, commercial paper, and other
borrowings. In the fourth quarter 2003, we issued $400 million in long-term
subordinated debt. In February 2004, we used a portion of the net proceeds
(approximately $350 million) from the sale of these securities to redeem our
outstanding Trust Notes with the remainder of the net proceeds from this
offering used for general corporate purposes.
The securities portfolio provides additional enhancement to our liquidity
position, which may be created through either security sales or repurchase
agreements. At March 31, 2005, we could have sold or transferred under
repurchase agreements over $7 billion of our available for sale securities,
although no portion of this balance was encumbered at March 31, 2005. Liquidity
may also be provided by the sale or maturity of other assets such as
interest-bearing deposits in banks, federal funds sold, and trading account
securities. The aggregate balance of these assets averaged $1.0 billion in the
first quarter 2005. Additional liquidity may be provided through loan maturities
and sales.
37
REGULATORY CAPITAL
The following tables summarize our risk-based capital, risk-weighted
assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION
MINIMUM
MARCH 31, DECEMBER 31, MARCH 31, REGULATORY
(DOLLARS IN THOUSANDS) 2004 2004 2005 REQUIREMENT
- ----------------------- ----------------- ----------------- ----------------- -----------------
CAPITAL COMPONENTS
Tier 1 capital.......... $ 3,510,616 $ 3,817,698 $ 3,728,822
Tier 2 capital.......... 946,422 968,294 968,292
----------------- ----------------- -----------------
Total risk-based
capital............... $ 4,457,038 $ 4,785,992 $ 4,697,114
================= ================= =================
Risk-weighted assets.... $34,132,921 $39,324,859 $41,167,052
================= ================= =================
Quarterly average
assets................ $42,597,143 $47,168,683 $47,892,405
================= ================= =================
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------- ---------- ------ ---------- ------ ---------- ------ ---------- -----
Total capital (to risk-
weighted assets)..... $4,457,038 13.06% $4,785,992 12.17% $4,697,114 11.41% >$3,293,364 8.0%
-
Tier 1 capital (to
risk-weighted assets) 3,510,616 10.29 3,817,698 9.71 3,728,822 9.06 > 1,646,682 4.0
-
Leverage(1)............ 3,510,616 8.24 3,817,698 8.09 3,728,822 7.79 > 1,915,696 4.0
-
- -------------
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
UNION BANK OF CALIFORNIA, N.A.
MINIMUM "WELL-CAPITALIZED"
MARCH 31, DECEMBER 31, MARCH 31, REGULATORY REGULATORY
(DOLLARS IN THOUSANDS) 2004 2004 2005 REQUIREMENT REQUIREMENT
- ----------------------- ----------------- ----------------- ----------------- ----------------- -----------------
CAPITAL COMPONENTS
Tier 1 capital......... $ 3,513,066 $ 3,597,738 $ 3,719,837
Tier 2 capital......... 479,639 493,756 492,259
----------------- ----------------- -----------------
Total risk-based
capital.............. $ 3,992,705 $ 4,091,494 $ 4,212,096
================= ================= =================
Risk-weighted assets... $33,506,773 $38,711,682 $40,563,339
================= ================= =================
Quarterly average
assets............... $42,045,737 $46,588,762 $47,267,803
================= ================= =================
CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------- ---------- ------ ---------- ------ ---------- ------ ----------- ----- ---------- -----
Total capital (to risk-
weighted assets)..... $3,992,705 11.92% $4,091,494 10.57% $4,212,096 10.38% >$3,245,067 8.0% >$4,056,334 10.0%
- -
Tier 1 capital (to
risk-weighted assets) 3,513,066 10.48 3,597,738 9.29 3,719,837 9.17 > 1,622,534 4.0 > 2,433,800 6.0
- -
Leverage(1)............ 3,513,066 8.36 3,597,738 7.72 3,719,837 7.87 > 1,890,712 4.0 > 2,363,390 5.0
- -
- -------------
(1) Tier 1 capital divided by quarterly average assets (excluding certain
intangible assets).
We and Union Bank of California, N.A. are subject to various regulations of
the federal banking agencies, including minimum capital requirements. We both
are required to maintain minimum ratios of Total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to quarterly average assets (the
Leverage ratio).
The decrease in our capital ratios from March 31, 2004, was attributable to
higher risk-weighted assets. Our Leverage ratio decrease was primarily
attributable to a $5 billion, or 12 percent, increase in quarterly average
assets, which was substantially the result of increases in both our residential
mortgage and commercial loan portfolios.
As of March 31, 2005, management believes the capital ratios of Union Bank
of California, N.A. met all regulatory requirements of "well-capitalized"
institutions, which are 10 percent for the Total risk-based capital ratio, 6
percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverage
ratio.
BUSINESS SEGMENTS
We segregate our operations into four primary business units for the
purpose of management reporting, as shown in the table that follows. The results
show the financial performance of our major business units.
38
The risk-adjusted return on capital (RAROC) methodology used seeks to
attribute economic capital to business units consistent with the level of risk
they assume. These risks are primarily credit risk, market risk and operational
risk. Credit risk is the potential loss in economic value due to the likelihood
that the obligor will not perform as agreed. Market risk is the potential loss
in fair value due to changes in interest rates, currency rates and equity
prices. Operational risk is the potential loss due to all other factors, such as
failures in internal control, system failures, or external events. RAROC is one
of several measures that is used to measure business unit compensation.
The following table reflects the condensed income statements, selected
average balance sheet items, and selected financial ratios, including changes
from the prior year, for each of our primary business units. The information
presented does not necessarily represent the business units' financial condition
and results of operations as if they were independent entities. Also, the table
has been expanded to include performance center earnings. A performance center
is a special unit whose income generating activities, unlike typical profit
centers, are based on other business segment units' customer base. The revenues
generated and expenses incurred for those transactions entered into to
accommodate our customers are allocated to other business segments where the
customer relationships reside. A performance center's purpose is to foster
cross-selling with a total profitability view of the products and services it
manages. For example, the Global Markets Trading and Sales unit, within the
Global Markets Group, is a performance center that manages the foreign exchange,
derivatives, and fixed income securities activities within the Global Markets
organization. Unlike financial accounting, there is no authoritative body of
guidance for management accounting equivalent to US GAAP. Consequently, reported
results are not necessarily comparable with those presented by other companies.
The RAROC measurement methodology recognizes credit expense for expected
losses arising from credit risk and attributes economic capital related to
unexpected losses arising from credit, market and operational risks. As a result
of the methodology used by the RAROC model to calculate expected losses,
differences between the provision for credit losses and credit expense in any
one period could be significant. However, over an economic cycle, the cumulative
provision for credit losses and credit expense for expected losses should be
substantially the same. Business unit results are based on an internal
management reporting system used by management to measure the performance of the
units and UnionBanCal Corporation as a whole. Our management reporting system
identifies balance sheet and income statement items for each business unit based
on internal management accounting policies. Net interest income is determined
using our internal funds transfer pricing system, which assigns a cost of funds
to assets or a credit for funds to liabilities and capital, based on their type,
maturity or repricing characteristics. Noninterest income and expense directly
or indirectly attributable to a business unit are assigned to that business. The
business units are assigned the costs of products and services directly
attributable to their business activity through standard unit cost accounting
based on volume of usage. All other corporate expenses (overhead) are allocated
to the business units based on a predetermined percentage of usage.
39
The business units' results for the prior periods have been restated to
reflect changes in the transfer pricing methodology and any reorganization
changes that may have occurred.
COMMUNITY BANKING COMMERCIAL
AND INVESTMENT FINANCIAL INTERNATIONAL
SERVICES GROUP SERVICES GROUP BANKING GROUP
----------------- ----------------- ---------------
AS OF THE THREE 2005 VS. 2004 AS OF THE THREE 2005 VS. 2004 AS OF THE THREE 2005 VS. 2004
MONTHS ENDED INCREASE/ MONTHS ENDED INCREASE/ MONTHS ENDED INCREASE/
MARCH 31, (DECREASE) MARCH 31, (DECREASE) MARCH 31, (DECREASE)
----------------- --------------- ----------------- --------------- --------------- ---------------
2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT
-------- -------- ------- ------- -------- -------- ------- ------- ------- ------- ------- -------
RESULTS OF OPERATIONS
AFTER PERFORMANCE
CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income
(expense)........... $174,713 $220,822 $46,109 26% $157,487 $198,136 $40,649 26% $ 7,575 $ 7,471 $ (104) (1)%
Noninterest income... 116,600 133,433 16,833 14 69,627 64,793 (4,834) (7) 18,189 17,658 (531) (3)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Total revenue........ 291,313 354,255 62,942 22 227,114 262,929 35,815 16 25,764 25,129 (635) (2)
Noninterest expense.. 218,956 256,782 37,826 17 104,627 108,862 4,235 4 15,683 18,345 2,662 17
Credit expense....... 7,786 8,910 1,124 14 31,226 23,667 (7,559) (24) 605 436 (169) (28)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Income before income
tax expense........ 64,571 88,563 23,992 37 91,261 130,400 39,139 43 9,476 6,348 (3,128) (33)
Income tax expense... 24,698 33,875 9,177 37 28,303 43,080 14,777 52 3,625 2,428 (1,197) (33)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Net income (loss).... $ 39,873 $ 54,688 $14,815 37 $ 62,958 $ 87,320 $24,362 39 $ 5,851 $ 3,920 $(1,931) (33)
======== ======== ======= ======== ======== ======= ======= ======= =======
PERFORMANCE CENTER
EARNINGS (DOLLARS IN
THOUSANDS):
Net interest income.. $ 170 $ 98 $ (72) (42) $ (129)$ (166) $ (37) (29) $ 9 $ 15 $ 6 67
Noninterest income... (10,552) (4,409) 6,143 58 16,618 10,424 (6,194) (37) 273 548 275 101
Noninterest expense.. (9,195) (3,639) 5,556 60 9,576 4,187 (5,389) (56) 43 204 161 374
Net income (loss).... (750) (426) 324 43 4,305 3,836 (469) (11) 147 222 75 51
Total loans (dollars
in millions)....... 27 26 (1) (4) (44) (57) (13) (30) -- -- -- na
AVERAGE BALANCES(DOLLARS
IN MILLIONS):
Total loans(1)....... $ 12,092 $ 14,514 $ 2,422 20 $ 12,085 $ 14,851 $ 2,766 23 $ 1,565 $ 1,627 $ 62 4
Total assets......... 13,310 15,918 2,608 20 14,192 18,011 3,819 27 2,004 2,016 12 1
Total deposits(1).... 18,666 20,268 1,602 9 13,338 14,874 1,536 12 1,663 1,582 (81) (5)
FINANCIAL RATIOS:
Risk adjusted return
on capital(2)...... 23% 28% 17% 22% 41% 25%
Return on average
assets(2).......... 1.20 1.39 1.78 1.97 1.17 0.79
Efficiency ratio(3).. 75.16 72.49 46.07 41.40 60.87 73.00
GLOBAL UNIONBANCAL
MARKETS GROUP OTHER CORPORATION
--------------- ------------------ -----------------
AS OF THE THREE 2005 VS 2004 AS OF THE THREE 2005 VS 2004 AS OF THE THREE
MONTHS ENDED INCREASE/ MONTHS ENDED INCREASE/ MONTHS ENDED
MARCH 31, (DECREASE) MARCH 31, (DECREASE) MARCH 31,
--------------- ----------------- ------------------ --------------- ----------------- ---------------
2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT
------- ------- -------- ------- -------- --------- ------- ------- -------- -------- ------ -------
RESULTS OF OPERATIONS
AFTER PERFORMANCE
CENTER EARNINGS
(DOLLARS IN THOUSANDS):
Net interest income
(expense)........... $38,440 $(6,253) $(44,693) (116)% $ 22,206 $ 20,623 $(1,583) (7)% $400,421 $440,799 $40,378 10%
Noninterest income... 1,541 839 (702) (46) 5,248 6,038 790 15 211,205 222,761 11,556 5
------- ------- -------- -------- --------- ------- -------- -------- -------
Total revenue........ 39,981 (5,414) (45,395) (114) 27,454 26,661 (793) (3) 611,626 663,560 51,934 8
Noninterest expense.. 6,427 4,183 (2,244) (35) 27,413 19,295 (8,118) (30) 373,106 407,467 34,361 9
Credit expense
(income)............ 50 55 5 10 (44,667) (41,068) 3,599 (8) (5,000) (8,000) (3,000) 60
------- ------- -------- -------- --------- ------- -------- -------- -------
Income (loss) before
income tax expense
(benefit).......... 33,504 (9,652) (43,156) (129) 44,708 48,434 3,726 8 243,520 264,093 20,573 8
Income tax expense
(benefit).......... 12,815 (3,692) (16,507) (129) 16,592 6,425 (10,167) (61) 86,033 82,116 (3,917) (5)
------- ------- -------- -------- --------- ------- -------- -------- -------
Net income (loss).... $20,689 $(5,960) $(26,649) (129) $ 28,116 $ 42,009 $13,893 49 $157,487 $181,977 $24,490 16
======= ======= ======== ======== ========= ======= ======== ======== =======
PERFORMANCE CENTER
EARNINGS (DOLLARS IN
THOUSANDS):
Net interest income.. $ (150)$ (106) $ 44 29 $ 100 $ 159 $ 59 59 $ -- $ -- $ -- na
Noninterest income... (10,196) (9,679) 517 5 3,857 3,116 (741) (19) -- -- -- na
Noninterest expense.. (1,906) (1,442) 464 24 1,482 690 (792) (53) -- -- -- na
Net income (loss).... (5,212) (5,152) 60 1 1,510 1,520 10 1 -- -- -- na
Total loans (dollars
in millions)....... -- -- -- na 17 31 14 82 -- -- -- na
AVERAGE BALANCES
(DOLLARS IN MILLIONS):
Total loans(1)....... $ 126 $ 64 $ (62) (49) $ 274 $ 247 $ (27) (10) $ 26,142 $ 31,303 $ 5,161 20
Total assets......... 12,382 10,981 (1,401) (11) 1,163 1,352 189 16 43,051 48,278 5,227 12
Total deposits(1).... 1,100 1,764 664 60 1,173 1,181 8 1 35,940 39,669 3,729 10
FINANCIAL RATIOS:
Risk adjusted return
on capital(2)...... 9 (3)% na na na na
Return on average
assets(2).......... 0.67 (0.22) na na 1.47 1.53%
Efficiency ratio(3).. 16.08 nm na na 60.84 60.80
- -----------------
(1) Represents loans and deposits for each business segment after allocation
between the segments of loans and deposits originated in one segment but
managed by another segment.
(2) Annualized
(3) The efficiency ratio is noninterest expense, excluding foreclosed asset
expense (income) and provision for losses on off-balance sheet commitments,
as a percentage of net interest income and noninterest income.
na = not applicable
nm = not meaningful
40
COMMUNITY BANKING AND INVESTMENT SERVICES GROUP
The Community Banking and Investment Services Group provides financial
products including a set of credit, deposit, trust, risk management, and
insurance products delivered through branches, relationship managers, private
bankers, trust administrators, and insurance agents to individuals and small
businesses.
During the first quarter 2005, net income increased by 37 percent over the
same period in 2004, reflecting the group's continued focus on growing the
consumer asset portfolio and attracting retail and small business deposits.
The group's strategy is to grow assets through an expanded small business
sales force, increased emphasis on real estate secured and Small Business
Administration (SBA) guaranteed loans to small business, and a stronger network
of residential real estate brokers. Increasing demand for home equity loans and
more effective cross-selling tactics have led to an overall growth in consumer
loans, despite run-off of discontinued auto dealer and auto lease lines of
business. In addition, the group expects a larger branch network, created from
new branches and acquired branches, to improve growth prospects when combined
with more robust efforts in the telephone and internet channels.
Total core deposit growth demonstrates the group's continued success in
attracting mass retail, affluent consumers and small business deposits through
marketing activities, relationship management, increased and improved sales
resources, new locations, and new products. Among the more successful marketing
activities has been the "Power Bank" network, in Fresno, California and in the
Central Coast region of California. These branches offer an expanded set of
service options, extended hours and have been remodeled to improve the customer
experience with facility enhancements. We do not, however, intend to expand the
"Power Bank" to additional markets in 2005 until we better understand the return
on our investment in facilities and improved service. The focus on
enterprise-wide cross-sell has been particularly effective in our affluent
market where a key strategy of The Private Bank is to expand its business by
leveraging existing Bank client relationships. These activities, in the
aggregate, have resulted in an increase of 12 percent in core deposits.
The largest portion of the 14 percent increase in noninterest income was
due to an increase in deposit fees and trust fees, which were attributable to
the recently acquired portfolios from CNA Trust (renamed TruSource) and the BTM
Trust Company. Overall, total revenues for the first quarter 2005 increased by
over 22 percent compared to the first quarter 2004.
The Community Banking and Investment Services Group is comprised of five
major divisions: Community Banking, Wealth Management, Institutional Services
and Asset Management, Consumer Asset Management, and Insurance Services
COMMUNITY BANKING serves its customers through 312 full-service branches in
California, 4 full-service branches in Oregon and Washington, and a network of
588 proprietary ATMs. Customers may also access our services 24 hours a day by
telephone or through our WEBSITE at WWW.UBOC.COM. In addition, the division
offers automated teller and point-of-sale merchant services.
This division is organized by service delivery method, by markets and by
geography. We serve our customers in the following ways:
o through community banking branches, which serve consumers and
businesses with checking and deposit services, as well as various
types of consumer financing;
o through on-line access to our internet banking services, which augment
our physical delivery channels by providing an array of customer
transaction, bill payment and loan payment services;
o through branches and business banking centers, which serve small
businesses with annual sales up to $5 million; and
o through in-store branches, which also serve consumers and small
businesses.
41
WEALTH MANAGEMENT provides comprehensive private banking services to our
affluent clientele.
o The Private Bank focuses primarily on delivering financial services to
high net worth individuals with sophisticated financial needs as well
as to professional service firms. Specific products and services
include trust and estate services, investment account management
services, and deposit and credit products. A key strategy of The
Private Bank is to expand its business by leveraging existing Bank
client relationships. Through 14 existing locations, The Private Bank
relationship managers offer all of our available products and
services.
INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment management
and administration services for a broad range of individuals and institutions.
o HighMark Capital Management, Inc., a registered investment advisor,
provides investment advisory services to institutional clients and our
proprietary mutual funds, the affiliated HighMark Funds. It also
provides advisory services to Union Bank of California, N.A. trust and
agency clients, including corporations, pension funds and individuals.
HighMark Capital Management, Inc. also provides mutual fund support
services. HighMark Capital Management, Inc.'s strategy is to increase
assets under management by broadening its client base and helping to
expand the distribution of shares of its mutual fund clients.
o Institutional Services provides custody, corporate trust, and
retirement plan services. Custody Services provides both domestic and
international safekeeping/settlement services in addition to
securities lending. Corporate Trust acts as trustee for corporate and
municipal debt issues and provides escrow services. Retirement
Services provides a full range of defined benefit and defined
contribution administrative services, including trustee services,
administration, investment management, and 401(k) valuation services.
The client base of Institutional Services includes financial
institutions, corporations, government agencies, unions, insurance
companies, mutual funds, investment managers, and non-profit
organizations. Institutional Services' strategy is to continue to
leverage and expand its position in our target markets. The
acquisition of CNA Trust Company (renamed TruSource) expanded our
retirement processing capability by providing outsourcing services for
direct distributors of retirement products, and strengthened capacity
to support smaller plans. The acquisition of the corporate trust
portfolio of BTM Trust Company enhanced our capability in the areas of
municipal and project finance trustee and agent services.
CONSUMER ASSET MANAGEMENT provides the centralized underwriting,
processing, servicing, collection and administration for consumer assets
including residential mortgages.
INSURANCE SERVICES provides a wide range of risk management services and
insurance products to business and retail customers through offices in
California and Oregon.
Through alliances with other financial institutions, the Community Banking
and Investment Services Group offers additional products and services, such as
credit cards, merchant bank cards, leasing, and asset-based and leveraged
financing.
The group competes with larger banks by attempting to provide service
quality superior to that of its major competitors. The group's primary means of
competing with community banks include its branch network and its technology to
deliver banking services. The group also offers convenient banking hours to
consumers through our drive-through banking locations and selected branches that
are open seven days a week.
The group competes with a number of commercial banks, internet banks,
savings associations and credit unions, as well as more specialized financial
service providers such as investment brokerage companies, consumer finance
companies, and residential real estate lenders.
42
COMMERCIAL FINANCIAL SERVICES GROUP
The Commercial Financial Services Group offers financing and cash
management services to middle market and large corporate businesses primarily
headquartered in the western United States. The group has continued to focus on
specific geographic markets and industry segments such as energy, entertainment,
and real estate. Relationship managers provide credit services, including
commercial loans, accounts receivable and inventory financing, project
financing, lease financing, trade financing, and real estate financing. In
addition to credit services, the group offers cash management services delivered
through deposit managers with significant industry expertise and experience in
cash management solutions for businesses, correspondent banks and government
entities.
In the first quarter 2005, the increase in net income was due to
significant growth in both loans and deposits. Net interest income increased by
26 percent due to higher demand deposits and a higher margin on deposits,
resulting in a $41 million improvement over the prior year. Deposit growth came
primarily from sales successes in middle market, corporate and real estate
industries. In addition to new sales, pricing strategies to retain volume helped
to offset the disintermediation associated with a rising interest rate
environment. Our title/escrow deposits were not a significant source of growth
in the first quarter.
First quarter 2005 average loans increased by 23 percent over the same
period last year. This is primarily due to the acquisition of Jackson Federal
and continued improvement in our approach to the commercial real estate market.
The margin on deposits improved through a combination of increased volume and
higher internal valuation rates.
The decrease in noninterest income was mainly attributable to lower deposit
fees due to an increase in the earnings credit available to our wholesale
customers as a result of higher interest rates; lower credit card fees as a
result of the sale of the merchant portfolio; and lower syndication fees, offset
by the first quarter gain in revenue of 16 percent. The increase in noninterest
expense during the first quarter 2005, compared to the first quarter 2004, was
primarily attributable to outside services expense from vendor bills paid on
behalf of our commercial customers.
The group's initiatives during 2005 will continue to include expanding
wholesale deposit activities and increasing domestic trade financing. Loan
strategies include originating, underwriting and syndicating loans in core
competency markets, such as the California middle-market, corporate banking,
commercial real estate, energy, entertainment, equipment leasing and commercial
finance. The group is particularly strong in processing services, including
services such as Automated Clearing House (ACH), check processing, and cash
vault services.
The Commercial Financial Services Group is comprised of the following
business units:
o the Commercial Banking Division, which serves California middle-market
and large corporate companies with commercial lending, trade
financing, and asset-based loans;
o the Corporate Deposit and Treasury Management Division, which provides
deposit and cash management expertise to middle-market and large
corporate clients, government agencies and specialized industries and
manages the Bank's web strategies for retail, small business, wealth
management and commercial clients;
o the Real Estate Industries Division, which provides real estate
lending products such as construction loans, commercial mortgages and
bridge financing;
o the Energy Capital Services Division, which provides corporate
financing and project financing to oil and gas companies, as well as
power and utility companies, nationwide; and
o the Corporate Capital Markets Division, which provides financing to
middle-market and large corporate clients in their defined industries
and geographic markets, together with limited merchant and investment
banking related products and services.
43
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 other
banks primarily on the basis of the quality of its relationship managers, the
level of industry expertise, the delivery of quality customer service, and its
reputation as a "business bank". The group also competes with a variety of other
financial services companies. Competitors include other major California banks,
as well as regional, national and international banks. In addition, the group
competes with investment banks, commercial finance companies, leasing companies,
and insurance companies.
INTERNATIONAL BANKING GROUP
Our International Banking Group primarily focuses on providing
correspondent banking and trade finance related products and services to
international financial institutions worldwide. This focus includes products and
services such as letters of credit, international payments, collections and
providing short-term financing. The majority of the revenue generated is from
financial institutions domiciled outside the U.S.
The group's business revolves around providing correspondent banking
services and short-term financing, mostly to financial institutions. Net
interest income in the first quarter 2005 was basically flat compared to same
period last year despite a decline of $56 million in DDA balances and $196
million in Sweep balances due to our decision to exit from the Russian and
former Soviet bloc markets. Adjusting for this decline, net interest income
increased by $0.8 million or 13 percent. This growth was mainly a result of
higher earnings credit rate on slightly higher core demand deposit balances
partially offset by narrowing spreads on earning assets due to rising interest
rates. The noninterest income decline was mainly attributable to reduced fees
due to the exit from the Russian and former Soviet bloc markets. The increase in
noninterest expense was attributable to costs incurred for compliance with
anti-money laundering and Banking Secrecy Act regulations.
The group has a long history of providing correspondent banking and
trade-related products and services to international financial institutions. We
believe the group continues to achieve strong customer loyalty in the
correspondent banking markets, but there are certain trends in these markets
that could materially adversely affect our international correspondent banking
business. These trends include heightened regulatory burdens related to the Bank
Secrecy Act and other anti-money laundering laws and regulations, as well as
consolidation of banks in key international markets and increased technological
investments and competition from major banks that are active in international
correspondent banking. The International Banking Group, headquartered in San
Francisco, also maintains offices in Asia, Latin America and Eastern Europe, and
an international banking subsidiary in New York.
GLOBAL MARKETS GROUP
The Global Markets Group operates to support all of the Bank's business
groups and serve the Company as a whole. This group is responsible for our
treasury management, which encompasses wholesale funding, liquidity management,
and interest rate risk management including the ALM securities portfolio
management and derivatives hedging activities. These treasury management
activities are carried out to counter-balance the residual risk positions of the
Company's core balance sheet and to manage those risks conservatively within
prudent guidelines. (For more discussion on these risk management activities,
see "Quantitative and Qualitative Disclosures About Market Risk".) Associated
with this function, the results of the treasury unit within this group includes
the funds transfer pricing results for the entire company, which allocates to
the other business segments their cost of funds on all asset categories and
credit for funds on all liability categories. Another important function of the
Global Markets Group is the offering of a broad range of market products and
risk management products in its UBOC Markets unit. The products include foreign
exchange and interest rate derivatives. In the fourth quarter 2004, this unit
began offering certain energy commodity derivative hedge products on a limited
scale, to serve our energy sector client base. The UBOC Markets unit includes
the Bank's brokerage subsidiary, UnionBanc
44
Investment Services LLC, whose profitability flows into the Community Banking
and Investment Services Group. The income of UBOC Markets attributable to
business with our clients is allocated, through performance centers, to the
business units.
Total revenue for the first quarter of 2005 decreased compared to the first
quarter of 2004, due mainly to the decrease in net interest income. The decrease
in net interest income was primarily the result of a decline in income from ALM
derivative hedges, and from the net impact of changes in transfer pricing rates
over the period as market rates increased.
OTHER
"Other" includes the following items:
o corporate activities that are not directly attributable to one of the
four major business units. Included in this category are certain other
nonrecurring items such as the results of operations of certain parent
company non-bank subsidiaries and the elimination of the fully
taxable-equivalent basis amount;
o the adjustment between the credit expense under RAROC and the
provision for credit losses under US GAAP and earnings associated with
unallocated equity capital;
o the adjustment between the tax expense calculated under RAROC using a
tax rate of 38.25 percent and the Company's effective tax rates;
o the Pacific Rim Corporate Group, with assets of $242 million at March
31, 2005, 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 in Japan; and
o the residual costs of support groups.
The first quarter 2005 financial results were impacted by the following
factors:
o Credit expense (income) of ($41.1) million was due to the difference
between the $8.0 million reversal of provision for loan losses
calculated under our US GAAP methodology and the $33.1 million in
expected losses for the reportable business segments, which utilizes
the RAROC methodology;
o Net interest income is the result of differences between the credit
for equity for the reportable segments under RAROC and the net
interest income earned by UnionBanCal Corporation, and a credit for
deposits in the Pacific Rim Corporate Group;
o Noninterest income $6.0 million;
o Noninterest expense of $19.3 million declined partially attributable
to lower litigation expenses and refinements in our overhead
allocations in the first quarter of 2005; and
o Income tax expense included a credit adjustment of $10.0 million to
reflect a reduction in reserves to the Internal Revenue Service with
respect to the tax treatment of certain leasing transactions.
The first quarter 2004 financial results were impacted by the following
factors:
o Credit expense (income) of ($44.7) million was due to the difference
between the $5.0 million reversal in provision for loan losses
calculated under our US GAAP methodology and the $39.7 million in
expected losses for the reportable business segments, which utilizes
the RAROC methodology;
o Net interest income is the result of differences between the credit
for equity for the reportable segments under RAROC and the net
interest income earned by UnionBanCal Corporation, and a credit for
deposits in the Pacific Rim Corporate Group;
45
o Noninterest income $5.2 million;
o Noninterest expense of $27.4 million; and
o Income tax expense included a credit adjustment of $6.0 million to
reflect a reduction in the estimate of California tax expense.
REGULATORY MATTERS
On October 18, 2004, Union Bank of California International entered into a
written agreement with the Federal Reserve Bank of New York relating to Union
Bank of California International's Bank Secrecy Act controls and processes.
Union Bank of California International is wholly-owned by Union Bank of
California, N.A., which is wholly-owned by UnionBanCal Corporation. Union Bank
of California International is headquartered in New York City and, as an Edge
Act subsidiary, is limited to engaging in international banking activities.
Union Bank of California International is implementing a plan to strengthen its
Bank Secrecy Act controls and processes.
As previously disclosed in our December 31, 2004 Annual Report on Form
10-K, we expected and on March 23, 2005, Union Bank of California, N.A., did
receive from the Office of the Comptroller of the Currency, its principal
regulator, a memorandum of understanding, which requires Union Bank of
California, N.A. to strengthen its Bank Secrecy Act and anti-money laundering
controls and processes. The memorandum of understanding did not impose any fines
or penalties.
Management is committed to resolving the issues raised by the regulators
and is continuing to take action aimed at resolving these matters.
These regulatory matters may adversely affect UnionBanCal Corporation's and
Union Bank of California, N.A.'s ability to obtain regulatory approvals for
future initiatives requiring regulatory approval, including acquisitions.
However, neither this effect, Union Bank of California, N.A.'s memorandum of
understanding with the Office of the Comptroller of the Currency, Union Bank of
California International's agreement with the Federal Reserve Bank of New York,
nor the financial impact of enhanced Bank Secrecy Act and anti-money laundering
controls and processes, are expected to have a material adverse impact on the
financial condition or results of operations of Union Bank of California, N.A.
or UnionBanCal Corporation.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This document includes forward-looking information, which is subject to the
"safe harbor" created by section 27A of the Securities Act of 1933, as amended,
and section 21E of the Securities Exchange Act of 1934, as amended. We may make
forward-looking statements in our Securities and Exchange Commission (SEC)
filings, press releases, news articles, conference calls with analysts and
stockholders and when we are speaking on behalf of UnionBanCal Corporation.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. Often, they include the words
"believe," "expect," "target," "anticipate," "intend," "plan," "estimate,"
"potential," "project," or words of similar meaning, or future or conditional
verbs such as "will," "would," "should," "could," or "may." These
forward-looking statements are intended to provide investors with additional
information with which they may assess our future potential. All of these
forward-looking statements are based on assumptions about an uncertain future
and are based on information available to us at the date of these statements. We
do not undertake to update forward-looking statements to reflect facts,
circumstances, assumptions or events that occur after the date the
forward-looking statements are made.
In this document, for example, we make forward-looking statements
discussing our expectations about:
o Pending legal actions
o Credit quality and provision for credit losses
46
o Net interest income including income from derivative hedges
o The impact of increases in interest rates and growth in our commercial
loan portfolio on our net interest margin
o The impact of strategic investments on our business
o The unallocated portion of our allowance for credit losses
o Our sensitivity to changes in interest rates
o The asset sensitivity of our balance sheet
o Increased regulatory controls and processes regarding Bank Secrecy Act
and anti-money laundering matters
o Trends in international markets, which could adversely affect our
international correspondent banking business
o Future legislative and regulatory developments, including the proposed
repeal of Regulation Q
There are numerous risks and uncertainties that could and will cause actual
results to differ materially from those discussed in our forward-looking
statements. Many of these factors are beyond our ability to control or predict
and could have a material adverse effect on our stock price, financial
condition, and results of operations or prospects. Such risks and uncertainties
include, but are not limited to those listed in "Industry Factors" and "Company
Factors."
Readers of this document should not rely solely on forward-looking
information and should consider all uncertainties and risks disclosed throughout
this document and in our other reports to the SEC, including, but not limited
to, those discussed below. Any factor described in this report could by itself,
or together with one or more other factors, adversely affect our business,
future prospects, results of operations or financial condition. There are also
other factors that we have not described in this report and our other reports
that could cause our results to differ from our expectations.
INDUSTRY FACTORS
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, decreases in interest rates could
result in an acceleration of loan prepayments. An increase in market interest
rates could also adversely affect the ability of our floating-rate borrowers to
meet their higher payment obligations. If this occurred, it could cause an
increase in nonperforming assets and charge-offs, which could adversely affect
our business.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD
Changes in market interest rates, including changes in the relationship
between short-term and long-term market interest rates or between different
interest rate indices, can impact our margin spread, that is, the difference
between the interest rates we charge on interest earning assets, such as loans,
and the interest rates we pay on interest bearing liabilities, such as deposits
or other borrowings. The impact could result in a decrease in our interest
income relative to interest expense.
THE CONTINUING WAR ON TERRORISM COULD ADVERSELY AFFECT U.S. AND GLOBAL
ECONOMIC CONDITIONS
Acts or threats of terrorism and actions taken by the U.S. or other
governments as a result of such acts or threats may result in a disruption of
U.S. and global economic and financial conditions and could adversely affect
business and economic and financial conditions in the U.S. and globally
generally and in our principal markets.
47
SUBSTANTIAL COMPETITION COULD ADVERSELY AFFECT US
Banking is a highly competitive business. We compete actively for loan,
deposit, and other financial services business in California, Oregon and
Washington, as well as nationally and internationally. Our competitors include a
large number of state and national banks, thrift institutions, credit unions and
major foreign-affiliated or foreign banks, as well as many financial and
nonfinancial firms that offer services similar to those offered by us, including
many large securities firms. Some of our competitors are community or regional
banks that have strong local market positions. Other competitors include large
financial institutions that have substantial capital, technology and marketing
resources that are well in excess of ours. 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.
ADVERSE EFFECTS OF, OR CHANGES IN, BANKING OR OTHER LAWS AND REGULATIONS OR
GOVERNMENTAL FISCAL OR MONETARY POLICIES COULD ADVERSELY AFFECT US
We are subject to significant federal and state regulation and supervision,
which is primarily for the benefit and protection of our customers and not for
the benefit of investors. In the past, our business has been materially affected
by these regulations. This will likely continue in the future. Laws, regulations
or policies, including accounting standards and interpretations, currently
affecting us and our subsidiaries may change at any time. Regulatory authorities
may also change their interpretation of these statutes and regulations.
Therefore, our business may be adversely affected by future changes in laws,
regulations, policies or interpretations or regulatory approaches to compliance
and enforcement, including requirements concerning enterprise-wide risk
management and the proposed repeal of Regulation Q, barring payment of interest
on business accounts. Additionally, our international activities may be subject
to the laws and regulations of the jurisdiction in which business is being
conducted. International laws, regulations and policies affecting us and our
subsidiaries may change at any time and affect our business opportunities and
competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi,
Ltd.'s controlling ownership of us, laws, regulations and policies adopted or
enforced by the Government of Japan and the Federal Reserve Board may adversely
affect our activities and investments and those of our subsidiaries in the
future.
Additionally, our business is affected significantly by the fiscal and
monetary policies of the U.S. federal government and its agencies. We are
particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the U.S. Under long-standing policy
of the Federal Reserve Board, a bank holding company is expected to act as a
source of financial strength for its subsidiary banks. As a result of that
policy, we may be required to commit financial and other resources to our
subsidiary bank in circumstances where we might not otherwise do so. Among the
instruments of monetary policy available to the Federal Reserve Board are (a)
conducting open market operations in U.S. government securities, (b) changing
the discount rates on borrowings by depository institutions, and (c) imposing or
changing reserve requirements against certain borrowings by banks and their
affiliates. These methods are used in varying degrees and combinations to
directly affect the availability of bank loans and deposits, as well as the
interest rates charged on loans and paid on deposits. The policies of the
Federal Reserve Board may have a material effect on our business, prospects,
results of operations and financial condition.
The Check Clearing for the 21st Century Act (Check 21) became effective on
October 28, 2004. Check 21 is designed to foster innovation in the payments
system and to enhance its efficiency by reducing some of the legal impediments
to check truncation (that is, the banking process by which cancelled original
checks are not returned to the customer with the customer's regular bank
statement). The law facilitates check truncation by creating a new negotiable
instrument called a substitute check, which would permit banks to truncate
original checks, to process check information electronically, and to deliver
substitute checks to banks that want to continue receiving paper checks. The law
does not require banks to accept checks in electronic form nor does it require
banks to use the new authority granted by Check 21 to create
48
substitute checks. In order to manage and control the changes which may be
necessitated by Check 21, we have established a "Check 21 Initiative Project
Management Structure," composed of representatives from many of our business,
operating and support units. The objective of this initiative is to allow us to
prioritize and allocate our resources and mitigate risk to our ongoing
operations. It is not possible at this time to predict the long-term financial
impact of Check 21 on our business.
Refer to "Supervision and Regulation" in our Annual Report on Form 10-K for
the year ended December 31, 2004, and "Regulatory Matters" for discussion of
other laws and regulations, including the Bank Secrecy Act and other anti-money
laundering laws and regulations that may have a material effect on our business,
prospects, results of operations and financial condition.
CHANGES IN ACCOUNTING STANDARDS COULD MATERIALLY IMPACT OUR FINANCIAL
STATEMENTS
From time to time the Financial Accounting Standards Board, the SEC and
bank regulators change the financial accounting and reporting standards that
govern the preparation of our financial statements. These changes can be very
difficult to predict and can materially impact how we record and report our
financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in our
restating prior period financial statements.
THERE ARE AN INCREASING NUMBER OF NON-BANK COMPETITORS PROVIDING FINANCIAL
SERVICES
Technology and other changes increasingly allow parties to complete
financial transactions electronically, and in many cases, without banks. For
example, consumers can pay bills and transfer funds over the internet and by
telephone without banks. Many non-bank financial service providers have lower
overhead costs and are subject to fewer regulatory constraints. If consumers do
not use banks to complete their financial transactions, we could potentially
lose fee income, deposits and income generated from those deposits.
COMPANY FACTORS
ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS
A substantial majority of our assets, deposits and fee income are generated
in California. As a result, poor economic conditions in California may cause us
to incur losses associated with higher default rates and decreased collateral
values in our loan portfolio. Economic conditions in California are subject to
various uncertainties at this time, including the pace and scope of the recovery
in the technology sector, and the California state government's continuing
budgetary and fiscal difficulties. If economic conditions in California decline,
we expect that our level of problem assets could increase and our prospects for
growth could be impaired. The State of California continues to face fiscal
challenges, the long-term impact of which on the State's economy cannot be
predicted with any certainty.
ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES WE SERVE COULD
ADVERSELY AFFECT OUR BUSINESS
We are subject to certain industry-specific economic factors. For example,
a significant and increasing portion of our total loan portfolio is related to
residential real estate, especially in California. Accordingly, a downturn in
the real estate and housing industries in California could have an adverse
effect on our operations and the quality of our real estate loan portfolio.
Increases in residential mortgage loan interest rates could also have an adverse
effect on our operations by depressing new mortgage loan originations. We
provide financing to businesses in a number of other industries that may be
particularly vulnerable to industry-specific economic factors, including the
commercial real estate industry, the communications / media industry, the retail
industry, the airline industry, the power industry and the technology industry.
Recent increases in fuel prices and energy costs have adversely affected
businesses in several of these industries. Industry-specific risks are beyond
our control and could adversely affect our portfolio of loans,
49
potentially resulting in an increase in nonperforming loans or charge-offs and a
slowing of growth or reduction in our loan portfolio.
WE ARE NOT ABLE TO OFFER ALL OF THE FINANCIAL SERVICES AND PRODUCTS OF A
FINANCIAL HOLDING COMPANY
Banks, securities firms, and insurance companies can now combine as a
"financial holding company." Financial holding companies can offer virtually any
type of financial service, including banking, securities underwriting, insurance
(both agency and underwriting), and merchant banking. Many of our competitors
have elected to become financial holding companies. Recently, a number of
foreign banks have acquired financial holding companies in the U.S., further
increasing competition in the U.S. market. Under current regulatory
interpretations, Mitsubishi Tokyo Financial Group, Inc. would be required to
make a financial holding company election. We do not expect that Mitsubishi
Tokyo Financial Group, Inc. will make such an election in the near future.
OUR STOCKHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD.;
OUR INTERESTS AND THOSE OF OUR MINORITY STOCKHOLDERS MAY NOT BE THE SAME AS
THOSE OF THE BANK OF TOKYO-MITSUBISHI, LTD.
The Bank of Tokyo-Mitsubishi, Ltd., a wholly-owned subsidiary of Mitsubishi
Tokyo Financial Group, Inc., owns a majority of the outstanding shares of our
common stock. As a result, The Bank of Tokyo-Mitsubishi, Ltd. can elect all of
our directors and can control the vote on all matters, including: approval of
mergers or other business combinations; a sale of all or substantially all of
our assets; 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
our common stock or other equity securities; and other matters that might be
favorable to The Bank of Tokyo-Mitsubishi, Ltd. A majority of our directors are
independent of The Bank of Tokyo-Mitsubishi, Ltd. and are not officers or
employees of UnionBanCal Corporation or any of our affiliates, including The
Bank of Tokyo-Mitsubishi, Ltd. However, because of The Bank of Tokyo-Mitsubishi,
Ltd.'s control over the election of our directors, we could designate ourselves
as a "controlled company" under the New York Stock Exchange Rules and could
change the composition of our Board of Directors so that the Board would not
have a majority of independent directors. The Bank of Tokyo-Mitsubishi, Ltd.'s
ability to prevent an unsolicited bid for us or any other change in control
could also have an adverse effect on the market price for our common stock.
POSSIBLE FUTURE SALES OF OUR SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD.
COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK
The Bank of Tokyo-Mitsubishi, Ltd. may sell shares of our common stock in
compliance with the federal securities laws. By virtue of The Bank of
Tokyo-Mitsubishi, Ltd.'s current control of us, The Bank of Tokyo-Mitsubishi,
Ltd. could sell large amounts of shares of our common stock by causing us to
file a registration statement that would allow it to sell shares more easily. In
addition, The Bank of Tokyo-Mitsubishi, Ltd. could sell shares of our common
stock without registration under certain circumstances, such as in a "private
placement." Although we can make no prediction as to the effect, if any, that
such sales would have on the market price of our common stock, sales of
substantial amounts of our common stock, or the perception that such sales could
occur, could adversely affect the market price of our common stock. If The Bank
of Tokyo-Mitsubishi, Ltd. sells or transfers shares of our common stock as a
block, another person or entity could become our controlling stockholder.
THE BANK OF TOKYO-MITSUBISHI, LTD.'S AND MITSUBISHI TOKYO FINANCIAL GROUP,
INC.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS
We fund our operations independently of The Bank of Tokyo-Mitsubishi, Ltd.
and Mitsubishi Tokyo Financial Group, Inc. and believe our business is not
necessarily closely related to the business or outlook of The Bank of
Tokyo-Mitsubishi, Ltd. or Mitsubishi Tokyo Financial Group, Inc. However, The
Bank of
50
Tokyo-Mitsubishi, Ltd.'s and Mitsubishi Tokyo Financial Group, Inc.'s credit
ratings may affect our credit ratings. The Bank of Tokyo-Mitsubishi, Ltd. and
Mitsubishi Tokyo Financial Group, Inc. are also subject to regulatory oversight
and review by Japanese and U.S. regulatory authorities. Our business operations
and expansion plans could be negatively affected by regulatory concerns related
to the Japanese financial system, The Bank of Tokyo-Mitsubishi, Ltd. or
Mitsubishi Tokyo Financial Group, Inc., and other developments concerning The
Bank of Tokyo-Mitsubishi, Ltd. or Mitsubishi Tokyo Financial Group, Inc.,
including the proposed merger with UFJ Holdings, Inc., which may result in
capital constraints as well as additional Japanese and U.S. regulatory
constraints.
POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD.
COULD ADVERSELY AFFECT US
The Bank of Tokyo-Mitsubishi, Ltd.'s view of possible new businesses,
strategies, acquisitions, divestitures or other initiatives may differ from
ours. This may delay or hinder us from pursuing such initiatives.
Also, as part of The Bank of Tokyo-Mitsubishi, Ltd.'s normal risk
management processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit
and other types of exposures and concentrations on an aggregate basis, including
exposures and concentrations at UnionBanCal Corporation. Therefore, at certain
levels or in certain circumstances, our ability to approve certain credits or
other banking transactions and categories of customers is subject to the
concurrence of The Bank of Tokyo-Mitsubishi, Ltd. We may wish to extend credit
or furnish other banking services to the same customers as The Bank of
Tokyo-Mitsubishi, Ltd. Our ability to do so may be limited for various reasons,
including The Bank of Tokyo-Mitsubishi, Ltd.'s aggregate exposure and marketing
policies.
Certain directors' and officers' ownership interests in The Bank of
Tokyo-Mitsubishi, Ltd.'s common stock or service as a director or officer or
other employee of both us and The Bank of Tokyo-Mitsubishi, Ltd. could create or
appear to create potential conflicts of interest, especially since both of us
compete in U.S. banking markets.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS
PAYABLE TO US
As a holding company, a substantial portion of our cash flow typically
comes from dividends our bank and nonbank subsidiaries pay to us. Various
statutory provisions restrict the amount of dividends our subsidiaries can pay
to us without regulatory approval. In addition, if any of our subsidiaries were
to liquidate, that subsidiary's creditors will be entitled to receive
distributions from the assets of that subsidiary to satisfy their claims against
it before we, as a holder of an equity interest in the subsidiary, will be
entitled to receive any of the assets of the subsidiary.
OUR ABILITY TO MAKE ACQUISITIONS IS SUBJECT TO REGULATORY CONSTRAINTS AND
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR
RESTRUCTURINGS MAY ADVERSELY AFFECT US
Our ability to obtain regulatory approval of acquisitions is subject to
constraints related to the Bank Secrecy Act, as described in "Supervision and
Regulation" in our Annual Report on Form 10-K for the year ended December 31,
2004, and above in "Regulatory Matters." Subject to our ability to successfully
address these regulatory concerns, we may seek to acquire or invest in financial
and non-financial companies that complement our business. There can be no
assurance that we will be successful in completing any such acquisition or
investment as this will depend on the availability of prospective target
opportunities at valuation levels we find attractive and the competition for
such opportunities from other parties. In addition, we continue to evaluate the
performance of all of our businesses and business lines and may sell a business
or business line. Any acquisitions, divestitures or restructurings may result in
the issuance of potentially dilutive equity securities, significant write-offs,
including those related to goodwill and other intangible assets, and/or the
incurrence of debt, any of which could have a material adverse effect on our
business, results of operations and financial condition. Acquisitions,
divestitures or
51
restructurings could involve numerous additional risks including difficulties in
obtaining any required regulatory approvals and in the assimilation or
separation of operations, services, products and personnel, the diversion of
management's attention from other business concerns, higher than expected
deposit attrition (run-off), divestitures required by regulatory authorities,
the disruption of our business, and the potential loss of key employees. There
can be no assurance that we will be successful in addressing these or any other
significant risks encountered.
PRIVACY RESTRICTIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our business model relies, in part, upon cross-marketing the services
offered by us and our subsidiaries to our customers. Laws that restrict our
ability to share information about customers within our corporate organization
could adversely affect our business, results of operations and financial
condition.
WE RELY ON THIRD PARTIES FOR IMPORTANT PRODUCTS AND SERVICES
Third party vendors provide key components of our business infrastructure
such as internet connections, network access and mutual fund distribution. While
we have selected these third party vendors carefully, we do not control their
actions. Any problems caused by these third parties, including as a result of
their not providing us their services for any reason or their performing their
services poorly, could adversely affect our ability to deliver products and
services to our customers and otherwise to conduct our business. Replacing these
third party vendors could also entail significant delay and expense.
SIGNIFICANT LEGAL ACTIONS COULD SUBJECT US TO SUBSTANTIAL UNINSURED
LIABILITIES
We are from time to time subject to claims related to our operations. These
claims and legal actions, including supervisory actions by our regulators, could
involve large monetary claims and significant defense costs. To protect
ourselves from the cost of these claims, we maintain insurance coverage in
amounts and with deductibles that we believe are appropriate for our operations.
However, our insurance coverage may not cover all claims against us or continue
to be available to us at a reasonable cost. As a result, we may be exposed to
substantial uninsured liabilities, which could adversely affect our business,
prospects, results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A complete explanation concerning our market risk exposure is incorporated
by reference to Part I, Item 2 of this document under the captions "Quantitative
and Qualitative Disclosures About Market Risk," "Liquidity Risk," and "Factors
That May Affect Future Results."
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer (principal executive officer) and Chief
Financial Officer (principal financial officer) have concluded that the design
and operation of our disclosure controls and procedures are effective as of
March 31, 2005. This conclusion is based on an evaluation conducted under the
supervision and with the participation of management. Disclosure controls and
procedures are those controls and procedures which ensure that information
required to be disclosed in this filing is accumulated and communicated to
management and is recorded, processed, summarized and reported in a timely
manner and in accordance with Securities and Exchange Commission rules and
regulations.
During the quarter ended March 31, 2005, there were no changes in our
internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
52
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various pending and threatened legal actions that arise
in the normal course of business. We maintain reserves for losses from legal
actions that are both probable and estimable.
Grafton Partners LP v. Union Bank of California is pending in Alameda
County Superior Court (filed March 12, 2003). That suit concerns a "Ponzi"
scheme perpetrated by PinnFund, USA, located in San Diego, California. The
victims of this scheme seek $235 million from the Bank. They assert that the
Bank improperly opened and administered a deposit account, which was used by
PinnFund in furtherance of the fraud.
The Bank has numerous legal defenses to the Grafton case. Based on our
evaluation to date of this pending case, management believes that this matter
will not result in a material adverse effect on our financial position or
results of operations. In addition, we believe the disposition of all other
claims currently pending will also not have a material adverse effect on our
financial position or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
REPURCHASES OF EQUITY SECURITIES
The following table presents repurchases by us of our equity securities
during the first quarter 2005:
TOTAL NUMBER OF SHARES APPROXIMATE DOLLAR VALUE
PURCHASED AS PART OF OF SHARES THAT
TOTAL NUMBER OF AVERAGE PRICE PAID PUBLICLY ANNOUNCED MAY YET BE PURCHASED
PERIOD SHARES PURCHASED PER SHARE PROGRAMS UNDER THE PROGRAMS
- ------------------------- ---------------- ------------------ ---------------------- ------------------------
JANUARY 2005
(January 24 - 25, 2005).. 80,000 $60.31 80,000 $86,616,969
FEBRUARY 2005
(February 23 - 28,
2005).................. 3,505,843(1) $57.57 3,505,843(1) $84,772,332(1)
MARCH 2005
(March 1 - 31, 2005)..... 537,100 $62.33 537,100 $51,295,185(2)
--------- ---------
TOTAL.................. 4,122,943 $58.25 4,122,943
========= =========
- ---------------
(1) On February 23, 2005, UnionBanCal Corporation announced and acquired
3,475,843 shares of common stock from The Bank of Tokyo-Mitsubishi, Ltd.
(BTM) at a per share price of $57.54 for a total of $200 million.
(2) In the first quarter of 2005, UnionBanCal Corporation used $40.1 million
from the $200 million repurchase program announced on April 28, 2004.
53
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Set forth below is information concerning each matter submitted to a vote
at the Annual Meeting of Stockholders on April 27, 2005 ("Annual Meeting"):
ELECTION OF DIRECTORS: Each of the following persons was elected as a
director to hold office until the 2006 Annual Meeting of Stockholders or until
earlier retirement, resignation or removal.
NOMINEE FOR WITHHELD
- ---------------------------------------- ----------- ----------
Aida M. Alvarez......................... 140,193,425 388,998
David R. Andrews........................ 140,301,956 280,467
L. Dale Crandall........................ 138,712,561 1,869,861
Richard D. Farman....................... 138,513,579 2,068,843
Stanley F. Farrar....................... 119,305,877 21,276,545
Philip B. Flynn......................... 139,041,533 1,540,890
Michael J. Gillfillan................... 140,093,557 488,866
Ronald L. Havner, Jr.................... 140,129,880 452,542
Norimichi Kanari........................ 139,103,681 1,478,741
Mary S. Metz............................ 139,353,106 1,229,317
Shigemitsu Miki......................... 112,302,023 28,280,400
Takahiro Moriguchi...................... 112,105,479 28,476,944
Takashi Morimura........................ 139,022,380 1,560,042
J. Fernando Niebla...................... 140,249,161 333,262
Tetsuo Shimura.......................... 138,986,087 1,596,336
PROPOSAL TO AMEND THE YEAR 2000 UNIONBANCAL CORPORATION MANAGEMENT STOCK
PLAN: Proposal No. 2 to increase the number of shares of common stock which may
be awarded under the Year 2000 UnionBanCal Corporation Management Stock Plan
received the following votes:
FOR:............................................. 113,810,784
AGAINST:......................................... 20,813,230
ABSTAIN:......................................... 256,470
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
Proposal No. 3 to ratify the selection of Deloitte & Touche LLP as the
independent registered public accounting firm of UnionBanCal Corporation
received the following votes:
FOR:............................................. 139,022,346
AGAINST:......................................... 1,458,360
ABSTAIN:......................................... 101,716
STOCKHOLDER PROPOSAL REGARDING CONFIDENTIAL VOTING: Proposal No. 4 to
approve a stockholder proposal regarding confidential voting received the
following votes:
FOR:............................................. 137,169,526
AGAINST:......................................... 2,995,244
ABSTAIN:......................................... 417,652
54
ITEM 6. EXHIBITS
NO. DESCRIPTION
------ ----------------------------------------------------------------------
10.1 Union Bank of California, N.A. Separation Pay Plan (Effective April 1,
2005)(1)
10.2 Form of 2005 Nonqualified Stock Option Agreement under the Year 2000
UnionBanCal Corporation Management Stock Plan(1)
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- -------------------------
(1) Filed as an exhibit to the UnionBanCal Corporation current report on Form
8-K, dated March 22, 2005, and incorporated by reference herein.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, UnionBanCal Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIONBANCAL CORPORATION
(Registrant)
Date: May 9, 2005 By: /S/ NORIMICHI KANARI
--------------------------------------
Norimichi Kanari
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Date: May 9, 2005 By: /S/ DAVID I. MATSON
--------------------------------------
David I. Matson
VICE CHAIRMAN AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
Date: May 9, 2005 By: /S/ DAVID A. ANDERSON
--------------------------------------
David A. Anderson
SENIOR VICE PRESIDENT AND CONTROLLER
(Chief Accounting Officer)
56