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EX-31.1 - EX-31.1 - MUFG Americas Holdings Corp | a2197148zex-31_1.htm |
EX-24.2 - EX-24.2 - MUFG Americas Holdings Corp | a2197148zex-24_2.htm |
EX-12.1 - EX-12.1 - MUFG Americas Holdings Corp | a2197148zex-12_1.htm |
EX-24.1 - EX-24.1 - MUFG Americas Holdings Corp | a2197148zex-24_1.htm |
EX-31.2 - EX-31.2 - MUFG Americas Holdings Corp | a2197148zex-31_2.htm |
EX-32.1 - EX-32.1 - MUFG Americas Holdings Corp | a2197148zex-32_1.htm |
EX-23.1 - EX-23.1 - MUFG Americas Holdings Corp | a2197148zex-23_1.htm |
EX-32.2 - EX-32.2 - MUFG Americas Holdings Corp | a2197148zex-32_2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the fiscal year ended December 31, 2009 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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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
Securities
registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Not
applicable
(Name of each exchange on which registered)
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock par value $1.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant: Not applicable; all of the voting stock of the registrant is owned by its parent, The Bank of Tokyo-Mitsubishi UFJ, Ltd.
As of January 31, 2010, the number of shares outstanding of the registrant's Common Stock was 136,330,829.
DOCUMENTS INCORPORATED BY REFERENCE
None
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I) (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 compared to our forecasts and expectations. See Part I, Item 1A. "Risk Factors," and the other risks described in this report for factors to be considered when reading any forward-looking statements in this filing.
This report includes forward-looking statements, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may." These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information 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, which discuss our expectations about:
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- Our business objectives, strategies and initiatives, our organizational structure, the growth of our business and our
competitive position and prospects
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- Our assessment of significant factors and developments that have affected or may affect our results
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- Pending and recent legal and regulatory actions, and future legislative and regulatory developments, including the effects
of legislation and governmental measures introduced in response to the financial crises affecting the banking system, financial markets and the U.S. economy and changes to the Federal Deposit
Insurance Corporation's deposit insurance assessment policies and anticipated costs as a result of these developments
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- Regulatory controls and processes and their impact on our business
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- The costs and effects of legal actions, investigations, regulatory actions, criminal proceedings or similar matters, or
adverse facts and developments related thereto
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- Credit quality and provision for credit losses, including our expectation that elevated levels of quarterly provisions for
credit losses will continue in 2010 due to a continued weak economic environment and further deterioration in our loan portfolio
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- Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance and our
portfolio credit quality, underwriting standards, and risk grade and credit migration trends and our delinquency rates compared to the industry average
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- Our assessment of economic conditions and trends and credit cycles and their impact on our business
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- Net interest income
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- The impact of changes in interest rates and our strategy to manage our interest rate risk profile
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- Loan portfolio composition and risk grade trends, expected charge offs, delinquency rates compared to the industry average
and our underwriting standards
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- Our required performance under guarantee and indemnification commitments
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- Our deposit base including renewal of time deposits
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- Our pension costs
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- The adequacy of our insurance coverage
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- Our relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers
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- Our expectation that a significant portion of our money market account balances will have similar relationship
characteristics to our other commercial deposit balances
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- Our belief that our off-balance sheet arrangements do not expose us to any greater risk of loss than is
already reflected on our balance sheet
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- Our intent to sell, and the likelihood that we would be required to sell, various investment securities
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- Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook for the
U.S. in general and for any particular region of the U.S. including, in particular, California, Oregon, Texas and Washington
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- The composition, estimated loss projections, and market sensitivity of our securities portfolios, our trading and hedging
strategies, prepayment projections and our management of the sensitivity of our balance sheet
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- Tax rates and taxes, including our intention to defend tax deductions, the possible effect of changes in Mitsubishi UFJ
Financial Group, Inc.'s taxable profits on our California State tax obligations and of expected tax credits or benefits and our intention to file our 2009 California tax return under a
water's-edge election
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- Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or change
in accounting principle and future recognition of impairments for the fair value of assets, including goodwill and intangible assets
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- Anticipated uses of the $2.0 billion capital contribution from The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU)
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- Expected rates of return, yields and projected results
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- Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network, pursue acquisitions or
otherwise restructure, reorganize or change our business mix, and their timing and their impact on our business
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- The relationship between our business and that of BTMU and Mitsubishi UFJ Financial Group, Inc., the impact of
their credit rating on our credit ratings and actions that may or may not be taken by BTMU and Mitsubishi UFJ Financial Group, Inc.
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- Our strategies and expectations regarding capital levels and liquidity, our funding base and intent to fund our operations
on an independent basis
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- The continued weak economic outlook for the U.S. economy
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 financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed in Part I, Item 1A "Risk Factors" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Readers of this document should not rely unduly 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.
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All reports that we file electronically with the Securities and Exchange Commission (SEC), including the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to those reports, are accessible at no cost on our internet website at www.unionbank.com as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. These filings are also accessible on the SEC's website at www.sec.gov.
As used in this Form 10-K, the term "UnionBanCal" and terms such as "we," "us" and "our" refer to UnionBanCal Corporation, Union Bank, N.A., one or more of their consolidated subsidiaries, or to all of them together.
We are a California-based, financial holding and commercial bank holding company whose major subsidiary, Union Bank, N.A., is a commercial bank. (On December 18, 2008, Union Bank, N.A. changed its name from Union Bank of California, N.A.) Union Bank provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington and Texas, as well as nationally and internationally.
On November 4, 2008, we became a privately held company pursuant to the Agreement and Plan of Merger, dated as of August 18, 2008, by and among UnionBanCal, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG), and Blue Jackets, Inc., a Delaware corporation and a wholly-owned subsidiary of BTMU (Merger Sub) (the Merger Agreement). All of our issued and outstanding shares of common stock are now owned by BTMU. Prior to the transaction, BTMU owned approximately 64 percent of our outstanding shares of common stock.
The Merger Agreement provided, among other things, for a cash tender offer by BTMU (the Offer) to purchase all of the publicly held outstanding shares of our common stock at a price of $73.50 per share in cash (the Offer Price). The offer expired on September 26, 2008, with purchase of the shares being effective on October 1, 2008. After the Offer, BTMU owned approximately 97 percent of our outstanding common stock. On November 4, 2008, pursuant to the Merger Agreement, Merger Sub was merged with and into UnionBanCal (the Merger), the separate corporate existence of Merger Sub ceased and UnionBanCal continued as the surviving corporation in the Merger. All remaining publicly held shares of our common stock issued and outstanding immediately prior to the closing of the Merger were converted into the right to receive an amount in cash equal to the Offer Price.
For further information regarding the privatization transaction, refer to Note 2 to our Consolidated Financial Statements included in this Form 10-K Report.
Our operations are divided into two reportable segments. These segments and their financial information are described more fully in "Business Segments" of our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and in Note 24 to our Consolidated Financial Statements included in this Form 10-K Report.
Retail Banking. Retail Banking offers our customers a wide spectrum of financial products under one convenient umbrella. Our broad line of checking and savings, investment, loan and fee-based banking products is designed to meet individual and business needs. These products are offered in 339 full-service branches, primarily in California. In addition, Retail Banking offers e-banking through our website, check cashing services at our Cash & Save® locations.
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Corporate Banking. Corporate Banking offers a variety of commercial financial services, including commercial loans and project financing, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized deposit and global treasury management solutions and selected capital markets products. The Corporate Banking customers include middle-market companies, large corporations, real estate companies and other more specialized industry customers. In addition, specialized depository services are offered to title and escrow companies, retailers, domestic financial institutions, bankruptcy trustees and other customers with significant deposit volumes. Corporate Banking includes a registered broker-dealer and a registered investment advisor, which provide securities brokerage and investment advisory services and manage a proprietary mutual fund family. Corporate Banking also offers loan, deposit and trust and investment products tailored to our high net worth customers, professional service firms, foundations and endowments through our Private Banking offices. Institutional customers are offered corporate trust, securities lending and custody (global and domestic) services.
At January 31, 2010, we had 9,676 full-time equivalent employees.
Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, Oregon, Washington and Texas, as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions, credit unions, finance companies, mortgage banks and major foreign-affiliated or foreign banks, as well as many financial and nonfinancial firms that offer services similar to those offered by us, including many large securities firms. Some of our competitors are insurance companies or community or regional banks that have strong local market positions. Other competitors include large financial institutions that have substantial capital, technology and marketing resources, which are well in excess of ours. Competition in our industry may intensify as a result of the recent and increasing level of consolidation of financial services companies, particularly in our principal markets resulting from adverse economic and financial market conditions. Such larger financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. We also experience competition, especially for deposits, from internet-based banking institutions, which have grown rapidly in recent years. Given the recent financial crises affecting the banking system and financial markets and related volatility and tightening of liquidity in the credit markets, many banks have been aggressively seeking deposits by utilizing interest rates which lack correlation to the current federal funds market. Although we have not been required to do so, net interest income could be adversely affected should competitive pressures cause us to increase our interest rates paid on deposits in order to maintain our market share.
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, including several large finance companies, securities firms and insurance companies. A number of foreign banks have either acquired financial holding companies or obtained financial holding company status in the U.S., further increasing competition in the U.S. market. On October 6, 2008, UnionBanCal Corporation, BTMU and MUFG obtained approval from the Board of Governors of the Federal Reserve System to become financial holding companies under the Bank Holding Company Act of 1956, as amended (the BHCA). We sought this new status from the Federal Reserve Board to provide us maximum flexibility to pursue new business opportunities as the banking and financial services industry undergoes rapid and profound changes.
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
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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.
Current federal law has made it easier for out-of-state banks to enter and compete in the states in which we operate. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-Neal Act), among other things, eliminated substantially all state law barriers to the acquisition of banks by out-of-state bank holding companies. A bank holding company may acquire banks in states other than its home state, without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the acquired bank has been organized and operating for a minimum period of time (not to exceed five years), and the requirement that the acquiring bank holding company, prior to or following the proposed acquisition, controls no more than 10 percent of the total amount of deposits of the insured depository institutions in the United States and no more than 30 percent of such deposits in that state (or such lesser or greater amount as may be established by state law). The Riegle-Neal Act also permits banks to acquire branches located in another state by purchasing or merging with a bank chartered in that state or a national banking association having its headquarters located in that state.
We believe that continued emphasis on enhanced services and distribution systems, an expanded customer base, increased productivity and strong credit quality, together with a substantial capital base, will better position us to meet the challenges provided by this competition.
Monetary Policy and Economic Conditions
Our earnings and businesses are affected not only by general economic conditions (both domestic and international), but also by the monetary policies of various governmental regulatory authorities of the United States and foreign governments and international agencies. In particular, our earnings and growth may be affected by actions of the Federal Reserve Board in connection with its implementation of national monetary policy through its open market operations in United States Government securities, control of the discount rate for borrowings by financial institutions and the federal funds rate and establishment of reserve requirements against both member and non-member financial institutions' deposits. These actions have a significant effect on the overall growth and distribution of loans and leases, investments and deposits, as well as on the rates earned on securities, loans and leases or paid on deposits. It is difficult to predict future changes in monetary policies and their effect on our business, particularly in light of the current challenging economic conditions.
Overview. Bank holding companies and banks are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors, the deposit insurance fund, and other clients of the institution, and not for the benefit of the investors in the stock or other securities of the bank holding company. Set forth below is a summary description of material laws and regulations that relate to our operation and those of our subsidiaries, including Union Bank. This summary description of applicable laws and regulations does not purport to be complete and is qualified in its entirety by reference to such laws and regulations.
Bank Holding Company Act (BHCA) and the Gramm-Leach-Bliley (GLB) Act. We, MUFG and BTMU are subject to regulation under the BHCA, which also subjects us to Federal Reserve Board reporting and examination requirements. Generally, the BHCA restricts our ability to invest in non-banking entities, and we may not acquire more than 5 percent of the voting shares of any domestic bank without the prior approval of the Federal Reserve Board. Our activities are limited, with some exceptions, to banking, the business of managing or controlling banks, and other activities that the Federal Reserve Board deems to be so closely related to banking as to be a proper incident thereto.
The GLB Act allows "financial holding companies" to offer banking, insurance, securities and other financial products. Among other things, the GLB Act amended the BHCA in order to provide a framework for engaging in new financial activities by bank holding companies. In 2008, UnionBanCal Corporation, BTMU
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and MUFG obtained approval from the Federal Reserve Board to become financial holding companies under the BHCA.
Under the GLB Act, "financial subsidiaries" of banks may engage in some types of activities beyond those permitted to banks themselves, provided certain conditions are met. At this time, Union Bank has no plans to form any "financial subsidiaries."
Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. Under this policy, the Federal Reserve Board may require a holding company to contribute additional capital to an undercapitalized subsidiary bank.
Comptroller of the Currency. Union Bank, as a national banking association, is subject to broad federal regulation and oversight extending to all its operations by the Office of the Comptroller of the Currency (OCC), its primary regulator, and also by the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC). As part of this authority, Union Bank is required to file periodic reports with the OCC and is subject to ongoing examination by the OCC.
The OCC has extensive enforcement authority over all national banks. If, as a result of an examination of a bank, the OCC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulations, various remedies are available to the OCC. These remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the bank's deposit insurance. The OCC, as well as other federal agencies, have adopted regulations and guidelines establishing safety and soundness standards, including but not limited to such matters as loan underwriting and documentation, internal controls and audit systems, interest rate risk exposure, asset quality and earnings and compensation and other employee benefits.
Other Regulatory Oversight. Our subsidiaries are also subject to extensive regulation, supervision, and examination by various other federal and state regulatory agencies. In addition, Union Bank and its subsidiaries are subject to certain restrictions under the Federal Reserve Act and related regulations, including restrictions on affiliate transactions. As a holding company, the principal source of our cash has been dividends and interest received from Union Bank. Dividends payable by Union Bank to us are subject to restrictions under a formula imposed by the OCC unless express approval is given to exceed these limitations. For more information regarding restrictions on loans and dividends by Union Bank to its affiliates and on transactions with affiliates, see Notes 19 and 23 to our Consolidated Financial Statements included in this Form 10-K Report.
The Federal Deposit Insurance Act, as amended (FDIA) requires federal bank regulatory authorities to take "prompt corrective action" in dealing with inadequately capitalized banks. The FDIA establishes five tiers of capital measurement ranging from "well-capitalized" to "critically undercapitalized." It is our policy to maintain capital ratios above the minimum regulatory requirements for "well-capitalized" institutions for both Union Bank and us. Management believes that, at December 31, 2009, Union Bank and we met the requirements for "well-capitalized" institutions.
Deposits of Union Bank are insured up to statutory limits by the FDIC and, accordingly, are subject to deposit insurance assessments. Amendments to the FDIA in 2005-2006 created a new assessment system designed to more closely tie what banks pay for deposit insurance to the risks they pose and adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the revenue needs of the insurance fund. As a result of this legislation, Union Bank has been subject to annual assessments on deposits since 2007. The initial assessment rate was approximately 5 basis points. Prior to this change, Union Bank was not
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paying any insurance assessments on deposits under the FDIC's risk-related assessment system. An FDIC credit for prior contributions offset the assessment in 2007 and part of 2008. As part of the Deposit Insurance Fund Restoration Plan adopted by the FDIC in October 2008, beginning on April 1, 2009, the FDIC initial base assessment rates were set between 12 and 45 basis points. In addition, on June 30, 2009, the FDIC imposed a special assessment on banks. Union Bank's special assessment totaled $34 million and was paid on September 30, 2009.
In November 2009, in light of the challenge to the federal deposit insurance fund from the severe U.S. recession, the FDIC issued a rule mandating that insured depository institutions prepay their quarterly risk-based assessments to the FDIC for the fourth quarter of 2009, and all of 2010, 2011 and 2012. Union Bank's prepayment totaled $352.6 million and was paid on December 30, 2009. Under this rule, each depository institution was required to record the entire amount of its prepayment as an asset, or a prepaid expense, and is allowed to count the payments as a depreciating asset. The prepaid assessments bear a zero-percent risk weight for risk-based capital purposes. The FDIC will not refund or collect additional prepaid assessments because of a decrease or growth in deposits over the next three years. However, if the prepaid assessment is not exhausted by June 30, 2013, the remaining amount of the prepayment will be returned to the depository institution. The prepaid assessments are in lieu of additional special assessments at this time; however, there can be no assurance that the FDIC will not impose additional special assessments or increase annual assessments in the future. Refer to "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive Overview" in Item 7 of this Form 10-K for a discussion of the recently-proposed "financial crisis responsibility fee" which could be imposed by the federal government on larger financial institutions to repay part of the cost of the government's support of the banking industry in 2008-2009.
There are additional requirements and restrictions in the laws of the United States and the states of California, Oregon, Texas, and Washington, as well as other states in which Union Bank and its subsidiaries may conduct operations. These include restrictions on the levels of lending and the nature and amount of investments, as well as activities as an underwriter of securities, the opening and closing of branches and the acquisition of other financial institutions. The consumer lending and finance activities of Union Bank are also subject to extensive regulation under various Federal and state laws. These statutes impose requirements on the making, enforcement and collection of consumer loans and on the types of disclosures that must be made in connection with such loans.
Union Bank is also subject to the Community Reinvestment Act (CRA). The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the needs of local communities, including low- and moderate-income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and the CRA into account when regulating and supervising other activities, and in evaluating whether to approve applications for permission to engage in new activities or for acquisitions of other banks or companies or de novo branching. An unsatisfactory rating may be the basis for denying the application. Based on the most current examination report dated June 1, 2009, Union Bank's compliance with CRA was rated "outstanding."
Union Bank has branches in Canada and the Cayman Islands. Any international activities of Union Bank are also subject to the laws and regulations of the jurisdiction where business is being conducted, which may change from time to time and affect Union Bank's business opportunities and competitiveness in these jurisdictions. Furthermore, due to BTMU's controlling ownership of us, regulatory requirements adopted or enforced by the Government of Japan may have an effect on the activities and investments of Union Bank and us in the future.
The activities of Union Bank subsidiaries, HighMark Capital Management, Inc. and UnionBanc Investment Services LLC, are subject to the rules and regulations of the SEC, as well as those of state securities
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regulators. UnionBanc Investment Services LLC is also subject to the rules and regulations of the Financial Industry Regulatory Authority (FINRA).
Under Federal Reserve Board rules, Union Bank is affiliated with the HighMark Funds. The HighMark Funds is a registered investment company, subject to the rules and regulations of the SEC.
Broker/Dealer Regulation. Union Bank is not registered as a broker or dealer. The GLB Act and applicable regulations require us to conduct non-exempted securities brokerage or dealer activities through our registered broker-dealer, UnionBanc Investment Services LLC. These laws and regulations also limit compensation we may pay our bank employees for referrals of brokerage business and limit Union Bank's ability to advertise securities brokerage services.
Bank Secrecy Act. The banking industry is now subject to significantly increased regulatory controls and processes regarding the Bank Secrecy Act and anti-money laundering laws. Failure to comply with these additional requirements may adversely affect the ability to obtain regulatory approvals for future initiatives requiring regulatory approval, including acquisitions. Under the USA PATRIOT Act, federal banking regulators must consider the effectiveness of a financial institution's anti-money laundering program prior to approving an application for a merger, acquisition or other activities requiring regulatory approval. Failure to comply with these requirements can also subject an insured depository institution to monetary fines, penalties and other sanctions.
Sarbanes-Oxley Act. In November 2008, we became a privately-held company. All of our issued and outstanding shares of common stock are now owned by BTMU. We file periodic reports with the SEC in accordance with the reduced disclosure format permitted for certain wholly-owned subsidiaries, and the Sarbanes-Oxley Act applies to us.
Among other provisions, Section 302(a) of the Sarbanes-Oxley Act requires our Chief Executive Officer and Chief Financial Officer to certify that our quarterly and annual reports do not contain any untrue statement or omission of a material fact and to make additional certifications as to the adequacy of our internal controls over financial reporting and other matters.
In response to these requirements, we have established a Disclosure Committee to monitor compliance with these rules. Membership of the Disclosure Committee is comprised of senior management from throughout our organization whom we believe collectively provide an extensive understanding of our operations. As part of our compliance with the Sarbanes-Oxley Act, we evaluate our internal control process quarterly and we test and assess our internal controls over financial reporting annually.
Basel Committee Capital Standards. The Basel Committee on Banking Supervision (BIS) proposed new international capital standards for banking organizations (Basel II) in June 2004, and the new framework is currently being evaluated and implemented by bank supervisory authorities worldwide. Basel II is an effort to update the original international bank capital accord (Basel I), which has been in effect since 1988. Basel II is intended to improve the consistency of capital regulations internationally, make regulatory capital more risk sensitive, and promote enhanced risk-management practices among large, internationally active banking organizations.
We do not meet the criteria in the new U.S. rules which would make adoption of the new Basel II rules mandatory. However, MUFG, which owns all of our issued and outstanding shares of common stock through its wholly-owned subsidiary BTMU, is subject to the requirements of the new Basel II under the rules of the Japan Financial Services Agency (JFSA). In addition, the rules of the JFSA require subsidiaries of Japanese banks and bank holding companies that represent more than 2 percent of the parent's consolidated risk-weighted assets to also comply with Basel II. Because we meet this criterion, the JFSA requirement will be applicable to us. In order to facilitate the JFSA requirements, we expect to adopt the new Basel II rules as in effect in the U.S., subject to approval by our U.S. bank regulators. BTMU is reimbursing us for expenditures that we are incurring
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for Basel II projects that we would not have undertaken for our own risk management purposes. At this time, the impact on our minimum capital requirements under Basel II is not known.
Customer Information Security. The federal bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. The guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Union Bank has adopted a customer information security program that has been approved by its Board of Directors.
Privacy. The GLB Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliate third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the banks' policies and procedures. Union Bank implemented a privacy policy effective since the GLB Act became law, pursuant to which all of its existing and new customers are notified of the privacy policies. State laws and regulations designed to protect the privacy and security of customer information also apply to us and our other subsidiaries.
Economic and Financial Crisis and the U.S. Government's Response
Congress, Treasury and the federal banking regulators have taken broad action since September 2008 to address volatility in the U.S. financial system and the U.S. recession. In October 2008, the Emergency Economic Stabilization Act of 2008 (the EESA) was enacted. Pursuant to the EESA, the maximum deposit insurance amount has been increased from $100,000 to $250,000 per depositor through December 31, 2013. Pursuant to its Temporary Liquidity Guarantee Program, the FDIC has guaranteed newly issued senior unsecured debt of participating financial institutions and their qualifying holding companies. Union Bank elected to participate and, during the first quarter of 2009, issued $1 billion principal amount of FDIC-guaranteed senior notes under this program.
In October 2008, the U.S. Treasury enacted a voluntary Capital Purchase Program under its Troubled Asset Relief Program (TARP) pursuant to which the Treasury purchased senior preferred stock of qualifying U.S. financial institutions. Many banks and bank holding companies participated in this program. UnionBanCal, as a wholly-owned subsidiary of a foreign bank, was not eligible to participate in the Capital Purchase Program.
Possible Future Legislation and Regulatory Initiatives
The recent economic and political environment has led to a number of proposed legislative, governmental and regulatory initiatives that may significantly impact our industry. For example, Congress is considering a variety of proposals that would make significant changes to the financial regulatory system and affect the financial services industry, including greater powers to regulate risk across the financial system; a new Financial Services Oversight Council; a Consumer Financial Protection Agency; potential limits on the scope of federal preemption of state laws as applied to national banks; restrictions on bank activities intended to protect consumers, such as "cram-down" provisions which would allow courts to modify mortgage terms in bankruptcy proceedings; and changes in the regulatory agencies. In addition, there have been recent proposals to place new restrictions on the size and activities of large financial institutions, restrict compensation paid to bank officers, substantially increase fees and taxes, and substantially increase capital and liquidity requirements. These and other initiatives could significantly change the competitive and operating environment in which we and our subsidiaries operate. We cannot predict whether these or any other
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proposals will be enacted or the ultimate impact of any such initiatives on our operations, competitive situation, financial condition or results of operations.
Other Recent Developments
In November 2009, the Federal Reserve Board adopted amendments under its Regulation E that impose new restrictions on banks' abilities to charge overdraft services and fees. The final rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. We expect these amendments to result in decreased revenues and increased compliance costs for the banking industry and Union Bank.
Financial Information
See our Consolidated Financial Statements starting on page F-53 for financial information about UnionBanCal Corporation and its subsidiaries.
We are subject to numerous risks and uncertainties, including but not limited to the following information:
Industry Factors
U.S. and global economies have experienced a serious recession, unprecedented volatility in the financial markets, and significant deterioration in sectors of the U.S consumer and business economy, all of which present challenges for the banking and financial services industry and for UnionBanCal Corporation; the U.S. Government has responded to these circumstances with a variety of measures; there can be no assurance that these measures will successfully address these circumstances
Commencing in 2007 and continuing throughout 2008 and 2009, adverse financial developments have impacted the U.S. and global economies and financial markets and present challenges for the banking and financial services industry and for UnionBanCal Corporation. These developments include a general recession both globally and in the U.S. and have contributed to substantial volatility in the financial markets.
In response, various significant economic and monetary stimulus measures were enacted by the U.S. Congress. Refer to "Supervision and Regulation" in Item 1 of this Form 10-K for discussion of these measures.
It cannot be predicted whether the U.S. governmental actions in the past two years will result in lasting improvement in financial and economic conditions affecting the U.S. banking industry and the U.S. economy. It also cannot be predicted whether and to what extent the efforts of the U.S. government to combat the recessionary conditions will continue. If, notwithstanding the government's fiscal and monetary measures, the U.S. economy were to remain in a recessionary condition for an extended period, this would present additional significant challenges for the U.S. banking and financial services industry and for our company. In addition, as a wholly-owned subsidiary of a foreign bank, we have not been eligible to participate in some federal programs such as the Department of Treasury's Capital Purchase Program and may not qualify for participation in future federal programs.
Recently, certain sovereign borrowers have encountered difficulties in financing renewals of their indebtedness. If this trend continues or worsens, it could have adverse impacts on costs in the global debt markets which could increase funding costs for banks generally.
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Difficult market conditions have adversely affected the U.S. banking industry
Dramatic declines in the housing market in the U.S. in general, and in California in particular, during 2008 and continuing in 2009, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities and, more recently, residential, commercial real estate loans and small business and other commercial loans, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. These adverse economic conditions have led to an increased level of commercial and consumer delinquencies, reduced consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets adversely affected our business, financial condition and results of operations in 2009. In addition, turbulent political and economic conditions in foreign countries have negatively impacted the U.S. financial markets and economy in general. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:
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- Our ability to assess the creditworthiness of our customers and counterparties may be impaired if the models and
approaches we use to select, manage, and underwrite our customers and counterparties become less predictive of future behaviors.
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- We may not be able to accurately estimate credit exposure losses because the process we use to estimate these losses
requires difficult, subjective, and complex judgments with respect to predictions which may not be amenable to precise estimates, including forecasts of economic conditions and how these economic
predictions might impair the ability of our borrowers to repay their loans.
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- Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by
further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
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- Significant fluctuations in the prices of equity and fixed income securities could adversely impact the revenues of our
asset management and trust business. Fees charged are based upon asset values, and declines in values proportionately reduce fees charged.
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- Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in
connection with current market conditions.
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- We may be required to incur goodwill impairment losses in future periods. See "Critical Accounting
EstimatesAnnual Goodwill Impairment Analysis."
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- We will likely be subject to increased FDIC deposit premiums which will increase our costs. The FDIC may also impose one or more special or emergency assessments and has required U.S. banks to prepay quarterly assessments due over the period from 2009 to 2012. Refer to "Supervision and Regulation" in Item 1 of this Form 10-K for discussion of recent FDIC actions relating to deposit assessments and to "Management's Discussion and Analysis of Financial Condition and Results of OperationsExecutive Overview" in Item 7 of this Form 10-K for a discussion of the recently-proposed "financial crisis responsibility fee" which could be imposed by the federal government on larger financial institutions to repay part of the cost of the government's support of the banking industry in 2008-2009.
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The effects of changes of or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us
We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and the Deposit Insurance Fund and not for the benefit of investors in our securities. In the past, our business has been materially affected by these regulations. This will continue and likely intensify in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance which could result in the imposition of significant civil money penalties or fines. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations. Compliance with laws and regulations, especially new laws and regulations, increases our expenses and diverts management attention from our business operations.
International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to our ownership by BTMU, laws, regulations, policies, fines and other supervisory actions adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely affect our activities and investments and those of our subsidiaries in the future.
We maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if compliance systems and procedures were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation.
Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the U.S. Under long-standing policy of the Federal Reserve Board, a bank holding company is expected to act as a source of financial and managerial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the Federal Reserve Board are (a) conducting open market operations in U.S. government securities, (b) changing the discount rates on borrowings by depository institutions and the federal funds rate, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the Federal Reserve Board may have a material effect on our business, prospects, results of operations and financial condition.
Refer to "Supervision and Regulation" in Item 1 of this Form 10-K for discussion of certain recently enacted and proposed laws and regulations that may affect our business.
Higher credit losses could require us to increase our allowance for credit losses through a charge to earnings
When we loan money or commit to loan money, we incur credit risk, or the risk of losses if our borrowers do not repay their loans. We reserve for credit losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of credit losses inherent in our loan portfolio and our unfunded credit commitments. The process for determining the amount of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the
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future impact from current economic conditions that might impair the ability of our borrowers to repay their loans.
We might underestimate the credit losses inherent in our loan portfolio and have credit losses in excess of the amount reserved. Or, we might increase the allowances because of changing economic conditions, which we conclude have caused losses to be sustained in our portfolio. For example, in a rising interest rate environment, borrowers with adjustable rate loans could see their payments increase. In the absence of offsetting factors such as increased economic activity and higher wages, this could reduce borrowers' ability to repay their loans, resulting in our increasing the allowances. Continued volatility in fuel and energy costs could also adversely impact some borrowers' ability to repay their loans. We might also increase the allowances because of unexpected events. Any increase in the allowances would result in a charge to earnings.
Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers and decrease our revenue from other customers
Under current bankruptcy laws, courts cannot force a modification of mortgage and home equity loans secured by primary residences. In response to the recent financial crisis, legislation has been proposed to allow mortgage loan "cram-downs," which would empower courts to modify the terms of mortgage and home equity loans including to reduce the principal amount to reflect lower underlying property values. This could result in our writing down the value of our residential mortgage and home equity loans to reflect their lower loan values. There is also risk that home equity loans in a second lien position (i.e., behind a mortgage) could experience significantly higher losses to the extent they become unsecured as a result of a cram-down. The availability of principal reductions or other mortgage loan modifications could make bankruptcy a more attractive option for troubled borrowers, leading to increased bankruptcy filings and accelerated defaults.
Recent changes in federal rules have imposed new restrictions on banks' abilities to charge overdraft services and fees and can be expected to result in decreased revenues and increased compliance costs for the industry and Union Bank. See "Supervision and RegulationOther Recent Developments."
The need to account for assets at market prices may adversely affect our results of operations
We report certain assets, including investments and securities, at fair value. Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that utilize market data inputs and assumptions to estimate fair value. Because generally accepted accounting principles require fair value measurements to reflect appropriate adjustments for risks related to liquidity and the use of unobservable assumptions, we may recognize unrealized losses even if we believe that the asset in question presents minimal credit risk. Given the continued adverse conditions in the capital markets, we may be required to recognize other-than-temporary impairments in future periods with respect to securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of the securities and our estimation of the anticipated recovery period.
Fluctuations in interest rates on loans could adversely affect our business
Significant increases in market interest rates on loans, 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.
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Fluctuations in interest rates on deposits or other funding sources could adversely affect our margin spread
Changes in market interest rates on deposits or other funding sources, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact and has in past years impacted our 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. This impact could result in a decrease in our interest income relative to interest expense. Recently, the banking industry has operated in an extremely low interest rate environment relative to historical averages. If a rising rate environment were to ensue, it could present new challenges for the industry and Union Bank.
Our deposit customers may pursue alternatives to bank deposits or seek higher yielding deposits, which may increase our funding costs and adversely affect our liquidity position
Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market, other non-depository investments or higher yielding deposits, as providing superior expected returns. Technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts, including products offered by other financial institutions or non-bank service providers. Future increases in short-term interest rates could increase such transfers of deposits to higher yielding deposits or other investments either with us or with external providers. In addition, our level of deposits may be affected by lack of consumer confidence in financial institutions, which have caused fewer depositors to be willing to maintain deposits that are not fully insured by the FDIC. While transaction accounts at FDIC-insured banks have been fully-guaranteed by the FDIC since October 2008, this guarantee expired as of December 31, 2009, unless individual banks elected to extend the guarantee, for an additional fee to the FDIC. Union Bank determined not to extend the guarantee as to its deposits. Those developments may cause depositors to withdraw deposits and place them in other institutions or to invest uninsured funds in investments perceived as being more secure, such as securities issued by the U.S. Treasury. These consumer preferences may force us to pay higher interest rates or reduce fees to retain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.
In addition, we have benefited from a "flight to quality" by consumers and businesses seeking the relative safety of bank deposits over the past two years. As interest rates rise from historically low levels during the current period, our newly acquired deposits may not be as stable or as interest rate insensitive as similar deposits may have been in the past, and as a recovery in the economy ensues, some existing or prospective deposit customers of banks generally, including Union Bank, may be inclined to pursue other investment alternatives.
Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, we can lose a relatively inexpensive source of funds, increasing our funding cost.
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. Competition in our
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industry may further intensify as a result of the recent and increasing level of consolidation of financial services companies, including in our principal markets resulting from adverse economic and market conditions. 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. We also experience competition, especially for deposits, from internet-based banking institutions, which have grown rapidly in recent years.
Changes in accounting standards could materially impact our financial statements
From time to time the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements or new interpretations of existing standards emerge as standard industry practice. 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.
The continuing war on terrorism and overseas military conflicts could adversely affect U.S. and global economic conditions
Acts or threats of terrorism and actions taken by the U.S. or other governments as a result of such acts or threats and other international hostilities may result in a disruption of U.S. and global economic and financial conditions and could adversely affect business, economic and financial conditions in the U.S. and globally and in our principal markets.
Company Factors
Adverse economic factors affecting certain industries we serve could adversely affect our business
We are subject to certain industry-specific economic factors. For example, a significant portion of our total loan portfolio is related to residential real estate, especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on our operations by depressing new mortgage loan originations, and could negatively impact our title and escrow deposit levels. Additionally, a continued or further downturn in the residential real estate and housing industries in California could have an adverse effect on our operations and the quality of our real estate loan portfolio. These factors could adversely impact the quality of our residential construction and residential mortgage portfolios in various ways, including by decreasing the value of the collateral for our mortgage loans. These factors could also negatively affect the economy in general and thereby our overall loan portfolio.
We provide financing to businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors and are impacting the performance of our commercial real estate and commercial and industrial portfolios. The commercial real estate industry in the U.S., and in California in particular, is being increasingly adversely impacted by the recessionary environment and lack of liquidity in the financial markets. The home building industry in California has been especially adversely impacted by the deterioration in residential real estate markets. Poor economic conditions and financial access for commercial real estate developers and homebuilders could continue to adversely affect commercial property values, resulting in higher nonperforming assets and charge offs in this sector. Our commercial and industrial portfolio, and the communications/media industry, the retail industry, the energy industry and the technology industry in
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particular, are also being impacted by recessionary market conditions. Continued volatility in fuel prices and energy costs could adversely affect businesses in several of these industries. Conditions in the commercial real estate and commercial and industrial markets have led us to take additional provisions against credit losses in these portfolios, as to which we expect a higher level of charge offs during 2010. Industry-specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans or charge offs and a slowing of growth or reduction in our loan portfolio.
Adverse California economic conditions could adversely affect our business
The government of the State of California currently faces economic and fiscal challenges, the long-term impact of which on the State's economy cannot be predicted with any certainty. 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 significant deterioration in the residential real estate sector and the California state government's budgetary and fiscal difficulties. Under the budget plan approved by the California Legislature and signed by Governor Arnold Schwarzenegger on February 20, 2009, the State of California reduced services, increased sales and income taxes and other fees and enacted other expense reduction measures. In addition, California funded a portion of the deficit through additional borrowings, which included registered warrants, a relatively high-cost form of financing. California voters did not approve ballot measures required to enact the budget during a special election held on May 19, 2009. The rejection of all of the revenue-related ballot measures resulted in budget deficits which were addressed, at least temporarily, in a California State Budget adopted on July 28, 2009.
On January 8, 2010, Governor Arnold Schwarzenegger submitted his proposed budget for the 2010 fiscal year. This budget provides for significant spending cuts to services, including healthcare, transportation and housing. The proposed budget also requires California to obtain $6.9 billion in federal funding. However, there have been no assurances from the federal government that such funds will be furnished to California. If such funds are not awarded, California may be forced to further cut state services or raise taxes or fees.
If the California state government's budgetary and fiscal difficulties continue or economic conditions in California decline further, we expect that our level of problem assets could increase and our prospects for growth could be impaired.
Our stockholder votes are controlled by The Bank of Tokyo-Mitsubishi UFJ
As of November 4, 2008, BTMU, a wholly-owned subsidiary of MUFG, owned all of the outstanding shares of our common stock. As a result, BTMU 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 BTMU or MUFG.
A majority of our directors are independent of BTMU and are not officers or employees of UnionBanCal Corporation or any of our affiliates, including BTMU. However, because of BTMU's control over the election of our directors, it could at any time change the composition of our Board of Directors so that the Board would not have a majority of independent directors.
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The Bank of Tokyo-Mitsubishi UFJ's and Mitsubishi UFJ Financial Group's financial or regulatory condition could adversely affect our operations
We generally fund our operations independently of BTMU and MUFG and believe our business is not necessarily closely related to the business or outlook of BTMU or MUFG. However, if BTMU and MUFG's credit ratings were to decline, this could adversely affect our credit ratings.
BTMU and MUFG are also subject to regulatory oversight, review and supervisory action (which can include fines or penalties) by Japanese and U.S. regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns or supervisory action in the U.S. and in Japan against BTMU or MUFG.
Potential conflicts of interest with The Bank of Tokyo-Mitsubishi UFJ could adversely affect us
The views of BTMU and MUFG regarding possible new businesses, strategies, acquisitions, divestitures or other initiatives, including compliance and risk management processes, may differ from ours. This may delay or hinder us from pursuing individual initiatives or cause us to incur additional costs and subject us to additional oversight.
Also, as part of BTMU's risk management processes, BTMU manages global credit and other types of exposures and concentrations on an aggregate basis, including exposures and concentrations at UnionBanCal. 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 BTMU. We may wish to extend credit or furnish other banking services to the same customers as BTMU. Our ability to do so may be limited for various reasons, including BTMU's aggregate exposure and marketing policies.
Certain directors' and officers' ownership interests in MUFG's common stock or service as a director or officer or other employee of both us and BTMU could create or appear to create potential conflicts of interest, especially since both we and BTMU 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 non-bank 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.
Risks associated with potential acquisitions or divestitures or restructurings may adversely affect us
We have in the past, and may in the future, seek to expand our business by acquiring other businesses which we believe will enhance our business. We cannot predict the frequency, size or timing of our acquisitions, as this will depend on the availability of prospective target opportunities at valuation levels we find attractive and the competition for such opportunities from other parties. There can be no assurance that our acquisitions will have the anticipated positive results, including results related to: the total cost of integration; the time required to complete the integration; the amount of longer-term cost savings; continued growth; or the overall performance of the acquired company or combined entity. We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we acquire. Integration of an acquired business can be complex and costly. If we are not able to integrate successfully past or future acquisitions, there is a risk that results of operations could be adversely affected. We may not be successful in completing any acquisition or investment as this will depend on the
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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 may sell or restructure a business. Any divestitures or restructurings may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition and may involve additional risks including difficulties in obtaining any required regulatory approvals, the diversion of management's attention from other business concerns, the disruption of our business and the potential loss of key employees.
We may not be successful in addressing these or any other significant risks encountered in connection with any acquisition, divestiture or restructuring we might make.
Privacy restrictions could adversely affect our business
Our business model relies, in part, upon cross-marketing the products and 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 and we do not control their actions. Among other services provided by these vendors, third-party vendors play a key role in the implementation of our integrated banking platform. Any problems caused by these third parties, including those as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers, implement our integrated banking platform and otherwise to conduct our business. Replacing these third-party vendors could also entail significant delay and expense.
Our business could suffer if we fail to attract, retain and successfully integrate skilled personnel
Our success depends, in large part, on our ability to attract and retain key personnel, including executives. Any of our current employees, including our senior management, may terminate their employment with us at any time. Competition for qualified personnel in our industry can be intense. We may not be successful in attracting and retaining sufficient qualified personnel. We may also incur increased expenses and be required to divert the attention of other senior executives to recruit replacements for the loss of any key personnel.
In the past few years, we have experienced significant turnover among members of management, primarily due to retirement. We must successfully integrate any new management personnel that we bring into the organization in order to achieve our operating objectives as new management becomes familiar with our business.
In recent months, the federal bank regulators have published guidance relating to incentive compensation policies at insured depository institutions and a release seeking comment on whether the FDIC's risk-based deposit insurance assessment system should be changed to account for risks arising from employee compensation programs. Specifically, the FDIC has requested comment on whether a bank's compensation program should be a basis for adjusting the bank's FDIC assessment rate. It cannot be predicted whether these regulatory initiatives will result in definitive regulations or policies that will affect compensation at depository institutions, nor whether the effect of any such regulations or policies will be to make it more difficult for banks to attract and retain skilled personnel.
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The challenging operating environment and current operational initiatives may strain our available resources
There are an increasing number of matters in addition to our core operations which require our attention and resources. These matters include implementation of our integrated banking platform, adoption of the Basel II capital guidelines, various strategic initiatives, a disruptive economic environment, a challenging regulatory environment and integration of new employees, including key members of management. Our ability to execute our core operations and to implement other important initiatives may be adversely affected if our resources are insufficient or if we are unable to allocate available resources effectively.
Significant legal or regulatory proceedings could subject us to substantial uninsured liabilities
We are from time to time subject to claims and proceedings related to our present or previous operations. These claims, which could include supervisory or enforcement actions by bank regulatory authorities, or criminal proceedings by prosecutorial authorities, could involve demands for large monetary amounts, including civil money penalties or fines imposed by government authorities, and significant defense costs. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by government authorities and may not cover all other claims that might be brought against us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition.
Changes in our tax rates could affect our future results
The State of California requires us to file our franchise tax returns as a member of a unitary group that includes MUFG and either all worldwide affiliates or only U.S. affiliates. Prior to 2009, we elected to file our California franchise tax returns on a worldwide unitary basis. We intend to file our 2009 California tax return under a water's-edge election. If a water's-edge election is made, it will be effective as of April 1, 2009, and MUFG will be included in our California franchise tax return through March 31, 2009, MUFG's fiscal year-end. Increases or decreases in MUFG's taxable profits will increase or decrease our effective tax rate. We review MUFG's financial information on a quarterly basis to determine the rate at which to recognize our California income taxes. However, all of the information relevant to determining the effective California tax rate may not be available until after the end of the period to which the tax relates, primarily due to MUFG's later fiscal year-end. Our California effective tax rate can change during the calendar year, or between calendar years, as additional information becomes available. If we understate our tax obligations we could be subject to penalties. Our effective tax rates are also affected by valuation changes in our deferred tax assets and liabilities, changes in tax laws or their interpretation and by the outcomes of examinations of our income tax returns by the tax authorities.
Our credit ratings are important in order to maintain liquidity.
Major credit rating agencies regularly evaluate the securities of UnionBanCal Corporation and the securities and deposits of Union Bank, and their ratings of our long-term debt and other securities and also of our short-term obligations are based on a number of factors, including our financial strength, ability to generate earnings, and other factors, some of which are not entirely within our control, such as conditions affecting the financial services industry and the economy. In light of the difficulties in the financial services industry, the financial markets and the economy, there can be no assurance that we will maintain our current long-term and short-term ratings.
If our long-term or short-term credit ratings suffer downgrades, such downgrades could adversely affect access to liquidity and could significantly increase our cost of funds, trigger additional collateral or funding
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requirements, and decrease the number of commercial depositors, investors and counterparties willing to lend to us, thereby curtailing our business operations and reducing our ability to generate income.
Certain of our derivative instruments contain provisions that require us to maintain a specified credit rating. If our credit rating were to fall below the specified rating, the counterparties to these derivative instruments could terminate the contract and demand immediate payment or demand immediate and ongoing full overnight collateralization for those derivative instruments in net liability positions.
Adverse changes in the credit ratings of our parent companies, BTMU and MUFG, could also adversely impact our credit ratings.
We are subject to operational risks
We are subject to many types of operational risks throughout our organization. Operational risk is the potential loss from our operations due to factors, such as failures in internal control, systems failures or external events, that do not fall into the market risk or credit risk categories described in "Management's Discussion and Analysis of Financial Condition and Results of OperationsBusiness Segments." Operational risk includes execution risk related to operational initiatives, including implementation of our integrated banking platform, reputational risk, legal and compliance risk, the risk of fraud or theft by employees, customers or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. A discussion of risks associated with regulatory compliance appears above under the caption "The effects of changes in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us."
We depend on the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and our employees in our day-to-day and ongoing operations. Our dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. Failures in our internal control or operational systems could impair our ability to operate our business and result in potential liability to customers, reputational damage and regulatory intervention, any of which could harm our operating results and financial condition.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, such as computer hacking or viruses, electrical or telecommunications outages or unexpected difficulties with the implementation of our integrated banking platform, which may give rise to disruption of service to customers and to financial loss or liability. Our business recovery plan may not work as intended or may not prevent significant interruptions of our operations.
Negative public opinion could damage our reputation and adversely impact our business and revenues
As a financial institution, our earnings and capital are subject to risks associated with negative public opinion. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our customers' expectations or applicable regulatory requirements, governmental enforcement actions, corporate governance and acquisitions, or from actions taken by regulators and community organizations in response to those activities. We generally fund our operations independently of BTMU and MUFG and believe our business is not necessarily closely related to the business or outlook of BTMU or MUFG. However, negative public opinion could also result from regulatory concerns regarding, or supervisory or other governmental actions in the U.S. or Japan against, us or Union Bank, or BTMU or MUFG. Negative public opinion can adversely affect our ability to keep and attract and/or retain lending and deposit customers and employees and can expose us to litigation and regulatory action and increased liquidity risk. Actual or alleged conduct by one of our businesses can result in negative public opinion about our other businesses. Negative public opinion could also affect our credit
23
ratings, which are important for some commercial deposit customers and also to our access to unsecured wholesale or other borrowings; significant changes in these ratings could change the cost and availability of these sources of funding.
Our framework for managing risks may not be effective in mitigating risk and loss to our company
Our risk management framework is made up of various processes and strategies to manage our risk exposure. Types of risk to which we are subject include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal risk, compliance risk, reputation risk, fiduciary risk and private equity risk, among others. Our framework to manage risk, including the framework's underlying assumptions, may not be effective under all conditions and circumstances. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud
On November 4, 2008, we became a privately held company pursuant to the Agreement and Plan of Merger, dated as of August 18, 2008, by and among UnionBanCal, BTMU and Blue Jackets, Inc., a Delaware corporation and a wholly-owned subsidiary of BTMU. All of our issued and outstanding shares of common stock are now owned by MUFG through its wholly-owned subsidiary BTMU. As such, we would have been no longer required to file periodic reports with the SEC pursuant to the Securities Exchange Act of 1934 (the Exchange Act); however, we have elected to voluntarily register our common stock under the Exchange Act and for so long as we maintain that registration in effect we will be required to continue to file such periodic reports with the SEC in accordance with a reduced disclosure format permitted for certain wholly-owned subsidiaries.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Item 1B. Unresolved Staff Comments
None.
At December 31, 2009, we operated 335 full service branches in California, 4 full service branches in Oregon and Washington, 1 branch in Texas and 2 foreign branches. We own the property occupied by 117 of the domestic offices and lease the remaining properties for periods of five to twenty years.
We own 2 administrative facilities in San Francisco, 2 in Los Angeles, and 3 in San Diego. Other administrative offices in Arizona, California, Illinois, Nevada, New York, Oregon, Virginia, Texas and Washington operate under leases expiring in one to twenty-six years.
Rental expense for branches and administrative premises is described in Note 6 to our Consolidated Financial Statements included in this Form 10-K Report.
24
We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain reserves for losses from legal actions that are both probable and estimable. In addition, we believe the disposition of all claims currently pending will not have a material adverse effect on our consolidated financial condition, operating results or liquidity.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On November 4, 2008 we became a wholly-owned subsidiary of BTMU and our common stock was delisted from the New York Stock Exchange. All of our issued and outstanding shares of common stock are now held by BTMU, and there is presently no established public trading market for our common stock.
For the period from January 1 through November 3, 2008, the average daily trading volume of our common stock was 1,550,976 shares. At November 3, 2008, our common stock closed at $73.48 per share. The following table presents stock quotations for the first three quarters in 2008 and the fourth quarter in 2008 through November 3, 2008.
|
2008 | ||||||
---|---|---|---|---|---|---|---|
|
High | Low | |||||
First quarter |
$ | 53.59 | $ | 39.32 | |||
Second quarter |
56.00 | 39.00 | |||||
Third quarter |
74.58 | 34.81 | |||||
Fourth quarter |
74.36 | 73.02 |
The following table presents quarterly per share cash dividends declared for 2008.
|
2008 | |||
---|---|---|---|---|
First quarter |
$ | 0.52 | ||
Second quarter |
0.52 | |||
Third quarter |
0.52 | |||
Fourth quarter |
|
Item 6. Selected Financial Data
See page F-1 of this Form 10-K Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
See pages F-1 through F-51 of this Form 10-K Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See pages F-35 through F-39 of this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data
See pages F-53 through F-136 of this Form 10-K Report.
25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls. Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of December 31, 2009. 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 the SEC's rules and regulations.
Internal Controls Over Financial Reporting. Management's Report on Internal Control Over Financial Reporting regarding the effectiveness of internal controls over financial reporting is presented on page F-140. The Report of Independent Registered Public Accounting Firm is presented on page F-137. During the quarter ended December 31, 2009, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to affect, our internal controls over financial reporting.
None.
26
Item 10. Directors, Executive Officers and Corporate Governance
Certain information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.
Code of Ethics
We have adopted a Code of Ethics applicable to senior financial officers, including our Chief Executive Officer, Chief Financial Officer and Controller. A copy of this Code of Ethics is posted on our website. To the extent required by SEC rules, we intend to disclose promptly any amendment to, or waiver from any provision of, the Code of Ethics applicable to senior financial officers on our website. Our website address is www.unionbank.com.
Item 11. Executive Compensation
The information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.
Item 14. Principal Accountant Fees and Services
Audit Fees
The following is a description of the fees billed to UnionBanCal by Deloitte & Touche LLP for each of the last two fiscal years. All fees for 2008 and 2009 were approved by our Audit & Finance Committee.
|
2008 | 2009 | |||||
---|---|---|---|---|---|---|---|
Audit Fees(1) |
$ | 3,816,314 | $ | 3,430,658 | |||
Audit-Related Fees(2) |
946,483 | 666,545 | |||||
Tax Fees(3) |
176,417 | 241,253 | |||||
Total |
$ | 4,939,214 | $ | 4,338,456 |
- (1)
- Audit
fees relate to services rendered in connection with the annual audit of UnionBanCal's consolidated financial statements, quarterly
reviews of financial statements included in UnionBanCal's quarterly reports on Form 10-Q, fees for consultation on new accounting and reporting requirements and SEC registration
statement services, and the attestation assessment related to the effectiveness of UnionBanCal's financial reporting controls, as required by Section 404 of the Sarbanes-Oxley Act. For 2008,
additional costs of the privatization, securities valuations and loan reviews due to the credit environment were incurred. For 2009, additional costs of the privatization and goodwill impairment
analysis were incurred.
- (2)
- Audit-related fees relate to assurance and related services that are reasonably related to the performance of the audit or review of UnionBanCal's financial statements and are not included in Audit Fees. For 2008 and 2009, this included fees for services provided in connection with service auditors reports and audits of employee benefit plans. For 2008, the overall cost of providing the Statements on Auditing Standards No. 70 reports for Union Bank's trust business partially increased due to the sale of the Retirement Recordkeeping Business. For 2009, additional costs of Basel II were incurred.
27
- (3)
- Tax fees include fees for tax compliance, tax advice, and tax planning services. For 2008 and 2009, fees related to tax compliance and preparation were $130,196 and $123,889, respectively. For 2008 and 2009, this included tax services for expatriates and the Calgary Branch. For 2008 and 2009, fees related to tax advice and planning were $46,221 and $117,364, respectively. For 2008, this included tax consulting on State of California matters and training. For 2009, this included tax consulting on the privatization.
The Audit & Finance Committee also considered whether the provision of the services other than audit services is compatible with maintaining Deloitte & Touche LLP's independence. All of the services described above were approved by the Audit & Finance Committee in accordance with the following policy.
Pre-approval of Services by Deloitte & Touche LLP
The Audit & Finance Committee has adopted a policy for pre-approval of audit and permitted non-audit services by Deloitte & Touche LLP. The Audit & Finance Committee will consider annually and, if appropriate, approve the provision of audit services by its independent registered public accounting firm and consider and, if appropriate, pre-approve the provision of certain defined audit and non-audit services; provided, however, that:
-
- the pre-approval request must be detailed as to the particular services to be provided;
-
- the pre-approval may not result in a delegation of the Audit & Finance Committee's responsibilities to
the management of UnionBanCal; and
-
- the pre-approved services must be commenced within six months of the Audit & Finance Committee's pre-approval decision.
The Audit & Finance Committee will also consider on a case-by-case basis and, if appropriate, approve, specific engagements that are not otherwise pre-approved.
Any proposed engagement that does not fit within the definition of a pre-approved service may be presented to the Audit & Finance Committee for consideration at its next regular meeting or, if earlier consideration is required, to the Audit & Finance Committee Chair. The Chair reports any specific approval of services at the Audit & Finance Committee's next regular meeting. The Audit & Finance Committee regularly reviews summary reports detailing all services being provided by its independent registered public accounting firm.
Item 15. Exhibits and Consolidated Financial Statement Schedules
(a)(1) Financial Statements
Our Consolidated Financial Statements, Management's Report on Internal Control Over Financial Reporting, and the Report of Independent Registered Public Accounting Firm are set forth on pages F-53 through F-140. (See index on page F-52).
(a)(2) Financial Statement Schedules
All schedules to our Consolidated Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in our Consolidated Financial Statements or accompanying notes.
(a)(3) Exhibits
No. | Description | |
---|---|---|
3.1 | Restated Certificate of Incorporation of the Registrant(1) | |
3.2 |
Bylaws of the Registrant(2) |
28
No. | Description | |
---|---|---|
4.1 | Trust Indenture between UnionBanCal Corporation and J.P. Morgan Trust Company, National Association, as Trustee, dated December 8, 2003(3) | |
4.2 |
The Registrant agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of long-term debt of the Registrant. |
|
10.1 |
Certain exhibits related to compensatory plans, contracts and arrangements have been omitted pursuant to item 601(b)(10)(c)(6) of Regulation S-K. |
|
12.1 |
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements(4) |
|
18.1 |
Preferability Letter of Independent Registered Public Accounting Firm(5) |
|
21.1 |
Subsidiaries of the Registrant has been omitted pursuant to General Instruction I(2) of Form 10-K |
|
23.1 |
Consent of Deloitte & Touche LLP(4) |
|
24.1 |
Power of Attorney(4) |
|
24.2 |
Resolution of Board of Directors(4) |
|
31.1 |
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(4) |
|
31.2 |
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(4) |
|
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(4) |
|
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(4) |
- (1)
- Incorporated
by reference to the exhibit of the same number to the UnionBanCal Corporation Current Report on Form 8-K
dated November 4, 2008 (SEC File No. 001-15081).
- (2)
- Incorporated
by reference to the exhibit of the same number to the UnionBanCal Corporation Current Report on Form 8-K
dated January 27, 2010 (SEC File No. 001-15081).
- (3)
- Incorporated
by reference to Exhibit 99.1 to the UnionBanCal Corporation Current Report on Form 8-K dated
December 8, 2003 (SEC File No. 001-15081).
- (4)
- Provided
herewith.
- (5)
- Incorporated by reference to the exhibit of the same number to the UnionBanCal Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (SEC File No. 001-15081).
29
UnionBanCal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Selected Financial Data
(Dollars in thousands)
|
2005 | 2006 | 2007 | 2008(1) | 2009(1) | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Results of operations: |
||||||||||||||||||
Net interest income(2) |
$ | 1,842,340 | $ | 1,844,393 | $ | 1,732,652 | $ | 2,060,660 | $ | 2,260,422 | ||||||||
(Reversal of) provision for loan losses(3) |
(50,683 | ) | (5,000 | ) | 81,000 | 515,000 | 1,114,000 | |||||||||||
Noninterest income |
681,342 | 759,214 | 799,539 | 772,656 | 727,144 | |||||||||||||
Noninterest expense |
1,480,057 | 1,557,949 | 1,574,201 | 1,896,696 | 2,088,501 | |||||||||||||
Income (loss) from continuing operations before income taxes(2) |
1,094,308 | 1,050,658 | 876,990 | 421,620 | (214,935 | ) | ||||||||||||
Taxable-equivalent adjustment |
4,352 | 6,401 | 9,272 | 9,812 | 11,310 | |||||||||||||
Income tax expense (benefit) |
357,529 | 274,720 | 294,354 | 127,868 | (161,284 | ) | ||||||||||||
Income (loss) from continuing operations |
732,427 | 769,537 | 573,364 | 283,940 | (64,961 | ) | ||||||||||||
Income (loss) from discontinued operations, net of taxes |
130,506 | (16,541 | ) | 34,730 | (15,055 | ) | | |||||||||||
Net income (loss) |
$ | 862,933 | $ | 752,996 | $ | 608,094 | $ | 268,885 | $ | (64,961 | ) | |||||||
Balance sheet (end of period): |
||||||||||||||||||
Total assets(5) |
$ | 49,416,002 | $ | 52,619,576 | $ | 55,727,748 | $ | 70,121,390 | $ | 85,598,128 | ||||||||
Total loans |
33,095,595 | 36,671,723 | 41,204,188 | 49,585,550 | 47,228,508 | |||||||||||||
Nonperforming assets |
61,645 | 42,365 | 56,525 | 436,515 | 1,349,793 | |||||||||||||
Total deposits |
39,949,257 | 41,850,682 | 42,680,191 | 46,049,769 | 68,517,653 | |||||||||||||
Medium- and long-term debt |
801,095 | 1,318,847 | 1,913,622 | 4,288,488 | 4,212,184 | |||||||||||||
Stockholder's equity |
4,559,700 | 4,571,401 | 4,737,981 | 7,484,305 | 9,580,333 | |||||||||||||
Balance sheet (period average)(6): |
||||||||||||||||||
Total assets |
$ | 47,449,564 | $ | 49,846,868 | $ | 53,468,142 | $ | 60,908,355 | $ | 73,766,090 | ||||||||
Total loans |
31,452,606 | 35,704,129 | 39,424,327 | 46,112,105 | 48,989,567 | |||||||||||||
Earning assets |
42,786,530 | 45,077,084 | 48,968,917 | 55,556,063 | 67,418,580 | |||||||||||||
Total deposits |
39,393,393 | 40,000,434 | 42,185,536 | 43,133,196 | 56,594,591 | |||||||||||||
Stockholder's equity |
4,280,085 | 4,574,185 | 4,603,022 | 5,170,795 | 7,855,190 | |||||||||||||
Financial ratios(6): |
||||||||||||||||||
Return on average assets: |
||||||||||||||||||
From continuing operations |
1.54 | % | 1.54 | % | 1.07 | % | 0.47 | % | (0.09 | )% | ||||||||
Net income |
1.82 | 1.51 | 1.14 | 0.44 | (0.09 | ) | ||||||||||||
Return on average stockholder's equity: |
||||||||||||||||||
From continuing operations |
17.11 | 16.82 | 12.46 | 5.49 | (0.83 | ) | ||||||||||||
Net income |
20.16 | 16.46 | 13.21 | 5.20 | (0.83 | ) | ||||||||||||
Efficiency ratio(7) |
57.99 | 59.80 | 60.68 | 64.24 | 66.34 | |||||||||||||
Net interest margin(2) |
4.31 | 4.09 | 3.54 | 3.71 | 3.35 | |||||||||||||
Tangible common equity ratio(3) |
8.31 | 7.84 | 7.73 | 6.96 | 8.29 | |||||||||||||
Tier 1 common capital ratio(4) |
9.15 | 8.66 | 8.28 | 8.76 | 11.80 | |||||||||||||
Tier 1 risk-based capital ratio(5) |
9.17 | 8.68 | 8.30 | 8.78 | 11.82 | |||||||||||||
Total risk-based capital ratio(5) |
11.10 | 11.71 | 11.21 | 11.63 | 14.54 | |||||||||||||
Leverage ratio(5) |
8.39 | 8.44 | 8.27 | 8.42 | 9.45 | |||||||||||||
Allowance for loan losses to:(8) |
||||||||||||||||||
Total loans |
1.06 | 0.90 | 0.98 | 1.49 | 2.87 | |||||||||||||
Nonaccrual loans |
596.91 | 792.32 | 722.64 | 177.79 | 103.03 | |||||||||||||
Allowances for credit losses to:(9) |
||||||||||||||||||
Total loans |
1.32 | 1.12 | 1.20 | 1.74 | 3.25 | |||||||||||||
Nonaccrual loans |
743.58 | 987.06 | 884.80 | 208.01 | 116.42 | |||||||||||||
Net loans charged off (recovered) to average total loans |
(0.01 | ) | 0.04 | 0.03 | 0.37 | 1.02 | ||||||||||||
Nonperforming assets to total loans, distressed loans held for sale, and foreclosed assets |
0.19 | 0.12 | 0.14 | 0.88 | 2.86 | |||||||||||||
Nonperforming assets to total assets(5) |
0.12 | 0.08 | 0.10 | 0.62 | 1.58 |
- (1)
- On
November 4, 2008, Mitsubishi UFJ Financial Group, Inc. (MUFG), through its wholly owned subsidiary, The Bank of
TokyoMitsubishi UFJ, Ltd. (BTMU), completed its acquisition of all of the remaining outstanding shares of UnionBanCal Corporation (the Company) common stock (the "privatization
transaction"). The Company estimated the fair value of its tangible assets and liabilities as of October 1, 2008 and recorded fair value adjustments to its tangible assets and liabilities
equivalent to the proportionate incremental percentage ownership acquired by BTMU in the privatization transaction. In addition, the Company recorded goodwill and other intangible assets. The
Company's financial condition as of December 31, 2008 reflects the impact of these fair value adjustments and other amounts recorded. The Company's results of operations starting in the fourth
quarter of 2008 include accretion and amortization related to the fair value adjustments.
- (2)
- Yields
and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
- (3)
- The
tangible equity ratio is calculated as tangible equity (stockholder's equity less goodwill and intangible assets net of deferred tax on
total intangibles) divided by tangible assets (total assets less goodwill and intangible assets net of deferred tax on total intangibles). The tangible equity ratio, while not required by
US GAAP, has been included to facilitate the understanding of UnionBanCal's capital structure and financial condition.
- (4)
- The
Tier 1 common capital ratio is the ratio of Tier 1 common capital to risk weighted assets. The Tier 1 common capital
ratio, while not required by US GAAP, has been included to facilitate the understanding of UnionBanCal's capital structure and financial condition.
- (5)
- End
of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.
- (6)
- Period
average balances and average balances used to calculate our financial ratios are based on continuing operations data only, unless
otherwise indicated.
- (7)
- The
efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance
sheet commitments and low income housing credit (LIHC) investment amortization expense, as a percentage of net interest income (taxable-equivalent basis) and noninterest income, and is calculated for
continuing operations only. LIHC amortization expense was $18.1 million, $21.3 million, $28.5 million, $40.6 million and $49.1 million for the years ended
December 31, 2005, 2006, 2007, 2008 and 2009, respectively.
- (8)
- The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans or total
nonperforming loans, as appropriate. These ratios relate to continuing operations only.
- (9)
- The allowances for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans or total nonperforming loans, as appropriate. These ratios relate to continuing operations only.
F-1
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 also refer to Part I, Item 1A "Risk Factors" 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 years ended December 31, 2007, 2008 and 2009 together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in this Form 10-K Report. Averages, as presented in the following tables, are substantially all based upon daily average balances.
As used in this Form 10-K Report, the term "UnionBanCal" and terms such as "we," "us" and "our" refer to UnionBanCal Corporation, Union Bank, N.A., one or more of their consolidated subsidiaries, or to all of them together.
We are a California-based, financial holding company and bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. We had consolidated assets of approximately $86 billion at December 31, 2009.
On November 4, 2008, we became a privately held company (privatization transaction). All of our issued and outstanding shares of common stock are owned by The Bank of Tokyo Mitsubishi UFJ, Ltd. (BTMU). Prior to the transaction, BTMU owned approximately 64 percent of our outstanding shares of common stock. For further information on UnionBanCal's privatization transaction, refer to Note 2 to our consolidated financial statements included in this Form 10-K report.
We are providing you with an overview of what we believe are the most significant factors and developments that impacted our 2009 results and that could impact our future results. Further detailed information can be found elsewhere in this Form 10-K Report. In addition, we ask that you carefully read this entire document and any other reports that we refer to in this Form 10-K Report for more detailed information that will assist your understanding of trends, events and uncertainties that impact us.
U.S. and global economies have experienced a serious recession, unprecedented volatility in the financial markets, and significant deterioration in sectors of the U.S consumer and business economy, all of which present challenges for the banking and financial services industry. Despite the continued uncertain economic environment, we generated significant deposit growth, as well as growth in net interest income.
In 2009, our average total loans grew 6 percent from 2008 to $49 billion. This growth was spread across residential real estate, construction, consumer and commercial real estate, due to increased loan demand and reduced competition.
During 2009, we provided $1,165 million for our allowances for credit losses compared to $550 million in 2008. The increase, which reflects weak economic conditions, was primarily attributable to higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, increased uncertainty related to the timing and severity of losses to be realized in the commercial real estate portfolio and increases in loss factors related to several portfolio sectors, including our consumer and small business loan portfolios. We anticipate that the economic environment will remain weak and will result in further deterioration in our loan portfolio. See further discussion below in "Allowances for Credit Losses."
Our nonperforming assets totaled $437 million and $1.3 billion at December 31, 2008 and 2009, respectively. The increase in nonperforming assets was primarily due to higher nonaccrual loans in all categories, reflecting weak economic conditions, and a previously disclosed change in accounting policy for
F-2
residential and home equity loans 90 days or more past due, which accounted for $225 million of the increase. Net loans charged off were $499 million in 2009, compared to $170 million in 2008. The increase in net loans charged off was primarily due to higher commercial, financial, and industrial loan charge offs.
At December 31, 2008 and 2009, our allowances for credit losses as a percent of total loans were 1.74 percent and 3.25 percent, respectively. At December 31, 2008 and 2009, our allowances for credit losses as a percent of nonaccrual loans were 208 percent and 116 percent, respectively. At December 31, 2008 and 2009, our allowance for loan losses as a percent of total loans were 1.49 percent and 2.87 percent, respectively. At December 31, 2008 and 2009, our allowance for loan losses as a percent of nonaccrual loans were 178 percent and 103 percent, respectively.
In 2009, our average total deposits increased 31 percent to $56.6 billion compared to 2008. In 2009, our average noninterest bearing deposits increased 10 percent to $13.9 billion compared to 2008. In 2009, our average interest bearing deposits increased by 40 percent compared to 2008 to $42.7 billion. The increase reflects the results of targeted retail and corporate deposit-gathering marketing initiatives throughout Union Bank, including a new industry strategy targeting retail brokerage firm clients and other long standing industry markets, as well as significant growth in money market account deposits from state and local governments, and institutional escrow clients. Average noninterest bearing deposits represented 25 percent of average total deposits in 2009, compared to 29 percent in 2008. The annualized average all-in-cost of funds improved to 0.84 percent in 2009, compared to 1.72 percent in 2008.
In 2009, our net interest income (on a taxable-equivalent basis) increased 10 percent from 2008 to $2.3 billion, primarily due to lower rates paid on interest bearing liabilities, investment securities growth, and purchase price accounting accretions related to our privatization, partially offset by lower yields on earning assets. However, our net interest margin contracted 36 basis points compared to the same period last year, primarily as a result of a decrease in our interest rate spread (the difference between our earning assets yield and total interest bearing liabilities rate) attributable to a significant growth in lower yielding interest bearing deposits in banks, which was driven by our excess liquidity.
In 2009, our noninterest income declined 6 percent from 2008 to $727 million, primarily due to lower trust and investment management fees, lower gains from the sales and distributions from, as well as impairments on, private capital investments and prior year gains on the partial redemption of our Visa Inc. and MasterCard Inc. common stocks. These decreases were partially offset by gains on the sale of U.S. Treasury and mortgage-backed securities.
In 2009, our noninterest expense grew by 10 percent from 2008 to $2.1 billion. The increase was primarily due to higher intangible asset amortization related to the privatization transaction, higher regulatory agency fees, higher provision for credit losses on off-balance sheet commitments, and higher expenses related to our low income housing investments (LIHC).
Our effective tax rate, reflecting a tax benefit was (71) percent in 2009, compared to 31 percent in 2008. The change in the effective tax rate was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current year, as well as the impact of tax credits and state income taxes.
On September 29, 2009, we received a $2.0 billion capital contribution from BTMU. The contribution was made to provide us with additional capital to offset potential future credit losses consistent with a highly adverse economic scenario. To the extent actual credit losses are lower than those that would be incurred in the highly adverse scenario, we will have excess capital that could be deployed to support incremental organic growth and acquisitions.
In the fourth quarter of 2008, we elected to participate in the voluntary Temporary Liquidity Guarantee (TLG) Program established by the FDIC in October 2008. Under the TLG Program, all senior unsecured debt issued by insured depository institutions between October 14, 2008 and October 31, 2009 with a maturity of more than 30 days was guaranteed by the FDIC. In the first quarter of 2009, the Bank issued $1.0 billion
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principal amount of Senior Floating Rate Notes guaranteed through the TLG Program, which remained outstanding as of December 31, 2009.
In January 2010, President Obama announced his intention to propose a Financial Crisis Responsibility Fee that would be imposed on U.S. financial firms with more than $50 billion in consolidated assets, regardless of whether or not such firms were eligible to receive TARP funds. (As a wholly-owned subsidiary of a foreign bank, we were not eligible for TARP.) The fee is intended to repay the cost of TARP. The proposed fee will be assessed at approximately 15 basis points of covered liabilities per year. Covered liabilities are defined as an institution's assets minus Tier 1 capital and FDIC assessed deposits, with adjustments for insurance liabilities covered by state guarantee funds. We cannot predict whether this proposal will be enacted in its current form or at all.
The discussion of our financial results is based on results from continuing operations, unless otherwise stated.
General
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 and other assumptions to determine the fair value of assets and liabilities. A change in the discount factor or another important assumption could significantly increase or decrease the values of those assets and liabilities and result in either a beneficial or an adverse impact to our financial results. We use historical loss factors, adjusted for current conditions, to estimate the inherent credit loss present in our loan and lease portfolio. Actual losses could differ significantly from the loss factors that we use. Other significant estimates that we use include employee turnover factors for our pension obligation, fair value of certain 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 primarily swaps and option contracts indexed to energy commodities, interest rates or foreign currencies. We record these contracts at fair value. When readily available quoted market prices are unavailable, we must extrapolate or estimate a market price from available observable market data.
Our most significant estimates are approved by our Risk & Capital Committee, which is comprised of selected senior officers of the Bank. For each financial reporting period, a review of these estimates is presented to and discussed with the Audit & Finance Committee of our Board of Directors.
All of our significant accounting policies are identified in Note 1 to our Consolidated Financial Statements included in this Form 10-K Report. The following describes our most critical accounting policies and our basis for estimating the allowances for credit losses, pension obligations, income taxes, asset impairment, valuation of financial instruments, annual goodwill impairment and hedge accounting.
Allowances for Credit Losses
The allowances for credit losses, which consist of the allowances for loan and off-balance sheet commitment losses, are estimates of the losses that may be sustained in our loan and lease portfolio as well as for certain off-balance sheet commitments such as unfunded loan commitments, standby letters of credit, and commercial lines of credit that are not for sale. The allowances are based on two methods of accounting. The
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first requires that losses be accrued for groups of loans when they are probable of occurring and estimable; the second requires that losses be accrued for individually impaired loans based on the difference between the value of collateral, present value of estimated future cash flows or price that is observable in the secondary market and the loan balance.
Our allowances for credit losses have four components: the formula allowance, the specific allowance, the unallocated allowance and the allowance for off-balance sheet commitments, which is included in other liabilities. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a model based, in part, on historical losses as an indicator of future losses and, as a result, could differ from the losses incurred in the future. This history is updated quarterly to include data that, in management's judgment, makes the historical data more relevant. Moreover, management adjusts the historical loss estimates for current conditions that would more accurately capture probable losses inherent in the portfolio. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, discounted cash flows, fair market value of collateral and secondary market information are all used to estimate those losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance is intended to capture losses that are attributable to various economic events, as well as to industry or geographic sectors, whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowances. Our allowance for off-balance sheet commitments is measured in approximately the same manner as the allowance for our loans but includes an estimate of likely utilization based upon historical data. At December 31, 2009, our allowance for loan losses was $1,357 million and our allowance for off-balance sheet commitments was $176 million, based upon our assessment of the probability of loss. For further information regarding our allowance for loan losses, see "Allowances for Credit Losses" in this Form 10-K Report.
Pension Obligations
Our pension obligations and related assets of our defined retirement benefit plan are presented in Note 9 to our Consolidated Financial Statements included in this Form 10-K Report. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using quoted market prices. Plan obligations and the annual benefit expense are estimated by management utilizing actuarially based data and key assumptions. Key assumptions in measuring the plan obligations and determining the pension benefit expense are the discount rate, the rate of compensation increases, and the estimated future return on plan assets. Our discount rate is calculated using a yield curve based on Aa3 or better rated bonds. This yield curve is matched to the anticipated timing of the actuarially determined estimated pension benefit payments to determine the weighted average discount rate. Compensation increase assumptions are based upon historical experience and anticipated future management actions. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plan.
Our net actuarial losses (pretax) decreased $225 million between December 31, 2008 and 2009. Of the total $527 million of net actuarial loss at December 31, 2009, $234 million, which is the excess of the fair value of plan assets over the market-related value of plan assets, is recognized separately through the asset smoothing method over four years. Approximately $121 million will be subject to amortization over 9.6 years. The remaining $172 million is not currently subject to amortization. The cumulative net actuarial loss resulted primarily from differences between expected and actual rate of return on plan assets and the discount rate. Included in our 2010 net periodic pension cost will be $12.7 million of amortization related to net actuarial losses. We estimate that our total 2010 net periodic pension cost will be approximately $3.7 million, assuming $100 million in contributions in 2010. The primary reason for the decrease in net periodic pension cost for 2010 compared to $7 million in 2009 is a higher asset base resulting in higher expected return on assets and an increase in the discount rate from 5.75 percent to 6.25 percent. The 2010 estimate for net periodic pension cost was actuarially determined using a discount rate of 6.25 percent, an expected return on plan assets of 8.00 percent and an expected compensation increase assumption of 4.70 percent.
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A 50 basis point increase in the discount rate, expected return on plan assets, or the rate of increase in future compensation levels would increase (decrease) 2010 periodic pension cost by ($13.4) million, ($9.1) million, and $3.9 million, respectively. A 50 basis point decrease in the discount rate, expected return on plan assets, or the rate of increase in future compensation levels would increase (decrease) 2010 periodic benefit cost by $14.8 million, $9.1 million, and ($3.7) million, respectively.
Income Taxes
UnionBanCal and its subsidiaries are subject to the income tax laws of the United States, its states, and other jurisdictions where we conduct business. These laws are complex and subject to different interpretations. The calculation of our provision for income taxes and related accruals requires the use of estimates and judgment. Income tax expense includes our estimate of amounts to be reported in our income tax returns, as well as deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they are reported in our tax returns. Deferred tax assets are evaluated for realization based on the expectation of future events, including the reversal of existing temporary differences and our ability to earn future taxable income.
We provide reserves for unrecognized tax benefits in accordance with the guidance related to accounting for uncertainty in income taxes. In applying the accounting guidance, we consider the relative risks and merits of positions taken in tax returns filed and to be filed, considering statutory, judicial, and regulatory guidance applicable to those positions. The guidance requires us to make assumptions and judgments about potential outcomes that lie outside management's control. To the extent the tax authorities disagree with our conclusions, and depending on the final resolution of those disagreements, our effective tax rate may be materially affected in the period of final settlement with the tax authorities.
The State of California requires us to file our franchise tax returns as a member of a unitary group that includes MUFG and either all worldwide affiliates or only U.S. affiliates. Prior to 2009, we filed our California franchise tax returns on a worldwide unitary basis. We intend to make a water's-edge election for our 2009 California tax return, and we have reflected that election in our 2009 income tax expense. If a water's-edge election is made, it will be effective as of April 1, 2009, and MUFG's worldwide taxable profits (or losses) will be included in our California franchise tax return through March 31, 2009, MUFG's fiscal year-end. Changes in MUFG's taxable profits will impact our effective tax rate. MUFG's taxable profits are impacted most significantly by changes in the worldwide economy, and decisions that they may make about the timing of the recognition of credit losses or other matters. When MUFG's taxable profits rise, our effective tax rate in California will rise, and when they decrease, our rate will decrease. We review MUFG's financial information on a quarterly basis in order to determine the rate at which to recognize our California income taxes. However, all of the information relevant to determining the effective California tax rate may not be available until after the end of the period to which the tax relates, primarily due to the difference between our and MUFG's fiscal year-ends. Our California effective tax rate can change during the calendar year or between calendar years as additional information becomes available. If we understate our tax obligations we could be subject to penalties. Recent amendments to California tax law now impose an automatic 20 percent penalty for an understatement of tax in excess of $1 million for any taxable year beginning on or after January 1, 2003 for which the statute of limitations on assessment has not expired.
Valuation of Financial Instruments
Effective January 1, 2008, we adopted new accounting guidance related to all financial assets and liabilities measured and reported on a fair value basis. At adoption, there was no impact on our financial position or results of operations. For detailed information on our use of fair valuation of financial instruments and our related valuation methodologies, see Note 17 to our Consolidated Financial Statements included in this Form 10-K Report.
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources (e.g., interest rates, yield curves, foreign exchange rates, volatilities and credit curves), while unobservable inputs reflect our estimates of assumptions that would be considered by market participants. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that consider our creditworthiness in determining the fair value of our trading liabilities.
Based on the observability of the inputs used in the valuation, we classify our financial assets and liabilities measured and disclosed at fair value within a three-level hierarchy (i.e., Level 1, Level 2 and Level 3). This hierarchy ranks the quality and reliability of the information used to determine fair values with Level 1 deemed most reliable and Level 3 having at least one significant unobservable input. The degree of management judgment required in measuring fair value increases with the higher level of measurement.
Included in the Level 3 category at December 31, 2008 are collateralized loan obligations (CLO), which are illiquid with limited market activity. These securities were transferred from securities available for sale to held to maturity in 2009. All of our CLO securities are known as "Cash Flow CLOs." A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. We estimate the fair value of our CLOs using a pricing model, as well as broker quotes. The model inputs are based on internally-developed assumptions, utilizing market data derived from market participants and credit rating agencies. These assumptions include, but are not limited to, estimated default rates, recovery rates, prepayment rates and reinvestment rates. The fair value of our CLOs increased by $0.3 billion from December 31, 2008 to $1.5 billion at December 31, 2009. Since no observable credit quality issues (i.e., no projected cash flow shortages) were present in our CLO portfolio at December 31, 2009, and we do not intend or it is not more likely than not that we will be required to sell the CLO securities before recovery, the securities were not other-than-temporarily impaired.
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The following table reflects financial instruments measured at fair value on a recurring basis as of December 31, 2009.
|
December 31, 2008 | December 31, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Fair Value | Percentage of Total |
Fair Value | Percentage of Total |
|||||||||||
Financial instruments recorded at fair |
|||||||||||||||
value on a recurring basis |
|||||||||||||||
Assets: |
|||||||||||||||
Level 1 |
$ | 961,535 | 10 | % | $ | 12,696,149 | 55 | % | |||||||
Level 2 |
7,624,037 | 79 | 10,746,219 | 46 | |||||||||||
Level 3 |
1,203,092 | 13 | 6,878 | | |||||||||||
Netting Adjustment(1) |
(153,377 | ) | (2 | ) | (135,885 | ) | (1 | ) | |||||||
Total |
$ | 9,635,287 | 100 | % | $ | 23,313,361 | 100 | % | |||||||
As a percentage of total Company assets |
14 | % | 27 | % | |||||||||||
Liabilities: |
|||||||||||||||
Level 1 |
$ | 56,470 | 6 | % | $ | 9,901 | 2 | % | |||||||
Level 2 |
1,131,570 | 109 | 643,115 | 119 | |||||||||||
Level 3 |
| | | | |||||||||||
Netting Adjustment(1) |
(153,377 | ) | (15 | ) | (111,885 | ) | (21 | ) | |||||||
Total |
$ | 1,034,663 | 100 | % | $ | 541,131 | 100 | % | |||||||
As a percentage of total Company liabilities |
2 | % | 1 | % | |||||||||||
- (1)
- Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.
Asset Impairment
We make estimates and assumptions when preparing our consolidated financial statements for which actual results will not be known for some time. This includes the recoverability of long-lived assets employed in our business, including those of acquired businesses.
On April 1, 2009, the Company adopted new accounting guidance related to the determination and recognition of other-than-temporary impairment related to debt securities. (FASB ASC 320-10, "InvestmentsDebt and Equity Securities"). The new guidance establishes new criteria for determining whether impairment is other-than-temporary and what portion of any such impairment is recognized in earnings. At adoption, there was no impact on our financial position or results of operations.
Debt securities available for sale and debt securities held to maturity are subject to impairment testing when a security's fair value is lower than its amortized cost. Debt securities with unrealized losses are considered other-than-temporarily impaired if we intend to sell the security, if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, or if we do not expect to recover the entire amortized cost basis of the security. Any impairment on securities we intend, or are more likely than not required, to sell is recognized in earnings as the entire difference between the amortized cost and its fair value. Any impairment on securities we do not intend, or are not more likely than not required, to sell before recovery is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The credit loss is measured as the difference between the present value of expected cash flows, discounted using the security's effective interest rate, and the amortized cost of the security. During 2009, we recognized an insignificant amount of other-than-temporary impairment on two CLO securities.
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Quarterly, we evaluate our private capital investments for impairment by reviewing the investee's business model, current and projected financial performance, liquidity and overall economic and market conditions. During 2009, we recognized an other-than-temporary impairment of $15.5 million for our private capital investment portfolio.
Annual Goodwill Impairment Analysis
We review our goodwill for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In testing for a potential impairment of goodwill, we estimate the fair value of goodwill allocated to our designated operating units and compare this value to the aggregate carrying value of goodwill for those operating units. At December 31, 2009, our goodwill balance was $2.4 billion.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. Additionally, significant judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include: a significant decline in expected future cash flows, a significant adverse change in the business climate, unanticipated competition and/or slower than expected growth rates.
The annual goodwill impairment test as of January 1, 2009 was performed during the first quarter of 2009, and no impairment was recognized.
During the second quarter of 2009, we changed the date of our annual goodwill impairment test from January 1 to April 1. The change was made to more closely align the impairment testing date with the testing date used by BTMU, as we became a wholly-owned subsidiary of BTMU in the fourth quarter of 2008.
The change in goodwill impairment testing date is deemed a change in accounting principle. Management believes that the change in accounting principle will not delay, accelerate, or avoid a goodwill impairment charge. Management determined that the change in accounting principle is preferable under the circumstances and does not result in adjustments to our financial statements when applied retrospectively.
In order to transition to the new annual goodwill impairment test date and to ensure that no more than twelve months elapse before the next annual goodwill impairment test is performed, goodwill impairment testing as of April 1, 2009 was performed during the second quarter of 2009. No impairment was recognized.
Due to the current uncertainties in the recessionary economic environment, there can be no assurance that our recent estimates relating to our recent goodwill impairment testing will prove to be accurate predictions of future circumstances. It is possible that we may be required to record charges relating to goodwill impairment losses in future periods either as a result of our annual impairment testing or upon the occurrence of other triggering events. Any changes relating to any such future impairment losses could be material.
Hedge Accounting
In order to manage the risk of adverse changes in the fair value or cash flows of certain financial instruments (e.g., loans, debt and securities) associated with changes in interest rates, foreign currency exchange rates, or other factors, derivative instruments are acquired to mitigate such adverse changes that might occur in the future. Most of the derivative instruments acquired for this purpose qualify for hedge accounting treatment under generally accepted accounting principles.
The determination of whether a hedging relationship qualifies for hedge accounting requires judgment. For example, before hedge accounting can be applied, the hedging relationship must be expected to be highly effective, which involves an assessment of past results and future expectations. At the end of each reporting period, a retrospective assessment must be made as to whether the hedge was highly effective based on the
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actual results for that period. The determination of changes in fair value of the hedged item attributable to the risk being hedged and the hedging instrument also may require judgment if quoted market prices or sufficient observable market data is unavailable. When a hedge is designated for a group of similar financial instruments, judgments must be made as to whether the individual items in that group share sufficient similar risks and characteristics to be hedged collectively.
If a derivative instrument is determined to no longer be highly effective as a designated hedge, hedge accounting is discontinued and the adjustment to the fair value of the derivative instrument would be recorded in earnings.
Summary of Financial Performance
|
|
|
|
Increase (Decrease) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
For the Years Ended | 2008 versus 2007 | 2009 versus 2008 | |||||||||||||||||||||
(Dollars in thousands) | 2007 | 2008 | 2009 | Amount | Percent | Amount | Percent | |||||||||||||||||
Results of Operations |
||||||||||||||||||||||||
Net interest income(1) |
$ | 1,723,380 | $ | 2,050,848 | $ | 2,249,112 | $ | 327,468 | 19.0 | % | $ | 198,264 | 9.7 | % | ||||||||||
Noninterest income |
||||||||||||||||||||||||
Service charges on deposit accounts |
304,362 | 302,965 | 290,764 | (1,397 | ) | (0.5 | ) | (12,201 | ) | (4.0 | ) | |||||||||||||
Trust and investment management fees |
157,734 | 165,255 | 134,997 | 7,521 | 4.8 | (30,258 | ) | (18.3 | ) | |||||||||||||||
Trading account activities |
65,608 | 54,530 | 73,590 | (11,078 | ) | (16.9 | ) | 19,060 | 35.0 | |||||||||||||||
Merchant banking fees |
44,123 | 49,546 | 64,652 | 5,423 | 12.3 | 15,106 | 30.5 | |||||||||||||||||
Securities gains, net |
1,621 | 44 | 24,281 | (1,577 | ) | (97.3 | ) | 24,237 | nm | |||||||||||||||
Gains (losses) on private capital investments, net |
43,881 | 11,699 | (12,781 | ) | (32,182 | ) | (73.3 | ) | (24,480 | ) | nm | |||||||||||||
Gain on the VISA IPO redemption |
| 14,211 | | 14,211 | nm | (14,211 | ) | (100.0 | ) | |||||||||||||||
Other noninterest income |
182,210 | 174,406 | 151,641 | (7,804 | ) | (4.3 | ) | (22,765 | ) | (13.1 | ) | |||||||||||||
Total noninterest income |
799,539 | 772,656 | 727,144 | (26,883 | ) | (3.4 | ) | (45,512 | ) | (5.9 | ) | |||||||||||||
Total revenue |
2,522,919 | 2,823,504 | 2,976,256 | 300,585 | 11.9 | 152,752 | 5.4 | |||||||||||||||||
Provision for loan losses |
81,000 | 515,000 | 1,114,000 | 434,000 | nm | 599,000 | nm | |||||||||||||||||
Noninterest expense |
||||||||||||||||||||||||
Salaries and other compensation |
756,974 | 810,277 | 798,883 | 53,303 | 7.0 | (11,394 | ) | (1.4 | ) | |||||||||||||||
Employee benefits |
154,048 | 167,804 | 172,773 | 13,756 | 8.9 | 4,969 | 3.0 | |||||||||||||||||
Salaries and employee benefits |
911,022 | 978,081 | 971,656 | 67,059 | 7.4 | (6,425 | ) | (0.7 | ) | |||||||||||||||
Net occupancy |
141,573 | 154,566 | 167,082 | 12,993 | 9.2 | 12,516 | 8.1 | |||||||||||||||||
Intangible asset amortization |
4,501 | 44,935 | 161,910 | 40,434 | nm | 116,975 | nm | |||||||||||||||||
Regulatory Agencies |
10,691 | 23,971 | 133,616 | 13,280 | nm | 109,645 | nm | |||||||||||||||||
Low income housing credit investment amortization |
28,496 | 40,577 | 49,081 | 12,081 | 42.4 | 8,504 | 21.0 | |||||||||||||||||
Provision for losses on off-balance sheet commitments |
9,000 | 35,000 | 51,000 | 26,000 | nm | 16,000 | 45.7 | |||||||||||||||||
Privatization-related expense |
| 90,505 | 45,882 | 90,505 | nm | (44,623 | ) | (49.3 | ) | |||||||||||||||
Other noninterest expense |
468,918 | 529,061 | 508,274 | 60,143 | 12.8 | (20,787 | ) | (3.9 | ) | |||||||||||||||
Total noninterest expense |
1,574,201 | 1,896,696 | 2,088,501 | 322,495 | 20.5 | 191,805 | 10.1 | |||||||||||||||||
Income (loss) from continuing operations before income taxes |
867,718 | 411,808 | (226,245 | ) | (455,910 | ) | (52.5 | ) | (638,053 | ) | nm | |||||||||||||
Income tax expense (benefit) |
294,354 | 127,868 | (161,284 | ) | (166,486 | ) | (56.6 | ) | (289,152 | ) | nm | |||||||||||||
Income (loss) from continuing operations |
$ | 573,364 | $ | 283,940 | $ | (64,961 | ) | $ | (289,424 | ) | (50.5 | ) | $ | (348,901 | ) | nm | ||||||||
- (1)
- Net
interest income does not include any adjustments for fully taxable equivalence.
nm = not meaningful
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The primary contributors to our financial performance for 2009 compared to 2008 are presented below.
-
- We provided a total of $1,165 million for credit losses ($1,114 million for loan losses and
$51 million for losses on off-balance sheet commitments) in 2009 compared to a total provision of $550 million for credit losses ($515 million for loan losses and
$35 million for losses on off-balance sheet commitments) in 2008. The provision increases were primarily attributable to higher criticized assets, especially in the commercial real
estate portfolio, higher nonaccrual loans, increased uncertainty related to the timing and severity of losses to be realized in the commercial real estate portfolio and increases in loss factors
related to several portfolio sectors, including our consumer and small business loan portfolios.
-
- Our net interest income was favorably influenced by higher volumes in most of our major loan categories, securities and
interest-bearing deposits in banks, as well as by lower average rates on our interest bearing liabilities. Additionally, net interest income increased due to the accretion of fair value adjustments on
loans and securities related to our privatization. Partly offsetting these positive influences to our net interest income were lower average yields on our earning assets and higher interest bearing
liabilities. However, our net interest margin contracted 36 basis points compared to the same period last year primarily as a result of a decrease in our interest rate spread (the difference between
our earning assets yield and total interest bearing liabilities rate) attributable to a significant growth in lower yielding interest bearing deposits in banks, which was driven by our excess
liquidity (see discussion under "Net Interest Income").
-
- The decrease in our noninterest income was due to several factors:
-
- Service
charges on deposit accounts decreased primarily due to lower overdraft fees resulting from changes in customer overdraft behavior;
-
- Trust
and investment management fees were lower primarily due to a decline in mutual fund assets (on which fees are based) as well as lower asset
yields. Average managed assets decreased by approximately 11 percent, while average non-managed assets increased by approximately 2 percent from 2008 to 2009. Total average
assets under administration for 2009 increased by 1 percent from 2008 to $237 billion;
-
- Net
gains on private capital investments decreased primarily due to prior year gains on sales and capital distributions, as well as private
capital investment impairments in the current year;
-
- Prior
year included gains on the partial redemption of our Visa Inc. common stock; and
-
- Other
noninterest income declined primarily due to prior year gains on the sale of assets, a prior year gain on the redemption of MasterCard stock
and a change to the equity method of accounting for certain private capital investments in the current year; partly offset by
-
- Trading
account income increased primarily due to higher gains on agency securities and a lower provision for credit losses on energy derivative
contracts;
-
- Merchant
banking fees increased primarily due to higher syndicated loan activity, higher referral fees, and higher risk participation fees; and
-
- Securities
gains increased primarily due to $27 million of gains on the sale of U.S. Treasury and mortgage-backed securities.
-
- Our higher noninterest expense was due to several factors:
-
- Expenses related to our privatization transaction included a $118 million increase in intangible amortization and a decrease in other privatization related costs of $45 million, primarily due to prior year higher professional service costs and higher amortization of bridge compensation awards;
F-11
-
- Regulatory
agency expenses increased as a result of an industry-wide increase in the FDIC deposit insurance assessment rate, a
one-time special FDIC assessment of $34 million and higher deposit balances; and
-
- Provision for losses on off-balance sheet commitments increased primarily due to higher criticized credits and increases in certain loss factors.
The primary contributors to our financial performance for 2008 compared to 2007 are presented below.
-
- We provided a total of $550 million for credit losses ($515 million for loan losses and $35 million
for losses on off-balance sheet commitments) in 2008 compared to a total provision of $90 million for credit losses ($81 million for loan losses and $9 million for
losses on off-balance sheet commitments) in 2007. The provision increases were primarily attributable to higher criticized assets, higher nonaccrual loans, increases in certain loss
factors related to our consumer and small business loan portfolios, and strong loan growth.
-
- Our net interest income was favorably influenced by higher volume in most of our major loan categories as well as by lower
average rates on our interest bearing liabilities. Partly offsetting these positive influences to our net interest income were lower average demand deposit balances, which resulted in a shift to more
costly interest bearing liabilities, and lower average yields on our earning assets (see discussion under "Net Interest Income").
-
- The decrease in our noninterest income was due to several factors:
-
- Trust
and investment management fees were higher primarily due to an increase in fees related to higher spreads and annual increases, despite no
change in average assets under management. Average managed assets decreased by approximately 5 percent, while average non-managed assets increased by approximately 1 percent
from 2007 to 2008. Total average assets under administration for 2008 were flat from 2007 at $235 billion;
-
- Trading
account activities were lower compared to the prior year primarily due to higher provision for losses on derivative contracts;
-
- Net
gains on private capital investments were lower compared to the prior year due to lower gains on sales and capital distributions; and
-
- Other
income increased primarily due to gains on the partial redemption of our Visa Inc. and MasterCard Inc. common stocks, higher
merchant banking income primarily due to higher referral fees and risk participation fees, partly offset by other gains in the prior year, including fixed asset sales and syndicated loans held for
sale.
-
- Our higher noninterest expense was due to several factors:
-
- Salaries
and employee benefits increased mainly due to annual merit increases and higher employee benefits;
-
- As
a result of our privatization we incurred costs of $91 million, which included salaries and employee benefits of $65 million
(primarily due to accelerated amortization of stock-based compensation and bridge compensation awards) and professional services of $22 million including investment banking fees. Additionally,
we recorded intangible asset amortization of $42 million related to fair value adjustments;
-
- Provision
for losses on off-balance sheet commitments increased primarily due to higher criticized credits and increases in certain
loss factors; and
-
- Other expenses increased due to higher net operating losses, which included higher charges related to losses on litigation and threatened claims, higher regulatory fees related to federal deposit insurance costs as credits available from prior quarters were exhausted, and higher amortization related to our LIHC investments.
F-12
The table below shows the major components of net interest income and net interest margin for the periods presented.
|
Years Ended December 31, | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2007 | 2008 | 2009 | |||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1) |
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1) |
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1) |
|||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||
Loans:(2) |
||||||||||||||||||||||||||||||
Commercial, financial and industrial |
$ | 14,595,016 | $ | 972,270 | 6.66 | % | $ | 17,045,080 | $ | 936,956 | 5.50 | % | $ | 17,239,150 | $ | 753,288 | 4.37 | % | ||||||||||||
Construction |
2,335,157 | 177,258 | 7.59 | 2,585,221 | 130,022 | 5.03 | 2,721,282 | 80,303 | 2.95 | |||||||||||||||||||||
Residential mortgage |
12,964,171 | 697,069 | 5.38 | 14,872,261 | 830,559 | 5.58 | 16,269,413 | 924,896 | 5.68 | |||||||||||||||||||||
Commercial mortgage |
6,364,705 | 448,403 | 7.05 | 7,793,422 | 447,662 | 5.74 | 8,259,400 | 370,242 | 4.48 | |||||||||||||||||||||
Consumer |
2,572,146 | 199,361 | 7.75 | 3,170,513 | 193,360 | 6.10 | 3,840,209 | 178,797 | 4.66 | |||||||||||||||||||||
Lease financing |
593,132 | 23,789 | 4.01 | 645,608 | 18,546 | 2.87 | 660,113 | 21,295 | 3.23 | |||||||||||||||||||||
Total Loans |
39,424,327 | 2,518,150 | 6.39 | 46,112,105 | 2,557,105 | 5.55 | 48,989,567 | 2,328,821 | 4.75 | |||||||||||||||||||||
Securitiestaxable |
8,541,217 | 440,797 | 5.16 | 8,230,740 | 413,180 | 5.02 | 11,943,958 | 451,157 | 3.78 | |||||||||||||||||||||
Securitiestax-exempt |
55,771 | 4,566 | 8.19 | 52,510 | 4,284 | 8.16 | 82,302 | 6,030 | 7.33 | |||||||||||||||||||||
Interest bearing deposits in banks |
53,978 | 3,276 | 6.07 | 29,352 | 574 | 1.96 | 5,168,329 | 13,449 | 0.26 | |||||||||||||||||||||
Federal funds sold and securities purchased under resale agreements |
505,732 | 26,247 | 5.19 | 256,281 | 6,472 | 2.53 | 206,853 | 371 | 0.18 | |||||||||||||||||||||
Trading account assets(3) |
387,892 | 8,648 | 2.23 | 875,075 | 5,814 | 0.66 | 1,027,571 | 1,094 | 0.11 | |||||||||||||||||||||
Total earning assets |
48,968,917 | 3,001,684 | 6.13 | 55,556,063 | 2,987,429 | 5.38 | 67,418,580 | 2,800,922 | 4.15 | |||||||||||||||||||||
Allowance for loan losses |
(336,871 | ) | (478,661 | ) | (958,975 | ) | ||||||||||||||||||||||||
Cash and due from banks |
1,902,952 | 1,951,761 | 1,248,226 | |||||||||||||||||||||||||||
Premises and equipment, net |
481,650 | 527,943 | 671,599 | |||||||||||||||||||||||||||
Other assets |
2,451,494 | 3,351,249 | 5,386,660 | |||||||||||||||||||||||||||
Total assets |
$ | 53,468,142 | $ | 60,908,355 | $ | 73,766,090 | ||||||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||
Domestic deposits: |
||||||||||||||||||||||||||||||
Transaction accounts |
$ | 14,129,408 | 409,508 | 2.90 | $ | 16,066,060 | 275,795 | 1.72 | $ | 30,757,333 | 274,676 | 0.89 | ||||||||||||||||||
Savings and consumer time |
4,351,961 | 116,544 | 2.68 | 4,027,824 | 66,275 | 1.65 | 4,617,999 | 56,479 | 1.22 | |||||||||||||||||||||
Large time |
9,469,386 | 465,088 | 4.91 | 10,358,779 | 296,977 | 2.87 | 7,286,282 | 77,146 | 1.06 | |||||||||||||||||||||
Total interest bearing deposits |
27,950,755 | 991,140 | 3.55 | 30,452,663 | 639,047 | 2.10 | 42,661,614 | 408,301 | 0.96 | |||||||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
1,142,487 | 56,299 | 4.93 | 2,137,718 | 47,065 | 2.20 | 180,087 | 137 | 0.08 | |||||||||||||||||||||
Net funding allocated from (to) discontinued operations(4) |
7,299 | 377 | 5.17 | 36,378 | 810 | 2.23 | | | | |||||||||||||||||||||
Commercial paper |
1,549,681 | 76,284 | 4.92 | 1,319,360 | 31,767 | 2.41 | 536,170 | 3,095 | 0.58 | |||||||||||||||||||||
Other borrowed funds(5) |
813,054 | 42,883 | 5.27 | 4,425,435 | 107,698 | 2.43 | 1,928,245 | 18,310 | 0.95 | |||||||||||||||||||||
Medium- and long-term debt |
1,776,069 | 101,096 | 5.69 | 2,915,838 | 99,429 | 3.41 | 4,867,602 | 109,704 | 2.25 | |||||||||||||||||||||
Trust notes |
14,656 | 953 | 6.50 | 14,204 | 953 | 6.71 | 13,751 | 953 | 6.93 | |||||||||||||||||||||
Total borrowed funds |
5,303,246 | 277,892 | 5.24 | 10,848,933 | 287,722 | 2.65 | 7,525,855 | 132,199 | 1.76 | |||||||||||||||||||||
Total interest bearing liabilities |
33,254,001 | 1,269,032 | 3.82 | 41,301,596 | 926,769 | 2.24 | 50,187,469 | 540,500 | 1.08 | |||||||||||||||||||||
Noninterest bearing deposits |
14,234,781 | 12,680,533 | 13,932,977 | |||||||||||||||||||||||||||
Other liabilities(4) |
1,376,338 | 1,755,431 | 1,790,454 | |||||||||||||||||||||||||||
Total liabilities |
48,865,120 | 55,737,560 | 65,910,900 | |||||||||||||||||||||||||||
Stockholder's Equity |
||||||||||||||||||||||||||||||
Common equity |
4,603,022 | 5,170,795 | 7,855,190 | |||||||||||||||||||||||||||
Total stockholder's equity |
4,603,022 | 5,170,795 | 7,855,190 | |||||||||||||||||||||||||||
Total liabilities and stockholder's equity |
$ | 53,468,142 | $ | 60,908,355 | $ | 73,766,090 | ||||||||||||||||||||||||
Reported Net Interest Income/Margin |
||||||||||||||||||||||||||||||
Net interest income/margin (taxable-equivalent basis) |
1,732,652 | 3.54 | % | 2,060,660 | 3.71 | % | 2,260,422 | 3.35 | % | |||||||||||||||||||||
Less: taxable-equivalent adjustment |
9,272 | 9,812 | 11,310 | |||||||||||||||||||||||||||
Net interest income |
$ | 1,723,380 | $ | 2,050,848 | $ | 2,249,112 | ||||||||||||||||||||||||
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Average Assets and Liabilities of Discontinued Operations for the Year Ended: |
December 31, 2007 | December 31, 2008 | December 31, 2009 | ||||||||
Assets |
$ | 130,117 | $ | 56,130 | $ | | |||||
Liabilities |
$ | 137,416 | $ | 92,508 | $ | | |||||
Net Assets (Liabilities) |
$ | (7,299 | ) | $ | (36,378 | ) | $ | |
- (1)
- Yields
and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
- (2)
- Average
balances on loans outstanding include all nonperforming loans and loans held for sale. The amortized portion of net loan origination
fees (costs) is included in interest income on loans, representing an adjustment to the yield.
- (3)
- Includes
non-interest earning trading derivative assets.
- (4)
- Net
funding allocated from (to) discontinued operations represents the shortage (excess) of assets over liabilities of discontinued
operations. The expense (earning) on funds allocated from (to) discontinued operations is calculated by taking the net balance and applying an earnings rate or a cost of funds equivalent to the
corresponding period's Federal funds purchased rate. The year-to-date expense (earning) amount is the sum of the quarterly amounts.
- (5)
- Includes interest bearing trading liabilities.
F-13
Net interest income in 2009, on a taxable-equivalent basis, increased 10 percent from 2008 and our net interest margin decreased by 36 basis points from 2008, primarily as a result of a decrease in our interest rate spread (the difference between our earning assets yield and total interest bearing liabilities rate) attributable to a significant growth in lower yielding interest bearing deposits in banks, which was driven by our excess liquidity. These results were primarily due to the following:
-
- Average earning assets increased $11.9 billion, or 21 percent, primarily due to an increase in interest
bearing deposits in banks, average investment securities and average loans. The $5.1 billion increase in interest bearing deposits in banks was primarily due to growth in Federal Reserve Bank
balances, which are now classified as earning assets since the Federal Reserve Bank began paying interest on these deposits starting on October 1, 2008. As our average interest bearing deposits
grew by $12.2 billion, or 40 percent, we increased our purchases of agency securities, which grew by a net average of $3.7 billion as the growth in deposits far outpaced the
growth in loan demand;
-
- Yields on our earning assets were unfavorably impacted by the decreasing interest rate environment resulting in a lower
average yield on average earning assets of 123 basis points;
-
- Net interest income increased $95.8 million due to the accretion of fair value adjustments on loans, securities and
debt related to our privatization transaction;
-
- Average interest bearing deposits increased $12.2 billion, or 40 percent. Average noninterest bearing
deposits represented 25 percent of average total deposits in 2009 compared to 29 percent in 2008; and
-
- In 2009, the annualized average all-in cost of funds was 0.84 percent, reflecting an average deposit-to-loan ratio of 116 percent and what we believe is a relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers. In 2008, the annualized all-in cost of funds was 1.72 percent and our average deposit-to-loan ratio was 94 percent.
Net interest income in 2008, on a taxable-equivalent basis, increased 19 percent from 2007 and our net interest margin increased by 17 basis points. These results were primarily due to the following:
-
- Average earning assets increased $6.6 billion, or 13 percent, primarily due to an increase in average loans.
The increase in average loans was largely due to a $2.5 billion increase in average commercial loans, a $1.9 billion increase in average residential mortgages and a $1.4 billion
increase in average commercial mortgages, partially offset by a $0.8 billion decrease in lower yielding loans related to title and escrow customers;
-
- Yields on our earning assets were unfavorably impacted by the decreasing interest rate environment resulting in a lower
average yield on average earning assets of 75 basis points;
-
- Average noninterest bearing deposits decreased $1.6 billion, or 11 percent. Average commercial noninterest
bearing deposits, excluding title and escrow deposits, declined $0.5 billion, or 5 percent. Title and escrow deposits declined $0.9 billion, or 50 percent, primarily due to
the slowdown in the real estate market. Consumer demand deposits decreased $0.1 billion, or 7 percent. Offsetting the decline in noninterest bearing deposits was a $2.5 billion,
or 9 percent, increase in interest bearing deposits. Average noninterest bearing deposits represented 29 percent of average total deposits in 2008 compared to 34 percent in 2007;
and
-
- In 2008, the annualized average all-in cost of funds was 1.72 percent, reflecting an average deposit-to-loan ratio of 94 percent and what we believe is a relatively high proportion of average noninterest bearing deposits to total deposits compared to most of our peers. In 2007, the annualized all-in cost of funds was 2.67 percent and our average deposit-to-loan ratio was 107 percent.
F-14
Analysis of Changes in Net Interest Income
The following table shows the changes in the components of net interest income on a taxable-equivalent basis for 2007, 2008 and 2009. The changes in net interest income between periods have been reflected as attributable either to volume or to rate changes. For purposes of this table, changes that are not solely due to volume or rate changes are allocated to rate. Loan fees of $65 million, $82 million and $182 million for the years ended 2007, 2008 and 2009, respectively, are included in this table. Adjustments have not been made for interest received from a prior period.
|
Years Ended December 31, | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 versus 2007 | 2009 versus 2008 | |||||||||||||||||||
|
Increase (decrease) due to change in | Increase (decrease) due to change in | |||||||||||||||||||
(Dollars in thousands) | Average Volume |
Average Rate |
Net Change |
Average Volume |
Average Rate |
Net Change |
|||||||||||||||
Changes in Interest Income(1) |
|||||||||||||||||||||
Loans: |
|||||||||||||||||||||
Commercial, financial and industrial |
$ | 163,174 | $ | (198,488 | ) | $ | (35,314 | ) | $ | 10,674 | $ | (194,342 | ) | $ | (183,668 | ) | |||||
Construction |
18,980 | (66,216 | ) | (47,236 | ) | 6,844 | (56,563 | ) | (49,719 | ) | |||||||||||
Residential mortgage |
102,655 | 30,835 | 133,490 | 77,961 | 16,376 | 94,337 | |||||||||||||||
Commercial mortgage |
100,725 | (101,466 | ) | (741 | ) | 26,747 | (104,167 | ) | (77,420 | ) | |||||||||||
Consumer |
46,373 | (52,374 | ) | (6,001 | ) | 40,851 | (55,414 | ) | (14,563 | ) | |||||||||||
Lease financing |
2,104 | (7,347 | ) | (5,243 | ) | 416 | 2,333 | 2,749 | |||||||||||||
Total Loans |
434,011 | (395,056 | ) | 38,955 | 163,493 | (391,777 | ) | (228,284 | ) | ||||||||||||
Securitiestaxable |
(16,021 | ) | (11,596 | ) | (27,617 | ) | 186,404 | (148,427 | ) | 37,977 | |||||||||||
Securitiestax-exempt |
(267 | ) | (15 | ) | (282 | ) | 2,431 | (685 | ) | 1,746 | |||||||||||
Interest bearing deposits in banks |
(1,495 | ) | (1,207 | ) | (2,702 | ) | 100,724 | (87,849 | ) | 12,875 | |||||||||||
Federal funds sold and securities purchased under resale agreements |
(12,947 | ) | (6,828 | ) | (19,775 | ) | (1,251 | ) | (4,850 | ) | (6,101 | ) | |||||||||
Trading account assets |
10,864 | (13,698 | ) | (2,834 | ) | 1,006 | (5,726 | ) | (4,720 | ) | |||||||||||
Total earning assets |
414,145 | (428,400 | ) | (14,255 | ) | 452,807 | (639,314 | ) | (186,507 | ) | |||||||||||
Changes in Interest Expense |
|||||||||||||||||||||
Deposits: |
|||||||||||||||||||||
Transaction accounts |
56,163 | (189,876 | ) | (133,713 | ) | 252,690 | (253,809 | ) | (1,119 | ) | |||||||||||
Savings and consumer time |
(8,687 | ) | (41,582 | ) | (50,269 | ) | 9,738 | (19,534 | ) | (9,796 | ) | ||||||||||
Large time |
43,669 | (211,780 | ) | (168,111 | ) | (88,181 | ) | (131,650 | ) | (219,831 | ) | ||||||||||
Total interest bearing deposits |
91,145 | (443,238 | ) | (352,093 | ) | 174,247 | (404,993 | ) | (230,746 | ) | |||||||||||
Federal funds purchased and securities sold under repurchase agreements |
49,065 | (58,299 | ) | (9,234 | ) | (43,068 | ) | (3,860 | ) | (46,928 | ) | ||||||||||
Net funding allocated from (to) discontinued operations |
1,503 | (1,070 | ) | 433 | (811 | ) | 1 | (810 | ) | ||||||||||||
Commercial paper |
(11,332 | ) | (33,185 | ) | (44,517 | ) | (18,875 | ) | (9,797 | ) | (28,672 | ) | |||||||||
Other borrowed funds |
190,372 | (125,557 | ) | 64,815 | (60,682 | ) | (28,706 | ) | (89,388 | ) | |||||||||||
Medium- and long-term debt |
64,853 | (66,520 | ) | (1,667 | ) | 66,555 | (56,280 | ) | 10,275 | ||||||||||||
Trust notes |
(29 | ) | 29 | | (30 | ) | 30 | | |||||||||||||
Total borrowed funds |
294,432 | (284,602 | ) | 9,830 | (56,911 | ) | (98,612 | ) | (155,523 | ) | |||||||||||
Total interest bearing liabilities |
385,577 | (727,840 | ) | (342,263 | ) | 117,336 | (503,605 | ) | (386,269 | ) | |||||||||||
Changes in net interest income |
$ | 28,568 | $ | 299,440 | $ | 328,008 | $ | 335,471 | $ | (135,709 | ) | $ | 199,762 | ||||||||
- (1)
- Interest income is presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
F-15
Noninterest Income and Noninterest Expense
The following tables detail our noninterest income and noninterest expense that exceeded 1 percent of our total revenues for the years ended December 31, 2007, 2008 and 2009.
|
|
|
|
Increase (Decrease) | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
Years Ended December 31, | |||||||||||||||||||
|
Years Ended December 31, | 2008 versus 2007 | 2009 versus 2008 | ||||||||||||||||||||
(Dollars in thousands) | 2007 | 2008 | 2009 | Amount | Percent | Amount | Percent | ||||||||||||||||
Service charges on deposit accounts |
$ | 304,362 | $ | 302,965 | $ | 290,764 | $ | (1,397 | ) | | % | $ | (12,201 | ) | (4 | )% | |||||||
Trust and investment management fees |
157,734 | 165,255 | 134,997 | 7,521 | 5 | (30,258 | ) | (18 | ) | ||||||||||||||
Trading account activities |
65,608 | 54,530 | 73,590 | (11,078 | ) | (17 | ) | 19,060 | 35 | ||||||||||||||
Merchant banking fees |
44,123 | 49,546 | 64,652 | 5,423 | 12 | 15,106 | 30 | ||||||||||||||||
Brokerage commissions and fees |
39,839 | 38,891 | 33,584 | (948 | ) | (2 | ) | (5,307 | ) | (14 | ) | ||||||||||||
Card processing fees, net |
30,307 | 31,553 | 32,512 | 1,246 | 4 | 959 | 3 | ||||||||||||||||
Securities gains, net |
1,621 | 44 | 24,281 | (1,577 | ) | (97 | ) | 24,237 | nm | ||||||||||||||
Gains (losses) on private capital investments, net |
43,881 | 11,699 | (12,781 | ) | (32,182 | ) | (73 | ) | (24,480 | ) | nm | ||||||||||||
Gain on the VISA IPO redemption |
| 14,211 | | 14,211 | nm | (14,211 | ) | (100 | ) | ||||||||||||||
Other |
112,064 | 103,962 | 85,545 | (8,102 | ) | (7 | ) | (18,417 | ) | (18 | ) | ||||||||||||
Total noninterest income |
$ | 799,539 | $ | 772,656 | $ | 727,144 | $ | (26,883 | ) | (3 | )% | $ | (45,512 | ) | (6 | )% | |||||||
nm = not meaningful
|
|
|
|
Increase (Decrease) | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
Years Ended December 31, | ||||||||||||||||||||
|
Years Ended December 31, | 2008 versus 2007 | 2009 versus 2008 | |||||||||||||||||||||
(Dollars in thousands) | 2007 | 2008 | 2009 | Amount | Percent | Amount | Percent | |||||||||||||||||
Salaries and other compensation |
$ | 756,974 | $ | 810,277 | $ | 798,883 | $ | 53,303 | 7 | % | $ | (11,394 | ) | (1 | )% | |||||||||
Employee benefits |
154,048 | 167,804 | 172,773 | 13,756 | 9 | 4,969 | 3 | |||||||||||||||||
Salaries and employee benefits |
911,022 | 978,081 | 971,656 | 67,059 | 7 | (6,425 | ) | (1 | ) | |||||||||||||||
Net occupancy |
141,573 | 154,566 | 167,082 | 12,993 | 9 | 12,516 | 8 | |||||||||||||||||
Intangible asset amortization |
4,501 | 44,935 | 161,910 | 40,434 | nm | 116,975 | nm | |||||||||||||||||
Regulatory Agencies |
10,691 | 23,971 | 133,616 | 13,280 | nm | 109,645 | nm | |||||||||||||||||
Outside services |
75,939 | 78,933 | 89,289 | 2,994 | 4 | 10,356 | 13 | |||||||||||||||||
Professional services |
67,021 | 70,886 | 70,055 | 3,865 | 6 | (831 | ) | (1 | ) | |||||||||||||||
Equipment |
63,607 | 61,571 | 66,236 | (2,036 | ) | (3 | ) | 4,665 | 8 | |||||||||||||||
Software |
57,114 | 60,448 | 62,950 | 3,334 | 6 | 2,502 | 4 | |||||||||||||||||
Advertising and public relations |
40,690 | 51,144 | 49,886 | 10,454 | 26 | (1,258 | ) | (2 | ) | |||||||||||||||
Low income housing credit investment amortization |
28,496 | 40,577 | 49,081 | 12,081 | 42 | 8,504 | 21 | |||||||||||||||||
Communications |
36,499 | 37,067 | 36,960 | 568 | 2 | (107 | ) | | ||||||||||||||||
Data processing |
33,052 | 32,090 | 33,250 | (962 | ) | (3 | ) | 1,160 | 4 | |||||||||||||||
Foreclosed asset expense |
110 | 1,019 | 6,339 | 909 | nm | 5,320 | nm | |||||||||||||||||
Provision for losses on off-balance sheet commitments |
9,000 | 35,000 | 51,000 | 26,000 | nm | 16,000 | 46 | |||||||||||||||||
Privatization-related expense |
| 90,505 | 45,882 | 90,505 | nm | (44,623 | ) | (49 | ) | |||||||||||||||
Other |
94,886 | 135,903 | 93,309 | 41,017 | 43 | (42,594 | ) | (31 | ) | |||||||||||||||
Total noninterest expense |
$ | 1,574,201 | $ | 1,896,696 | $ | 2,088,501 | $ | 322,495 | 20 | % | $ | 191,805 | 10 | % | ||||||||||
nm = not meaningful
F-16
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2007 | 2008 | 2009 | |||||||
Income (loss) from continuing operations before income taxes |
$ | 867,718 | $ | 411,808 | $ | (226,245 | ) | |||
Income tax expense (benefit) |
294,354 | 127,868 | (161,284 | ) | ||||||
Effective tax rate |
34 | % | 31 | % | (71 | )% |
A negative effective tax rate in the above table indicates a net income tax benefit.
The change in the effective tax rate in 2009 compared to 2008 was primarily due to pre-tax income in the prior year compared to pre-tax loss in the current year, as well as the impact of tax credits and state income taxes.
The lower effective tax rate in 2008 compared to 2007 was primarily due to the effect of higher tax credits and lower income before taxes.
We intend to make a water's-edge election for our 2009 California tax return, and we have reflected that election in our 2009 income tax expense. We filed our 2007 and 2008 California franchise tax returns on the worldwide unitary basis, incorporating the financial results of MUFG and its worldwide affiliates.
In the normal course of business, the tax returns of UnionBanCal and its subsidiaries are subject to review and examination by various tax authorities. In the course of its examination of our federal tax returns for the years 1998 through 2004, the IRS has disallowed the tax deductions claimed with respect to certain leveraged leasing transactions, referred to as "lease-in/lease-outs" (LILOs). We believe our tax treatment of these LILOs was consistent with applicable tax law, regulations and case law, and we intend to defend our position vigorously. We have paid the balance of tax and interest assessed, and have filed a refund suit in the Court of Federal Claims. A trial date has not yet been set.
Accounting for uncertain tax positions establishes a "more-likely-than-not" recognition threshold that must be met before a tax benefit can be recognized in the financial statements. For tax positions that meet the more-likely-than-not threshold, an enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon final settlement with the taxing authority. We recognized a $49.3 million reduction to the beginning balance of retained earnings upon adoption of the accounting guidance related to uncertain tax positions on January 1, 2007.
The amounts of unrecognized tax benefits at December 31, 2007, 2008 and 2009 were $137.7 million, $191.0 million and $201.7 million, respectively. Of these amounts, $53.1 million, $64.0 million and $71.0 million, respectively, would affect the effective tax rate, if recognized. Unrecognized tax benefits that do not affect the effective tax rate would result in adjustments to other income tax accounts, primarily deferred taxes. Accrued interest expense on unrecognized tax benefits at December 31, 2007, 2008 and 2009, was $10.5 million and $15.8 million and $0.6 million, respectively. The net changes to unrecognized tax benefits and accrued interest resulted in an increase in our effective tax rate of 0.1 percent in 2007, 3.5 percent in 2008 and 3.9 percent in 2009. The increases in 2008 and 2009 were due to the addition to our reserves for uncertain state income tax positions.
For additional information regarding income tax expense, including a reconciliation between the effective tax rate and the statutory tax rate and changes in unrecognized tax benefits, see Note 11 to our Consolidated Financial Statements included in this Form 10-K Report.
F-17
Our principal business activity is the extension of credit in the form of loans and credit substitutes to individuals and businesses. Our policies and applicable laws and regulations governing the extension of credit require risk analysis including an extensive evaluation of the purpose of the request and the borrower's ability and willingness to repay us as scheduled. Our evaluation also includes ongoing portfolio and credit management through portfolio diversification, lending limit constraints, credit review and approval policies, and extensive internal monitoring.
We manage and control credit risk through diversification of the portfolio by type of loan, industry concentration, dollar limits on multiple loans to the same borrower, geographic distribution and type of borrower. Geographic diversification of loans originated through our branch network is generally within California, Oregon, Washington and Texas, which we consider to be our principal markets. In addition, we originate and participate in lending activities outside these states, as well as internationally.
In analyzing our loan portfolios, we apply specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics of the loans within the various portfolios. Our residential, consumer and certain small commercial loans and leases are relatively homogeneous and no single loan is individually significant in terms of its size or potential risk of loss. Therefore, we review these portfolios by analyzing their performance as a pool of loans. In contrast, our monitoring process for the larger commercial, financial and industrial, construction, commercial mortgage, leases, and foreign loan portfolios includes a periodic review of individual loans. Loans that are performing, but have shown some signs of weakness, are subjected to more stringent reporting and oversight. We review these loans to assess the ability of the borrowing entity to continue to service all of its interest and principal obligations and, as a result, may adjust the risk grade of the loan accordingly. In the event that we believe that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status, even though the loan may be current as to principal and interest payments.
We have a Credit Risk Committee, chaired by the Chief Risk Officer and composed of the Chief Credit Officer for Corporate and Commercial Real Estate, the Chief Credit Officer for Retail Banking and other executive and senior officers, that establishes our overall risk appetite, portfolio concentration limits, and credit risk rating methodology. This committee is supported by the Credit Policy Forum, composed of Group Senior Credit Officers that have responsibility for establishing credit policy, credit underwriting criteria, and other risk management controls. Credit Administration, under the direction of the Chief Credit Officer and their designated Group Senior Credit Officers, are responsible for administering the credit approval process and related policies. Policies require an evaluation of credit requests and ongoing reviews of existing credits in order to verify that we know with whom we are doing business, that the purpose of the credit is acceptable, and that the borrower is able and willing to repay as agreed. Furthermore, policies require prompt identification and quantification of asset quality deterioration or potential loss.
Another part of the control process is the Independent Risk Monitoring Group for Credit (IRMG-Credit), which reports to the Audit & Finance Committee of the Board of Directors and provides both the Board of Directors and executive management with an independent assessment of the level of credit risk and the effectiveness of the credit management process. IRMG-Credit routinely reviews the accuracy and timeliness of risk grades assigned to individual borrowers with the goal of ensuring that the business unit credit risk identification process is functioning properly. This group also assesses compliance with credit policies and underwriting standards at the business unit level. Additionally, IRMG-Credit reviews and provides commentary on proposed changes to credit policies, practices and underwriting guidelines. IRMG-Credit summarizes its significant findings on a regular basis and provides recommendations for corrective action when credit management or control deficiencies are identified.
F-18
The following table shows loans outstanding by loan type and as a percentage of total loans for 2005 through 2009.
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Increase (Decrease) December 31, 2009 From: |
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|
December 31, | December 31, 2008 | ||||||||||||||||||||||||||||||||||||||
(Dollars in millions) | 2005 | 2006 | 2007 | 2008 | 2009 | Amount | Percent | |||||||||||||||||||||||||||||||||
Commercial, financial and industrial |
$ | 11,451 | 35 | % | $ | 12,945 | 35 | % | $ | 14,564 | 35 | % | $ | 18,469 | 37 | % | $ | 15,258 | 32 | % | $ | (3,211 | ) | (17.4 | )% | |||||||||||||||
Construction |
1,447 | 4 | 2,176 | 6 | 2,407 | 6 | 2,744 | 6 | 2,429 | 5 | (315 | ) | (11.5 | ) | ||||||||||||||||||||||||||
Mortgage: |
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Residential |
11,380 | 34 | 12,344 | 34 | 13,827 | 34 | 15,881 | 32 | 16,716 | 35 | 835 | 5.3 | ||||||||||||||||||||||||||||
Commercial |
5,683 | 17 | 6,028 | 16 | 7,021 | 17 | 8,186 | 17 | 8,246 | 18 | 60 | 0.7 | ||||||||||||||||||||||||||||
Total mortgage |
17,063 | 51 | 18,372 | 50 | 20,848 | 51 | 24,067 | 49 | 24,962 | 53 | 895 | 3.7 | ||||||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||||||||||
Installment |
891 | 3 | 1,137 | 3 | 1,327 | 3 | 2,202 | 4 | 2,244 | 5 | 42 | 1.9 | ||||||||||||||||||||||||||||
Revolving lines of credit |
1,611 | 5 | 1,401 | 4 | 1,334 | 3 | 1,436 | 3 | 1,673 | 4 | 237 | 16.5 | ||||||||||||||||||||||||||||
Total consumer |
2,502 | 8 | 2,538 | 7 | 2,661 | 6 | 3,638 | 7 | 3,917 | 9 | 279 | 7.7 | ||||||||||||||||||||||||||||
Lease financing |
580 | 2 | 581 | 2 | 655 | 2 | 646 | 1 | 654 | 1 | 8 | 1.2 | ||||||||||||||||||||||||||||
Total loans held for investment |
33,043 | 100 | 36,612 | 100 | 41,135 | 100 | 49,564 | 100 | 47,220 | 100 | (2,344 | ) | (4.7 | ) | ||||||||||||||||||||||||||
Total loans held for sale |
53 | | 60 | | 69 | | 22 | | 9 | | (13 | ) | (59.1 | ) | ||||||||||||||||||||||||||
Total loans |
$ | 33,096 | 100 | % | $ | 36,672 | 100 | % | $ | 41,204 | 100 | % | $ | 49,586 | 100 | % | $ | 47,229 | 100 | % | $ | (2,357 | ) | (4.8 | )% | |||||||||||||||
Commercial, Financial and Industrial Loans
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.
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 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. We are active in, among other sectors, the oil and gas, communications, entertainment, healthcare, retailing, power and utilities and financial services industries.
The commercial, financial and industrial loan portfolio decreased from December 31, 2008 to December 31, 2009 mainly due to a decline in the utilization rate of revolving credit lines by existing customers, our aggressive and proactive portfolio management, our tighter underwriting standards, and a slight decline in loan demand in many sectors as a result of the difficult economic environment. However, average commercial financial and industrial loans for 2009 increased by $194 million to $17.2 billion.
Construction and Commercial Mortgage Loans
We engage in real estate lending that includes commercial mortgage loans and construction loans secured by deeds of trust.
Construction loans are extended primarily to commercial property developers and to residential builders. As of December 31, 2009, the construction loan portfolio consisted of approximately 90 percent in the commercial income producing real estate industry and 10 percent with residential homebuilders. The construction loan portfolio decreased 12 percent from December 31, 2008 to December 31, 2009 due to the decline in the homebuilder portfolio which decreased by approximately 57 percent, or $316 million.
F-19
Additionally, operating conditions continue to weaken for our commercial property developers, and as a result, we continue to experience negative risk grade trends in the overall portfolio.
Geographically, the outstanding construction loan portfolio was concentrated 45 percent in California and 55 percent out of state as of December 31, 2009. The largest out of state concentration was 14 percent in Washington. The California outstandings are distributed as follows: 39 percent in the Los Angeles/Orange County region, including the Inland Empire, 26 percent in the San Francisco Bay Area, 16 percent in Sacramento and the Central Valley, 14 percent in San Diego, and 5 percent in the Central Coast region.
The commercial mortgage loan portfolio consists of loans secured by commercial income properties primarily in California. The commercial mortgage portfolio increased slightly from December 31, 2008 to December 31, 2009 due to continued moderate originations and a reduced rate of early loan repayments associated with the tightening of the credit markets.
We originate residential mortgage loans, secured by one-to-four family residential properties, through our multiple channel network (including branches, private bankers, mortgage brokers, and loan-by-phone) throughout California, Oregon and Washington, and we periodically purchase loans in our market area.
At December 31, 2009, 71 percent of our residential mortgage loans were interest only, none of which are negative amortizing. At origination, these interest only loans had relatively high credit scores and had weighted average loan-to-value (LTV) ratios of approximately 66 percent. The remainder of the portfolio consists of a small amount of balloon loans and regular amortizing loans.
We do not have a program for originating or purchasing subprime loan products. However, we have loan products that allow a customer to move more quickly through the loan origination process by reducing the need to verify the income or assets of the customer. We refer to these as Portfolio Express loans. Portfolio Express loans are only available to existing clients for no-cash-out/rate and term refinance of existing residential mortgages with the Bank and eliminate the verification of both income and assets but must pass a reasonability test. "Low doc" and "no doc" (discontinued in 2008) loans comprise less than half of our residential loan portfolio, and the delinquency rates relative to the outstanding balances at December 31, 2009 were slightly less than fully documented loans. At December 31, 2009, the total amount of "no doc" and "low doc" loans past due 30 days or more was $178.6 million, compared to $75.3 million at December 31, 2008. The total amount of residential mortgages delinquent 30 days or more was $367.3 million at December 31, 2009, compared to $172.3 million at December 31, 2008. Although delinquencies have risen since December 31, 2008 as a result of the declining real estate market and downturn in the economy, the delinquency rate remains low compared to the industry average for California prime loans. We believe that our underwriting standards remain conservative and as described above, programs with higher risk have been discontinued.
We hold most of the loans we originate. However, we sell some of our 30-year, fixed rate loans, except for the Community Reinvestment Act (CRA) qualifying loans.
We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network, Private Banking Offices and via the internet. The increase in consumer loans from December 31, 2008 was primarily in our FlexEquity line/loan product. The FlexEquity line/loan allows our customers the flexibility to manage a line of credit with as many as four fixed rate loans under a single product. When customers convert all or a portion of their FlexEquity lines to fixed rate loans, these new loans are classified as installment loans. As a result of the continuing decline in the overall property values in California, we have reduced our maximum loan to value limits on all second trust deed programs we offer. At origination, these loans had relatively high credit scores and had weighted-average loan-to-value (LTV) ratios of approximately
F-20
60 percent. Our total home equity loans and lines delinquent 30 days or more were $39.4 million at December 31, 2009, compared to $28.3 million at December 31, 2008. Our annual review program reviews all equity secured lines with a commitment amount of $200,000 or more and an origination date between 2004-2008, and includes obtaining an updated credit report as well as an updated value on the property to reassess our LTV position. Action is taken to reduce or freeze limits, as applicable and pursuant to applicable laws and regulations, to minimize additional exposure in a declining market. In addition, to help mitigate the overall effect of the declining real estate market on new originations, we reduced by 5 percent the maximum LTV allowable for any owner or non owner occupied property valued over $250,000. The change was effective January 1, 2009.
We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. At December 31, 2009, we had leveraged leases of $549.0 million, which were net of non-recourse debt of approximately $1.1 billion. We utilize a number of special purpose entities for our leveraged leases. These entities do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP 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.
Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of December 31, 2008 and 2009 for Canada, the only country where such outstandings exceeded one 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 the country shown in the table below, any significant local currency outstandings are funded by local currency borrowings.
(Dollars in millions) | Financial Institutions |
Public Sector Entities |
Corporations and Other Borrowers |
Total Outstandings |
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December 31, 2008 |
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Canada |
$ | 111 | $ | | $ | 796 | $ | 907 | ||||||
December 31, 2009 |
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Canada |
$ | 88 | $ | | $ | 837 | $ | 925 |
We recorded a provision for loan losses of $515 million and $1,114 million in 2008 and 2009, respectively. We recorded a provision for losses on off-balance sheet commitments of $35 million and $51 million in 2008 and 2009, respectively. The provisions for loan losses and for losses on off-balance sheet commitments are charged to income to bring our total allowances for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowances for Credit Losses" below.
F-21
Allowance Policy and Methodology
We maintain allowances for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. The allowances are based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio and unused commitments to provide financing. Our methodology for measuring the appropriate level of the allowances relies on several key elements, which include the formula allowance, the specific allowance for identified problem credit exposures, the unallocated allowance and the allowance for off-balance sheet commitments.
The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans, leases and commitments. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Loss factors are developed in the following ways:
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- loss factors for individually graded credits are derived from a migration model that tracks historical losses over a
period, such as an economic cycle, which we believe captures the inherent losses in our loan portfolio; and
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- pooled loan loss factors (not individually graded loans) are based on expected net charge offs. Pooled loans are loans that are homogeneous in nature, such as consumer installment, home equity, residential mortgage loans and certain small commercial loans.
We believe that an economic cycle is a period in which both upturns and downturns in the economy have been reflected. We calculate loss factors over a time interval that spans what we believe constitutes a complete and representative economic cycle.
Loan loss factors, which are used in determining our formula allowance, are adjusted quarterly primarily based upon the changes in the level of historical net charge offs and parameter updates by management. We estimate our probable losses inherent in the portfolio based on a loss confirmation period. The loss confirmation period is the estimated average period of time between a material adverse event affecting the creditworthiness of a borrower and the subsequent recognition of a loss. Based upon our evaluation process, we believe that, for our non-criticized, risk-graded loans, on average, losses are sustained approximately 10 quarters after an adverse event in the creditor's financial condition has taken place. For our criticized risk-graded loans, we measure the losses based upon the remaining life of the loan. See definition of criticized credits under "Changes in the Allocated (Formula and Specific) Allowances" in this section of our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). For pool-managed credits, the loss confirmation period is 4 quarters for all products.
Furthermore, based on management's judgment, our methodology permits adjustments to any loss factor used in the computation of the formula allowance for significant factors, which affect the collectibility of the portfolio as of the evaluation date, but are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information that has become available. This includes changing the number of periods that are included in the calculation of the loss factors and adjusting qualitative factors to be representative of the economic cycle that we expect will impact the portfolio. Updates of the loss confirmation period are done when significant events cause us to reexamine our data.
A specific allowance is established in cases where management has identified significant conditions or circumstances related to a credit or a portfolio segment that management believes indicate the probability that a loss has been incurred. This amount may be determined either by a method prescribed by accounting
F-22
guidance related to accounting for an impairment of a loan or methods that include a range of probable outcomes based upon certain qualitative factors.
The unallocated allowance is composed of attribution factors, which are based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions evaluated in connection with the unallocated allowance may include existing general economic and business conditions affecting the key lending areas, credit quality trends, collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, bank regulatory examination results and findings of our internal credit examiners. Although our assessments of these conditions are reviewed quarterly with our senior credit officers, there can be no assurance that the adverse impact of any of these conditions on us will not be in excess of our expectations.
The allowances for credit losses are based upon estimates of probable losses inherent in the loan portfolio and certain off-balance sheet commitments. The actual losses can vary from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The loss migration model that is used to establish the loan loss factors for individually graded loans is designed to be self-correcting by taking into account our loss experience over prescribed periods. In addition, by basing the loan loss factors over a period reflective of an economic cycle, recent loss data that may not be reflective of prospective losses going forward will not have an undue influence on the calculated loss factors.
The following table reflects the related allowance for loan losses allocated to a loan category at the period end and percentage of the allocation to the period end loan balance of that loan category, as set forth in the "Loans" table on page F-19.
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December 31, | ||||||||||||||||||||||
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(Dollars in thousands) | 2005 | 2006 | 2007 | ||||||||||||||||||||
Commercial, financial, and industrial |
$ | 169,700 | 1.48 | % | $ | 150,600 | 1.16 | % | $ | 172,800 | 1.19 | % | |||||||||||
Construction |
19,800 | 1.37 | 34,600 | 1.59 | 57,300 | 2.38 | |||||||||||||||||
Mortgage: |
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Residential |
3,400 | 0.03 | 3,700 | 0.03 | 4,100 | 0.03 | |||||||||||||||||
Commercial |
72,500 | 1.28 | 73,600 | 1.22 | 70,900 | 1.01 | |||||||||||||||||
Total mortgage |
75,900 | 0.44 | 77,300 | 0.42 | 75,000 | 0.36 | |||||||||||||||||
Consumer: |
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Installment |
1,900 | 0.21 | 1,200 | 0.11 | 2,900 | 0.22 | |||||||||||||||||
Revolving lines of credit |
2,000 | 0.12 | 1,800 | 0.13 | 3,700 | 0.28 | |||||||||||||||||
Total consumer |
3,900 | 0.16 | 3,000 | 0.12 | 6,600 | 0.25 | |||||||||||||||||
Lease financing |
17,200 | 2.97 | 6,500 | 1.12 | 6,100 | 0.93 | |||||||||||||||||
Total allocated allowance |
286,500 | 0.87 | 272,000 | 0.74 | 317,800 | 0.77 | |||||||||||||||||
Unallocated |
65,032 | 59,077 | 84,926 | ||||||||||||||||||||
Total allowance for loan losses |
$ | 351,532 | 1.06 | % | $ | 331,077 | 0.90 | % | $ | 402,726 | 0.98 | % | |||||||||||
F-23
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Increase (Decrease) December 31, 2009 From |
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December 31, | December 31, 2008 | |||||||||||||||||||||
(Dollars in thousands) | 2008 | 2009 | Amount | Percent | |||||||||||||||||||
Commercial, financial, and industrial |
$ | 339,777 | 1.84 | % | $ | 445,500 | 2.92 | % | $ | 105,723 | 31 | % | |||||||||||
Construction |
139,088 | 5.07 | 251,100 | 10.34 | 112,012 | 81 | |||||||||||||||||
Mortgage: |
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Residential |
40,200 | 0.25 | 121,400 | 0.73 | 81,200 | 202 | |||||||||||||||||
Commercial |
119,159 | 1.46 | 260,700 | 3.16 | 141,541 | 119 | |||||||||||||||||
Total mortgage |
159,359 | 0.66 | 382,100 | 1.53 | 222,741 | 140 | |||||||||||||||||
Consumer: |
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Installment |
3,100 | 0.14 | 2,300 | 0.10 | (800 | ) | (26 | ) | |||||||||||||||
Revolving lines of credit |
23,600 | 1.64 | 80,100 | 4.79 | 56,500 | 239 | |||||||||||||||||
Total consumer |
26,700 | 0.73 | 82,400 | 2.10 | 55,700 | 209 | |||||||||||||||||
Lease financing |
3,800 | 0.59 | 5,000 | 0.76 | 1,200 | 32 | |||||||||||||||||
Total allocated allowance |
668,724 | 1.35 | 1,166,100 | 2.47 | 497,376 | 74 | |||||||||||||||||
Unallocated |
69,043 | 190,900 | 121,857 | 176 | |||||||||||||||||||
Total allowance for loan losses |
$ | 737,767 | 1.49 | % | $ | 1,357,000 | 2.87 | % | $ | 619,233 | 84 | % | |||||||||||
Comparison of the Total Allowances and Related Provisions for Credit Losses
At December 31, 2007, 2008 and 2009, our total allowances for credit losses were 885 percent, 208 percent and 116 percent of total nonaccrual loans, respectively. At December 31, 2007, 2008 and 2009, our total allowances for loan losses were 723 percent, 178 percent and 103 percent of total nonaccrual loans, respectively.
In addition, the allowances incorporate the results of measuring impaired loans as provided in the accounting standards that prescribe the measurement methods, income recognition and disclosures related to impaired loans. At December 31, 2007, 2008 and 2009, total impaired loans were $56 million, $415 million and $1,317 million, respectively, and the associated impairment allowances were $11 million, $107 million and $223 million, respectively.
As a result of management's assessment of the relevant factors, including the credit quality of our loan portfolio, the negative impact from the economic slowdown on our lending portfolios (especially our commercial real estate portfolio) and changes in the composition of the loan portfolio, we recorded a provision for loan losses of $1,114 million in 2009, compared to $515 million in 2008.
Overall, our loan portfolio experienced higher criticized assets, especially in the commercial real estate portfolio, higher nonaccrual loans, and increases in certain loss factors related to our consumer and small business portfolios, reflecting the continued weak economic environment.
We expect the elevated level of provision for credit losses, which we experienced in 2009, to continue in 2010. The factors driving the increase in our projected credit provision during 2010 include management's belief that the economic environment remains weak and will result in further deterioration in our loan portfolio.
During the first quarter of 2009, the loss confirmation period (LCP) for residential mortgages and home equity loans and lines of credit products was updated to better reflect the impact of recent economic conditions on losses within these portfolios. As a result of our analyses and peer surveys, the LCP for consumer home equity loans and residential mortgages was changed from between 1.5 years and 2 years, to 1 year, which resulted in a lower provision for credit losses in the first quarter of 2009. In addition, during the second quarter
F-24
of 2009, we reduced our commercial loan portfolio loss factors based on past charge off experience over a slightly shorter economic time frame, further adjusted for an updated analysis of the severity of the economic cycle.
Other than the above mentioned LCP change and change in our commercial loan portfolio loss factors, as well as for the refinement in estimates and assumptions regarding the effects of economic and business conditions on borrowers and other factors, which affected the assessment of the unallocated allowance, there were no other significant changes during 2007, 2008 and 2009, in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the formula and specific or unallocated allowances for credit losses.
The following table sets forth the components of the allowances for credit losses.
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December 31, | Increase December 31, 2009 From December 31, 2008 |
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(Dollars in millions) | 2007 | 2008 | 2009 | Amount | Percent | |||||||||||||
Allocated allowance: |
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Formula |
$ | 395 | $ | 682 | $ | 1,110 | $ | 428 | 63 | % | ||||||||
Specific |
12 | 112 | 232 | 120 | 107 | |||||||||||||
Total allocated allowance |
407 | 794 | 1,342 | 548 | 69 | |||||||||||||
Unallocated allowance |
86 | 69 | 191 | 122 | 177 | |||||||||||||
Total allowances for credit losses |
$ | 493 | $ | 863 | $ | 1,533 | $ | 670 | 78 | % | ||||||||
Changes in the Allocated (Formula and Specific) Allowances
The increase in the formula allowance from December 31, 2008 was primarily due to an increase in criticized credits (as defined below), especially in the commercial real estate portfolio, higher nonaccrual loans and higher loss factors for most our lending portfolios as a result of the prolonged negative impact of the weak economy.
The specific allowance increase from December 31, 2008 to December 31, 2009 was primarily reflective of an increase in nonaccrual loans, partially offset by the amount of loss inherent in these loans. At December 31, 2008, the specific allowance increased from December 31, 2007, primarily reflective of an increase in nonaccrual loans and the amount of loss inherent in these loans, partly offset by an $8 million adjustment for impaired loans related to our privatization.
The total allocated allowance includes the allowance for losses related to off-balance sheet exposures such as unfunded commitments and letters of credit.
At December 31, 2009, the allocated portion of the allowances for credit losses included $745 million related to special mention and classified credits (criticized credits), compared to $408 million at December 31, 2008 and $124 million at December 31, 2007. Special mention and classified credits are those that are internally risk graded as "special mention," "substandard" or "doubtful." Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, could jeopardize repayment of the loan and result in further downgrade. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as "doubtful" has critical weaknesses that make full collection improbable.
Changes in the Unallocated Allowance
The unallocated allowance at December 31, 2007, 2008 and 2009 was $86 million, $69 million and $191 million, respectively. The increase from 2008 to 2009 was primarily due to deteriorating trends in the commercial real estate income property markets, the effect of budgetary problems within the state of California and its local governments and the negative impact of high unemployment and significant residential property devaluations.
F-25
Change in the Total Allowances for Credit Losses
The following table sets forth a reconciliation of changes in our allowances for credit losses.
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Increase (Decrease) December 31, 2009 From: |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31, | December 31, 2008 | |||||||||||||||||||||||
(Dollars in thousands) | 2005 | 2006 | 2007 | 2008 | 2009 | Amount | Percent | ||||||||||||||||||
Balance, beginning of period |
$ | 399,156 | $ | 351,532 | $ | 331,077 | $ | 402,726 | $ | 737,767 | $ | 335,041 | 83 | % | |||||||||||
Loans charged off: |
|||||||||||||||||||||||||
Commercial, financial and industrial |
19,962 | 36,520 | 12,177 | 118,780 | 305,628 | 186,848 | nm | ||||||||||||||||||
Construction |
118 | | | 31,903 | 70,833 | 38,930 | nm | ||||||||||||||||||
Commercial mortgage |
2,062 | | | 1,205 | 72,868 | 71,663 | nm | ||||||||||||||||||
Residential mortgage |
9 | 336 | 92 | 6,706 | 39,966 | 33,260 | nm | ||||||||||||||||||
Consumer |
4,532 | 3,777 | 6,335 | 18,688 | 42,729 | 24,041 | nm | ||||||||||||||||||
Lease financing |
19,862 | 22 | | | | | | ||||||||||||||||||
Total loans charged off |
46,545 | 40,655 | 18,604 | 177,282 | 532,024 | 354,742 | nm | ||||||||||||||||||
Recoveries of loans previously charged off: |
|||||||||||||||||||||||||
Commercial, financial and industrial |
47,526 | 19,135 | 6,953 | 5,358 | 29,620 | 24,262 | nm | ||||||||||||||||||
Construction |
34 | | | 631 | 1,383 | 752 | nm | ||||||||||||||||||
Commercial mortgage |
63 | 2 | | 18 | 275 | 257 | nm | ||||||||||||||||||
Residential mortgage |
10 | 71 | 336 | 2 | 25 | 23 | nm | ||||||||||||||||||
Consumer |
1,716 | 1,513 | 1,082 | 1,099 | 1,311 | 212 | 19 | ||||||||||||||||||
Lease financing |
206 | 4,486 | 118 | 213 | | (213 | ) | (100 | ) | ||||||||||||||||
Total recoveries of loans previously charged off |
49,555 | 25,207 | 8,489 | 7,321 | 32,614 | 25,293 | nm | ||||||||||||||||||
Net loans charged off (recovered) |
(3,010 | ) | 15,448 | 10,115 | 169,961 | 499,410 | 329,449 | nm | |||||||||||||||||
(Reversal of) provision for loan losses |
(50,683 | ) | (5,000 | ) | 81,000 | 515,000 | 1,114,000 | 599,000 | 116 | ||||||||||||||||
Privatizationadjustment for impaired loans |
| | | (8,417 | ) | 2,062 | 10,479 | nm | |||||||||||||||||
Foreign translation adjustment and other net additions (deductions) |
49 | (7 | ) | 764 | (1,581 | ) | 2,581 | 4,162 | nm | ||||||||||||||||
Ending balance of allowance for loan losses |
$ | 351,532 | $ | 331,077 | $ | 402,726 | $ | 737,767 | $ | 1,357,000 | $ | 619,233 | 84 | ||||||||||||
Allowance for losses on off-balance sheet commitments |
86,375 | 81,374 | 90,374 | 125,374 | 176,374 | 51,000 | 41 | ||||||||||||||||||
Allowances for credit losses |
$ | 437,907 | $ | 412,451 | $ | 493,100 | $ | 863,141 | $ | 1,533,374 | $ | 670,233 | 78 | ||||||||||||
Allowances for loan losses to total loans(1) |
1.06 | % | 0.90 | % | 0.98 | % | 1.49 | % | 2.87 | % | |||||||||||||||
Allowances for credit losses to total loans(2) |
1.32 | 1.12 | 1.20 | 1.74 | 3.25 | ||||||||||||||||||||
(Reversal of) provision for loan losses to net loans charged off (recovered) |
nm | (32.37 | ) | 800.79 | 303.01 | 223.06 | |||||||||||||||||||
Net loans charged off (recovered) to average total loans |
(0.01 | ) | 0.04 | 0.03 | 0.37 | 1.02 |
- (1)
- The
allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans. These ratios
relate to continuing operations only.
- (2)
- The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans. These ratios relate to continuing operations only.
nm - not meaningful
F-26
Total loans charged off in 2009 increased from the prior year primarily as a result of market softness on commercial real estate dependent loans, and the impact of the recession on newspaper, financial institution and municipality loans, in particular. The increase was also a result of an increase in unemployment, and a curtailment of personal income coupled with declining residential property values. Charge offs reflect the realization of losses in the portfolio that were recognized previously through provisions for credit losses.
Loan recoveries in 2009 increased from 2008. 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.
Nonperforming assets consist of nonaccrual loans, restructured loans that are nonperforming 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. Effective on January 1, 2009, consumer home equity loans and one-to-four single family residential loans were placed on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure. Previously, these loans were not placed on nonaccrual status. However, before and after this nonaccrual accounting policy change, the loss content was charged off on or before the loans were 180 days past due. As a result of this nonaccrual accounting policy change, home equity and one-to-four family residential loans totaling $225 million ($10 million of which is restructured) have been placed on nonaccrual status as of December 31, 2009. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to our Consolidated Financial Statements included in this Form 10-K Report.
Restructured loans are loans in which the Bank has formally restructured all or a significant portion of the loan and provided a concession in the form of debt forgiveness, a modification of interest rate and/or payment terms. Any impairment, not previously recorded, is accounted for at the time of restructuring. Restructured loans are separately disclosed as nonperforming assets for the calendar year of restructuring. If a restructured loan was negotiated at a market rate at the date of restructuring and performs under the modified terms for a sustained period, it may be disclosed as performing assets in the subsequent calendar year.
Foreclosed assets include property where the Bank acquired title through foreclosure or "deed in lieu" of foreclosure.
F-27
The following table sets forth an analysis of nonperforming assets.
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Increase (Decrease) December 31, 2009 From: |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, | December 31, 2008 | ||||||||||||||||||||||
(Dollars in thousands) | 2005 | 2006 | 2007 | 2008 | 2009 | Amount | Percent | |||||||||||||||||
Commercial, financial and industrial |
$ | 50,073 | $ | 7,552 | $ | 29,293 | $ | 260,272 | $ | 335,581 | $ | 75,309 | 28.9 | % | ||||||||||
Construction |
| | 13,662 | 98,934 | 335,085 | 236,151 | nm | |||||||||||||||||
Commercial mortgage |
8,819 | 19,187 | 12,775 | 55,750 | 414,429 | 358,679 | nm | |||||||||||||||||
Residential mortgage |
| | | | 194,482 | 194,482 | nm | |||||||||||||||||
Consumer |
| | | | 20,492 | 20,492 | nm | |||||||||||||||||
Lease financing |
| 15,047 | | | 108 | 108 | nm | |||||||||||||||||
Restructurednonaccrual |
| | | | 16,954 | 16,954 | nm | |||||||||||||||||
Total nonaccrual loans |
58,892 | 41,786 | 55,730 | 414,956 | 1,317,131 | 902,175 | nm | |||||||||||||||||
Restructured Loans |
||||||||||||||||||||||||
Foreclosed assets |
2,753 | 579 | 795 | 20,214 | 32,662 | 12,448 | 61.6 | |||||||||||||||||
Restructurednonperforming |
| | | 1,345 | | (1,345 | ) | (100.0 | ) | |||||||||||||||
Total nonperforming assets |
$ | 61,645 | $ | 42,365 | $ | 56,525 | $ | 436,515 | $ | 1,349,793 | $ | 913,278 | nm | |||||||||||
Restructured loans that continue to accrue interest |
$ | | $ | | $ | | $ | | $ | 3,811 | $ | 3,811 | nm | |||||||||||
Allowances for loan losses |
$ | 351,532 | $ | 331,077 | $ | 402,726 | $ | 737,767 | $ | 1,357,000 | $ | 619,233 | 83.9 | % | ||||||||||
Allowances for credit losses |
$ | 437,907 | $ | 412,451 | $ | 493,100 | $ | 863,141 | $ | 1,533,374 | $ | 670,233 | 77.7 | % | ||||||||||
Nonaccrual loans to total loans |
0.18 | % | 0.11 | % | 0.14 | % | 0.84 | % | 2.79 | % | ||||||||||||||
Allowance for loan losses to nonaccrual loans(1) |
596.91 | 792.32 | 722.64 | 177.79 | 103.03 | |||||||||||||||||||
Allowances for credit losses to nonaccrual loans(2) |
743.58 | 987.06 | 884.80 | 208.01 | 116.42 | |||||||||||||||||||
Nonperforming assets to total loans, distressed loans held for sale, and foreclosed assets |
0.19 | 0.12 | 0.14 | 0.88 | 2.86 | |||||||||||||||||||
Nonperforming assets to total assets |
0.12 | 0.08 | 0.10 | 0.62 | 1.58 |
- (1)
- The
allowance for loan losses to nonaccrual loans ratios are calculated using the allowance for loan losses against end of period total
nonaccrual loans. These ratios relate to continuing operations only.
- (2)
- The allowances for credit losses to nonaccrual loans ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total nonaccrual loans. These ratios relate to continuing operations only.
nm - not meaningful
The increase in nonaccrual loans from December 31, 2008 to December 31, 2009 was primarily due to an increase in commercial, construction and commercial mortgage loans, primarily within the commercial real estate industry sector. Additionally, we had increases in residential and consumer home equity nonaccrual loans due to the change in our nonaccrual accounting policy effective January 1, 2009. During 2008 and
F-28
2009, we had $4 million and $84 million in sales of nonperforming loans, respectively. Losses from these sales were reflected in charge offs.
The following table sets forth an analysis of loans contractually past due 90 days or more as to interest or principal and still accruing, but not included in nonaccrual loans above.
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Increase (Decrease) December 31, 2009 From | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, | December 31, 2008 | ||||||||||||||||||||||
(Dollars in thousands) | 2005 | 2006 | 2007 | 2008 | 2009 | Amount | Percent | |||||||||||||||||
Commercial, financial and industrial |
$ | 187 | $ | 3,085 | $ | 3,797 | $ | 2,529 | $ | 4,393 | $ | 1,864 | 73.7 | % | ||||||||||
Construction |
677 | | | | | | | |||||||||||||||||
Mortgage: |
||||||||||||||||||||||||
Residential |
2,784 | 2,359 | 13,359 | 59,940 | | (59,940 | ) | (100.0 | ) | |||||||||||||||
Commercial |
499 | 2,155 | | 181 | 413 | 232 | nm | |||||||||||||||||
Total mortgage |
3,283 | 4,514 | 13,359 | 60,121 | 413 | (59,708 | ) | (99.3 | ) | |||||||||||||||
Consumer and other |
819 | 1,706 | 2,982 | 8,097 | 229 | (7,868 | ) | (97.2 | ) | |||||||||||||||
Total loans 90 days or more past due and still accruing |
$ | 4,966 | $ | 9,305 | $ | 20,138 | $ | 70,747 | $ | 5,035 | $ | (65,712 | ) | (92.9 | )% | |||||||||
nm - not meaningful
The decline in loans contractually past due 90 days or more from December 31, 2008 to December 31, 2009 was primarily due to the change in our nonaccrual policy for residential and consumer home equity loans described above.
If interest that was due on the book balances of all nonaccrual and restructured loans (including loans that were, but are no longer, on nonaccrual) had been accrued under their original terms, we would have recognized an additional $54.0 million of interest income in 2009.
After designation as a nonaccrual loan, we recognized interest income on a cash basis of $4.3 million and $9.7 million for loans that were on nonaccrual status during 2008 and 2009, respectively.
Management of the securities portfolio involves the maximization of return while maintaining prudent levels of quality, market risk and liquidity. At December 31, 2009, approximately 99 percent of our securities, based upon carrying value, were investment grade. The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities are detailed in Note 3 to our Consolidated Financial Statements included in this Form 10-K Report.
Our securities available for sale are recorded at fair value with the change in fair value recognized in accumulated other comprehensive income. Our ALM Securities portfolio, which consists of available for sale U.S. government, state and municipal, and mortgage-backed securities held for Asset and Liability Management (ALM) purposes, totaled $22.4 billion at December 31, 2009. ALM Securities are valued at fair value by a pricing service whose prices can be corroborated by recent security trading activities.
Our asset-backed securities primarily consist of CLO securities, which are known as Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, we reassessed
F-29
the classification of our CLOs. On February 28, 2009, we reclassified $1.1 billion at fair value, from available for sale to held to maturity. The related unrealized pre-tax loss of $589 million included in accumulated other comprehensive income (OCI) remained in OCI and is being amortized as a yield adjustment through earnings over the remaining terms of the CLOs. However, there is no impact on earnings, as an equal fair value discount on the securities is being accreted through earnings over the remaining terms of the CLOs. No gain or loss was recognized at the time of reclassification. We consider the held to maturity classification to be more appropriate because we have the ability and the intent to hold these securities to maturity.
At December 31, 2009, the fair value of our CLO securities had increased by $259.0 million from December 31, 2008, primarily due to an increase in liquidity in the marketplace. We estimate the fair value of our CLOs using a pricing model, as well as broker quotes. The model is based on internally-developed assumptions, utilizing market data derived from market participants and credit rating agencies. These assumptions include, but are not limited to, estimated default rates, recovery rates, prepayment rates and reinvestment rates. At December 31, 2009, 20 percent of our CLO securities were rated single-A or better by two major rating agencies.
We conduct a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment. Based on this analysis, an insignificant amount of impairment was recognized on two CLO securities during the year. Since no observable credit quality issues were present in the remaining CLO portfolio at December 31, 2009, the Company concluded that these securities were not other-than-temporarily impaired.
The following tables show the remaining contractual maturities and expected yields of the securities based upon amortized cost at December 31, 2009. The fair value of our securities available for sale portfolio at December 31, 2009 was $22.6 billion, compared to $8.2 billion at December 31, 2008.
Included in our securities available for sale portfolio at December 31, 2008 and 2009 were ALM Securities of $6.8 billion and $22.4 billion, respectively. These securities had an expected weighted average maturity of 2.9 years and 2.2 years, respectively.
|
December 31, 2009 | |
|
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|
Maturity | |
|
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|
One Year or Less |
Over One Year Through Five Years |
Over Five Years Through Ten Years |
Over Ten Years | Total Amortized Cost |
|||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||
U.S. Treasury |
$ | 299,488 | 0.32 | % | $ | | | % | $ | | | % | $ | | | % | $ | 299,488 | 0.32 | % | ||||||||||||
Other U.S. government |
3,500,019 | 0.58 | 8,811,607 | 1.61 | | | | | 12,311,626 | 1.32 | ||||||||||||||||||||||
Residential mortgage-backed securitiesagency(1)(2) |
13 | 4.40 | 309,668 | 3.69 | 1,441,601 | 3.83 | 7,464,489 | 4.12 | 9,215,771 | 4.06 | ||||||||||||||||||||||
Residential mortgage-backed securitiesnon-agency(1)(2) |
| | | | 13,468 | 5.07 | 441,178 | 5.37 | 454,646 | 5.36 | ||||||||||||||||||||||
State and municipal |
1,845 | 7.43 | 10,072 | 6.83 | 11,007 | 3.56 | 20,363 | 5.41 | 43,287 | 5.36 | ||||||||||||||||||||||
Asset-backed and debt securities |
| | 23,482 | 7.25 | 21,326 | 3.94 | 67,801 | 7.02 | 112,609 | 6.48 | ||||||||||||||||||||||
Equity securities(3) |
| | | | | | | | 74,791 | | ||||||||||||||||||||||
Total securities available for sale |
$ | 3,801,365 | 0.56 | % | $ | 9,154,829 | 1.70 | % | $ | 1,487,402 | 3.84 | % | $ | 7,993,831 | 4.22 | % | $ | 22,512,218 | 2.54 | % | ||||||||||||
F-30
|
December 31, 2009 Maturity |
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|
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|
One Year or Less |
Over One Year Through Five Years |
Over Five Years Through Ten Years |
Over Ten Years |
Total Amortized Cost |
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(Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||
Collateralized loan obligations |
$ | | | % | $ | 9,941 | 3.98 | % | $ | 1,364,314 | 1.10 | % | $ | 384,461 | 1.03 | % | $ | 1,758,716 | 1.10 | % | ||||||||||||
Foreign securities |
96 | 0.25 | | | | | | | 96 | 0.25 | ||||||||||||||||||||||
Total securities held to maturity |
$ | 96 | 0.25 | % | $ | 9,941 | 3.98 | % | $ | 1,364,314 | 1.10 | % | $ | 384,461 | 1.03 | % | $ | 1,758,812 | 1.10 | % | ||||||||||||
- (1)
- Although
the mortgage-backed securities have been ascribed to periods based upon their contractual maturities, principal payments are
received prior to maturity because borrowers have the right to repay their obligations at any time.
- (2)
- See
discussion of expected duration in "Quantitative and Qualitative Disclosures About Market Risk."
- (3)
- Equity securities do not have a stated maturity and are included in the total column only.
The following table presents our loans by contractual maturity except for loans held for sale, which are presented based on the period when the sale is expected to take place.
|
December 31, 2009 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | One Year or Less |
Over One Year Through Five Years |
Over Five Years |
Total | |||||||||||||
Commercial, financial and industrial |
$ | 2,830,073 | $ | 10,265,915 | $ | 2,162,093 | $ | 15,258,081 | |||||||||
Construction |
1,259,983 | 906,763 | 262,263 | 2,429,009 | |||||||||||||
Mortgage: |
|||||||||||||||||
Residential |
257 | 12,718 | 16,703,073 | 16,716,048 | |||||||||||||
Commercial |
931,979 | 2,208,694 | 5,105,105 | 8,245,778 | |||||||||||||
Total mortgage |
932,236 | 2,221,412 | 21,808,178 | 24,961,826 | |||||||||||||
Consumer: |
|||||||||||||||||
Installment |
2,893 | 55,835 | 2,185,511 | 2,244,239 | |||||||||||||
Revolving lines of credit |
1,526,653 | 139,628 | 6,561 | 1,672,842 | |||||||||||||
Total consumer |
1,529,546 | 195,463 | 2,192,072 | 3,917,081 | |||||||||||||
Lease financing |
8,229 | 73,006 | 572,508 | 653,743 | |||||||||||||
Total loans held to maturity |
6,560,067 | 13,662,559 | 26,997,114 | 47,219,740 | |||||||||||||
Total loans held for sale |
8,768 | | | 8,768 | |||||||||||||
Total loans |
$ | 6,568,835 | $ | 13,662,559 | $ | 26,997,114 | $ | 47,228,508 | |||||||||
Allowance for loan losses |
1,357,000 | ||||||||||||||||
Loans, net |
$ | 45,871,508 | |||||||||||||||
Total fixed rate loans due after one year |
$ | 10,598,627 | |||||||||||||||
Total variable rate loans due after one year |
30,061,046 | ||||||||||||||||
Total loans due after one year |
$ | 40,659,673 | |||||||||||||||
F-31
The following table presents our deposits as of December 31, 2008 and 2009.
|
December 31, | Increase (Decrease) December 31, 2009 From December 31, 2008 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2008 | 2009 | Amount | Percent | |||||||||||
Interest checking |
$ | 665,766 | $ | 849,283 | $ | 183,517 | 28 | % | |||||||
Money market |
19,265,507 | 39,952,337 | 20,686,830 | 107 | |||||||||||
Total interest bearing transaction accounts |
19,931,273 | 40,801,620 | 20,870,347 | 105 | |||||||||||
Savings |
2,065,950 | 3,716,566 | 1,650,616 | 80 | |||||||||||
Time |
10,485,673 | 9,440,478 | (1,045,195 | ) | (10 | ) | |||||||||
Total interest bearing deposits(1) |
32,482,896 | 53,958,664 | 21,475,768 | 66 | |||||||||||
Noninterest bearing deposits |
13,566,873 | 14,558,989 | 992,116 | 7 | |||||||||||
Total deposits |
$ | 46,049,769 | $ | 68,517,653 | $ | 22,467,884 | 49 | % | |||||||
(1) Total interest bearing deposits include: |
|||||||||||||||
Brokered Deposits: |
|||||||||||||||
Money market |
$ | | $ | 5,340,452 | $ | 5,340,452 | nm | ||||||||
Time |
567,564 | 979,352 | 411,788 | 73 | |||||||||||
Total brokered deposits |
567,564 | 6,319,804 | 5,752,240 | nm | |||||||||||
Nonbrokered deposits |
31,915,332 | 47,638,860 | 15,723,528 | 49 | |||||||||||
Total interest bearing deposits |
$ | 32,482,896 | $ | 53,958,664 | $ | 21,475,768 | 66 | % | |||||||
nm = not meaningful
Money market deposits experienced significant growth as a result of targeted retail and corporate deposit-gathering marketing initiatives throughout Union Bank, including a new industry strategy targeting retail brokerage firm clients and other long-standing industry markets, a "flight to quality" as depositors sought the safety of deposits at insured depository institutions in light of the economic conditions, as well as significant growth in money market account deposits from state and local governments, and institutional escrow clients.
Our brokered deposits, as defined in accordance with regulatory reporting guidance, increased in 2009 from 2008, primarily due to growth in money market account balances in new relationships established with brokerage firms to place their underlying clients' cash accounts with Union Bank to optimize yield and provide FDIC deposit insurance coverage. We expect that a significant portion of these balances will have similar relationship characteristics to our other commercial deposit balances.
The following table presents domestic time deposits of $100,000 and over by maturity.
(Dollars in thousands) | December 31, 2009 | ||||
---|---|---|---|---|---|
Three months or less |
$ | 4,420,739 | |||
Over three months through six months |
446,826 | ||||
Over six months through twelve months |
748,040 | ||||
Over twelve months |
487,636 | ||||
Total domestic time deposits of $100,000 and over |
$ | 6,103,241 | |||
We offer certificates of deposit and other time deposits of $100,000 and over at market rates of interest. A large portion of these deposits are offered to customers, both public and private, who have done business with us for an extended period. Based on our historical experience, we expect that as these deposits mature, the majority will continue to be renewed at market rates of interest.
F-32
The following table presents information on our borrowed funds.
|
December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2007 | 2008 | 2009 | ||||||||||
Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 4.29%, 0.53% and 0.07% at December 31, 2007, 2008 and 2009, respectively(1) |
$ | 1,631,602 | $ | 172,758 | $ | 150,453 | |||||||
Commercial paper, with weighted average interest rates of 4.25%, 1.48%, and 0.16% at December 31, 2007, 2008 and 2009, respectively |
1,266,656 | 1,164,327 | 888,541 | ||||||||||
Other borrowed funds: |
|||||||||||||
Federal Home Loan Bank borrowings, with weighted average interest rates of 4.52% and 2.22% at December 31, 2007 and 2008, respectively |
949,000 | 1,850,000 | | ||||||||||
Term federal funds purchased, with weighted average interest rates of 4.79%, 2.60% and 0.19% at December 31, 2007, 2008 and 2009, respectively |
805,970 | 1,230,060 | 505,000 | ||||||||||
Federal Reserve Bank Term borrowings, with weighted average interest rate of 0.79% at December 31, 2008 |
| 5,000,000 | | ||||||||||
All other borrowed funds, with weighted average interest rates of 5.24%, 5.42% and 1.75% at December 31, 2007, 2008 and 2009, respectively |
120,649 | 116,537 | 86,934 | ||||||||||
Total borrowed funds |
$ | 4,773,877 | $ | 9,533,682 | $ | 1,630,928 | |||||||
Federal funds purchased and securities sold under repurchase agreements: |
|||||||||||||
Maximum outstanding at any month end |
$ | 1,823,872 | $ | 4,946,587 | $ | 320,376 | |||||||
Average balance during the year |
1,142,487 | 2,137,718 | 180,087 | ||||||||||
Weighted average interest rate during the year(1) |
4.93 | % | 2.20 | % | 0.08 | % | |||||||
Commercial paper: |
|||||||||||||
Maximum outstanding at any month end |
$ | 1,875,647 | $ | 1,699,440 | $ | 888,541 | |||||||
Average balance during the year |
1,549,681 | 1,319,360 | 536,170 | ||||||||||
Weighted average interest rate during the year |
4.92 | % | 2.41 | % | 0.58 | % | |||||||
Other borrowed funds: |
|||||||||||||
Federal Home Loan Bank borrowings: |
|||||||||||||
Maximum outstanding at any month end |
$ | 949,000 | $ | 2,600,000 | $ | 850,000 | |||||||
Average balance during the year |
35,312 | 1,492,456 | 348,630 | ||||||||||
Weighted average interest rate during the year |
4.59 | % | 2.76 | % | 1.16 | % | |||||||
Term federal funds purchased: |
|||||||||||||
Maximum outstanding at any month end |
$ | 2,005,340 | $ | 1,723,839 | $ | 1,233,250 | |||||||
Average balance during the year |
716,115 | 882,652 | 298,055 | ||||||||||
Weighted average interest rate during the year |
5.25 | % | 2.84 | % | 0.83 | % | |||||||
Federal Reserve Bank Term Borrowings: |
|||||||||||||
Maximum outstanding at any month end |
$ | | $ | 5,000,000 | $ | 3,500,000 | |||||||
Average balance during the year |
| 1,925,833 | 1,156,164 | ||||||||||
Weighted average interest rate during the year |
| % | 1.79 | % | 0.29 | % | |||||||
All other borrowed funds: |
|||||||||||||
Maximum outstanding at any month end |
$ | 120,649 | $ | 321,012 | $ | 117,056 | |||||||
Average balance during the year |
61,627 | 124,494 | 125,396 | ||||||||||
Weighted average interest rate during the year |
5.96 | % | 5.59 | % | 6.71 | % |
- (1)
- Weighted average interest rates provided relate to external funding and do not reflect expense (earning) allocated on net funding to (from) discontinued operations.
F-33
Capital Adequacy and Regulatory Capital
Capital Adequacy and Capital Management
We strive to maintain strong capital levels and to use capital effectively. We have historically adhered to a policy of strong capital, including regulatory capital ratios above the applicable "well-capitalized" thresholds. Strong capital levels improve our ability to absorb unanticipated losses and contribute to higher ratings by bank regulatory agencies and credit rating agencies.
We strive to use our capital effectively, with our first priority to support our long-term growth and strategic positioning. Capital is used to fund loan growth and other balance sheet growth, to reinvest in our core businesses and to fund strategic acquisitions.
Our primary source of capital is income generated by our operations. On September 29, 2009, we received a $2.0 billion capital contribution from BTMU and made a corresponding $1.8 billion capital contribution to the Bank.
We are subject to minimum capital requirements at both the bank and holding company levels, as defined by our bank regulators. We have historically maintained capital levels well above the minimum thresholds and, where applicable, in excess of the thresholds established by the banking regulators to identify "well-capitalized" institutions.
In addition, we monitor a variety of US GAAP capital measures and hybrid capital measures to maintain capital levels consistent with our goals. These measures include the tangible common equity ratio, the Tier 1 common capital ratio and various capital metrics favored by the major credit rating agencies. We analyze these ratios relative to our current financial position, our projected financial position and peer banks.
Regulatory Capital
The following table, which includes assets of discontinued operations, summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios.
|
December 31, | |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Minimum Regulatory Requirement |
||||||||||||||||||
(Dollars in thousands) | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||
Capital Components |
|||||||||||||||||||
Tier 1 capital |
$ | 4,178,160 | $ | 4,333,865 | $ | 4,533,763 | $ | 5,466,713 | $ | 7,484,516 | |||||||||
Tier 2 capital |
876,713 | 1,509,338 | 1,590,160 | 1,773,391 | 1,718,807 | ||||||||||||||
Total risk-based capital |
$ | 5,054,873 | $ | 5,843,203 | $ | 6,123,923 | $ | 7,240,104 | $ | 9,203,323 | |||||||||
Risk-weighted assets |
$ | 45,540,448 | $ | 49,904,203 | $ | 54,606,527 | $ | 62,251,071 | $ | 63,298,173 | |||||||||
Quarterly average assets |
$ | 49,789,877 | $ | 51,353,681 | $ | 54,843,792 | $ | 64,917,854 | $ | 79,226,967 | |||||||||
Capital Ratios |
|||||||||||||||||||
Total risk-based capital |
11.10 | % | 11.71 | % | 11.21 | % | 11.63 | % | 14.54 | % | 8.0 | % | |||||||
Tier 1 risk-based capital |
9.17 | 8.68 | 8.30 | 8.78 | 11.82 | 4.0 | |||||||||||||
Leverage ratio(1) |
8.39 | 8.44 | 8.27 | 8.42 | 9.45 | 4.0 |
- (1)
- Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
We and the Bank are subject to various regulations of the federal banking agencies, including minimum capital requirements. We are both required to maintain minimum ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the Leverage ratio).
The increase in our and Union Bank's capital ratios, compared with December 31, 2008, primarily resulted from the capital contributions discussed above.
F-34
As of December 31, 2009, the most recent notification from the OCC categorized the Bank as "well-capitalized." This means that the Bank 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.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk primarily exists in interest rate risk in our non-trading balance sheet and, to a much lesser degree, in price risk in our trading portfolio. The objective of market risk management is to mitigate any undue adverse impact on earnings and capital arising from changes in interest rates and other market variables and to ensure the Bank has adequate sources of liquidity. This risk management objective supports our broad objective of enhancing shareholder value, which encompasses stable earnings growth over time and capital stability.
The Board of Directors, directly or through its appropriate committee, approves our Asset and Liability Management, Investment and Derivatives Policy (ALM Policy), which governs the management of market risk and guides our investment, derivatives and trading activities. The ALM Policy establishes the Bank's risk tolerance guidelines by outlining standards for measuring market risk, creates Board-level limits for specific market risks, establishes guidelines for reporting market risk and requires independent review and oversight of market risk activities.
The Risk & Capital Committee (RCC), comprised of selected senior officers of the Bank, among other things, strives to ensure that the Bank has an effective process to identify, measure, monitor, and manage market risk as required by the ALM Policy. The RCC provides the broad and strategic guidance of market risk management by formulating high-level strategies for market risk management and defining the risk/return direction for the Bank, and by approving the investment, derivatives and trading policies that govern the Bank's activities. The Asset Liability Management Committee (ALCO) is also responsible for the ongoing management of market risk and approves specific risk management programs, including those related to interest rate hedging, investment securities, wholesale funding and trading activities.
The Treasurer is primarily responsible for the implementation of risk management strategies approved by ALCO and for operational management of market risk through the funding, investment and derivatives hedging activities of Corporate Treasury. The managers of the Global Markets Division and the Capital Markets Division are responsible for operational management of price risk through the trading activities conducted in their respective divisions. The Market Risk Management (MRM) unit is responsible for the monitoring of market risk and MRM functions independently of all operating and management units. The RCC may delegate to ALCO various decisions pertaining to market risk management as it deems appropriate.
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)
ALCO monitors interest rate risk monthly through a variety of modeling techniques that are used to quantify the sensitivity of Net Interest Income (NII) and of Economic Value of Equity (EVE) to changes in interest rates. As directed by ALCO, and in consideration of the importance of our demand deposit accounts as a funding source, NII is adjusted in the policy risk measure to incorporate the effect of certain noninterest income and expense items related to these deposits that are nevertheless sensitive to changes in interest rates. NII, so adjusted, is termed Economic NII. In managing interest rate risk, ALCO monitors NII sensitivity on both an adjusted ("Economic") and an unadjusted ("Accounting") basis over various time horizons and in response to a variety of interest rate changes.
Our NII policy measure involves a simulation of "Earnings-at-Risk" (EaR) in which we estimate the impact that gradual, ramped-on parallel shifts in the yield curve would have on earnings over a 12-month horizon,
F-35
given our projected balance sheet profile. We measure and monitor our interest rate risk profile using two calculations of EaR: Accounting NII-at-Risk and Economic NII-at-Risk, the latter adjusted for the noninterest items described above. Under the policy limits, the negative change in simulated Economic NII in either the up or down 200 basis point shock scenarios may not, except on a temporary basis, exceed 4 percent of Economic NII as measured in the no interest rate change base case scenario.
Our EaR simulations use a 12-month projected balance sheet in order to model the impact of interest rate changes. Assumptions are made to model the future behavior of deposit rates and loan spreads based on statistical analysis, management's outlook, and historical experience. The prepayment risks related to residential loans and mortgage-backed securities are measured using industry estimates of prepayment speeds.
During the first half of 2009, our interest rate risk profile was more asset sensitive primarily due to significant core deposit growth. Toward the end of 2009, our interest rate risk profile became closer to neutral as a result of deployment of surplus cash into ALM Securities and execution of receive fixed swaps. During 2009, we added $4 billion of interest rate cap hedges to protect the Bank from rising interest rates (see discussion of "ALM Derivatives" below).
At December 31, 2009, Economic NII sensitivity was risk neutral to parallel rate shifts. A +200 basis point parallel shift in rates would increase 12-month Economic NII by 0.03 percent, while a similar downward shift in rates would decrease it by 3.09 percent. At December 31, 2008, a +200 basis point parallel shift in rates would increase 12-month Economic NII by 0.01 percent, while a similar downward shift in rates would reduce it by 1.75 percent. We caution that significant low levels of current interest rates and ongoing enhancements to our interest rate risk modeling may make prior year comparisons of Economic NII less meaningful. Economic NII adjusts our reported NII for the effect of certain noninterest bearing deposit related fee and expense items. Those adjustment items are innately liability sensitive, meaning that reported NII is less liability sensitive than Economic NII.
(Dollars in millions) | December 31, 2008 |
December 31, 2009 |
|||||
---|---|---|---|---|---|---|---|
+200 basis points |
$ | 0.2 | $ | 0.9 | |||
as a percentage of base case NII |
0.01 | % | 0.03 | % | |||
-200 basis points |
$ | (40.8 | ) | $ | (83.6 | ) | |
as a percentage of base case NII |
(1.75 | )% | (3.09 | )% |
The above table is presented on a continuing operations basis, with all assets and liabilities associated with our discontinued operations eliminated. We believe that this approach provides the best representation of our risk profiles.
In the case of non-parallel yield curve changes, our Economic NII will benefit from curve steepening with short-term rates dropping and long-term rates rising. Conversely, Economic NII will contract if the curve is inverted with short-term rates rising and long-term rates dropping.
In addition to EaR, we measure the sensitivity of EVE to interest rate shocks. EVE-at-Risk is reviewed and monitored for its compliance with ALCO guidelines. Our EVE-at-Risk at December 31, 2009, reflects a moderate but similar exposure to rising rates as compared to December 31, 2008. Additionally, our EVE-at-Risk shows moderate exposure to falling rates, due to the nature of a low rate environment.
We believe that, together, our NII and EVE simulations provide management with a reasonably comprehensive view of the sensitivity of our operating results and value profile to changes in interest rates, at least over the measurement horizon. However, as with any financial model, the underlying assumptions are inherently uncertain and subject to refinement as modeling techniques and theory improve and historical data becomes more readily accessible. Consequently, our simulation models cannot predict with certainty how
F-36
rising or falling interest rates might impact net interest income. Actual and simulated results will differ to the extent there are variances between actual and assumed interest rate changes, balance sheet volumes and management strategies, among other factors. Key underlying assumptions include prepayment speeds on mortgage-related assets, changes in market conditions, loan volume and pricing, deposit volume and price sensitivity, customer preferences and cash flows and maturities of derivative financial instruments.
ALM Activities
During 2009, the Bank's risk profile became more asset sensitive over the course of the year due to significant core deposit growth, termination of ALM fair value swaps and unprecedented low interest rates. As interest rates rose toward the end of 2009 and as the Bank deployed surplus cash into the ALM Securities portfolio and executed receive fixed swaps, the interest rate risk profile shifted closer to a neutral position. The remaining ALM derivatives portfolio continues to partially offset the risk of lower interest rates. In managing the interest rate sensitivity of our balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our interest rate risk profile, if necessary. During 2009, the Bank purchased interest rate cap contracts to mitigate the risk from rising rates.
ALM Securities
At December 31, 2008 and 2009, our ALM Securities portfolio included $6.8 billion and $22.4 billion, respectively, of available for sale securities held for ALM purposes. At December 31, 2009, approximately $5.9 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During 2009, we purchased $22.8 billion and sold $5.0 billion par value of securities, as part of our investment portfolio strategy, while $2.5 billion par value of ALM Securities matured or were called. The ALM Securities portfolio continues to be prudently managed taking into account all risks including the risk of rising rates.
The portfolio is expected to remain predominately comprised of agency mortgage-backed and agency debt securities as our non-agency mortgage-backed securities continue to mature in 2010. Based on current prepayment projections, the estimated ALM Securities portfolio's effective duration was 2.2 at December 31, 2009, compared to 2.4 at December 31, 2008. 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 decrease of approximately 2.2 percent for an immediate 1.0 percent parallel increase in interest rates.
ALM Derivatives
During 2009, the ALM derivatives portfolio increased by $3.4 billion notional amount due to purchases of $4.0 billion notional amount of LIBOR cap contracts and execution of $3.0 billion notional amount of receive fixed interest rate swap contracts, offset by maturities of $2.7 billion and terminations of $950 million notional amount of receive fixed interest rate swaps and floors.
The fair value of the ALM derivatives portfolio decreased primarily due to the addition of receive fixed interest rate swaps, maturities of interest rate swaps and floor option contracts, terminations of interest rate swaps, and the realization of interest income. The decrease was partially offset by the addition of cap option contracts, which benefit from the expectation of higher future interest rates. For additional discussion of derivative instruments and our hedging strategies, see Note 18 to our Consolidated Financial Statements included in this Form 10-K Report.
F-37
The following table provides the notional value and the fair value of our ALM derivatives portfolio as of December 31, 2007, 2008 and 2009 and the change in fair value between December 31, 2008 and 2009.
|
December 31, | |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Increase / (Decrease) From December 31, 2008 to December 31, 2009 |
||||||||||||||
(Dollars in thousands) | 2007 | 2008 | 2009 | ||||||||||||
Total gross notional amount of positions held for purposes other than trading: |
$ | 9,250,000 | $ | 5,400,000 | $ | 8,800,000 | $ | 3,400,000 | |||||||
Of which, interest rate swaps pay fixed rates of interest: |
| | | | |||||||||||
Fair value of positions held for purposes other than trading: |
|||||||||||||||
Gross positive fair value |
148,036 | 317,569 | 97,186 | (220,383 | ) | ||||||||||
Gross negative fair value |
2,015 |
|
12,164 |
12,164 |
|||||||||||
Positive fair value of positions, net |
$ | 146,021 | $ | 317,569 | $ | 85,022 | $ | (232,547 | ) | ||||||
Trading Activities
We enter into trading account activities primarily as a financial intermediary for customers and, to some extent, for our own account. By acting as a financial intermediary, we are able to provide our customers with access to a range of products supporting the securities, foreign exchange and derivatives markets. In acting for our own account, we may take positions in certain securities, foreign exchange and interest rate instruments, subject to various limits in amount, tenor and other respects, with the objective of generating trading profits.
We believe that the risks associated with these positions are conservatively managed. We utilize a combination of position limits Value-at-Risk (VaR), and stop-loss limits, applied at an aggregated level and to various sub-components within those limits. Positions are controlled and reported both in notional and VaR terms. Our calculation of VaR estimates how high the loss in fair value might be, at a 99 percent confidence level, due to an adverse shift in market prices over a period of ten business days. VaR at the trading activity level is managed within the maximum limit of $14.0 million established by Board policy for total trading positions. The VaR model incorporates assumptions on key parameters, including holding period and historical volatility.
The following table sets forth the average, high and low 10-day, 99 percent VaR for our trading activities for the years ended December 31, 2008 and 2009.
|
December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | |||||||||||||||||
(Dollars in thousands) | Average VaR |
High VaR |
Low VaR |
Average VaR |
High VaR |
Low VaR |
|||||||||||||
Foreign exchange |
$ | 307 | $ | 720 | $ | 105 | $ | 319 | $ | 1,401 | $ | 33 | |||||||
Securities |
285 | 788 | 1 | 182 | 892 | 3 | |||||||||||||
Interest Rate Derivates |
517 | 2,147 | 44 | 973 | 2,273 | 336 |
Consistent with our business strategy of focusing on the sale of capital markets products to customers, we manage our trading risk exposures at relatively low levels. Our foreign exchange business continues to derive the majority of its revenue from customer-related transactions. We take interbank trading positions only on a limited basis and we do not take any large or long-term strategic positions in the market for our own portfolio. Similarly, we continue to generate most of our securities trading income from customer-related transactions.
F-38
As of December 31, 2009, we had $25.2 billion notional amount of interest rate derivative contracts. We enter into these agreements for customer accommodations and for our own account, accepting risks up to management approved VaR levels.
As of December 31, 2009, we had $2.4 billion notional amount of foreign exchange derivative contracts. We enter into these agreements for customer accommodations to support their hedging and operating needs and for our own account, accepting risks up to management approved VaR levels.
We market energy derivative contracts to existing energy industry customers, primarily oil and gas producers, in order to meet their hedging needs. All transactions are fully matched to offsetting (mirror) derivative contracts with third parties to remove our exposure to market risk, with income earned on the credit spread. As of December 31, 2009, we had $3.4 billion notional amount of energy derivative contracts with approximately half of these energy derivative contracts entered into as an accommodation for customers and the remaining half entered into as matching contracts to remove our exposure to market risk on our customer accommodation transactions.
The following table provides the notional value and the fair value of our trading derivatives portfolio as of December 31, 2007, 2008 and 2009 and the change in fair value between December 31, 2008 and 2009.
|
December 31, | |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Increase / (Decrease) From December 31, 2008 to December 31, 2009 |
|||||||||||||
(Dollars in thousands) | 2007 | 2008 | 2009 | |||||||||||
Total gross notional amount of positions held for trading purposes: |
||||||||||||||
Interest rate |
$ | 12,585,978 | $ | 20,398,695 | $ | 25,226,564 | $ | 4,827,869 | ||||||
Foreign exchange(1) |
4,665,760 | 7,112,873 | 2,407,178 | (4,705,695 | ) | |||||||||
Equity |
| 10,914 | 254,372 | 243,458 | ||||||||||
Energy |
2,900,690 | 3,757,674 | 3,405,389 | (352,285 | ) | |||||||||
Total |
$ | 20,152,428 | $ | 31,280,156 | $ | 31,293,503 | $ | 13,347 | ||||||
Fair value of positions held for trading purposes: |
||||||||||||||
Gross positive fair value |
$ | 397,183 | $ | 1,145,208 | $ | 649,300 | $ | (495,908 | ) | |||||
Gross negative fair value |
380,313 |
1,137,724 |
632,426 |
(505,298 |
) |
|||||||||
Positive fair value of positions, net |
$ | 16,870 | $ | 7,484 | $ | 16,874 | $ | 9,390 | ||||||
- (1)
- Excludes spot contracts with notional amounts of $1.1 billion, $1.1 billion and $0.3 billion at December 31, 2007, 2008 and 2009, respectively.
Liquidity risk is the risk that the Bank's financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its contractual obligations. The objective of liquidity risk management is to maintain a sufficient amount of liquidity and diversity of funding sources to allow the Bank to meet expected and unexpected obligations in both stable and adverse conditions.
The management of liquidity risk is governed by the ALM Policy under the oversight of RCC and the Audit & Finance Committee of the Board. ALCO oversees liquidity risk management activities. Corporate Treasury formulates the Bank's liquidity and contingency planning strategies and is responsible for identifying, monitoring and reporting on liquidity risk. Market Risk Management, which is part of the Enterprise Wide Risk Reporting and Analysis unit, partners with Corporate Treasury to establish sound policy and effective risk controls. RCC and ALCO also maintain a Liquidity Contingency Plan that identifies actions to be taken to help
F-39
ensure adequate liquidity if an event should occur that disrupts or adversely affects the Bank's normal funding activities.
Liquidity risk is managed using a total balance sheet perspective that analyzes all sources and uses of liquidity including loans, investments, deposits and borrowings, as well as off-balance sheet exposures. Various tools are used to measure and monitor liquidity, including pro-forma forecasting of the sources and uses of cash flow over a 12 month time horizon, stress-testing of the pro-forma forecast and assessment of the Bank's capacity to raise incremental unsecured and secured funding. Stress-testing, which incorporates both bank-specific and systemic market scenarios that would adversely affect the Bank's liquidity position, facilitates the identification of appropriate remediary measures to help ensure that the Bank maintains adequate liquidity in adverse conditions. Such measures may include extending the maturity profile of liabilities, adding new funding sources, altering dependency on certain funding sources and/or selling assets.
The primary sources of liquidity are core deposits and wholesale funding. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international. Also included are secured funds raised by selling securities under repurchase agreements and by borrowing from the Federal Home Loan Bank of San Francisco (FHLB). We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse circumstances. We generally view our core deposits to be relatively stable. Secured borrowings via repurchase agreements and advances from the FHLB are also recognized as highly reliable funding sources and we therefore maintain these sources primarily to meet our contingency funding needs.
Total deposits grew $22.5 billion from $46.0 billion at December 31, 2008 to $68.5 billion at December 31, 2009 as a result of targeted marketing in certain market segments and continuing trend for clients to maintain high liquidity positions. Given generally weak demand for lending products in 2009, the proceeds of the increase in deposits were deployed to reduce wholesale funding, which declined from $16.4 billion at December 31, 2008 to $8.9 billion at December 31, 2009, and to grow the Bank's securities portfolio from $8.2 billion at December 31, 2008 to $23.8 billion at December 31, 2009.
Core deposits, which consist of total deposits excluding brokered deposits and deposits $100,000 and over, provide us with a sizable source of relatively stable and low-cost funds. At December 31, 2009, our core deposits totaled $55.7 billion, and combined with stockholder's equity, funded 76.2 percent of our $85.6 billion in total assets. Most of the remaining funding was provided by wholesale borrowings from secured and unsecured sources of varying maturities.
The Bank has pledged collateral under secured borrowing facilities with the FHLB and the Federal Reserve Bank of San Francisco (FRB). The Bank borrowed under the Term Auction Facility (TAF) through the FRB during the year, but as of year end there were no outstanding borrowings. As of December 31, 2009, the Bank had $2.0 billion of borrowings outstanding with the FHLB and the Bank had a remaining combined unused borrowing capacity of $18.3 billion from the FHLB and the FRB.
Our securities portfolio provides liquidity through either securities sales or repurchase agreements. During 2009, capacity under repurchase agreements increased $15.6 billion from $1.5 billion at December 31, 2008 to $17.1 billion at December 31, 2009.
The Bank has a $4.0 billion unsecured Bank Note Program. As of December 31, 2009, the remaining available funding under the Bank Note Program was approximately $2.6 billion. We do not have any firm commitments in place to sell securities under the Bank Note Program. At December 31, 2009, a total of $1.0 billion of TLG Program guaranteed debt was outstanding which consisted entirely of medium-term notes.
In addition to the funding provided by the Bank, we raise funds at the holding company level. UnionBanCal Corporation has in place a shelf registration with the SEC permitting ready access to the public debt markets. As of December 31, 2009, $1.5 billion of debt or other securities were available for issuance under this shelf registration. We do not have firm commitments in place to sell securities under this shelf registration.
F-40
We believe that these sources, in addition to our core deposits and equity capital, provide a stable funding base. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.
The costs and ability to raise funds are influenced by our credit ratings. Our credit ratings could be impacted by changes in the credit ratings of BTMU and MUFG. The following table provides our credit ratings as of December 31, 2009.
|
|
Union Bank, N.A. |
UnionBanCal Corporation |
|||
---|---|---|---|---|---|---|
Standard & Poor's |
Long-term | A+ | A | |||
|
Short-term | A-1 | A-1 | |||
Moody's |
Long-term |
A2 |
|
|||
|
Short-term | P-1 | | |||
Fitch |
Long-term |
A |
A |
|||
|
Short-term | F1 | F1 | |||
DBRS |
Long-term |
A (high) |
A |
|||
|
Short-term | R-1 (middle) | R-1 (low) |
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations and Commitments
Off-balance sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which we have: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
Our most significant off-balance sheet arrangements are limited to obligations under guarantee contracts such as financial and performance standby letters of credit for our credit customers, commercial letters of credit, unfunded commitments to lend, commitments to sell mortgage loans and commitments to fund investments in various CRA related investments and venture capital investments. To a lesser extent, we enter into contractual guarantees of agented sales of low income housing tax credit investments that require us to perform under those guarantees if there are breaches of performance of the underlying income-producing properties. As part of our leasing activities, we may be lessor to special purpose entities to which we provide financing for large equipment leasing projects.
It is our belief that none of these arrangements expose us to any greater risk of loss than is already reflected on our balance sheet. We do not have any off-balance sheet arrangements in which we have any retained or contingent interest (as we do not transfer or sell our assets to entities in which we have a continuing involvement), nor any variable interests in any unconsolidated entity to which we may be a party, except for those leasing arrangements described previously.
The following table presents, as of December 31, 2009, our significant and determinable contractual obligations by payment date, except for obligations under our pension and postretirement plans, which are
F-41
included in Note 9 to our Consolidated Financial Statements included in this Form 10-K Report, and accrued interest payable, which is not significant.
|
December 31, 2009 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | One Year or less |
Over One Year through Three Years |
Over Three Years through Five Years |
Over Five Years |
Total | |||||||||||||
Time deposits |
$ | 8,501,043 | $ | 667,328 | $ | 264,732 | $ | 7,375 | $ | 9,440,478 | ||||||||
Medium- and long-term debt(1) |
1,001,000 | 2,000,000 | 400,000 | 700,000 | 4,101,000 | |||||||||||||
Junior subordinated debt payable to subsidiary grantor trust(1) |
| | | 13,000 | 13,000 | |||||||||||||
Operating leases (premises) |
66,549 | 117,811 | 101,775 | 218,169 | 504,304 | |||||||||||||
Purchase obligations |
39,265 | 61,783 | 7,600 | 7,600 | 116,248 | |||||||||||||
Total debt and operating leases |
$ | 9,607,857 | $ | 2,846,922 | $ | 774,107 | $ | 946,144 | $ | 14,175,030 | ||||||||
- (1)
- These interest bearing obligations are principally used to fund interest earning assets. As such, interest payments on contractual obligations were excluded from disclosed amounts as the potential cash outflows would have corresponding cash inflows from interest earning assets.
The payment amounts in the above table represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments or other similar carrying value adjustments. Contractual obligations presented do not include $201.7 million of unrecognized income tax benefits. Of this amount, $198.8 million has been paid. At this time it is highly uncertain whether and when we would be required to pay the remaining $2.9 million of unrecognized tax benefits.
Purchase obligations include any legally binding contractual obligations that require us to spend more than $1,000,000 annually under the contract. Payments are shown through the date of contract termination. Purchase obligations in the table above include purchases of hardware, software licenses and printing. For information regarding our sources of liquidity to meet these obligations, see "Liquidity Risk" in the preceding section.
The following table presents our significant commitments to fund as of December 31, 2008 and 2009.
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2008 | 2009 | |||||
Commitments to extend credit |
$ | 21,746,133 | $ | 21,771,188 | |||
Standby letters of credit |
4,588,552 | 4,651,236 | |||||
Commercial letters of credit |
50,590 | 43,127 | |||||
Risk participations in bankers' acceptances |
23,925 | 68 | |||||
Commitments to fund principal investments |
111,237 | 88,392 | |||||
Commitments to fund low-income housing credit (LIHC) investments |
139,449 | 150,227 |
Commitments to extend credit are legally binding agreements to lend to a customer provided there are no violations of any condition established in the contract. Commitments have fixed expiration dates or other termination clauses and may require maintenance of compensatory balances. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while
F-42
commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. Additionally, we enter into risk participations in bankers' acceptances wherein a fee is received to guarantee a portion of the credit risk on an acceptance of another bank. The majority of these types of commitments have terms of one year or less. At December 31, 2009, the carrying value of our risk participations in bankers' acceptances and our standby and commercial letters of credit totaled $5.8 million. Estimated exposure to loss related to these commitments is included in the allowance for losses on off-balance sheet commitments. The carrying value of the standby and commercial letters of credit and the allowance for losses on off-balance sheet commitments are included in other liabilities on the consolidated balance sheet.
The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on our credit assessment of the customer.
Principal investments include direct investments in private and public companies and indirect investments in private equity funds. We issue 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.
We invest in either guaranteed or unguaranteed LIHC investments. The guaranteed LIHC investments carry a minimum rate of return guarantee by an entity we believe to be creditworthy. The unguaranteed LIHC investments carry partial guarantees covering the timely completion of projects, availability of tax credits and operating deficit thresholds from the issuer. For these LIHC investments, we have committed to provide additional funding as stipulated by our investment participation.
We are the fund manager for limited liability companies issuing LIHC investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, we guarantee a minimum rate of return throughout the investment term of over a twelve-year weighted average period. Additionally, we receive guarantees which include the timely completion of projects, availability of tax credits and operating deficit thresholds from the limited liability partnerships/corporations issuing the LIHC investments that reduce our ultimate exposure to loss. Our maximum exposure to loss under these guarantees is limited to a return of investor capital and minimum investment yield, which was $193.0 million as of December 31, 2009. We believe the risk that we would be required to pay investors for a yield deficiency is low, based on the continued performance of the underlying properties. We have a reserve of $6.8 million recorded related to these guarantees, which represents the remaining unamortized fair value of the guarantee fees that were recognized at inception.
We have rental commitments under long-term operating lease agreements, as reflected in the above table on contractual obligations.
We guarantee our subsidiaries' leveraged lease transactions with terms ranging from fifteen to thirty years. Following the original funding of these leveraged lease transactions, we have no material obligation to be satisfied. As of December 31, 2009, we had no exposure to loss for these agreements.
We conduct securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $1.4 billion and $1.9 billion at December 31, 2008 and 2009, respectively. The market value of the associated collateral was $1.4 billion and $2.0 billion at December 31, 2008 and 2009, respectively. At December 31, 2009, we had no exposure
F-43
that would require us to pay under this securities lending indemnification, since the collateral market value exceeded the securities lent.
We occasionally enter into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. We become liable to pay the financial institution only if the financial institution is unable to collect amounts owed to them by their customer. As of December 31, 2009, the maximum exposure to loss under these contracts totaled $43.5 million. The risk that we would be required to perform under these guarantees varies based on the creditworthiness of the other financial institution's customer. Credit risk grades are assigned by us based on the estimated probability of default. The risk of default is considered low for those with superior to good credit ratings, moderate for those with satisfactory to adequate credit ratings, and high for those considered special mention, substandard, doubtful and loss. Based on these criteria, at December 31, 2009, we had a maximum exposure to loss under these contracts with a low, moderate, and high risk of payment exposure of $9.6 million, $25.5 million, and $8.4 million, respectively. At December 31, 2009, we maintained a reserve of $1.5 million for losses related to these guarantees.
We are a member of the Visa USA network (Visa). Visa's bylaws obligate its members to indemnify Visa for losses in connection with the settlement of certain antitrust lawsuits. Our indemnification obligation is limited to our proportionate share. We had a liability of $4.3 million and $4.2 million at December 31, 2008 and 2009, respectively, representing the estimated fair value of our obligations under the indemnity provisions. The decrease in this liability from December 31, 2008 to December 31, 2009 was primarily due to a $700 million contribution Visa made on behalf of members to the litigation escrow account in the second quarter of 2009, offset by our revised assessment of the likely settlement amount for one of the cases. The $4.2 million liability represents our estimate of the fair value of our proportionate share of the sum of Visa's remaining amount owed to American Express under the previously executed settlement agreement plus our estimate of Visa's future settlements under pending lawsuits, after subtracting the balance in Visa's escrow account. Our maximum exposure to loss for the remaining pending Visa antitrust lawsuits is not determinable, as it is dependent on the outcome of the litigation, but any loss should be proportionate to our ownership interest in Visa. At December 31, 2009, the risk that we would be required to pay as a result of this guarantee is considered to be low, based on Visa's continued cash funding of the escrow account to pay its antitrust lawsuit settlements.
We are subject to various pending and threatened legal actions that arise in the normal course of business. Reserves for losses from legal actions that are both probable and estimable are recorded at the time of that determination. Management believes that the disposition of all claims currently pending will not have a material adverse effect on our consolidated financial condition, operating results or liquidity.
As a result of a corporate reorganization in the fourth quarter of 2009, we evaluated our business segments. Under the new organizational structure, we have three operating segments: Retail Banking Group, Corporate Banking Group and Pacific Rim Corporate Group. Based on accounting guidance, the Corporate Banking Group and Pacific Rim Corporate Group segments have been aggregated together. We have two reportable business segments: Retail Banking and Corporate Banking.
Prior to this reorganization, the various operating segments were aggregated into two reportable business segments formerly known as "Retail Banking" and "Wholesale Banking". Our new reportable business segment structure is similar to the previous structure. However, the Global and Wealth Markets Division, which was previously included in Retail Banking, is now included in Corporate Banking. Additionally, the goodwill, intangible assets, and related amortization/accretion associated with our privatization transaction previously were included in our segment results. To align with the chief operating decision maker's view of our segments, we have adjusted our 2008 and 2009 reportable business segment results to exclude privatization-related
F-44
goodwill, intangible assets, and related amortization/accretion from our reportable business segment results and included such amounts in "Other."
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 and operational, given that market risk is not assumed by the business units. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Operational risk is the potential loss due to all other factors, such as failures in internal control, system failures or external events. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and equity prices. RAROC may be one of several measures that is used to measure business unit compensation.
The table that follows reflects the condensed income statements, selected average balance sheet items, and selected financial ratios, including changes from the prior year, for each of our reportable business segments. The information presented does not necessarily represent the businesses' financial condition and results of operations as if they were independent entities. We reflect a "market view" perspective in measuring our business segments. The market view is a measurement of our customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are reflected in "Reconciling Items." The market view approach fosters cross-selling with a total profitability view of the products and services being managed. For example, the Securities Trading and Sales unit within the Global and Wealth Markets Division is a business unit that manages the fixed income securities activities for all retail and corporate customers throughout the Bank. This unit retains and also allocates revenues and expenses to divisions responsible for such retail and commercial customer relationships.
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 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.
The reportable business segment results for the prior periods have been adjusted to reflect changes in the transfer pricing methodology, the organizational changes that have occurred, our discontinued operations and the market view contribution. Our discontinued operations consist of three separate businesses: international correspondent banking, retirement recordkeeping services and insurance brokerage business.
F-45
|
Retail Banking | |
|
Corporate Banking | |
|
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of and for the Year Ended December 31, |
2008 vs. 2009 Increase/(decrease) |
As of and for the Year Ended December 31, |
2008 vs. 2009 Increase/(decrease) |
||||||||||||||||||||||||||||
|
2007 | 2008 | 2009 | Amount | Percent | 2007 | 2008 | 2009 | Amount | Percent | ||||||||||||||||||||||
Results of operations after performance |
||||||||||||||||||||||||||||||||
center earnings (dollars in thousands): |
||||||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 702,211 | $ | 767,164 | $ | 841,859 | $ | 74,695 | 10 | % | $ | 840,381 | $ | 1,073,530 | $ | 1,549,404 | $ | 475,874 | 44 | % | ||||||||||||
Noninterest income (expense) |
311,056 | 302,558 | 283,072 | (19,486 | ) | (6 | ) | 521,723 | 513,053 | 479,177 | (33,876 | ) | (7 | ) | ||||||||||||||||||
Total revenue |
1,013,267 | 1,069,722 | 1,124,931 | 55,209 | 5 | 1,362,104 | 1,586,583 | 2,028,581 | 441,998 | 28 | ||||||||||||||||||||||
Noninterest expense (income) |
740,626 | 803,091 | 818,479 | 15,388 | 2 | 741,952 | 820,178 | 906,944 | 86,766 | 11 | ||||||||||||||||||||||
Credit expense (income) |
24,643 | 26,986 | 27,794 | 808 | 3 | 112,209 | 196,639 | 338,667 | 142,028 | 72 | ||||||||||||||||||||||
Income (loss) from continuing operations before income taxes |
247,998 | 239,645 | 278,658 | 39,013 | 16 | 507,943 | 569,766 | 782,970 | 213,204 | 37 | ||||||||||||||||||||||
Income tax expense (benefit) |
94,859 | 91,664 | 108,955 | 17,291 | 19 | 142,442 | 146,556 | 219,954 | 73,398 | 50 | ||||||||||||||||||||||
Income (loss) from continuing operations |
153,139 | 147,981 | 169,703 | 21,722 | 15 | 365,501 | 423,210 | 563,016 | 139,806 | 33 | ||||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes |
| | | | | | | | | | ||||||||||||||||||||||
Net income (loss) |
$ | 153,139 | $ | 147,981 | $ | 169,703 | $ | 21,722 | 15 | $ | 365,501 | $ | 423,210 | $ | 563,016 | $ | 139,806 | 33 | ||||||||||||||
Average balances (dollars in millions): |
||||||||||||||||||||||||||||||||
Total loans(1) |
$ | 16,471 | $ | 18,991 | $ | 21,112 | $ | 2,121 | 11 | $ | 24,055 | $ | 28,485 | $ | 29,903 | $ | 1,418 | 5 | ||||||||||||||
Total assets |
17,232 | 19,777 | 21,926 | 2,149 | 11 | 28,869 | 33,507 | 35,549 | 2,042 | 6 | ||||||||||||||||||||||
Total deposits(1) |
16,618 | 16,720 | 19,384 | 2,664 | 16 | 20,946 | 21,315 | 35,749 | 14,434 | 68 | ||||||||||||||||||||||
Financial ratios: |
||||||||||||||||||||||||||||||||
Risk adjusted return on capital |
33 | % | 30 | % | 32 | % | 16 | % | 15 | % | 16 | % | ||||||||||||||||||||
Return on average assets |
0.89 | 0.75 | 0.77 | 1.27 | 1.26 | 1.58 | ||||||||||||||||||||||||||
Efficiency ratio(2) |
73.08 | 74.98 | 72.65 | 52.38 | 49.14 | 42.04 |
|
Other | |
|
Reconciling Items | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of and for the Year Ended December 31, |
2008 vs. 2009 Increase/(decrease) |
As of and for the Year Ended December 31, |
|||||||||||||||||||||||
|
2007 | 2008 | 2009 | Amount | Percent | 2007 | 2008 | 2009 | ||||||||||||||||||
Results of operations after performance center earnings (dollars in thousands): |
||||||||||||||||||||||||||
Net interest income (expense) |
$ | 218,302 | $ | 250,960 | $ | (86,462 | ) | $ | (337,422 | ) | (134 | )% | $ | (37,514 | ) | $ | (40,806 | ) | $ | (55,689 | ) | |||||
Noninterest income (expense) |
19,212 | 14,427 | 24,869 | 10,442 | 72 | (52,452 | ) | (57,382 | ) | (59,974 | ) | |||||||||||||||
Total revenue |
237,514 | 265,387 | (61,593 | ) | (326,980 | ) | (123 | ) | (89,966 | ) | (98,188 | ) | (115,663 | ) | ||||||||||||
Noninterest expense (income) |
126,342 | 312,705 | 403,254 | 90,549 | 29 | (34,719 | ) | (39,278 | ) | (40,176 | ) | |||||||||||||||
Credit expense (income) |
(55,206 | ) | 292,081 | 748,400 | 456,319 | nm | (646 | ) | (706 | ) | (861 | ) | ||||||||||||||
Income (loss) from continuing operations before income taxes |
166,378 | (339,399 | ) | (1,213,247 | ) | (873,848 | ) | nm | (54,601 | ) | (58,204 | ) | (74,626 | ) | ||||||||||||
Income tax expense (benefit) |
77,938 | (88,089 | ) | (461,014 | ) | (372,925 | ) | nm | (20,885 | ) | (22,263 | ) | (29,179 | ) | ||||||||||||
Income (loss) from continuing operations |
88,440 | (251,310 | ) | (752,233 | ) | (500,923 | ) | nm | (33,716 | ) | (35,941 | ) | (45,447 | ) | ||||||||||||
Income (loss) from discontinued operations, net of income taxes |
34,730 | (15,055 | ) | | 15,055 | 100 | | | | |||||||||||||||||
Net income (loss) |
$ | 123,170 | $ | (266,365 | ) | $ | (752,233 | ) | $ | (485,868 | ) | nm | $ | (33,716 | ) | $ | (35,941 | ) | $ | (45,447 | ) | |||||
Average balances (dollars in millions): |
||||||||||||||||||||||||||
Total loans(1) |
$ | 14 | $ | (77 | ) | $ | (358 | ) | $ | (281 | ) | (365 | ) | $ | (1,116 | ) | $ | (1,287 | ) | $ | (1,667 | ) | ||||
Total assets |
8,501 | 8,933 | 17,977 | 9,044 | 101 | (1,134 | ) | (1,309 | ) | (1,686 | ) | |||||||||||||||
Total deposits(1) |
5,552 | 6,090 | 2,752 | (3,338 | ) | (55 | ) | (930 | ) | (992 | ) | (1,290 | ) | |||||||||||||
Financial ratios: |
||||||||||||||||||||||||||
Risk adjusted return on capital |
na | na | na | |||||||||||||||||||||||
Return on average assets |
na | na | na | |||||||||||||||||||||||
Efficiency ratio(2) |
na | na | na |
|
UnionBanCal Corporation |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of and for the Year Ended December 31, |
2008 vs. 2009 Increase/(decrease) |
|||||||||||||||
|
2007 | 2008 | 2009 | Amount | Percent | ||||||||||||
Results of operations after performance center earnings (dollars in thousands): |
|||||||||||||||||
Net interest income (expense) |
$ | 1,723,380 | $ | 2,050,848 | $ | 2,249,112 | $ | 198,264 | 10 | % | |||||||
Noninterest income (expense) |
799,539 | 772,656 | 727,144 | (45,512 | ) | (6 | ) | ||||||||||
Total revenue |
2,522,919 | 2,823,504 | 2,976,256 | 152,752 | 5 | ||||||||||||
Noninterest expense (income) |
1,574,201 | 1,896,696 | 2,088,501 | 191,805 | 10 | ||||||||||||
Credit expense (income) |
81,000 | 515,000 | 1,114,000 | 599,000 | 116 | ||||||||||||
Income (loss) from continuing operations before income taxes |
867,718 | 411,808 | (226,245 | ) | (638,053 | ) | nm | ||||||||||
Income tax expense (benefit) |
294,354 | 127,868 | (161,284 | ) | (289,152 | ) | nm | ||||||||||
Income (loss) from continuing operations |
573,364 | 283,940 | (64,961 | ) | (348,901 | ) | (123 | ) | |||||||||
Income (loss) from discontinued operations, net of income taxes |
34,730 | (15,055 | ) | | 15,055 | 100 | |||||||||||
Net income (loss) |
$ | 608,094 | $ | 268,885 | $ | (64,961 | ) | $ | (333,846 | ) | (124 | ) | |||||
Average balances (dollars in millions): |
|||||||||||||||||
Total loans(1) |
$ | 39,424 | $ | 46,112 | $ | 48,990 | $ | 2,878 | 6 | ||||||||
Total assets |
53,468 | 60,908 | 73,766 | 12,858 | 21 | ||||||||||||
Total deposits(1) |
42,186 | 43,133 | 56,595 | 13,462 | 31 | ||||||||||||
Financial ratios: |
|||||||||||||||||
Risk adjusted return on capital |
na | na | na | ||||||||||||||
Return on average assets |
1.07 | % | 0.47 | % | (0.09 | )% | |||||||||||
Efficiency ratio(2) |
60.68 | 64.24 | 66.34 |
- (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)
- The
efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), the provision for losses on off-balance
sheet commitments, and low income housing investment credit (LIHC) amortization expense, as a percentage of net interest income and noninterest income.
na = not applicable
nm = not meaningful
F-46
Retail Banking
Retail Banking provides deposit and credit financial products delivered through our branches and relationship managers to individuals and small businesses. Retail banking is focused on executing a strategy that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and sales strategies to attract new customers in these identified target markets.
During 2009, net income of Retail Banking increased compared to 2008, resulting from a 10 percent increase in net interest income, partially offset by a 6 percent decrease in noninterest income and a 2 percent increase in noninterest expense. The increase in net interest income was primarily due to the growth in loans and interest bearing deposits.
Average asset growth for 2009 compared to 2008 was primarily driven by an 11 percent growth in average loans, mainly in residential mortgages. Additionally, the focus on home equity loans and more effective cross-selling efforts have resulted in an overall growth in consumer loans.
Average deposits increased 16 percent in 2009 compared to 2008. This increase was primarily due to the Retail Banking's strategy which continues to focus on attracting consumer and small business deposits through marketing activities, increasing customer cross-sell, relationship management, increasing and improving sales resources, establishing new locations and products. We expect that a larger branch network, along with this Retail Banking strategy, will improve growth prospects when combined with more robust efforts in the telephone and internet channels.
Noninterest income decreased in 2009 compared to 2008 by 6 percent mainly as a result of lower service charges on deposits resulting from changes in customer overdraft behavior. Noninterest expense increased by 2 percent in 2009 compared to 2008. This increase was primarily due to higher FDIC deposit insurance assessment rates, including the impact of a one-time special FDIC assessment, and increased staff costs.
Retail Banking is comprised of the following major divisions: Retail Banking Branches and Consumer Asset Management.
-
- the Retail Banking Branches Division serves its customers through 335 full-service branches in California, and 4 full-service branches in Oregon and Washington. Customers may also access our services 24 hours-a-day by telephone or through our website at www.unionbank.com. In addition, the branches offer automated teller and point-of-sale merchant services.
The Retail Banking Branches Division is organized geographically. We serve our customers in the following ways:
-
- through
conveniently located banking branches, which serve consumers and businesses with checking and deposit services, as well as various types
of consumer financing and investment services;
-
- through
our internet banking services, which augment our physical delivery channels by providing an array of customer transaction, bill payment
and loan payment services; and
-
- through
in-store branches.
-
- the Consumer Asset Management Division provides the centralized origination, underwriting, processing, servicing, collection and administration for consumer assets including residential mortgages.
Through alliances with other financial institutions, the Consumer Asset Management Division offers additional products and services, such as credit cards and merchant services.
Our Retail Banking Branches and Consumer Asset Management Divisions compete with larger banks by attempting to provide service quality superior to that of our major competitors. The primary means of competing with community banks include our branch network and our technology to deliver banking services.
F-47
We also offer convenient banking hours to consumers through our drive-through banking locations and selected branches that are open seven days a week.
These divisions compete 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.
Corporate Banking
Corporate Banking offers financing, depository and cash management services to middle market and large corporate businesses primarily headquartered in the western U.S. Corporate Banking continues to focus on specific geographic markets and industry segments such as energy, institutional trusts, 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, Corporate Banking offers a broad range of depository and global treasury solutions delivered through deposit managers with significant industry expertise and experience in businesses of all sizes including numerous vertical industry niches such as U.S. correspondent banks and government entities, as well as investment and risk management products.
The main strategy of our Corporate Banking business units is to target industries and companies for which we can reasonably expect to be one of a customer's primary banks. Consistent with this strategy, Corporate Banking business units attempt to serve a large part of the targeted customers' credit and depository needs. The Corporate Banking business units compete with other banks primarily on the basis of the quality of our relationship managers, the level of industry expertise, the delivery of quality customer service, and our reputation as a "business bank." We also compete with a variety of other financial services companies as well as non-bank companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies and insurance companies.
During 2009, net income of Corporate Banking increased 33 percent, compared to 2008, resulting from a 44 percent increase in net interest income, partially offset by a 7 percent decrease in noninterest income, an 11 percent increase in noninterest expense and higher credit expense. The increase in net interest income was mainly due to higher loan volume and higher deposits.
During 2009, average loans increased 5 percent compared to 2008 and includes increases in our commercial and industrial loan portfolio, our real estate construction portfolio, and our commercial real estate portfolio, mainly related to Energy Capital Services and Real Estate Industries groups.
During 2009, average deposits increased 68 percent compared to 2008. Money market deposits experienced significant growth as a result of long-term corporate deposit-gathering strategies, a "flight to quality" and entry into new business niches. These new niches provided funding from large institutional accounts, including brokerage firms. These relationships reflect execution of a business strategy to obtain deposits from brokerage and institutional clients. In addition, state and local government and Corporate Banking deposits experienced significant growth.
Noninterest income decreased 7 percent in 2009, compared to 2008, primarily due to lower trust and investment management fees and lower gains on private capital investments as well as impairment losses, partially offset by higher deposit fees, merchant banking fees and trading income. Noninterest expense increased 11 percent in 2009 compared to 2008 primarily due to higher FDIC deposit insurance assessment rates, including the impact of a one-time special FDIC assessment.
Corporate Banking initiatives continue to include expanding commercial and loan relationship strategies that include originating, underwriting and syndicating loans in core competency markets, such as the California middle market, corporate banking, commercial real estate, institutional trusts, energy, equipment
F-48
leasing and commercial finance. Corporate Deposits and Global Treasury Management Division provides a full range of depository and treasury management products and solutions.
Corporate Banking is comprised of the following main divisions:
-
- the Commercial Banking Division, which serves California, Oregon, and
Washington middle market and large corporate companies with commercial lending, trade financing and asset-based loans;
-
- the Real Estate Industries Division, which provides real estate lending
products such as construction loans, commercial mortgages and bridge financing;
-
- the Specialized Financial Services Division, which provides customized
lending products to target markets, nationwide, through the following operating units;
-
- Energy
Capital Services provides corporate financing and project financing to oil and gas companies, as well as power and utility companies;
-
- National
Banking provides financing, deposits and traditional banking services to corporate clients in defined industries. Its Equipment Leasing
arm provides lease financing services to corporate customers;
-
- Capital
Markets 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.
-
- Corporate Deposit and Global Treasury Management Division targets numerous
industry relationship markets with deep industry and product expertise. Corporate Deposit and Global Treasury Management Division provides working capital solutions to meet deposit, investment and
global treasury management services to businesses of all sizes. This division also manages Union Bank's web strategies for retail, small business, wealth management and commercial clients, as well as
commercial product development;
-
- the Global and Wealth Markets Division, which serves our customers with
their foreign exchange, interest rate and energy risk management and investment needs. The Global and Wealth Markets Division offers energy derivative contracts, on a limited basis, to serve our
energy sector client base. The division takes market risk when buying and selling securities and foreign exchange contracts for its own account and accepts limited market risk when providing
derivative contracts, since a significant portion of the market risk for these products is offset with third parties. The division also includes our registered broker-dealer, UnionBanc Investment
Services LLC, which is a subsidiary of Union Bank;
-
- Wealth
Management Services Division provides comprehensive financial services to our wealthy clientele. The Private Bank focuses primarily on
delivering financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms, foundations and endowments. Specific products and services
include trust and estate services, financial planning, investment account management services, and deposit and credit products. A key strategy of The Private Bank is to expand its business by
acquiring new client relationships, as well as leveraging existing Bank client relationships. Through 15 existing locations, Private Bank relationship managers offer all of our available products and
services; and
-
- Institutional
Services and Asset Management Services Division provides investment management and administration services for a broad range of
individuals and institutions;
-
- HighMark Capital Management, Inc., a registered investment advisor, provides investment management and advisory services to institutional clients as well as investment advisory, administration and support services to our proprietary mutual funds, the affiliated HighMark Funds. It also provides investment management services to Union Bank with respect to most
F-49
-
- 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 and
trustee services for project finance. Institutional Services provides defined benefit services, including trustee services and investment management. 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 Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies headquartered in either Japan or the U.S.
of its trust and agency clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc.'s strategy is to expand distribution, to broaden its client base and to increase its assets under management; and
Other
The net loss increased from ($266.4) million in 2008 to ($752.2) million in 2009, primarily due to lower net interest income, higher loan loss provision and higher noninterest expense.
"Other" includes the following items:
-
- the funds transfer pricing results for our 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;
-
- Corporate Treasury, which is responsible for our ALM, wholesale funding and the ALM investment and derivatives hedging
portfolios. These Treasury management activities are carried out to counter-balance the residual risk positions of our balance sheet and to manage those risks within the guidelines established by
ALCO. (For additional discussion regarding these risk management activities, see "Quantitative and Qualitative Disclosures About Market Risk");
-
- the adjustment between the credit expense under RAROC and the provision for credit losses under US GAAP;
-
- the residual costs of support groups;
-
- corporate activities that are not directly attributable to one of the two business segments. Included in this category are
certain other items such as the results of operations of certain non-bank subsidiaries of UnionBanCal and the elimination of the fully taxable-equivalent basis amount;
-
- Goodwill, intangible assets, and related amortization/accretion associated with our privatization transaction;
-
- the discontinued operations resulting from the sales of our retirement recordkeeping and insurance brokerage businesses;
and
-
- the adjustment between the tax expense calculated using the marginal tax rate of 39.1 percent and our effective tax rates.
The 2009 financial results were impacted by the following factors:
-
- credit expense of $748.4 million was due to the difference between the $1,114.0 million provision for loan losses calculated under our US GAAP methodology and the $365.6 million in expected losses for the business segments, which utilizes the RAROC methodology;
F-50
-
- net interest income (expense) decreased $337.4 million to ($86.5) million compared to the same period in 2008
primarily due to the changes in transfer pricing rates, market rates, and a change in transfer pricing methodology;
-
- noninterest income (expense) of $24.9 million;
-
- noninterest expense (income) of $403.3 million primarily related to residual costs of support groups and corporate
activities not directly related to either of the two reportable business segments. The increase in noninterest expense includes higher amortization related to our privatization transaction and a
$16.0 million increase in provision for losses on off-balance sheet commitments; and
-
- income tax expense (benefit) of ($461.0) million was due to the difference between the ($161.3) million, or a (71) percent effective tax rate for our consolidated results, and the actual tax expense calculated for the reportable business segments (including reconciling items) of $299.7 million using the marginal tax rate.
The 2008 financial results were impacted by the following factors:
-
- credit expense of $292.1 million was due to the difference between the $515.0 million provision for loan
losses calculated under our US GAAP methodology and the $222.9 million in expected losses for the business segments, which utilizes the RAROC methodology;
-
- net interest income (expense) increased $32.7 million to $251.0 million compared to 2007 primarily due to
the changes in transfer pricing rates;
-
- noninterest income of $14.4 million;
-
- noninterest expense of $312.7 million primarily relates to residual costs of support groups and corporate
activities not directly related to either of the two reportable business segments. In 2008, we incurred $134.9 million in privatization-related expense and a $26.0 million increase in
provision for losses on off-balance sheet commitments;
-
- income tax expense (benefit) of ($88.1) million was due to the difference between the $127.9 million, or a
31 percent effective tax rate for our consolidated results, and the actual tax expense calculated for the business segments of $216.0 million using the marginal tax rate; and
-
- loss from discontinued operations of $15.1 million.
F-51
UnionBanCal Corporation and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-52
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Income
|
Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Amounts in thousands) | 2007 | 2008 | 2009 | ||||||||
Interest Income |
|||||||||||
Loans |
$ | 2,511,552 | $ | 2,549,512 | $ | 2,319,643 | |||||
Securities |
443,685 | 415,870 | 455,184 | ||||||||
Interest bearing deposits in banks |
3,276 | 574 | 13,449 | ||||||||
Federal funds sold and securities purchased under resale agreements |
26,247 | 6,472 | 371 | ||||||||
Trading account assets |
7,652 | 5,189 | 965 | ||||||||
Total interest income |
2,992,412 | 2,977,617 | 2,789,612 | ||||||||
Interest Expense |
|||||||||||
Deposits |
991,140 | 639,047 | 408,301 | ||||||||
Federal funds purchased and securities sold under repurchase agreements |
56,676 | 47,875 | 137 | ||||||||
Commercial paper |
76,284 | 31,767 | 3,095 | ||||||||
Other borrowed funds |
42,883 | 107,698 | 18,310 | ||||||||
Medium- and long-term debt |
101,096 | 99,429 | 109,704 | ||||||||
Trust notes |
953 | 953 | 953 | ||||||||
Total interest expense |
1,269,032 | 926,769 | 540,500 | ||||||||
Net Interest Income |
1,723,380 | 2,050,848 | 2,249,112 | ||||||||
Provision for loan losses |
81,000 | 515,000 | 1,114,000 | ||||||||
Net interest income after provision for loan losses |
1,642,380 | 1,535,848 | 1,135,112 | ||||||||
Noninterest Income |
|||||||||||
Service charges on deposit accounts |
304,362 | 302,965 | 290,764 | ||||||||
Trust and investment management fees |
157,734 | 165,255 | 134,997 | ||||||||
Trading account activities |
65,608 | 54,530 | 73,590 | ||||||||
Merchant banking fees |
44,123 | 49,546 | 64,652 | ||||||||
Brokerage commissions and fees |
39,839 | 38,891 | 33,584 | ||||||||
Card processing fees, net |
30,307 | 31,553 | 32,512 | ||||||||
Securities gains, net |
1,621 | 44 | 24,281 | ||||||||
Other |
155,945 | 129,872 | 72,764 | ||||||||
Total noninterest income |
799,539 | 772,656 | 727,144 | ||||||||
Noninterest Expense |
|||||||||||
Salaries and employee benefits |
911,022 | 978,081 | 971,656 | ||||||||
Net occupancy |
141,573 | 154,566 | 167,082 | ||||||||
Intangible asset amortization |
4,501 | 44,935 | 161,910 | ||||||||
Regulatory agencies |
10,691 | 23,971 | 133,616 | ||||||||
Outside services |
75,939 | 78,933 | 89,289 | ||||||||
Professional services |
67,021 | 70,886 | 70,055 | ||||||||
Equipment |
63,607 | 61,571 | 66,236 | ||||||||
Software |
57,114 | 60,448 | 62,950 | ||||||||
Foreclosed asset expense |
110 | 1,019 | 6,339 | ||||||||
Provision for losses on off-balance sheet commitments |
9,000 | 35,000 | 51,000 | ||||||||
Privatization-related expense |
| 90,505 | 45,882 | ||||||||
Other |
233,623 | 296,781 | 262,486 | ||||||||
Total noninterest expense |
1,574,201 | 1,896,696 | 2,088,501 | ||||||||
Income (loss) from continuing operations before income taxes |
867,718 | 411,808 | (226,245 | ) | |||||||
Income tax expense (benefit) |
294,354 | 127,868 | (161,284 | ) | |||||||
Income (Loss) from Continuing Operations |
573,364 | 283,940 | (64,961 | ) | |||||||
Income (loss) from discontinued operations before income taxes |
66,753 | (27,368 | ) | | |||||||
Income tax expense (benefit) |
32,023 | (12,313 | ) | | |||||||
Income (Loss) from Discontinued Operations |
34,730 | (15,055 | ) | | |||||||
Net Income (Loss) |
$ | 608,094 | $ | 268,885 | $ | (64,961 | ) | ||||
See accompanying notes to consolidated financial statements.
F-53
UnionBanCal Corporation and Subsidiaries
Consolidated Balance Sheets
|
December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2008 | 2009 | |||||||
Assets |
|||||||||
Cash and due from banks |
$ | 1,568,578 | $ | 1,198,258 | |||||
Interest bearing deposits in banks |
2,872,698 | 6,585,029 | |||||||
Federal funds sold and securities purchased under resale agreements |
63,069 | 442,552 | |||||||
Total cash and cash equivalents |
4,504,345 | 8,225,839 | |||||||
Trading account assets: |
|||||||||
Pledged as collateral |
6,283 | 15,168 | |||||||
Held in portfolio |
1,210,496 | 710,480 | |||||||
Securities available for sale: |
|||||||||
Pledged as collateral |
54,525 | 2,500 | |||||||
Held in portfolio |
8,140,013 | 22,556,329 | |||||||
Securities held to maturity (Fair value: 2009, $1,457,654) |
| 1,227,718 | |||||||
Loans (net of allowance for credit losses: 2008, $737,767; 2009, $1,357,000) |
48,847,783 | 45,871,508 | |||||||
Due from customers on acceptances |
23,131 | 8,514 | |||||||
Premises and equipment, net |
680,004 | 674,298 | |||||||
Intangible assets |
713,485 | 561,040 | |||||||
Goodwill |
2,369,326 | 2,369,326 | |||||||
Other assets |
3,571,995 | 3,375,408 | |||||||
Assets of discontinued operations to be disposed or sold |
4 | | |||||||
Total assets |
$ | 70,121,390 | $ | 85,598,128 | |||||
Liabilities |
|||||||||
Noninterest bearing |
$ | 13,566,873 | $ | 14,558,989 | |||||
Interest bearing |
32,482,896 | 53,958,664 | |||||||
Total deposits |
46,049,769 | 68,517,653 | |||||||
Federal funds purchased and securities sold under repurchase agreements |
172,758 | 150,453 | |||||||
Commercial paper |
1,164,327 | 888,541 | |||||||
Other borrowed funds |
8,196,597 | 591,934 | |||||||
Trading account liabilities |
1,034,663 | 538,894 | |||||||
Acceptances outstanding |
23,131 | 8,514 | |||||||
Other liabilities |
1,685,412 | 1,096,095 | |||||||
Medium- and long-term debt |
4,288,488 | 4,212,184 | |||||||
Junior subordinated debt payable to subsidiary grantor trust |
13,980 | 13,527 | |||||||
Liabilities of discontinued operations to be extinguished or assumed |
7,960 | | |||||||
Total liabilities |
62,637,085 | 76,017,795 | |||||||
Commitments, contingencies and guaranteesSee Note 24 |
|||||||||
Stockholder's Equity |
|||||||||
Preferred stock: |
|||||||||
Authorized 5,000,000 shares, no shares issued or outstanding at December 31, 2008 and 2009 |
| | |||||||
Common stock, par value $1 per share: |
|||||||||
Authorized 300,000,000 shares, issued 136,330,829 shares in 2008 and 2009 |
136,331 | 136,331 | |||||||
Additional paid-in capital |
3,195,023 | 5,195,023 | |||||||
Retained earnings |
4,964,802 | 4,899,841 | |||||||
Accumulated other comprehensive loss |
(811,851 | ) | (650,862 | ) | |||||
Total stockholder's equity |
7,484,305 | 9,580,333 | |||||||
Total liabilities and stockholder's equity |
$ | 70,121,390 | $ | 85,598,128 | |||||
See accompanying notes to consolidated financial statements.
F-54
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
(In thousands, except shares) | Number of shares |
Common stock |
Additional paid-in capital |
Treasury stock |
Retained earnings |
Accumulated other comprehensive income (loss) |
Total stock- holder's equity |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCE DECEMBER 31, 2006 |
156,460,057 | $ | 156,460 | $ | 1,083,649 | $ | (1,064,606 | ) | $ | 4,655,272 | $ | (259,374 | ) | $ | 4,571,401 | |||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income-2007 |
608,094 | 608,094 | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||
Net change in unrealized losses on cash flow hedges |
50,968 | 50,968 | ||||||||||||||||||||||
Net change in unrealized losses on securities available for sale |
(71,285 | ) | (71,285 | ) | ||||||||||||||||||||
Foreign currency translation adjustment |
517 | 517 | ||||||||||||||||||||||
Pension and other benefits adjustment |
(3,949 | ) | (3,949 | ) | ||||||||||||||||||||
Total comprehensive income, net of tax |
584,345 | |||||||||||||||||||||||
Adjustment for uncertain tax positions |
(49,300 | ) | | (49,300 | ) | |||||||||||||||||||
Adjustment for changes in timing of cash flows relating to income taxes generated by leveraged leases |
(20,803 | ) | (20,803 | ) | ||||||||||||||||||||
Stock options exercised |
800,850 | 801 | 32,498 | 33,299 | ||||||||||||||||||||
Restricted stock granted, net of forfeitures |
288,305 | 288 | (288 | ) | | |||||||||||||||||||
Restricted stock and performance share units vested |
10,309 | 10 | (10 | ) | | |||||||||||||||||||
Excess tax benefitstock based compensation |
4,616 | 4,616 | ||||||||||||||||||||||
Compensation expensestock options |
12,999 | 12,999 | ||||||||||||||||||||||
Compensation expenserestricted stock |
14,413 | 14,413 | ||||||||||||||||||||||
Compensation expenserestricted stock units, performance share units and other share-based compensation |
5,860 | 5,860 | ||||||||||||||||||||||
Common stock repurchased(1) |
(137,978 | ) | (137,978 | ) | ||||||||||||||||||||
Dividends declared on common stock, $2.03 per share(2) |
(280,871 | ) | (280,871 | ) | ||||||||||||||||||||
Net change |
1,099 | 70,088 | (137,978 | ) | 257,120 | (23,749 | ) | 166,580 | ||||||||||||||||
BALANCE DECEMBER 31, 2007 |
157,559,521 | $ | 157,559 | $ | 1,153,737 | $ | (1,202,584 | ) | $ | 4,912,392 | $ | (283,123 | ) | $ | 4,737,981 | |||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net income-2008 |
268,885 | 268,885 | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||
Net change in unrealized losses on cash flow hedges(3) |
59,633 | 59,633 | ||||||||||||||||||||||
Net change in unrealized losses on securities available for sale(3) |
(388,079 | ) | (388,079 | ) | ||||||||||||||||||||
Foreign currency translation adjustment |
(1,853 | ) | (1,853 | ) | ||||||||||||||||||||
Pension and other benefits adjustment |
(412,608 | ) | (412,608 | ) | ||||||||||||||||||||
Total comprehensive loss, net of tax |
(474,022 | ) | ||||||||||||||||||||||
Split-Dollar Life Insurance adjustment |
(236 | ) | (236 | ) | ||||||||||||||||||||
Income tax benefit on dividends on share-based payment awards adjustment |
451 | 451 | ||||||||||||||||||||||
Capital contribution from The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) |
1,000,000 | 1,000,000 | ||||||||||||||||||||||
Stock options exercised |
2,307,005 | 2,307 | 107,471 | 109,778 | ||||||||||||||||||||
Stock option payouts as a result of privatization(4)(5) |
(173,396 | ) | (173,396 | ) | ||||||||||||||||||||
Restricted stock granted, net of forfeitures |
20,198 | 20 | (20 | ) | | |||||||||||||||||||
Performance share and restricted stock units, and other share based compensation payouts as a result of privatization(4)(5) |
(30,193 | ) | (30,193 | ) | ||||||||||||||||||||
Excess tax benefitstock based compensation |
61,109 | 61,109 | ||||||||||||||||||||||
Compensation expensestock options |
23,831 | 23,831 | ||||||||||||||||||||||
Compensation expenserestricted stock |
41,557 | 41,557 | ||||||||||||||||||||||
Compensation expenserestricted stock units, performance share units and other share-based compensation |
18,054 | 18,054 | ||||||||||||||||||||||
Common stock repurchased(1) |
(2,214 | ) | (2,214 | ) | ||||||||||||||||||||
Common and treasury stock cancellation(4) |
(23,555,895 | ) | (23,555 | ) | (1,181,243 | ) | 1,204,798 | | ||||||||||||||||
Adjustments related to privatization(4) |
2,173,665 | 214,179 | 2,387,844 | |||||||||||||||||||||
Dividends declared on common stock, $1.56 per share(2) |
(216,239 | ) | (216,239 | ) | ||||||||||||||||||||
Net change |
(21,228 | ) | 2,041,286 | 1,202,584 | 52,410 | (528,728 | ) | 2,746,324 | ||||||||||||||||
BALANCE DECEMBER 31, 2008 |
136,330,829 | $ | 136,331 | $ | 3,195,023 | $ | | $ | 4,964,802 | $ | (811,851 | ) | $ | 7,484,305 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net loss-2009 |
(64,961 | ) | (64,961 | ) | ||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||
Net change in unrealized gains on cash flow hedges(3) |
(54,010 | ) | (54,010 | ) | ||||||||||||||||||||
Net change in unrealized losses on securities(3) |
56,401 | 56,401 | ||||||||||||||||||||||
Foreign currency translation adjustment |
1,376 | 1,376 | ||||||||||||||||||||||
Net change in pension and other benefits |
157,222 | 157,222 | ||||||||||||||||||||||
Total comprehensive income, net of tax |
96,028 | |||||||||||||||||||||||
Capital contribution from BTMU |
2,000,000 | 2,000,000 | ||||||||||||||||||||||
Net change |
| 2,000,000 | | (64,961 | ) | 160,989 | 2,096,028 | |||||||||||||||||
BALANCE DECEMBER 31, 2009 |
136,330,829 | $ | 136,331 | $ | 5,195,023 | $ | | $ | 4,899,841 | $ | (650,862 | ) | $ | 9,580,333 | ||||||||||
- (1)
- Common stock repurchased includes commission costs.
- (2)
- Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date.
- (3)
- Includes amortization of privatization adjustments. See Note 2 to these consolidated financial statements for additional information on the Company's privatization transaction.
- (4)
- See Note 2 to these consolidated financial statements for a description of the Company's privatization.
- (5)
- See Note 15 to these consolidated financial statements for a description of payouts relating to compensation plans, which were canceled on November 4, 2008 as a result of the Company's privatization.
See accompanying notes to consolidated financial statements.
F-55
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Cash Flows
|
For the Years Ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2007 | 2008 | 2009 | ||||||||||
Cash Flows from Operating Activities: |
|||||||||||||
Net income (loss) |
$ | 608,094 | $ | 268,885 | $ | (64,961 | ) | ||||||
Income (loss) from discontinued operations, net of taxes |
34,730 | (15,055 | ) | | |||||||||
Income (loss) from continuing operations, net of taxes |
573,364 | 283,940 | (64,961 | ) | |||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|||||||||||||
Provision for loan losses |
81,000 | 515,000 | 1,114,000 | ||||||||||
Provision for losses on off-balance sheet commitments |
9,000 | 35,000 | 51,000 | ||||||||||
Depreciation, amortization and accretion |
117,980 | 143,859 | 154,777 | ||||||||||
Stock-based compensationstock options and other share-based compensation |
33,272 | 83,442 | | ||||||||||
Deferred income taxes |
(24,764 | ) | (181,046 | ) | (121,772 | ) | |||||||
Net gains on sales of securities |
(1,621 | ) | (44 | ) | (24,281 | ) | |||||||
Net decrease (increase) in trading account assets |
(227,012 | ) | (613,446 | ) | 491,131 | ||||||||
Net decrease (increase) in prepaid expenses |
(37,898 | ) | 431,566 | (432,875 | ) | ||||||||
Net decrease (increase) in fees and other receivable |
11,468 | 86,627 | (29,587 | ) | |||||||||
Net increase in other assets |
(235,202 | ) | (510,702 | ) | (302,342 | ) | |||||||
Net increase (decrease) in accrued expenses |
82,368 | 493,858 | (415,602 | ) | |||||||||
Net increase (decrease) in trading account liabilities |
92,921 | 683,606 | (495,769 | ) | |||||||||
Net increase (decrease) in other liabilities |
(78,173 | ) | 274,777 | (197,670 | ) | ||||||||
Loans originated for resale |
(680,541 | ) | (428,301 | ) | (65,337 | ) | |||||||
Net proceeds from sale of loans originated for resale |
669,333 | 389,833 | 47,547 | ||||||||||
Excess tax benefitstock-based compensation |
(4,616 | ) | (61,109 | ) | | ||||||||
Other, net |
34,820 | (399,652 | ) | 171,678 | |||||||||
Discontinued operations, net |
60,563 | 77,222 | (6,027 | ) | |||||||||
Total adjustments |
(97,102 | ) | 1,020,490 | (61,129 | ) | ||||||||
Net cash provided by (used in) operating activities |
476,262 | 1,304,430 | (126,090 | ) | |||||||||
Cash Flows from Investing Activities: |
|||||||||||||
Proceeds from sales of securities available for sale |
352,568 | 14,647 | 5,295,472 | ||||||||||
Proceeds from matured and called securities available for sale |
1,806,844 | 1,554,813 | 2,536,986 | ||||||||||
Purchases of securities available for sale |
(1,970,887 | ) | (1,936,558 | ) | (23,295,394 | ) | |||||||
Proceeds from matured securities held to maturity |
| | 8,322 | ||||||||||
Purchases of premises and equipment, net |
(104,680 | ) | (95,405 | ) | (100,527 | ) | |||||||
Net decrease (increase) in loans |
(4,604,981 | ) | (8,841,250 | ) | 1,863,514 | ||||||||
Other, net |
| (5,031 | ) | (809 | ) | ||||||||
Discontinued operations, net |
3,241 | 3,732 | | ||||||||||
Net cash used in investing activities |
(4,517,895 | ) | (9,305,052 | ) | (13,692,436 | ) | |||||||
Cash Flows from Financing Activities: |
|||||||||||||
Net increase in deposits |
829,509 | 3,369,578 | 22,467,884 | ||||||||||
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements |
547,675 | (1,458,844 | ) | (22,305 | ) | ||||||||
Net increase (decrease) in commercial paper and other borrowed funds |
1,048,715 | 5,218,649 | (6,880,449 | ) | |||||||||
Capital contribution from the Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) |
| 1,000,000 | 2,000,000 | ||||||||||
Common stock repurchased |
(137,978 | ) | (2,214 | ) | | ||||||||
Proceeds from issuance of medium- and long-term debt |
749,250 | 2,276,000 | 1,625,000 | ||||||||||
Repayment of medium- and long-term debt |
(200,000 | ) | | (1,650,000 | ) | ||||||||
Payments of cash dividends |
(274,974 | ) | (287,995 | ) | | ||||||||
Stock options exercised |
37,915 | 170,887 | | ||||||||||
Share-based compensation payouts as a result of privatization |
| (203,589 | ) | | |||||||||
Other, net |
1,267 | (1,853 | ) | 1,376 | |||||||||
Discontinued operations, net |
(20,170 | ) | (96,591 | ) | (1,929 | ) | |||||||
Net cash provided by financing activities |
2,581,209 | 9,984,028 | 17,539,577 | ||||||||||
Net increase (decrease) in cash and cash equivalents |
(1,460,424 | ) | 1,983,406 | 3,721,051 | |||||||||
Cash and cash equivalents at beginning of year |
3,981,435 | 2,521,633 | 4,504,345 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
622 | (694 | ) | 443 | |||||||||
Cash and cash equivalents at end of year |
$ | 2,521,633 | $ | 4,504,345 | $ | 8,225,839 | |||||||
Cash Paid During the Year For: |
|||||||||||||
Interest |
$ | 1,337,976 | $ | 938,895 | $ | 562,050 | |||||||
Income taxes |
305,803 | 236,931 | 209,579 | ||||||||||
Supplemental Schedule of Noncash Investing and Financing Activities: |
|||||||||||||
Securities available for sale transferred to securities held to maturity |
$ | | $ | | $ | 1,144,036 | |||||||
Loans transferred to foreclosed assets (OREO) |
1,571 | 32,506 | 66,225 | ||||||||||
Term borrowingissued in current year, but settled after end of year |
| 1,000,000 | |
See accompanying notes to consolidated financial statements.
F-56
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009
Note 1Summary of Significant Accounting Policies and Nature of Operations
Introduction
UnionBanCal Corporation, a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), is a financial holding company and commercial bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. UnionBanCal Corporation and its subsidiaries (the Company) provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington, and Texas as well as nationally and internationally.
See Note 2 for information on the Company's privatization transaction.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. The Company accounts for investments over which it exerts significant influence using the equity method of accounting. Investments where the Company does not exert significant influence are accounted for at cost. Investments, both under the equity method of accounting and at cost, are included in other assets.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (US GAAP) and general practice within the banking industry. The policies that materially affect the determination of financial position, results of operations and cash flows are summarized below.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts for prior periods may have been reclassified to conform to current financial statement presentation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest bearing deposits in banks, and federal funds sold and securities purchased under resale agreements, which have original maturities less than 90 days.
Resale and Repurchase Agreements
Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the same or substantially the same securities before maturity at a fixed or determinable price. The Company's policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
F-57
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
Trading Account Assets
Trading account assets are recorded at fair value and consist of securities and loans that management acquires with the intent to hold for short periods of time in order to take advantage of anticipated changes in market values. Substantially all of the securities have a high degree of liquidity and readily determinable market value. Interest earned, paid, or accrued on trading account assets is included in interest income using a method that produces a level yield. Realized gains and losses from the sale or close-out of trading account positions and unrealized market value adjustments are recognized in noninterest income.
Also included in trading account assets are the unrealized gains related to a variety of derivative contracts, primarily interest rate swaps and options, energy derivative contracts and foreign exchange contracts, entered into either for trading purposes, based on management's intent at inception, or as an accommodation to customers.
Derivatives held or issued for trading or customer accommodation are carried at fair value, with realized and unrealized changes in fair values on contracts included in noninterest income in the period in which the changes occur. Unrealized gains and losses are reported gross and included in trading account assets and trading account liabilities, respectively. Cash flows are reported net as operating activities.
Total unrealized losses on trading account securities totaled $0.4 million at December 31, 2009.
Securities
Securities for which management has both the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. The Company's held to maturity securities consist of the collateralized loan obligation (CLO) portfolio. Debt securities and equity securities with readily determinable market values that are not classified as trading assets or held to maturity are classified as available for sale and are carried at fair value, with the unrealized gains or losses reported net of taxes as a component of accumulated other comprehensive income (loss) in stockholder's equity until realized.
Interest income on debt securities classified as either available for sale or held to maturity includes the amortization of premiums and the accretion of discounts using a method that produces a level yield and is included in interest income on securities.
The Company recognizes other-than-temporary impairment on its securities available for sale and held to maturity portfolios when it does not expect to recover its amortized cost in any individual security. A debt security is subject to impairment testing when its fair value is lower than its amortized cost at the end of a reporting period. Typical debt securities in the portfolio that are subject to testing for other-than-temporary impairment are CLOs and non-agency residential mortgage-backed securities. In determining whether impairment is other than temporary, the Company considers expected cash flows utilizing a number of assumptions such as recovery rates, default rates and reinvestment rates, business models, current and projected financial performance, and overall economic conditions.
Debt securities with unrealized losses are considered other-than-temporarily impaired if the Company intends to sell the security, if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the entire amortized cost basis of the security. Any impairment on securities the Company intends, or is more likely than not required to sell, is recognized in earnings as the entire difference between the amortized cost and its fair value. Any
F-58
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
impairment on securities the Company does not intend or it is not more likely than not required to sell before recovery is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The credit loss is measured as the difference between the present value of expected cash flows, discounted using the security's effective interest rate, and the amortized cost of the security.
Marketable equity securities are subject to testing for other-than-temporary impairment when there is a severe or sustained decline in market price below the amount recorded for that investment. The Company considers the issuer's financial condition, capital strength, and near-term prospects in assessing whether other-than-temporary impairment exists.
Realized gains and losses on the sale of and credit losses related to other-than-temporary impairment on available for sale securities are included in noninterest income as securities gains (losses), net. The specific identification method is used to calculate realized gains and losses on sales.
Securities available for sale that are pledged under an agreement to repurchase and which may be sold or repledged under that agreement have been separately identified as pledged as collateral.
Loans Held for Investment, Loans Held for Sale, and Certain Loans Acquired at a Discount
Loans are reported at the principal amounts outstanding, net of unamortized nonrefundable loan fees, related direct loan origination costs and fair value adjustments related to the Company's privatization. Deferred net fees and costs related to loans held for investment are recognized in interest income on an effective yield basis over the contractual loan term.
Loans held for sale are carried at the lower of cost or fair value on an individual basis for commercial loans and on an aggregate basis for residential mortgage loans. Changes in value are recognized in other noninterest income. Nonrefundable fees and direct loan origination costs related to loans held for sale are deferred and recognized as a component of the gain or loss on sale. Interest income is accrued principally on a simple interest basis.
Loans purchased with evidence of credit quality deterioration since their origination are recorded initially at fair value with no allowance for loan losses. Interest income is recognized based on the excess of future expected cash flows over the purchase price versus contractual cash flows. Subsequently, such loans are considered impaired if it becomes probable that the Company will be unable to collect the initial expected future cash flows. At that time, the Company will establish an allowance for loan losses up to the amount expected at acquisition. An increase in cash flows previously expected is recorded as interest income prospectively over the remaining life of the loan.
Loans purchased without evidence of credit deterioration since origination are recorded at the present value of amounts to be received discounted at current interest rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities with the allowance for loan losses carried over. The difference between the recorded value and the par value of the loans is reflected in interest income over the life of the loan.
Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. Interest accruals are continued for
F-59
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
certain small business loans that are processed centrally, consumer loans, and one-to-four family residential mortgage loans. These loans are charged off or written down to their net realizable value based on delinquency time frames that range from 120 to 270 days, depending on the type of credit that has been extended. Effective January 1, 2009, consumer equity loans and one-to-four single family residential loans are placed on nonaccrual when these loans are delinquent 90 days or more, or in foreclosure. Interest accruals are also continued for loans that are both well-secured and in the process of collection. For this purpose, loans are considered well-secured if they are collateralized by property having a net realizable value in excess of the amount of principal and accrued interest outstanding or are guaranteed by a financially responsible and willing party. Loans are considered "in the process of collection" if collection is proceeding in due course either through legal action or other actions that are reasonably expected to result in the prompt repayment of the debt or in its restoration to current status.
When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed against current period operating results. When full collection of the outstanding principal balance is in doubt, subsequent payments received are first applied to unpaid principal and then to uncollected interest. A loan may be returned to accrual status at such time as the loan is brought fully current as to both principal and interest, and, in management's judgment, such a loan is considered to be fully collectible on a timely basis. However, the Company's policy also allows management to continue the recognition of interest income on certain loans designated as nonaccrual. This portion of the nonaccrual portfolio is referred to as "Cash Basis Nonaccrual" loans. This policy only applies to loans that are well-secured and in management's judgment are considered to be fully collectible but the timely collection of payments is in doubt. Although the accrual of interest is suspended, interest income is recognized as it is received.
Loans are considered impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including interest payments. Impaired loans are carried at the lower of the recorded investment in the loan, the present value of expected future cash flows discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. Additionally, some impaired loans with commitments of less than $2.5 million are aggregated for the purpose of measuring impairment using historical loss factors as a means of measurement. Excluded from the impairment analysis are large groups of smaller balance homogeneous loans such as consumer and residential mortgage loans, which are evaluated on a pool basis.
The Company offers primarily two types of leases to customers: 1) direct financing leases where the assets leased are acquired without additional financing from other sources, and 2) leveraged leases where a substantial portion of the financing is provided by debt with no recourse to the Company. Direct financing leases are carried net of unearned income, unamortized nonrefundable fees and related direct costs associated with the origination or purchase of leases. Leveraged leases are carried net of nonrecourse debt.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge offs, net of recoveries. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, the specific allowance and the unallocated allowance.
F-60
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
The formula allowance is calculated by applying loss factors to outstanding loans. Loss factors are based on the Company's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. The Company derives the loss factors for most commercial loans from a loss migration model and, for pooled loans, by using expected net charge offs. Pooled loans are homogeneous in nature and include consumer and residential mortgage loans, and certain small commercial loans. Estimated losses are based on a loss confirmation period, which is the estimated average period of time between a material adverse event affecting the creditworthiness of a borrower for non-criticized, risk-graded credits or through the remaining life of the loan for criticized, risk-graded credits, and the subsequent recognition of a loss.
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate that a probable loss has been incurred in excess of the amount determined by the application of the formula allowance. The specific allowance also includes impaired leases.
The unallocated allowance is composed of attribution factors, which are based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions evaluated in connection with the unallocated allowance may include existing general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, bank regulatory examination results and findings of the Company's internal credit examiners.
The allowance also incorporates the results of measuring impaired loans. Impairment is recognized as a component of the existing allowance for loan losses.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation and amortization, and fair value adjustments related to the Company's privatization. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of each asset. Lives of premises range from ten to forty years; lives of furniture, fixtures and equipment range from three to eight years. Leasehold improvements are amortized over the term of the respective lease or the estimated life of the improvement, whichever is shorter.
Long-lived assets that are held are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is determined if the expected undiscounted future cash flows of a long-lived asset is lower than its carrying value. In the event of impairment, the Company recognizes a loss for the difference between the carrying amount and the fair value of the asset. The impairment loss is reflected in noninterest expense.
Intangible Assets
Intangible assets represent purchased assets that lack physical substance and can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged. Intangible assets are recorded at fair value at the date of acquisition.
Intangible assets that have infinite lives are tested for impairment at least annually.
F-61
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
Intangible assets that have finite lives, which include core deposit intangibles, customer relationships and trade name, are amortized either using the straight-line method or a method that patterns the manner in which the economic benefit is consumed. Intangible assets are typically amortized over their estimated periods of benefit, which range from six to forty years. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
Other Real Estate Owned
Other real estate owned (OREO) represents the collateral acquired through foreclosure in full or partial satisfaction of the related loan. OREO is recorded at the lower of the loan's unpaid principal balance or its fair value as established by a current appraisal, adjusted for disposition costs. Any write-down at the date of transfer is charged to the allowance for loan losses. OREO values, recorded in other assets, are reviewed on an ongoing basis and any decline in value is recognized as foreclosed asset expense in the current period. The net operating results from these assets are included in the current period in noninterest expense as foreclosed asset expense (income).
Other Investments
The Company invests in private capital investments which include direct investments in private companies and indirect investments in private equity funds. These investments are accounted for based on the cost or equity method of accounting depending on whether the Company has significant influence over the investee. These investments are initially recorded at cost. Under the equity method the investment is adjusted for the Company's share of investee's net income or loss for the period. Under the cost method dividends received are recognized in other noninterest income and dividends received in excess of the investee's earnings are considered a return of investment and are recorded as a reduction of investment cost. These investments are evaluated for other-than-temporary impairment if events or conditions indicate that it is probable that the carrying value of the investment will not be fully recovered in the foreseeable future. If an investment is determined to be impaired, it is written down to its current fair value. Fair value is estimated based on a company's business model, current and projected financial performance, liquidity and overall economic and market conditions. As a practical expedient, fair value can also be estimated as the net asset value (NAV) of the fund.
The Company invests in limited liability partnerships and other entities operating qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. These low-income housing credit (LIHC) investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. The unguaranteed LIHC investments are initially recorded at cost, and the carrying value is amortized as an expense over the period of available tax credits and tax benefits.
The Company also invests in guaranteed LIHC investments where the availability of tax credits are guaranteed by a creditworthy entity. The investments are initially recorded at cost and amortized over the period the tax credits are allocated to provide a constant effective yield.
The Company invests in limited liability partnerships that operate renewable energy projects. Tax credits, taxable income and distributions associated with these renewable energy projects are allocated to investors according to the terms of the partnership agreements. These investments are accounted for under the equity method, with the initial investment recorded at cost and the carrying value adjusted for partnership allocations
F-62
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
received. These investments are tested annually for impairment, based on projected operating results and realizability of tax credits.
All these investments are included within other assets and any other-than temporary impairment is recognized in other noninterest income.
Derivative Instruments Held for Purposes Other Than Trading
The Company enters into a variety of derivative contracts as a means of reducing the Company's interest rate and foreign exchange exposures. All derivative instruments are recorded at fair value and included in other assets or other liabilities. At inception, the Company designates a derivative instrument as: a hedge of the fair value of a recognized asset or liability (i.e., fair value hedge), a hedge of the variability in the expected future cash flows associated with an existing recognized asset or liability or a probable forecasted transaction (i.e., cash flow hedge), or as a free-standing derivative (i.e., economic hedge). For free-standing derivatives, the change in fair value is recognized in earnings.
The Company applies hedge accounting to certain of its derivatives. To qualify for hedge accounting, a derivative must be highly effective in achieving offsetting changes in the hedged item attributable to the risk being hedged. For both fair value hedges and cash flow hedges, any ineffectiveness (i.e., the amount, which may arise during the hedging relationship, by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk) is recognized in noninterest expense in the period in which it arises. For qualifying fair value hedges of interest bearing assets or liabilities, the change in the fair value of the hedged item and the hedging instrument, to the extent effective, is completely offset with no impact on earnings. For qualifying cash flow hedges, the unrealized changes in fair value, to the extent effective, are recognized in other comprehensive income. Amounts realized on cash flow hedges related to variable rate loans and deposit liabilities are recognized in net interest income in the period in which the cash flow from the hedged item is recognized in earnings. The fair value of cash flow hedges related to forecasted transactions is recognized as an adjustment to the carrying value of the asset or liability in the period when the forecasted transaction occurs or in noninterest expense if the forecasted transaction no longer is expected to occur.
If a derivative instrument is determined to no longer be highly effective as a designated hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument would be recorded in earnings.
Operating Leases
The Company enters into a variety of lease contracts generally for premises and equipment. Lease contracts that do not transfer substantially all of the benefits and risks of ownership and do not meet the accounting requirements for capital lease classification are treated as operating leases. The Company accounts for the payments of rent on these contracts on a straight-line basis over the lease term. At inception of the lease term, any periods for which no rents are paid and/or escalation clauses are stipulated in the lease contract are included in the determination of the rent expense and recognized ratably over the lease term.
F-63
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
The Company records liabilities for legal obligations associated with the future retirement of buildings and leasehold improvements at fair value when incurred. The assets are increased by the related liability and depreciated over the estimated useful life of that asset.
Foreign Currency Translation
Assets, liabilities and results of operations for foreign branches are recorded based on the functional currency (i.e., the local currency) of each branch. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the period end spot foreign exchange rates. Revenues and expenses are translated daily using end of day spot foreign exchange rates, with resulting gains or losses included in stockholder's equity, as a component of accumulated other comprehensive income (loss), on a net-of-tax basis.
Income Taxes
The Company files consolidated federal and combined state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes, rather than amounts reported on the Company's income tax return. Interest income, interest expense and penalties pertaining to the settlement, or expected settlement, of prior years' tax issues are recognized in income tax expense. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. Under this method, the computation of the net deferred tax liability or asset gives current recognition to changes in the tax laws. Deferred tax assets are recognized when they meet a "more-likely-than-not" threshold. For tax positions that meet the more-likely-than-not threshold, the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority is recognized.
Allowance for Losses on Off-Balance Sheet Commitments
The Company maintains an allowance for losses on off-balance sheet commitments to absorb losses inherent in those commitments upon funding. The commitments include unfunded loan commitments, standby letters of credit and commercial lines of credit that are not for sale. The Company's methodology for assessing the appropriateness of this allowance is the same as that used for the allowance for loan losses and incorporates an assumption based upon historical information of likely utilization. See accounting policy "Allowance for Loan Losses." The allowance for losses on off-balance sheet commitments is classified as other liabilities and the change in this allowance is recognized in noninterest expense.
Employee Pension and Other Postretirement Benefits
The Company provides a variety of pension and other postretirement benefit plans for eligible employees and retirees. Provisions for the costs of these employee pension and other postretirement benefit plans are accrued and charged to expense when the benefit is earned.
Junior Subordinated Debt Payable to Subsidiary Grantor Trust (Trust Notes)
Trust notes are accounted for as liabilities on the balance sheet. Interest on trust notes is treated as interest expense on an accrual basis.
F-64
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
Additional information on the trust notes can be found in Note 14 to these consolidated financial statements.
Recently Issued Accounting Pronouncements
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-01, "Topic-105-Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles." The new guidance establishes the FASB Accounting Standards Codification (FASB ASC) as the single source of authoritative US GAAP. The FASB ASC does not significantly change current US GAAP and merely restructures the information in a topical format. The FASB ASC was effective July 1, 2009 and the technical references to US GAAP included in these consolidated financial statements are provided under the new FASB ASC structure with the prior terminology included parenthetically within this note. At adoption, there was no impact from this change on the Company's financial position or results of operations.
Business Combinations
In December 2007, the FASB issued new guidance impacting FASB ASC 805, "Business Combinations" (formerly Statement of Financial Accounting Standards (SFAS) No. 141R, "Business Combinations"). The guidance requires that all business combinations be accounted for under the "acquisition method." The guidance requires that the assets, liabilities and noncontrolling interests of a business combination be measured at fair value at the acquisition date. The acquisition date is defined as the date an acquirer obtains control of the entity, which is typically the closing date. The guidance requires that all acquisition and restructuring related costs be expensed as incurred and that any contingent consideration be measured at fair value and recorded as either equity or a liability with the liability remeasured at fair value in subsequent periods. The guidance was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.
Noncontrolling Interest in Consolidated Financial Statements
In December 2007, the FASB issued new guidance impacting FASB ASC 810-10, "Consolidations" (formerly SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment to ARB No. 51"). The guidance requires that a noncontrolling interest (formerly minority interest) be measured at fair value at the acquisition date and be presented in the equity section on the balance sheet. The guidance requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions with no resulting gain or loss. If control is lost, the noncontrolling interest is remeasured to fair value and a gain or loss is recorded. The guidance was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued new guidance impacting FASB ASC 815-10, "Derivatives and Hedging" (formerly SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133"). The guidance requires expanded qualitative, quantitative and credit-risk
F-65
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
disclosures of derivative instruments and hedging activities. These disclosures include more detailed information about gains and losses, location of derivative instruments in financial statements, and credit-risk-related contingent features in derivative instruments. The guidance also requires the disclosure of all significant concentrations of credit risks arising from derivative instruments. The guidance, which applies only to disclosures, was effective January 1, 2009. Disclosures required under this Statement are included in Note 18 to these consolidated financial statements.
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued new guidance impacting FASB ASC 350-30, "IntangiblesGoodwill and Other" (formerly Staff Position (FSP) FAS 142-3, "Determination of the Useful Life of Intangible Assets"). The guidance requires that an entity consider its own assumptions about the renewal or extension period, adjusted for entity-specific factors, when determining the useful life of a recognized intangible asset. In the absence of that experience, an entity should consider market participant assumptions. The guidance was effective January 1, 2009. At adoption there was no impact on the Company's financial position or results of operations.
Employers' Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued new guidance impacting FASB ASC 715-20-50, "Compensation Retirement BenefitsDefined Benefit PlansDisclosure" (formerly FSP FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets"), which expands the disclosure requirements related to an employer's defined benefit pension or other postretirement plan. The guidance requires additional disclosure information, including how a company makes investment allocation decisions, the fair value of each major category of plan assets and the nature and amount of concentration risk within or across those plan asset categories. Additionally, the guidance requires disclosures about the valuation of plan assets, including the level within the fair value hierarchy in which fair value measurements of plan assets fall and information about the inputs and valuation techniques used to measure the fair value of plan assets. The guidance, which applies only to disclosures, was effective December 31, 2009. Disclosures required under this Statement are included in Note 9 to these consolidated financial statements.
Accounting for Contingencies from Business Combinations
In April 2009, the FASB issued new guidance impacting FASB ASC 805-10, "Business Combinations" (formerly FSP FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies"). The guidance requires that an asset or liability assumed in a business combination that arises from a contingency be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined during the measurement period, the accounting for the acquired contingency should follow existing accounting guidance. The guidance was effective January 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.
Fair Value Measurements in Inactive Markets
In April 2009, the FASB issued new guidance impacting FASB ASC 820-10, "Fair Value Measurements and Disclosures" (formerly FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for
F-66
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly"). The guidance provides additional information for estimating fair value when the volume and level of activity for an asset or liability has significantly decreased. The guidance provides factors to consider when determining whether there has been a significant decline in volume or level of activity. The guidance also affirms that the objective of a fair value measurement is the price that would be received to sell an asset in an orderly transaction under current market conditions, even if the market is inactive. The guidance was effective April 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.
Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the FASB issued new guidance impacting FASB ASC 320-10, "Investments-Debt and Equity Securities" (formerly FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments"). The guidance amends the determination and recognition of other-than-temporary impairment criteria related to debt securities. The guidance establishes new criteria for determining whether impairment is other-than-temporary and what portion of any such impairment is recognized in earnings. A company is required to assert whether it intends or it is more likely than not that it will need to sell a security with an unrealized loss before full recovery of the amortized cost basis. If it is likely that a security will be sold prior to full recovery, the security must be written down to its current fair value and the entire loss recognized in earnings immediately. If it is likely that the security will not be sold prior to recovery, but the amortized cost basis will not be collected, the security must be written down to its current fair value. However, in that case, only the credit loss component shall be recognized in earnings immediately with the remaining non-credit related loss portion recorded in other comprehensive income. The guidance was effective April 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.
Subsequent Events
In May 2009, the FASB issued FASB ASC 855-10, "Subsequent Events" (formerly SFAS No. 165, "Subsequent Events"), which requires an evaluation of events or transactions that occur after the balance sheet date through the date that the financial statements are issued or available to be issued. The guidance also provides information about when such a subsequent event should be recognized in the financial statements and requires the disclosure of the date through which subsequent events were evaluated and whether that represents the date the financial statements were issued or available to be issued. The guidance was effective June 30, 2009. In February 2010, the FASB issued FASB ASU 2010-09, "Amendments to Certain Recognition and Disclosure Requirements," which amends the above subsequent event guidance to remove the requirement to disclose the actual date through which subsequent events have been evaluated. This guidance was effective upon issuance. At adoption of both of the above guidance, there was no impact on the Company's financial position or results of operations. The Company evaluates the impact of subsequent events through the date that its financial statements are issued. Disclosures required under this guidance are included in Note 27 to these consolidated financial statements.
Accounting for Transfers of Financial Assets
In December 2009, the FASB issued ASU 2009-16, "Accounting for Transfers of Financial Assets" which formally codifies SFAS No. 166, "Accounting for Transfers of Financial Assetsan amendment of FASB Statement 140," which was issued in June 2009. The guidance eliminates the concept of qualifying special purpose entities (QSPEs) and modifies financial asset derecognition criteria. The elimination of the exception
F-67
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
for QSPEs will likely result in many sponsors that transferred financial assets to such vehicles to consolidate them. The derecognition modifications require that companies consider all arrangements such that the transferred financial asset is legally isolated from the transferor and any of its consolidated affiliates when determining whether derecognition is appropriate for a transferred financial asset. For a transfer of a portion of a financial asset to be derecognized, it must meet the definition of a participating interest. The guidance also requires that all beneficial interests retained in transferred financial assets be initially measured at fair value. Disclosures are amended to require description of a company's continuing involvement with transferred financial assets and details regarding financial or other support provided. The guidance is effective January 1, 2010. Management believes that adopting this guidance will not have a material impact on the Company's financial position or results of operations.
Consolidation Criteria for Variable Interest Entities
In December 2009, the FASB issued ASU 2009-17, "Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities" which formally codifies SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" which was issued in June 2009. The guidance changes the method of analyzing which party shall consolidate a variable interest entity (VIE) by providing revised criteria for determining the primary beneficiary. A company would be required to determine the primary beneficiary of a VIE on a continual basis based on a qualitative assessment of which party, if any, has the power to direct activities and the right to receive benefits or the obligation to absorb losses. The guidance also states that if power is shared by multiple parties such that no one party has the power to direct the activities, then no party shall consolidate the VIE. Disclosures are also amended to require disclosure of continuing involvement with VIEs and judgments used in the consolidation analysis such as the method, significant judgments and assumptions used for determining the primary beneficiary. The guidance is effective January 1, 2010. As a result of reviewing the Company's variable interest entities and the determination of the primary beneficiary, the Company expects to consolidate certain Low Income Housing Tax Credit investment funds. At adoption, management expects to recognize additional assets of approximately $300 million upon consolidation of these entities. Management believes that adopting this guidance will not have a material impact on the Company's results of operations.
Measuring Liabilities at Fair Value
In August 2009, the FASB issued ASU 2009-05, "Measuring Liabilities at Fair Value." This guidance amends FASB ASC 820-10, "Fair Value Measurements and Disclosures" to clarify that, if available, an entity should measure the fair value of a liability using a quoted price in an active market. If such information is not available, an entity should use a valuation technique based on the quoted price when the liability or similar liabilities are traded as assets, if available, which should not be adjusted for any transfer restrictions. The guidance also emphasizes that an entity should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The guidance was effective October 1, 2009. At adoption, there was no impact on the Company's financial position or results of operations.
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
In October 2009, the FASB issued ASU 2009-12, "Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." This guidance amends FASB ASC 820-10, "Fair Value Measurements and Disclosures" to state that if an investment does not have a readily determinable fair value
F-68
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 1Summary of Significant Accounting Policies and Nature of Operations (Continued)
and has all the attributes of an investment company, a reporting entity is permitted, as a practical expedient, to estimate fair value using the investment's net asset per share (NAV). The NAV should be calculated as of the reporting entity's measurement date and, if not, the NAV must be adjusted for significant market events since its calculation. This guidance also precludes a reporting entity from using this practical expedient if it is probable that it will sell the investment at a price other than NAV. The guidance also requires enhanced disclosures about the nature and risk of such investments. The guidance was effective October 1, 2009. At adoption, there was no material impact on the Company's financial position or results of operations. Disclosures required under this guidance are included in Note 17 to these consolidated financial statements.
Improving Disclosures about Fair Value Measurements
In January 2009, the FASB issued ASU 2010-06, "Improving Disclosures about Fair Value Measurements." This guidance amends FASB ASC 820-10, "Fair Value Measurements and Disclosures" with respect to disclosures. Specifically, this guidance requires the disclosure of transfers in and out of Level 1 and Level 2 and a gross presentation within the Level 3 rollforward. This guidance also clarifies that the information should be presented by class of financial asset or liability and that a discussion of valuation techniques and inputs is required for Level 2 and Level 3 recurring and nonrecurring fair value measurements. The guidance is effective March 31, 2010 except for the gross presentation within the Level 3 rollforward, which is effective March 31, 2011. Management believes that adopting this guidance will not have a significant impact on the Company's financial position or results of operations.
On November 4, 2008, the Company became a privately held company (privatization transaction) pursuant to the Agreement and Plan of Merger, dated as of August 18, 2008, by and among the Company, BTMU, a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc. (MUFG), and Blue Jackets, Inc., a Delaware corporation and a wholly-owned subsidiary of BTMU (Merger Sub) (the Merger Agreement). All of the Company's issued and outstanding shares of common stock are now owned by BTMU. Prior to the transaction, BTMU owned approximately 64 percent of the Company's outstanding shares of common stock.
The Merger Agreement provided, among other things, for a cash tender offer by BTMU (the Offer) to purchase all of the publicly held outstanding shares of the Company's common stock at a price of $73.50 per share in cash (the Offer Price). The Offer expired on September 26, 2008, with purchase of the shares being effective on October 1, 2008. After the Offer, BTMU owned approximately 97 percent of the Company's outstanding common stock. On November 4, 2008, pursuant to the Merger Agreement, Merger Sub was merged with and into the Company (the Merger), the separate corporate existence of Merger Sub ceased and the Company continued as the surviving corporation in the Merger. All remaining publicly held shares of the Company's common stock issued and outstanding immediately prior to the closing of the Merger were converted into the right to receive the Offer Price.
The privatization transaction was accounted for as a business combination and the purchase price was pushed down to the Company's consolidated financial statements. Accordingly, the purchase price paid by BTMU plus related purchase accounting adjustments have been reflected on the Company's consolidated balance sheet as of October 1, 2008. This resulted in a new basis of accounting which reflects an adjustment for the estimated fair value of the Company's assets and liabilities. On October 1, 2008, BTMU owned approximately 97 percent of the Company's common stock and acquired the remaining 3 percent on
F-69
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 2Privatization (Continued)
November 4, 2008. The difference in the fair value between these dates was deemed to be immaterial. Accordingly, the Company recorded all fair value adjustments on October 1, 2008.
The fair value adjustment of the Company's assets and liabilities was required to reflect only the proportionate incremental percentage of shares acquired by BTMU in the privatization transaction, which was 35.58 percent. Therefore, the historical book value of the Company's tangible assets and liabilities plus 35.58 percent of the differential between the fair value and the book value of such assets and liabilities as of October 1, 2008 was reflected on the Company's consolidated balance sheet.
In addition, certain new identifiable intangible assets, such as customer relationships, customer deposit intangibles (CDI) and trade name, have been recorded at 35.58 percent of their estimated fair value at October 1, 2008. After all of the fair value adjustments to the Company's assets and liabilities were assigned, the remainder of the purchase price was recorded as goodwill. None of the fair value adjustments are deductible for tax purposes. However, purchase accounting allows for the establishment of deferred tax liabilities on intangibles (other than goodwill), which will be reflected as a tax benefit on the Company's future consolidated statements of income in proportion to and over the amortization period of the related intangible asset.
Goodwill previously recorded by BTMU, which totaled $335 million, was pushed down to the Company's consolidated balance sheet as part of the privatization transaction. In addition, CDI totaling $92 million and a fair value adjustment to loans of negative $15 million, which were previously recorded by BTMU, had also been pushed down to the Company's consolidated balance sheet.
The following table summarizes the purchase price and the computation of goodwill as of October 1, 2008:
(Dollars in millions, except per share amount) | |
|||
---|---|---|---|---|
Shares purchased by BTMU |
49,904,762 | |||
Offer price |
$ | 73.50 | ||
Purchase price |
3,668 | |||
Capitalized acquisition costs |
15 | |||
Total |
$ | 3,683 | ||
Stockholder's equity as of September 30, 2008 |
$ |
4,693 |
||
Minority interest ratio |
35.58 | % | ||
Minority interest as of September 30, 2008 |
1,670 | |||
Other adjustment |
8 | |||
Minority interest acquired by BTMU |
1,678 | |||
Goodwill |
2,005 |
|||
Fair value adjustments |
(326 |
) |
||
Goodwill pushed-down from BTMU |
335 |
|||
Total goodwill recorded |
$ |
2,014 |
||
F-70
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 2Privatization (Continued)
The following table summarizes the allocation of goodwill by operating business segments as of October 1, 2008:
(Dollars in millions) | |
|||
---|---|---|---|---|
Retail Banking |
$ | 954 | ||
Corporate Banking |
1,046 | |||
Other |
14 | |||
Total |
$ | 2,014 | ||
Management estimated the fair value of its assets and liabilities as of October 1, 2008. Among the balances adjusted were identifiable assets related to loans, leases and premises and equipment, and liabilities related to debt.
The following table summarizes the adjusted balance sheet as of October 1, 2008:
(Dollars in millions) | |
|||
---|---|---|---|---|
Assets |
||||
Total cash and cash equivalents |
$ |
2,464 |
||
Trading account assets |
729 | |||
Securities available for sale |
8,295 | |||
Loans (net of allowance for loan losses) |
47,437 | |||
Due from customers on acceptances |
22 | |||
Premises and equipment, net |
657 | |||
Intangible assets |
756 | |||
Goodwill |
2,369 | |||
Other assets |
2,528 | |||
Assets of discontinued operations to be disposed or sold |
5 | |||
Total assets |
$ | 65,262 | ||
Liabilities |
||||
Total deposits |
$ |
42,356 |
||
Federal funds purchased and securities sold under repurchase agreements |
1,760 | |||
Commercial paper |
1,660 | |||
Other borrowed funds |
6,719 | |||
Trading account liabilities |
507 | |||
Acceptances outstanding |
22 | |||
Other liabilities |
1,319 | |||
Medium- and long-term debt |
3,803 | |||
Junior subordinated debt payable to subsidiary grantor trust |
14 | |||
Liabilities of discontinued operations to be extinguished or assumed |
22 | |||
Total liabilities |
58,182 | |||
Total stockholder's equity |
7,080 | |||
Total liabilities and stockholder's equity |
$ | 65,262 | ||
F-71
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 2Privatization (Continued)
The Company assigned amounts to intangible assets at October 1, 2008 as follows:
(Dollars in millions) | Fair Value at October 1, 2008 |
Life (years) | |||||
---|---|---|---|---|---|---|---|
Core deposit intangibles |
$ | 484 | 10 | ||||
Customer relationships |
57 | 22 | |||||
Trade name |
109 | 40 | |||||
Other |
10 | 7 | |||||
Total |
$ | 660 | |||||
The Company recorded amortization (accretion) of the fair value adjustments by category for the years ended December 31, 2008 and 2009 as follows:
|
For the year ended December 31, |
||||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2008 | 2009 | |||||
Securities |
$ | (3,258 | ) | $ | (31,984 | ) | |
Loans |
(14,350 | ) | (92,885 | ) | |||
Cash flow hedges |
4,141 | 13,088 | |||||
Premises and equipment |
2,119 | 6,390 | |||||
Intangible assets |
42,254 | 160,338 | |||||
Long-term debt |
1,113 | 3,640 | |||||
Total amortization |
$ | 32,019 | $ | 58,587 | |||
The Company recorded expenses for the privatization transaction for the years ended December 31, 2008 and 2009 as follows:
|
For the year ended December 31, |
||||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2008 | 2009 | |||||
Salaries and employee benefits(1) |
$ | 65,047 | $ | 44,380 | |||
Professional services |
22,029 | 1,502 | |||||
Other |
3,429 | | |||||
Total |
$ | 90,505 | $ | 45,882 | |||
- (1)
- Includes $47.3 million for the acceleration of stock compensation at December 31, 2008, and $17.7 million and $44.4 million for the amortization of the bridge award compensation at December 31, 2008 and 2009, respectively.
As part of the Merger Agreement, all outstanding stock options, performance share units, restricted stock units and stock units were cancelled and settled or will be settled in cash, and all unvested restricted stock awards vested. The unamortized expense for stock options, performance share units and restricted stock units was accelerated in 2008. The amounts that were settled for stock options, performance share units, restricted stock units and stock units were recorded as a reduction to additional paid-in capital of $203.6 million. The acceleration and vesting of these awards resulted in stock-based compensation expense of $47.3 million in 2008.
F-72
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 2Privatization (Continued)
Additionally, as part of the Merger Agreement, certain officers and other employees of the Company were granted bridge compensation awards, which vest over the interim period during which no long-term incentive compensation awards are in place up to April 2011. The total amount awarded was $71.8 million, and $17.7 million and $44.4 million were amortized and recorded as compensation expense in 2008 and 2009, respectively.
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below.
Securities Available for Sale
|
December 31, | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2007 | 2008 | 2009 | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Amortized Cost(1) |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | Amortized Cost(1) |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||||||||||
U.S. Treasury |
$ | 1,008 | $ | | $ | | $ | | $ | | $ | 299,488 | $ | 189 | $ | | $ | 299,677 | |||||||||||
Other U.S. government |
712,108 | 761,000 | 17,988 | | 778,988 | 12,311,626 | 13,165 | 47,373 | 12,277,418 | ||||||||||||||||||||
Residential mortgage-backed securitiesagency |
4,964,370 | 5,371,181 | 87,803 | 12,038 | 5,446,946 | 9,215,771 | 171,513 | 25,161 | 9,362,123 | ||||||||||||||||||||
Residential mortgage-backed securitiesnon-agency |
757,609 | 639,679 | | 124,592 | 515,087 | 454,646 | 36 | 63,243 | 391,439 | ||||||||||||||||||||
State and municipal |
56,756 | 52,749 | 2,185 | 87 | 54,847 | 43,287 | 1,830 | 21 | 45,096 | ||||||||||||||||||||
Asset-backed and debt securities |
1,948,855 | 1,837,287 | 48,921 | 597,310 | 1,288,898 | 112,609 | 1,598 | 6,072 | 108,135 | ||||||||||||||||||||
Equity securities |
13,061 | 109,919 | 126 | 355 | 109,690 | 74,791 | 441 | 291 | 74,941 | ||||||||||||||||||||
Foreign securities |
1,393 | 82 | | | 82 | | | | | ||||||||||||||||||||
Total securities available for sale |
$ | 8,455,160 | $ | 8,771,897 | $ | 157,023 | $ | 734,382 | $ | 8,194,538 | $ | 22,512,218 | $ | 188,772 | $ | 142,161 | $ | 22,558,829 | |||||||||||
Securities Held to Maturity
|
December 31, 2009 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Recognized in Other Comprehensive Income (OCI)(2) |
|
Not recognized in OCI(2) |
|
||||||||||||||||||
(Dollars in thousands) | Amortized Cost(1) |
Gross Unrealized Gains |
Gross Unrealized Losses |
Carrying Value |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||||||
CLOs |
$ | 1,758,716 | $ | | $ | 531,094 | $ | 1,227,622 | $ | 231,135 | $ | 1,199 | $ | 1,457,558 | |||||||||
Foreign securities |
96 | | | 96 | | | 96 | ||||||||||||||||
Total securities held to maturity |
$ | 1,758,812 | $ | | $ | 531,094 | $ | 1,227,718 | $ | 231,135 | $ | 1,199 | $ | 1,457,654 | |||||||||
- (1)
- Amortized
cost has been updated to reflect fair value adjustments as a result of the Company's privatization. Refer to Note 2 to these
consolidated financial statements for further detail.
- (2)
- The amount recognized in OCI reflects the unrealized loss at date of transfer to the held to maturity classification, net of amortization, while the amount not recognized in OCI reflects the incremental change in value after such transfer.
For the years ended December 31, 2007, 2008 and 2009, interest income included $2.9 million, $5.9 million and $4.1 million, respectively, from non-taxable securities.
F-73
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 3Securities (Continued)
Transfer of Securities from Available for Sale to Held to Maturity
The Company's CLOs consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. During the first quarter of 2009, management reassessed the classification of its CLOs. On February 28, 2009, the Company reclassified its CLOs, which totaled $1.1 billion at fair value, from available for sale to held to maturity. The related unrealized pre-tax loss of $589 million included in accumulated OCI at the date of reclassification remained in OCI and is being amortized as a yield adjustment through earnings over the remaining terms of the CLOs. However, there is no impact on earnings, as an equal fair value discount on the securities is being accreted through earnings over the remaining terms of the CLOs. No gain or loss was recognized at the time of reclassification. Accordingly, no change was recorded in the amortized cost basis of the securities as a result of the transfer. The Company considers the held to maturity classification to be more appropriate because the Company has the ability and the intent to hold these securities to maturity.
The amortized cost and fair value of securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
Maturity Schedule of Securities
Securities Available for Sale(1)
|
December 31, 2009 | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Amortized Cost |
Fair Value |
||||||
Due in one year or less |
$ | 3,801,365 | $ | 3,804,260 | ||||
Due after one year through five years |
9,154,829 | 9,124,894 | ||||||
Due after five years through ten years |
1,487,402 | 1,526,028 | ||||||
Due after ten years |
7,993,831 | 8,028,706 | ||||||
Equity securities(2) |
74,791 | 74,941 | ||||||
Total securities available for sale |
$ | 22,512,218 | $ | 22,558,829 | ||||
Securities Held to Maturity
|
December 31, 2009 | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Amortized Cost(3) |
Fair Value |
||||||
Due in one year or less |
$ | 96 | $ | 96 | ||||
Due after one year through five years |
9,941 | 8,603 | ||||||
Due after five years through ten years |
1,364,314 | 1,158,042 | ||||||
Due after ten years |
384,461 | 290,913 | ||||||
Total securities held to maturity |
$ | 1,758,812 | $ | 1,457,654 | ||||
- (1)
- The
remaining contractual maturities of mortgage-backed securities are classified without regard to prepayments. The contractual maturity of
these securities is not a reliable indicator of their expected life since borrowers have the right to repay their obligations at any time.
- (2)
- Equity
securities do not have a stated maturity.
- (3)
- Amortized cost reflects fair value adjustments as a result of the Company's privatization. Refer to Note 2 to these condensed consolidated financial statements.
F-74
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 3Securities (Continued)
The proceeds from sales of securities, gross realized gains and gross realized losses are shown below.
Securities
|
December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2007 | 2008 | 2009 | |||||||
Proceeds from sales |
$ | 352,568 | $ | 14,647 | $ | 5,295,472 | ||||
Gross realized gains |
1,608 | 74 | 27,491 | |||||||
Gross realized losses |
| 30 | 42 |
Analysis of Unrealized Losses on Securities
At December 31, 2008 and 2009, the Company's securities available for sale, shown below, were in a continuous unrealized loss position for the periods less than 12 months and 12 months or more.
Securities Available for Sale
|
December 31, 2008 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | ||||||||||||||||||||
Residential mortgage-backed securitiesagency |
$ | 188,741 | $ | 2,035 | 25 | $ | 607,171 | $ | 10,003 | 84 | $ | 795,912 | $ | 12,038 | 109 | ||||||||||||||
Residential mortgage-backed securitiesnon-agency |
331,123 | 52,533 | 10 | 183,964 | 72,059 | 9 | $ | 515,087 | $ | 124,592 | 19 | ||||||||||||||||||
State and municipal |
3,242 | 74 | 5 | 1,669 | 13 | 7 | 4,911 | 87 | 12 | ||||||||||||||||||||
Asset-backed and debt securities |
38,221 | 9,261 | 3 | 1,088,480 | 588,049 | 218 | 1,126,701 | 597,310 | 221 | ||||||||||||||||||||
Equity securities |
5,085 | 355 | 3 | | | | 5,085 | 355 | 3 | ||||||||||||||||||||
Total securities available for sale |
$ | 566,412 | $ | 64,258 | 46 | $ | 1,881,284 | $ | 670,124 | 318 | $ | 2,447,696 | $ | 734,382 | 364 | ||||||||||||||
|
December 31, 2009 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | ||||||||||||||||||||
Other U.S. government |
$ | 8,682,501 | $ | 47,373 | 106 | $ | | $ | | | $ | 8,682,501 | $ | 47,373 | 106 | ||||||||||||||
Residential mortgage-backed securitiesagency |
2,928,456 | 24,628 | 61 | 232,670 | 533 | 28 | 3,161,126 | 25,161 | 89 | ||||||||||||||||||||
Residential mortgage-backed securitiesnon-agency |
| | | 362,471 | 63,243 | 17 | 362,471 | 63,243 | 17 | ||||||||||||||||||||
State and municipal |
760 | 1 | 2 | 1,498 | 20 | 6 | 2,258 | 21 | 8 | ||||||||||||||||||||
Asset-backed and debt securities |
27,325 | 2,218 | 3 | 62,427 | 3,853 | 9 | 89,752 | 6,072 | 12 | ||||||||||||||||||||
Equity securities |
| | | 164 | 291 | 2 | 164 | 291 | 2 | ||||||||||||||||||||
Total securities available for sale |
$ | 11,639,042 | $ | 74,220 | 172 | $ | 659,230 | $ | 67,940 | 62 | $ | 12,298,272 | $ | 142,161 | 234 | ||||||||||||||
F-75
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 3Securities (Continued)
Securities Held to Maturity
|
December 31, 2009 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | ||||||||||||||||||||
CLOs |
$ | 103,921 | $ | 26,412 | 21 | $ | 1,353,637 | $ | 505,881 | 201 | $ | 1,457,558 | $ | 532,293 | 222 | ||||||||||||||
Total securities held to maturity |
$ | 103,921 | $ | 26,412 | 21 | $ | 1,353,637 | $ | 505,881 | 201 | $ | 1,457,558 | $ | 532,293 | 222 | ||||||||||||||
The Company's securities are primarily investments in debt securities. Debt securities available for sale and debt securities held to maturity are subject to quarterly impairment testing when a security's fair value is lower than its amortized cost. Debt securities with unrealized losses are considered other-than-temporarily impaired if the Company intends to sell the security, if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the entire amortized cost basis of the security. Any impairment on securities the Company intends, or is more likely than not required, to sell is recognized in earnings as the entire difference between the amortized cost and its fair value. Any impairment on securities the Company does not intend or it is not more likely than not required to sell before recovery is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. The credit loss is measured as the difference between the present value of expected cash flows, discounted using the security's effective interest rate, and the amortized cost of the security.
The following describes the nature of the Company's investments, the causes of impairment, the severity and duration of the impairment, if applicable, and the conclusions reached on the temporary or other-than-temporary status of the unrealized losses.
At December 31, 2009, the Company did not have the intent to sell temporarily impaired securities until a recovery of the fair value, which may be maturity, and it is more likely than not that the Company will not have to sell the securities prior to recovery of fair value.
Other U.S. Government Securities
Other U.S. Government securities are securities issued by one of the several Government-Sponsored Enterprises (GSEs) such as Fannie Mae, Freddie Mac, Federal Home Loan Banks or Federal Farm Credit Banks. They are not backed by the full faith and credit of the United States government. These securities are issued with a stated interest rate and mature in less than five years. The unrealized losses on other U.S. Government securities resulted from higher interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than-temporarily impaired at December 31, 2009.
Residential Mortgage-Backed SecuritiesAgency
Agency residential mortgage-backed securities consist of securities guaranteed by a GSE such as Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on agency residential mortgage-backed securities resulted from higher interest rates subsequent to purchase and not credit quality. As a result, the securities were not other-than-temporarily impaired at December 31, 2009.
F-76
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 3Securities (Continued)
Residential Mortgage-Backed SecuritiesNon-Agency
Non-agency residential mortgage backed securities are issued by financial institutions with no guarantee from GSEs. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The securities are primarily rated investment grade. The unrealized losses on non-agency residential mortgage-backed securities resulted from declining credit quality of underlying collateral and additional credit spreads widening since purchase. The Company estimated loss projections for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral provided by a third-party vendor using industry consensus estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Based on this assessment of expected credit losses of each security, the Company concluded these securities were not other-than-temporarily impaired at December 31, 2009.
State and Municipal Securities
State and municipal securities are primarily securities issued by state and local governments to finance operating expenses and various projects. These securities are issued at a stated interest rate and have varying expected maturities ranging up to 30 years. The unrealized losses on the state and municipal securities resulted from higher interest rates subsequent to purchase and not from credit quality. As a result, the securities were not other-than-temporarily impaired at December 31, 2009.
Asset-Backed and Debt Securities
Asset-backed and debt securities in a loss position at December 31, 2009 consist of $83.3 million in privately placed debt securities issued by power and utilities companies and $6.4 million in commercial mortgage-backed securities. Expected cash flows of debt securities to power and utilities companies are assessed to determine if the amortized cost basis of the securities is recoverable. Based on this assessment, the Company concluded that these securities were not other-than-temporarily impaired as of December 31, 2009.
Collateralized Loan Obligations
CLOs are classified as held to maturity (see discussion above). Certain of these CLOs are highly illiquid securities for which fair values are difficult to obtain. Unrealized losses arise from widening credit spreads, credit quality of the underlying collateral, uncertainty regarding the valuation of such securities and the market's opinion of the performance of the fund managers. Cash flow analysis of the underlying collateral provides an estimate of other-than-temporary impairment, which is performed quarterly when the fair value of a security is lower than its amortized cost. Any security with a change in credit rating is also subject to cash flow analysis to determine whether or not an other-than-temporary impairment exists. The fair value of the CLO portfolio was adversely impacted in 2008 and 2009 by the overall financial market crisis. Although none of the CLOs in the Company's portfolio contain subprime loan assets, widening credit spreads caused their value to decline. An analysis was performed as of December 31, 2009 to determine whether any of the unrealized losses related to CLOs was believed to be other-than-temporary. Based on this analysis, an insignificant amount of impairment was recognized on two CLO securities during 2009. Since no observable credit quality issues were present in the remaining CLO portfolio at December 31, 2009, the Company concluded that these securities were not other-than-temporarily impaired.
F-77
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 3Securities (Continued)
Securities Pledged as Collateral
Transactions involving purchases of securities under agreements to resell (reverse repurchase agreements or reverse repos) or sales of securities under agreements to repurchase (repurchase agreements or repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell (or purchase) the same or substantially the same securities before maturity at a fixed or determinable price. The Company's policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
The Company reports securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. Trading and available for sale securities pledged as collateral, which totaled $15.2 million and $2.5 million, respectively, at December 31, 2009, have been separately identified on the consolidated balance sheet. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At December 31, 2009, the Company had $5.9 billion of securities available for sale pledged as collateral where the secured party cannot resell or repledge such securities. These available for sale securities have been pledged to secure borrowings ($0.4 billion), to support unrealized losses on derivative transactions reported in trading liabilities ($0.3 billion) and to secure public and trust department deposits ($5.2 billion).
At December 31, 2008, the Company did not accept any securities as collateral that it is permitted by contract to sell or repledge. At December 31, 2009, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $442.6 million ($434.6 million of which has been repledged to secure public agency or bankruptcy deposits and to cover short sells.) These securities were received as collateral for secured lending and to obtain qualified securities to meet the Company's collateral needs.
F-78
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 4Loans and Allowance for Loan Losses
A summary of loans, net of unearned interest and fees (costs) of $14 million and $53 million, at December 31, 2008 and 2009, respectively, is as follows:
|
December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2008 | 2009 | ||||||||
Commercial, financial and industrial(1) |
$ | 18,469,023 | $ | 15,258,081 | ||||||
Construction |
2,744,062 | 2,429,009 | ||||||||
Mortgage: |
||||||||||
Residential |
15,880,835 | 16,716,048 | ||||||||
Commercial |
8,186,388 | 8,245,778 | ||||||||
Total mortgage |
24,067,223 | 24,961,826 | ||||||||
Consumer: |
||||||||||
Installment |
2,201,602 | 2,244,239 | ||||||||
Revolving lines of credit |
1,435,494 | 1,672,842 | ||||||||
Total consumer |
3,637,096 | 3,917,081 | ||||||||
Lease financing |
645,765 | 653,743 | ||||||||
Total loans held for investment |
49,563,169 | 47,219,740 | ||||||||
Total loans held for sale |
22,381 | 8,768 | ||||||||
Total loans |
49,585,550 | 47,228,508 | ||||||||
Allowance for loan losses |
737,767 | 1,357,000 | ||||||||
Loans, net |
$ | 48,847,783 | $ | 45,871,508 | ||||||
- (1)
- Included in commercial, financial and industrial loans at December 31, 2008 and 2009 were overdrafts from various deposit accounts of $68.6 million and $25.5 million, respectively.
Changes in the allowance for loan losses were as follows:
|
Years Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2007 | 2008 | 2009 | |||||||
Balance, beginning of year |
$ | 331,077 | $ | 402,726 | $ | 737,767 | ||||
Loans charged off |
18,604 | 177,282 | 532,024 | |||||||
Recoveries of loans previously charged off |
8,489 | 7,321 | 32,614 | |||||||
Total net loans charged off |
10,115 | 169,961 | 499,410 | |||||||
Provision for allowance for loan losses |
81,000 | 515,000 | 1,114,000 | |||||||
Privatizationadjustment for impaired loans |
| (8,417 | ) | 2,062 | ||||||
Foreign translation adjustment |
764 | (1,581 | ) | 2,581 | ||||||
Ending balance of allowance for loan losses |
402,726 | 737,767 | 1,357,000 | |||||||
Allowance for off-balance sheet commitment losses |
90,374 | 125,374 | 176,374 | |||||||
Allowances for credit losses balance, end of year |
$ | 493,100 | $ | 863,141 | $ | 1,533,374 | ||||
The provision for loan losses increased by $599 million to $1.1 billion in 2009 from $515 million in 2008, primarily due to higher criticized assets, especially in the commercial real estate portfolio, higher
F-79
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 4Loans and Allowance for Loan Losses (Continued)
nonaccrual loans, increased uncertainty related to the timing and severity of losses to be realized in the commercial real estate portfolio and increases in loss factors related to several portfolio sectors, including the consumer and small business portfolios.
Nonaccrual loans totaled $415.0 million and $1.3 billion at December 31, 2008 and 2009, respectively. There were $1 million and $20.8 million (none and $3.8 million of which were on accrual status at December 31, 2008 and 2009, respectively) of troubled debt restructured loans (TDRs) at December 31, 2008 and 2009, respectively. Effective January 1, 2009, consumer home equity loans and one-to-four single family residential loans were placed on nonaccrual status when these loans are delinquent 90 days or more, or in foreclosure. Previously, these loans were not placed on nonaccrual status. However, before and after this nonaccrual accounting policy change, the loss content was charged off on or before the loans were 180 days past due. As a result of this nonaccrual accounting policy change, home equity and one-to-four family residential loans totaling $225.3 million ($10.3 million of which are restructured loans) have been placed on nonaccrual status as of December 31, 2009. Loans 90 days past due and still accruing totaled $70.7 million and $5.0 million at December 31, 2008 and 2009, respectively.
Loan Impairment
Impaired loans include commercial, financial and industrial, construction, commercial mortgage, residential mortgage and consumer loans designated as nonaccrual. When the value of an impaired loan is less than the recorded investment in the loan, a portion of the Company's allowance for loan losses is allocated as an impairment allowance.
The Company's policy for recognition of interest income, charge offs of loans, and application of payments on impaired loans is the same as the policy applied to nonaccrual loans.
The following table sets forth information about the Company's impaired loans.
|
December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2007 | 2008 | 2009 | ||||||||
Impaired loans with an allowance |
$ | 55,522 | $ | 410,494 | $ | 1,266,253 | |||||
Impaired loans without an allowance(1) |
208 | 5,807 | 50,878 | ||||||||
Total impaired loans(2) |
$ | 55,730 | $ | 416,301 | $ | 1,317,131 | |||||
Allowance for impaired loans |
$ | 11,250 | $ | 106,835 | $ | 223,080 | |||||
Average balance of impaired loans during the year |
$ | 40,460 | $ | 262,722 | $ | 1,139,195 | |||||
Interest income recognized on loans in nonaccrual status during the year |
$ | 3,912 | $ | 4,315 | $ | 9,704 |
- (1)
- These
loans do not require an allowance for credit losses since the fair values of the impaired loans equal or exceed the recorded
investments in the loans. Included in this category was $1 million of nonperforming TDRs at December 31, 2008.
- (2)
- Total impaired loans were evaluated for impairment using four measurement methods as follows: $41 million, $324 million and $175 million were evaluated using the present value of the expected future cash flows at December 31, 2007, 2008 and 2009, respectively; $0 million, $3 million and $675 million were evaluated using the fair value of the collateral at December 31, 2007, 2008 and 2009, respectively; $15 million, $89 million and $447 million were evaluated using historical loss factors at December 31, 2007, 2008 and 2009, respectively; and $0 million, $0 million and $3 million were evaluated based on the observable market for the indebtedness at December 31, 2007, 2008 and 2009, respectively.
F-80
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 4Loans and Allowance for Loan Losses (Continued)
Related Party Loans
In some cases, the Company makes loans to related parties including its directors, executive officers, and their affiliated companies. Such loans are recorded in loans on the consolidated balance sheet. Related party loans outstanding to individuals who served as directors or executive officers and their affiliated companies at anytime during the year totaled $17 million and $7 million at December 31, 2008 and 2009, respectively. In the opinion of management, these related party loans were made on substantially the same terms, including interest rates and collateral requirements, as those terms prevailing in the market at the date these loans were made. During 2008 and 2009, there were no loans to related parties that were charged off. Additionally, at December 31, 2008 and 2009, there were no loans to related parties that were nonperforming.
During 2008, the Company extended credit to BTMU, in the form of overdrafts in BTMU's accounts with the Company in the ordinary course of business. There were no overdraft balances outstanding as of December 31, 2008 and 2009.
Note 5Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill, which is reported on a continuing operations basis, during 2007, 2008 and 2009, are shown in the table below.
As part of the Company's privatization transaction, $2.0 billion of goodwill was recorded on October 1, 2008. For further information, see Note 2 to these consolidated financial statements.
(Dollars in thousands) | 2007 | 2008 | 2009 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Goodwill, beginning of year |
$ | 360,058 | $ | 355,287 | $ | 2,369,326 | |||||
Adjustment of goodwill related to retirement recordkeeping business sale |
(4,771 | ) | | | |||||||
Goodwill related to privatization transaction |
| 2,014,039 | | ||||||||
Goodwill, end of year |
$ | 355,287 | $ | 2,369,326 | $ | 2,369,326 | |||||
Goodwill by reportable business segment: |
|||||||||||
Retail Banking |
$ | 198,965 | $ | 1,152,648 | $ | 1,152,648 | |||||
Corporate Banking |
156,322 | 1,216,678 | 1,216,678 | ||||||||
Goodwill, end of year |
$ | 355,287 | $ | 2,369,326 | $ | 2,369,326 | |||||
The Company reviews its goodwill for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The annual goodwill impairment test as of January 1, 2009 was performed during the first quarter of 2009, and no impairment was recognized.
During the second quarter of 2009, the Company changed the date of its annual goodwill impairment test from January 1st to April 1st. The change was made to more closely align the impairment testing date with the testing date used by BTMU, as the Company became a wholly owned subsidiary of BTMU in the fourth quarter of 2008.
F-81
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 5Goodwill and Other Intangible Assets (Continued)
The change in goodwill impairment testing date was deemed a change in accounting principle. Management believes that the change in accounting principle will not delay, accelerate, or avoid a goodwill impairment charge. Management determined that the change in accounting principle is preferable under the circumstances and does not result in adjustments to the Company's financial statements when applied retrospectively.
In order to transition to the new annual goodwill impairment test date and to ensure that no more than twelve months elapse before the next annual goodwill impairment test is performed, goodwill impairment testing as of April 1, 2009 was performed during the second quarter of 2009. No impairment was recognized.
Intangible Assets
The table below reflects the Company's identifiable intangible assets and accumulated amortization at December 31, 2008 and 2009.
As part of the privatization transaction, the Company recorded $752 million of intangible assets (CDI of $576 million, trade name of $109 million, customer relationships of $57 million and other of $10 million) on October 1, 2008. For further information, see Note 2 to these consolidated financial statements.
|
December 31, 2008 | December 31, 2009 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in thousands | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||
Core deposit intangibles |
$ | 619,398 | $ | (79,585 | ) | $ | 539,813 | $ | 619,398 | $ | (233,042 | ) | $ | 386,356 | |||||
Trade name |
108,733 | (683 | ) | 108,050 | 108,733 | (3,430 | ) | 105,303 | |||||||||||
Customer relationships |
53,761 | (1,323 | ) | 52,438 | 53,761 | (5,531 | ) | 48,230 | |||||||||||
Other |
9,555 | | 9,555 | 9,555 | (1,498 | ) | 8,057 | ||||||||||||
Subtotalintangibles with a definite useful life |
$ | 791,447 | $ | (81,591 | ) | $ | 709,856 | $ | 791,447 | $ | (243,501 | ) | $ | 547,946 | |||||
Other intangibles with an indefinite useful life |
3,629 | | 3,629 | 13,094 | | 13,094 | |||||||||||||
Total intangibles |
$ | 795,076 | $ | (81,591 | ) | $ | 713,485 | $ | 804,541 | $ | (243,501 | ) | $ | 561,040 | |||||
Total amortization expense on for 2007, 2008 and 2009 was $4.5 million, $44.9 million and $161.9 million, respectively.
F-82
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 5Goodwill and Other Intangible Assets (Continued)
Estimated future amortization expense on a continuing operations basis at December 31, 2009 is as follows.
(Dollars in thousands) | Core Deposit Intangibles (CDI) |
Trade Name | Customer Relationships |
Other | Total Identifiable Intangible Assets |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years ending December 31, : |
||||||||||||||||||
2010 |
$ | 114,029 | $ | 2,747 | $ | 4,246 | $ | 1,488 | $ | 122,510 | ||||||||
2011 |
88,015 | 2,747 | 3,968 | 1,322 | 96,052 | |||||||||||||
2012 |
69,260 | 2,747 | 3,679 | 873 | 76,559 | |||||||||||||
2013 |
44,743 | 2,747 | 3,436 | 852 | 51,778 | |||||||||||||
2014 |
31,803 | 2,747 | 3,232 | 712 | 38,494 | |||||||||||||
Thereafter |
38,506 | 91,568 | 29,669 | 2,810 | 162,553 | |||||||||||||
Total estimated amortization expense |
$ | 386,356 | $ | 105,303 | $ | 48,230 | $ | 8,057 | $ | 547,946 | ||||||||
Premises and equipment are carried at cost, less accumulated depreciation and amortization. Software in development is included in other assets. As of December 31, 2008 and 2009, the amounts were as follows:
|
December 31, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | ||||||||||||||||||
(Dollars in thousands) | Cost(1) | Accumulated Depreciation and Amortization |
Net Book Value(1) |
Cost(1) | Accumulated Depreciation and Amortization |
Net Book Value(1) |
||||||||||||||
Land |
$ | 133,965 | $ | | $ | 133,965 | $ | 134,286 | $ | | $ | 134,286 | ||||||||
Premises |
601,088 | 276,476 | 324,612 | 605,822 | 307,204 | 298,618 | ||||||||||||||
Leasehold improvements |
267,739 | 173,277 | 94,462 | 286,482 | 189,967 | 96,515 | ||||||||||||||
Furniture, fixtures and equipment |
656,813 | 529,848 | 126,965 | 694,400 | 549,521 | 144,879 | ||||||||||||||
Total |
$ | 1,659,605 | $ | 979,601 | $ | 680,004 | $ | 1,720,990 | $ | 1,046,692 | $ | 674,298 | ||||||||
- (1)
- Cost has been updated to reflect fair value adjustments as a result of the Company's privatization.
Please see Note 2 to these consolidated financial statements for further detail.
F-83
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 6Premises and Equipment (Continued)
Rental, depreciation and amortization expenses were as follows:
|
Years ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2007 | 2008 | 2009 | |||||||
Rental expense of premises |
$ | 54,534 | $ | 59,055 | $ | 68,532 | ||||
Less: rental income |
10,367 | 11,415 | 11,719 | |||||||
Net rental expense |
$ | 44,167 | $ | 47,640 | $ | 56,813 | ||||
Other net rental expense, primarily for equipment |
$ | 406 | $ | 414 | $ | 375 | ||||
Depreciation and amortization of premises and equipment |
$ | 83,921 | $ | 88,221 | $ | 96,446 | ||||
Future minimum lease payments at December 31, 2009 are as follows:
(Dollars in thousands) | |
||||
---|---|---|---|---|---|
Years ending December 31,: |
|||||
2010 |
$ | 66,549 | |||
2011 |
60,511 | ||||
2012 |
57,300 | ||||
2013 |
54,410 | ||||
2014 |
47,365 | ||||
Thereafter |
218,169 | ||||
Total minimum operating lease payments |
$ | 504,304 | |||
Minimum rental income due in the future under subleases |
$ | 1,509 | |||
The Company's leases are for land, branch or office space. A majority of the leases provide for the payment of taxes, maintenance, insurance, and certain other expenses applicable to the leased premises. Many of the leases contain extension provisions and escalation clauses. These leases are generally renewable and may in certain cases contain renewal provisions and options to expand or contract space, terminate or purchase the leased premises at predetermined contractual dates. In addition, escalation clauses may exist, which are tied to either a predetermined rate or may change based on a specified percentage increase or the Consumer Price Index.
At December 31, 2008 and 2009, the Company had recorded a liability of $4.3 million, for asset retirement obligations. These obligations include environmental remediation on buildings and the removal of leasehold improvements from leased premises to be vacated. Additional obligations for hazardous material disposal and premise restoration are not estimable due to the uncertainty of disposal or lease termination dates.
F-84
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Private Capital and Other Investments
The following table shows the balances of private capital and other investments at the end of 2008 and 2009.
|
December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2008 | 2009 | |||||||
Private capital and other investments: |
|||||||||
Private capital investmentscost basis |
$ | 153,077 | $ | 119,121 | |||||
Private capital investmentsequity method |
| 46,296 | |||||||
LIHC investmentsguaranteed |
219,851 | 185,779 | |||||||
LIHC investmentsunguaranteed |
329,027 | 319,031 | |||||||
Renewable energy investments |
165,749 | 305,917 | |||||||
Total private capital and other investments |
$ | 867,704 | $ | 976,144 | |||||
The Company invests in private capital funds either directly in privately held companies or indirectly through private equity funds. These investments are accounted for based on the cost or equity method depending on whether the Company has significant influence over the investee. The investments' fair value is estimated when events or conditions indicate that it is probable that the carrying value of the investment will not be fully recovered in the foreseeable future. Fair value is estimated based on the company's business model, current and projected financial performance, liquidity and overall economic and market conditions. As a practical expedient, fair value can also be estimated as the NAV of the fund. If fair value is estimated to be below cost, an evaluation for other-than-temporary impairment is performed. If any of the factors used to determine fair value indicate that a recovery is unlikely or will not occur for a reasonable period of time, an other-than-temporary impairment is recorded. Based on this analysis, the Company recorded $15.5 million of other-than-temporary impairment in 2009 on its private capital investments.
The Company also invests in limited liability partnerships and other entities operating qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. These LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. The unguaranteed LIHC investments are initially recorded at cost, and the carrying value is amortized over the period of available tax credits and tax benefits. As of December 31, 2008 and 2009, this category also includes $43.0 million and $34.8 million, respectively, of investments in real estate private equity funds that are compliant with the Community Reinvestment Acts Standards (CRA investments). These investments are tested annually for impairment. During 2009, the Company recorded $2.3 million and $8.1 million of other-than-temporary impairment on its unguaranteed LIHC and CRA investments, respectively.
The Company also invests in guaranteed LIHC investments where the availability of tax credits are guaranteed by a creditworthy entity. The investments are initially recorded at cost and amortized over the period the tax credits are allocated to provide a constant effective yield. These investments are tested annually for impairment. The Company had no other-than-temporary impairment during the year on its guaranteed LIHC investments.
The Company invests in limited liability partnerships that operate renewable energy projects. Tax credits, taxable income and distributions associated with these renewable energy projects are allocated to investors according to the terms of the partnership agreements. These investments are accounted for under the equity
F-85
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 7Other Assets (Continued)
method, with the initial investment recorded at cost and the carrying value adjusted for the Company's share of partnership net income and distributions received. These investments are tested annually for impairment, based on projected operating results and expected realizability of tax credits. The Company had no other-than-temporary impairment during the year on its renewable energy investments.
Other Real Estate Owned
The Company records foreclosed assets at the lower of cost or fair value, less selling expenses. At December 31, 2008 and 2009, the value of foreclosed assets was $20.2 million and $32.7 million, respectively.
FDIC Insurance
At December 31, 2009, the FDIC insurance prepaid balance was $331.7 million. There was no such balance at December 31, 2008.
At December 31, 2009, the Company had $939.4 million in domestic interest bearing time deposits with a remaining term of greater than one year, of which $487.6 million exceeded $100,000. Maturity information for all domestic interest bearing time deposits with a remaining term of greater than one year is summarized below.
(Dollars in thousands) | December 31, 2009 | ||||
---|---|---|---|---|---|
Due after one year through two years |
$ | 523,257 | |||
Due after two years through three years |
144,071 | ||||
Due after three years through four years |
146,699 | ||||
Due after four years through five years |
118,033 | ||||
Due after five years |
7,376 | ||||
Total |
$ | 939,436 | |||
Note 9Employee Pension and Other Postretirement Benefits
The following information includes both continuing and discontinued operations.
Retirement Plan
The Company maintains the Union Bank Retirement Plan (the Pension Plan), which is a noncontributory qualified defined benefit pension plan covering substantially all of the domestic employees of the Company. The Pension Plan provides retirement benefits based on years of credited service and the final average compensation amount, as defined in the Pension Plan. Employees become eligible for this Plan after one year of service and become fully vested after five years of service. The Company's funding policy is to make contributions between the minimum required and the maximum deductible amount as allowed by the Internal Revenue Code. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future.
F-86
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 9Employee Pension and Other Postretirement Benefits (Continued)
Other Postretirement Benefits
General
The Company maintains the Union Bank Employee Health Benefit Plan, which is a qualified plan and in part provides certain healthcare benefits for its retired employees and life insurance benefits for those employees who retired prior to January 1, 2001, which together are presented as "Other Benefits." The healthcare cost is shared between the Company and the retiree. The life insurance plan is noncontributory. The accounting for the Other Benefits Plan anticipates future cost-sharing changes that are consistent with the Company's intent to maintain a level of cost-sharing at approximately 25 to 50 percent, depending on the retiree's age and length of service with the Company. Assets set aside to cover such obligations are primarily invested in mutual funds and insurance contracts.
The following table sets forth the fair value of the assets in the Company's pension plan and other benefit plan as of December 31, 2008 and 2009.
|
Pension Plan | Other Benefits Plan | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31, | Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2008 | 2009 | 2008 | 2009 | |||||||||
Change in plan assets |
|||||||||||||
Fair value of plan assets, beginning of year |
$ | 1,744,500 | $ | 1,209,291 | $ | 173,603 | $ | 125,052 | |||||
Actual return on plan assets |
(356,352 | ) | 266,974 | (32,538 | ) | 31,117 | |||||||
Fair value adjustment amount related to the Company's privatization |
(133,803 | ) | | (13,480 | ) | | |||||||
Employer contributions |
| 100,000 | 8,831 | 11,933 | |||||||||
Plan participants' contributions |
| | 4,239 | 4,361 | |||||||||
Benefits paid |
(45,054 | ) | (48,963 | ) | (15,603 | ) | (17,847 | ) | |||||
Fair value of plan assets, end of year |
$ | 1,209,291 | $ | 1,527,302 | $ | 125,052 | $ | 154,616 | |||||
The investment objective for the Company's Pension Plan and Other Benefits Plan is to maximize total return within reasonable and prudent levels of risk. The Plans' asset allocation strategy is the principal determinant in achieving expected investment returns on the Plans' assets. The asset allocation strategy favors equities, with a target allocation of 65 percent in equity securities, 25 percent in debt securities, and 10 percent in real estate investments. Additionally, the Other Benefit Plan holds investments in an insurance contract with Hartford Life that is separate from the target allocation. Actual asset allocations may fluctuate within acceptable ranges due to market value variability. If market fluctuations cause an asset class to fall outside of its strategic asset allocation range, the portfolio will be rebalanced as appropriate. A core equity position of domestic large cap and small cap stocks will be maintained, in conjunction with a diversified portfolio of international equities and fixed income securities. Plan asset performance is compared against established indices and peer groups to evaluate whether the risk associated with the portfolio is appropriate for the level of return.
The Company periodically reviews the Plans' strategic asset allocation policy and the expected long-term rate of return for plan assets. The investment return volatility of different asset classes and the liability structure of the plans are evaluated to determine whether adjustments are required to the Plans' strategic asset allocation policy, taking into account the principles established in the Company's funding policy. Management periodically reviews and adjusts the long-term rate of return on assets assumption for the Plans based on the expected long-term rate of return for the asset classes and their weightings in the Plans' strategic asset
F-87
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 9Employee Pension and Other Postretirement Benefits (Continued)
allocation policy and taking into account the prevailing economic and regulatory climate and practices of other companies both within and outside our industry.
The following table provides the fair value by level within the fair value hierarchy of the Company's period-end assets by major asset category for the Pension Plan and Other Benefits Plan. For information about the fair value hierarchy levels, refer to Note 17. The Plans do not hold any equity or debt securities issued by the Company or any related parties.
|
December 31, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||
Pension Plan Investments: |
|||||||||||||
Money market funds |
$ |
12,110 |
$ |
|
$ |
|
$ |
12,110 |
|||||
U.S. Government securities |
41,182 | | | 41,182 | |||||||||
Corporate bonds |
| 161,224 | | 161,224 | |||||||||
Equity securities |
144,240 | | | 144,240 | |||||||||
Real estate funds |
| | 52,488 | 52,488 | |||||||||
Limited partnerships |
| 97,201 | | 97,201 | |||||||||
Common collective funds |
| 336,620 | | 336,620 | |||||||||
Mutual funds |
680,653 | | | 680,653 | |||||||||
Other |
| 584 | 1,000 | 1,584 | |||||||||
Total Plan Investments |
$ | 878,185 | $ | 595,629 | $ | 53,488 | $ | 1,527,302 | |||||
|
Level 3 Assets for year ended December 31, 2009 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Real Estate Funds | Other | Total | |||||||
Beginning balanceJanuary 1, 2009 |
$ | 79,579 | $ | | $ | 79,579 | ||||
Unrealized gains (losses)(1) |
(28,211 | ) | 81 | (28,130 | ) | |||||
Purchases, issuances, and settlements |
1,120 | 919 | 2,039 | |||||||
Ending balanceDecember 31, 2009 |
$ | 52,488 | $ | 1,000 | $ | 53,488 | ||||
- (1)
- There were no level 3 plan assets sold during the year.
|
December 31, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||
Other Postretirement Retirement Benefits Plan Investments: |
|||||||||||||
Money market funds |
$ |
9 |
$ |
|
$ |
|
$ |
9 |
|||||
Common collective funds |
| 33,349 | | 33,349 | |||||||||
Mutual funds |
85,737 | | | 85,737 | |||||||||
Pooled separate account |
| 35,521 | | 35,521 | |||||||||
Total Plan Investments |
$ | 85,746 | $ | 68,870 | $ | | $ | 154,616 | |||||
F-88
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 9Employee Pension and Other Postretirement Benefits (Continued)
A description of the valuation methodologies used to determine the fair value of the Plans' assets included within the tables above is as follows:
Money Market Funds
Money market funds represent cash and maintain a constant NAV of $1. These money market funds are classified as Level 1 measurements based on unadjusted prices for identical securities in an active market.
U.S. Government Securities
U.S. treasury securities are fixed income securities that are debt instruments issued by the United States Department of the Treasury. These securities are valued by a third-party pricing provider using secondary transactions in an active market for identical securities. U.S. treasury securities are classified as Level 1 measurements based on unadjusted prices for identical instruments in active markets.
U.S agency securities are fixed income securities and are valued by a third party pricing provider using secondary transactions in an active market for identical securities. These securities are classified as Level 1 measurements based on unadjusted prices for identical instruments in active markets.
Corporate Bonds
Corporate bonds are fixed income securities in investment-grade bonds of U.S. issuers from diverse industries. These securities are classified as Level 2 based on valuations provided by a third-party pricing provider using quoted market prices in an active market for similar securities.
Equity Securities
Equity securities are common stock and the fair value is recorded based on quoted market prices obtained from an exchange. These securities are classified as Level 1 measurements based on unadjusted prices for identical instruments in active markets.
Real Estate Funds
Real estate funds invest in real estate property with a focus on apartment complexes and retail shopping centers. The valuations of these investments require significant judgment due to the absence of quoted market prices, lack of liquidity and the scarcity of observable sales of similar assets. The values are estimated by adjusting the previous quarter's NAV for current quarterly income and depreciation activity. These funds are classified as Level 3 measurements due to the use of significant unobservable inputs and judgment to estimate fair value.
Limited Partnerships
Limited partnerships invest in equity securities of diverse foreign companies in developed markets across diverse industries. Limited partnerships are valued using the NAV of the partnership at the end of the period. These partnerships are classified as Level 2 measurements due to the use of quoted market prices of the underlying securities in actively traded markets as the primary input to derive the NAV.
F-89
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 9Employee Pension and Other Postretirement Benefits (Continued)
Common Collective Funds
Common collective funds invest in bonds of U.S. and foreign issuers and in equity securities of U.S. and foreign real estate companies. These funds are valued using the NAV of the fund at the end of the period. These funds are classified as Level 2 measurements due to the use of quoted market prices of the underlying securities in actively traded markets as the primary input to derive the NAV.
Mutual Funds
Mutual funds invest in equity securities that seek to track the performance of the Standard & Poor's 500, S&P Completion and the EAFE® indexes. These funds are valued using an exchange traded NAV at the end of the period. These mutual funds are classified as Level 1 measurements based on unadjusted quoted prices for identical instruments in active markets.
Pooled Separate Account
The pooled separate account is an investment with Hartford Life Company. The investment consists of four funds that mainly invest in U.S. agency guaranteed mortgage-backed securities, investment-grade bonds of U.S. issuers from diverse industries, and exchange traded equity securities of U.S. and foreign companies. These funds are valued using quoted market prices of the funds' underlying investments to derive the funds' NAV at the end of the period. The investment is comprised of equity securities and U.S. bonds. This investment is classified as Level 2 measurements due to the use of quoted market prices of the underlying securities in actively traded markets as the primary input to derive the NAV.
The following table sets forth the benefit obligation activity and the funded status for each of the Company's plans at December 31, 2008 and 2009. In addition, the table sets forth the over/(under) funded status at December 31, 2008 and 2009. This pension benefits table does not include the obligations for the Executive Supplemental Benefit Plans (ESBPs).
|
Pension Benefits | Other Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years Ended December 31, | Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2008 | 2009 | 2008 | 2009 | |||||||||
Accumulated benefit obligation |
$ | 1,291,710 | $ | 1,304,460 | |||||||||
Change in projected benefit obligation |
|||||||||||||
Projected benefit obligation, beginning of year |
$ | 1,305,848 | $ | 1,454,343 | $ | 200,060 | $ | 218,690 | |||||
Service cost |
50,166 | 52,375 | 7,941 | 8,370 | |||||||||
Interest cost |
78,085 | 83,067 | 11,391 | 11,283 | |||||||||
Plan participants' contributions |
| | 4,239 | 4,361 | |||||||||
Fair value adjustment amount related to the Company's privatization |
(73,374 | ) | | (7,823 | ) | | |||||||
Actuarial loss (gain) |
138,672 | (86,628 | ) | 17,798 | (203 | ) | |||||||
Medicare part D employer subsidy payments |
| | 687 | 813 | |||||||||
Benefits paid |
(45,054 | ) | (48,963 | ) | (15,603 | ) | (17,847 | ) | |||||
Projected benefit obligation, end of year |
1,454,343 | 1,454,194 | 218,690 | 225,467 | |||||||||
Fair value of plan assets, end of year |
1,209,291 | 1,527,302 | 125,052 | 154,616 | |||||||||
Over/(under) funded status |
$ | (245,052 | ) | $ | 73,108 | $ | (93,638 | ) | $ | (70,851 | ) | ||
F-90
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009 (Continued)
Note 9Employee Pension and Other Postretirement Benefits (Continued)