Attached files
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EX-31.2 - EX-31.2 - MUFG Americas Holdings Corp | a2204039zex-31_2.htm |
EX-32.2 - EX-32.2 - MUFG Americas Holdings Corp | a2204039zex-32_2.htm |
EX-32.1 - EX-32.1 - MUFG Americas Holdings Corp | a2204039zex-32_1.htm |
EX-31.1 - EX-31.1 - MUFG Americas Holdings Corp | a2204039zex-31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2011 |
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OR |
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o |
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 |
Commission file number 1-15081
UnionBanCal Corporation
(Exact name of registrant as specified in its charter)
Delaware |
94-1234979 |
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(State of Incorporation) | (I.R.S. Employer Identification No.) | |
400 California Street, San Francisco, California |
94104-1302 |
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(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number: (415) 765-2969 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 þ (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 Exchange Act). Yes o No þ
Number of shares of Common Stock outstanding at April 30, 2011: 136,330,829
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
UnionBanCal Corporation and Subsidiaries
Table of Contents
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which include expectations for our operations and business and our assumptions for those expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our expectations. See Part I, Item 1A. "Risk Factors," in our 2010 Annual Report on Form 10-K, Part II, Item 1A. "Risk Factors" in this report, and the other risks described in this report and in our 2010 Annual Report on Form 10-K for factors to be considered when reading any forward-looking statements in this filing.
This report includes forward-looking statements, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may." These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information known to our management at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made.
In this document, for example, we make forward-looking statements, which discuss our expectations about:
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- Our business objectives, strategies and initiatives, our organizational structure, the growth of our business, our
competitive position and prospects, and the effect of competition on our business and strategies
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- Our assessment of significant factors and developments that have affected or may affect our results
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- Our assessment of economic conditions and trends and economic and credit cycles, and their impact on our business
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- The economic outlook for the California, U.S. and global economy and our expectations that economic conditions may improve
during 2011
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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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- Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook within
specific industries, for the U.S. in general, for particular states in the U.S. including California, Oregon, Texas and Washington, and in foreign countries (including Japan)
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- The impact of the severe earthquake and related events in Japan earlier in 2011 on the Bank's customers based or doing
business in Japan and its impact on our business
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- Pending and recent legislative and regulatory actions, and future legislative and regulatory developments, including the
effects of legislation and governmental measures introduced in response to the financial crises affecting the banking system, financial markets and the U.S. economy, the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Dodd-Frank Act), changes to the Federal Deposit Insurance Corporation's deposit insurance assessment policies, the effect on and application
of foreign laws and regulations to our business and operations, and anticipated fees, costs or other impacts on our business and operations as a result of these developments
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- Our strategies and expectations regarding capital levels and liquidity, our funding base, core deposits, our intent and ability to implement new capital standards under the Dodd-Frank Act and the Basel Committee capital standards and the effect of the foregoing on our business
3
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- Our intent and ability to fund our operations on an independent basis from our parent company
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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, our
anticipated litigation strategies or adverse facts and developments related thereto
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- Our allowance for credit losses, including the conditions we consider in determining the unallocated allowance and our
portfolio credit quality, underwriting standards, risk grade and credit migration trends and loss reserves for FDIC covered loans
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- Loan portfolio composition and risk grade trends, delinquency rates compared to the industry average, our underwriting
standards and practices and our intent to sell or hold loans we originate
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- Our intent to sell or hold, and the likelihood that we would be required to sell, or expectations regarding recovery of
the amortized cost basis of, various investment securities and our hedging strategies and activities
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- Expected rates of return, maturities, yields, loss exposure, growth rates and projected results
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- Tax rates and taxes, the possible effect of changes in taxable profits of the U.S. operations of Mitsubishi UFJ Financial
Group, Inc. (MUFG) on our California State tax obligations and of expected tax credits or benefits, and tax treatment of FDIC-assisted acquisitions
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- Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements, guidance
or changes in accounting principles and future recognition of impairments for the fair value of assets, including goodwill, financial instruments, intangible assets and other assets acquired in our
April 2010 FDIC-assisted acquisitions
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- Decisions to downsize, sell or close units, dissolve subsidiaries, expand our branch network, pursue acquisitions,
purchase banking facilities and equipment, or otherwise restructure, reorganize or change our business mix, and their timing and their impact on our business
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- Our expectations regarding the impact of acquisitions on our business and results of operations and amounts we will
receive from the FDIC, or must pay to the FDIC, under loss share agreements
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- The impact of changes in our credit rating
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- Maintenance of casualty and liability insurance coverage appropriate for our operations
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- The relationship between our business and that of BTMU and MUFG, the impact of their credit ratings, operations or
prospects on our credit ratings and actions that may or may not be taken by BTMU and MUFG
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- Descriptions of assumptions underlying or relating to any of the foregoing
There are numerous risks and uncertainties that could cause actual outcomes and results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to, those listed in Item 1A "Risk Factors" of Part II and Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part I of this Form 10-Q.
Readers of this document should not rely unduly on any forward-looking statements, which reflect only our management's belief as of the date of this report and should consider all uncertainties and risks disclosed throughout this document and in our other reports to the SEC, including, but not limited to, those discussed below. Any factor described in this report could by itself, or together with one or more other factors, adversely affect our business, future prospects, results of operations or financial condition.
4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
UnionBanCal Corporation and Subsidiaries
Consolidated Financial Highlights
|
For the Three Months Ended |
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|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | March 31, 2011 |
March 31, 2010 |
Percent Change |
||||||||
Results of operations: |
|||||||||||
Net interest income |
$ | 618 | $ | 574 | 8 | % | |||||
(Reversal of) provision for loan losses |
(102 | ) | 170 | nm | |||||||
Noninterest income |
240 | 210 | 14 | ||||||||
Noninterest expense |
615 | 525 | 17 | ||||||||
Income before income taxes and including noncontrolling interests |
345 | 89 | 288 | ||||||||
Income tax expense |
114 | 15 | nm | ||||||||
Net income including noncontrolling interests |
231 | 74 | 212 | ||||||||
Deduct: Net loss from noncontrolling interests |
4 | 3 | 33 | ||||||||
Net income attributable to UnionBanCal Corporation (UNBC) |
$ | 235 | $ | 77 | 205 | ||||||
Balance sheet (period average): |
|||||||||||
Total assets |
$ | 80,056 | $ | 84,810 | (6 | )% | |||||
Total securities |
21,601 | 23,546 | (8 | ) | |||||||
Total loans held for investment |
48,283 | 46,848 | 3 | ||||||||
Earning assets |
71,351 | 77,660 | (8 | ) | |||||||
Total deposits |
59,471 | 67,838 | (12 | ) | |||||||
UNBC Stockholder's equity |
10,167 | 9,532 | 7 | ||||||||
Performance Ratios: |
|||||||||||
Return on average assets(1) |
1.19 | % | 0.37 | % | |||||||
Return on average UNBC stockholder's equity(1) |
9.38 | 3.29 | |||||||||
Core efficiency ratio, excluding impact of privatization(2) |
67.47 | 61.51 | |||||||||
Net interest margin(1)(3) |
3.49 | 2.98 | |||||||||
Net loans charged off to average total loans held for investment(1) |
0.44 | 1.03 | |||||||||
Net loans charged off to average total loans held for investment, excluding FDIC covered assets(1)(8) |
0.46 | 1.03 |
|
As of | |
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March 31, 2011 | December 31, 2010 | |
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Balance sheet (end of period): |
|||||||||||
Total assets |
$ | 80,642 | $ | 79,097 | 2 | % | |||||
Total securities |
21,673 | 22,114 | (2 | ) | |||||||
Total loans held for investment |
48,105 | 48,094 | | ||||||||
Nonperforming assets |
1,032 | 1,142 | (10 | ) | |||||||
Total deposits |
58,677 | 59,954 | (2 | ) | |||||||
Long-term debt |
6,078 | 5,598 | 9 | ||||||||
UNBC Stockholder's equity |
10,355 | 10,125 | 2 | ||||||||
Capital ratios: |
|||||||||||
Tier 1 risk-based capital ratio |
12.84 | % | 12.44 | % | |||||||
Total risk-based capital ratio |
15.41 | 15.01 | |||||||||
Leverage ratio |
10.66 | 10.34 | |||||||||
Tier 1 common capital ratio(4) |
12.84 | 12.42 | |||||||||
Tangible common equity ratio(5) |
9.80 | 9.67 | |||||||||
Credit Ratios: |
|||||||||||
Allowance for loan losses to total loans held for investment(6) |
2.15 | % | 2.48 | % | |||||||
Allowance for loan losses to nonaccrual loans(6) |
118.50 | 123.40 | |||||||||
Allowance for credit losses to total loans held for investment(7) |
2.46 | 2.81 | |||||||||
Allowance for credit losses to nonaccrual loans(7) |
135.61 | 140.23 | |||||||||
Nonperforming assets to total loans held for investment and other real estate owned (OREO) |
2.14 | 2.37 | |||||||||
Nonperforming assets to total assets |
1.28 | 1.44 | |||||||||
Nonaccrual loans to total loans held for investment |
1.81 | 2.01 | |||||||||
Excluding FDIC covered assets(8): |
|||||||||||
Allowance for loan losses to total loans held for investment(6) |
2.17 | % | 2.50 | % | |||||||
Allowance for loan losses to nonaccrual loans(6) |
129.10 | 137.32 | |||||||||
Allowance for credit losses to total loans held for investment(7) |
2.48 | 2.85 | |||||||||
Allowance for credit losses to nonaccrual loans(7) |
148.17 | 156.44 | |||||||||
Nonperforming assets to total loans held for investment and OREO |
1.74 | 1.91 | |||||||||
Nonperforming assets to total assets |
1.03 | 1.15 | |||||||||
Nonaccrual loans to total loans held for investment |
1.68 | 1.82 |
- (1)
- Annualized.
- (2)
- The core efficiency ratio, excluding impact of privatization, a non-GAAP financial measure, is net noninterest expense (noninterest expense excluding privatization-related expenses and fair value amortization/accretion, foreclosed asset expense, the (reversal of) provision for losses on off-balance sheet commitments, low income housing credit investment amortization expense, expenses of the consolidated Variable Interest Entities (VIEs), merger costs related to the acquisitions of
5
certain assets and assumption of certain liabilities of Frontier Bank and Tamalpais Bank) as a percentage of total revenue (net interest income (taxable-equivalent basis) and noninterest income). Management discloses the core efficiency ratio as a measure of the efficiency of our operations, focusing on those costs most relevant to our core activities. Refer to "Noninterest Expense" in this Form 10-Q for further information.
- (3)
- Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
- (4)
- The Tier 1 common capital ratio is the ratio of Tier 1 capital, less qualifying trust preferred securities, to risk-weighted assets. The Tier 1 common capital ratio, a non-GAAP financial measure, has been included to facilitate the understanding of the Company's capital structure and for use in assessing and comparing the quality and composition of UNBC's capital structure to other financial institutions. Refer to "Capital" in this Form 10-Q for further information. All of the trust preferred securities were paid off during the quarter ended March 31, 2011.
- (5)
- The tangible common equity ratio, a non-GAAP financial measure, is calculated as tangible common equity divided by tangible assets. The methodology of determining tangible common equity may differ among companies. The tangible common equity ratio has been included to facilitate the understanding of the Company's capital structure and for use in assessing and comparing the quality and composition of UNBC's capital structure to other financial institutions. Refer to "Capital" in this Form 10-Q for further information.
- (6)
- The allowance for loan losses ratios are calculated using the allowance for loan losses against end of period total loans held for investment or total nonaccrual loans, as appropriate.
- (7)
- The allowance for credit losses ratios are calculated using the sum of the allowances for loan losses and for losses on off-balance sheet commitments against end of period total loans held for investment or total nonaccrual loans, as appropriate.
- (8)
- These ratios exclude the impact of the acquired loans and OREO, which are covered under loss share agreements between Union Bank, N.A. and the FDIC. Such agreements are related to the April 2010 acquisitions of certain assets and assumption of certain liabilities of Frontier and Tamalpais.
nm = not meaningful
6
This report includes forward-looking statements, which include expectations for our operations and business and our assumptions for those expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our expectations. Please refer to Part II Item 1A "Risk Factors" of our Quarterly Report on Form 10-Q (this Form 10-Q) for a discussion of some factors that may cause results to differ.
Please refer to our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K) along with the following discussion and analysis of our consolidated financial condition and results of operations for the period ended March 31, 2011 in this Form 10-Q. Averages, as presented in the following tables, are substantially all based upon daily average balances.
As used in this Form 10-Q, the term "UnionBanCal" or "the Company" and terms such as "we," "us" and "our" refer to UnionBanCal Corporation, Union Bank, N.A., one or more of their consolidated subsidiaries, or to all of them together.
We are a California-based financial holding company and commercial bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington and Texas, as well as nationally and internationally. We had consolidated assets of $80.6 billion at March 31, 2011.
On November 4, 2008, we became a privately held company (privatization transaction). All of our issued and outstanding shares of common stock are owned by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU). Prior to the privatization transaction, BTMU owned approximately 64 percent of our outstanding shares of common stock.
We are providing you with an overview of what we believe are the most significant factors and developments that impacted our first quarter 2011 results and that could impact our future results. Further detailed information can be found elsewhere in this Form 10-Q. In addition, we ask that you carefully read this entire document and any other reports that we refer to in this Form 10-Q for more detailed information that will assist your understanding of trends, events and uncertainties that impact us.
Our sources of revenue are net interest income and noninterest income. Net interest income is generated predominantly from interest received from loans, investment securities and other interest-earning assets, less interest paid on deposits and borrowings. The primary sources of noninterest income are revenues from service charges on deposit accounts, trust and investment management fees, and trading account activities. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that impact our revenue sources. A summary of our key financial results are presented below:
Performance Highlights
In the first quarter of 2011, total revenue was comprised of 72 percent net interest income and 28 percent noninterest income. Our net interest income increased $44 million, or 8 percent, to $618 million in the first quarter of 2011 compared to the first quarter of 2010. Our net interest margin increased 51 basis points to 3.49 percent compared to the same period last year. The increase in net interest margin was primarily driven by a decrease in lower yielding interest bearing deposits in banks and by lower rates paid on interest bearing liabilities driven by targeted rate reductions in interest bearing deposits. Reflecting this planned deposit decline, our average interest bearing deposits decreased by 21 percent to $42.3 billion compared to the first quarter of 2010. Likewise, our average interest bearing deposits in banks decreased by 82 percent to
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$1.2 billion compared to the first quarter of 2010. This resulted in a decrease in the annualized average all-in-cost of funds from 0.62 percent in the first quarter of 2010 to 0.51 percent in the first quarter of 2011.
In the first quarter of 2011, our noninterest income increased $30 million, or 14 percent, from the first quarter of 2010 to $240 million, primarily due to a gain on the sale of MasterCard shares and higher trading account revenue, partially offset by reductions in service charges on deposit accounts. Our noninterest expense increased $90 million, or 17 percent, to $615 million compared to the same period last year, primarily due to higher base salaries, largely driven by the growth in the number of employees partially as a result of our Tamalpais and Frontier acquisitions, benefits and incentive compensation accruals, and certain reserves for contingencies. These increases were partially offset by lower regulatory assessment expense, higher reversals for provision for losses on off-balance sheet commitments and lower privatization-related intangible asset amortization.
During the first quarter of 2011, the total reversal of provision for credit losses was $115 million compared to a total provision for credit losses of $165 million in the first quarter of 2010. The decrease was primarily due to improved credit quality of the loan portfolio, reflecting a reduced level of criticized balances, including lower nonaccrual loans and lower loss factors during the first quarter of 2011 compared to the first quarter of 2010. See further discussion below under "Allowance for Credit Losses."
Our nonperforming assets totaled $1.0 billion and $1.1 billion at March 31, 2011 and December 31, 2010, respectively. Our nonperforming assets, excluding FDIC covered assets, totaled $815 million and $890 million at March 31, 2011 and December 31, 2010, respectively. The decrease in nonperforming assets, excluding FDIC covered assets, from December 31, 2010 resulted from lower levels of nonaccrual loans primarily in our commercial mortgage portfolio and our construction portfolio as a result of increased sales and charge-offs of problem loans in the first quarter of 2011. Total net loan charge-offs were $53 million in the first quarter of 2011 and $119 million in the first quarter of 2010.
Balance Sheet Highlights
Our total assets increased $1.5 billion, or 2 percent, to $80.6 billion at March 31, 2011 from December 31, 2010. Interest bearing deposits in banks increased $1.7 billion from $0.2 billion at December 31, 2010 to $1.9 billion at March 31, 2011, partially offset by a $0.5 billion, or 2 percent decrease in securities available for sale from the corresponding balances at December 31, 2010.
Our total liabilities increased $1.3 billion, or 2 percent, to $70.0 billion at March 31, 2011 from December 31, 2010, primarily due to an increase in commercial paper and other short-term borrowings, partially offset by a decrease in interest bearing deposits. This planned deposit decline resulted primarily from targeted rate reductions. Total loans increased $168 million to $47.1 billion at March 31, 2011 from December 31, 2010. Total loans, excluding FDIC covered loans, also remained relatively flat compared to December 31, 2010.
Our stockholder's equity of $10.4 billion at March 31, 2011 grew $230 million, or 2 percent, from December 31, 2010. Our Tier 1 risk-based capital ratio increased to 12.84 percent from 12.44 percent, the total risk-based capital ratio increased to 15.41 percent from 15.01 percent and our tangible common equity ratio increased to 9.80 percent from 9.67 percent, at March 31, 2011 from December 31, 2010, respectively. These capital ratios increased during the period primarily as capital accumulation from earnings retention outpaced capital requirements to support our asset growth.
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, which include management estimates and judgments. The financial information contained within our statements is, to a significant extent, financial information that is based on approximate
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measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use discount factors and other assumptions to determine the fair value of certain assets and liabilities. A change in the discount factor or another important assumption could significantly increase or decrease the values of those assets and liabilities and result in either a beneficial or an adverse impact to our financial results. We use historical loss factors, adjusted for current conditions, to estimate the inherent credit loss present in our loan and lease portfolio. Actual losses could differ significantly from the loss factors that we use. Other significant estimates that we use include the fair values of our acquired loans (see Note 5 in this Form 10-Q), FDIC indemnification asset, and certain derivatives and securities (see Notes 10 and 11 in this Form 10-Q), assumptions used in measuring our pension obligations, and assumptions regarding our effective income tax rates.
For each financial reporting period, our most significant estimates are presented to and discussed with the Audit & Finance Committee of our Board of Directors.
Understanding our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, both our Critical Accounting Estimates and our significant accounting policies are discussed in detail in our 2010 Form 10-K filed with the SEC. There have been no material changes to these critical accounting estimates during the first quarter of 2011.
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The following table shows the major components of net interest income and net interest margin.
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For the Three Months Ended | Increase (Decrease) in | ||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31, 2011 | March 31, 2010 | |
|
Interest Income/ Expense(1) |
|||||||||||||||||||||||||||||
|
Average Balance | |||||||||||||||||||||||||||||||||
|
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1)(2) |
Average Balance |
Interest Income/ Expense(1) |
Average Yield/ Rate(1)(2) |
||||||||||||||||||||||||||||
(Dollars in millions) | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||
Loans:(3) |
||||||||||||||||||||||||||||||||||
Commercial, financial and industrial |
$ | 15,325 | $ | 157 | 4.13 | % | $ | 14,955 | $ | 162 | 4.39 | % | $ | 370 | 2 | % | $ | (5 | ) | (3 | )% | |||||||||||||
Construction |
1,341 | 12 | 3.48 | 2,309 | 17 | 2.97 | (968 | ) | (42 | ) | (5 | ) | (29 | ) | ||||||||||||||||||||
Residential mortgage |
17,794 | 220 | 4.94 | 16,785 | 228 | 5.42 | 1,009 | 6 | (8 | ) | (4 | ) | ||||||||||||||||||||||
Commercial mortgage |
7,778 | 85 | 4.38 | 8,234 | 86 | 4.20 | (456 | ) | (6 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||
Consumer |
3,823 | 40 | 4.29 | 3,916 | 43 | 4.43 | (93 | ) | (2 | ) | (3 | ) | (7 | ) | ||||||||||||||||||||
Lease financing |
776 | 8 | 4.33 | 649 | 6 | 3.81 | 127 | 20 | 2 | 33 | ||||||||||||||||||||||||
Total loans, excluding FDIC covered loans |
46,837 | 522 | 4.48 | 46,848 | 542 | 4.65 | (11 | ) | (0 | ) | (20 | ) | (4 | ) | ||||||||||||||||||||
FDIC covered loans |
1,446 | 39 | 10.89 | | | | 1,446 | nm | 39 | nm | ||||||||||||||||||||||||
Total loans |
48,283 | 561 | 4.67 | 46,848 | 542 | 4.65 | 1,435 | 3 | 19 | 4 | ||||||||||||||||||||||||
Securities |
21,601 | 143 | 2.64 | 23,546 | 144 | 2.44 | (1,945 | ) | (8 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||
Interest bearing deposits in banks |
1,200 | 1 | 0.25 | 6,597 | 4 | 0.25 | (5,397 | ) | (82 | ) | (3 | ) | (75 | ) | ||||||||||||||||||||
Federal funds sold and securities |
||||||||||||||||||||||||||||||||||
purchased under resale agreements |
96 | | 0.18 | 461 | | 0.10 | (365 | ) | (79 | ) | | | ||||||||||||||||||||||
Trading account assets |
150 | | 1.19 | 208 | 1 | 1.68 | (58 | ) | (28 | ) | (1 | ) | (100 | ) | ||||||||||||||||||||
Other earning assets |
21 | | 3.49 | | | | 21 | nm | | | ||||||||||||||||||||||||
Total earning assets |
71,351 | 705 | 3.97 | 77,660 | 691 | 3.57 | (6,309 | ) | (8 | ) | 14 | 2 | ||||||||||||||||||||||
Allowance for loan losses |
(1,182 | ) | (1,407 | ) | 225 | 16 | ||||||||||||||||||||||||||||
Cash and due from banks |
1,246 | 1,205 | 41 | 3 | ||||||||||||||||||||||||||||||
Premises and equipment, net |
712 | 674 | 38 | 6 | ||||||||||||||||||||||||||||||
Other assets |
7,929 | 6,678 | 1,251 | 19 | ||||||||||||||||||||||||||||||
Total assets |
$ | 80,056 | $ | 84,810 | $ | (4,754 | ) | (6 | )% | |||||||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||||
Interest bearing deposits: |
||||||||||||||||||||||||||||||||||
Transaction and money market accounts |
$ | 25,489 | $ | 15 | 0.25 | $ | 39,861 | $ | 63 | 0.64 | $ | (14,372 | ) | (36 | ) | $ | (48 | ) | (76 | ) | ||||||||||||||
Savings and consumer time |
7,857 | 14 | 0.71 | 5,972 | 12 | 0.81 | 1,885 | 32 | 2 | 17 | ||||||||||||||||||||||||
Large time |
8,987 | 24 | 1.03 | 7,621 | 11 | 0.56 | 1,366 | 18 | 13 | 118 | ||||||||||||||||||||||||
Total interest bearing deposits |
42,333 | 53 | 0.50 | 53,454 | 86 | 0.65 | (11,121 | ) | (21 | ) | (33 | ) | (38 | ) | ||||||||||||||||||||
Commercial paper and other short-term borrowings(4) |
2,435 | 1 | 0.27 | 1,496 | 1 | 0.40 | 939 | 63 | | | ||||||||||||||||||||||||
Long-term debt |
5,902 | 31 | 2.16 | 4,574 | 27 | 2.35 | 1,328 | 29 | 4 | 15 | ||||||||||||||||||||||||
Total borrowed funds |
8,337 | 32 | 1.61 | 6,070 | 28 | 1.87 | 2,267 | 37 | 4 | 14 | ||||||||||||||||||||||||
Total interest bearing liabilities |
50,670 | 85 | 0.68 | 59,524 | 114 | 0.77 | (8,854 | ) | (15 | ) | (29 | ) | (25 | ) | ||||||||||||||||||||
Noninterest bearing deposits |
17,138 | 14,384 | 2,754 | 19 | ||||||||||||||||||||||||||||||
Other liabilities |
1,815 | 1,276 | 539 | 42 | ||||||||||||||||||||||||||||||
Total liabilities |
69,623 | 75,184 | (5,561 | ) | (7 | ) | ||||||||||||||||||||||||||||
Equity |
||||||||||||||||||||||||||||||||||
UNBC Stockholder's equity |
10,167 | 9,532 | 635 | 7 | ||||||||||||||||||||||||||||||
Noncontrolling interests |
266 | 94 | 172 | 183 | ||||||||||||||||||||||||||||||
Total equity |
10,433 | 9,626 | 807 | 8 | ||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 80,056 | $ | 84,810 | $ | (4,754 | ) | (6 | )% | |||||||||||||||||||||||||
Net interest income/spread (taxable-equivalent basis) |
620 | 3.29 | % | 577 | 2.80 | % | 43 | 7 | % | |||||||||||||||||||||||||
Impact of noninterest bearing deposits |
0.17 | 0.15 | ||||||||||||||||||||||||||||||||
Impact of other noninterest bearing sources |
0.03 | 0.03 | ||||||||||||||||||||||||||||||||
Net interest margin |
3.49 | 2.98 | ||||||||||||||||||||||||||||||||
Less: taxable-equivalent adjustment |
2 | 3 | (1 | ) | (33 | ) | ||||||||||||||||||||||||||||
Net interest income |
$ | 618 | $ | 574 | $ | 44 | 8 | % | ||||||||||||||||||||||||||
- (1)
- Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
- (2)
- Annualized.
- (3)
- Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.
- (4)
- Includes interest bearing trading liabilities.
- nm
- = not meaningful
10
Net interest income for the first quarter of 2011, on a taxable-equivalent basis, increased $43 million, or 7 percent, compared to the first quarter of 2010. Our net interest margin in the first quarter of 2011 increased by 51 basis points to 3.49 percent compared to the first quarter of 2010. These results were primarily due to the following:
-
- Average earning assets decreased $6.3 billion, or 8 percent, primarily due to a decrease in average interest
bearing deposits in banks and a decrease in securities, partially offset by an increase in average loans. As our average interest bearing deposit liabilities declined by $11.1 billion, or
21 percent, as part of a planned deposit decline driven by targeted rate reductions, we reduced our interest bearing deposits in banks by $5.4 billion, or 82 percent;
-
- Yields on our average earning assets increased 40 basis points due to a decrease in lower yielding assets, primarily
interest bearing deposits in banks;
-
- Average noninterest bearing deposits represented 29 percent of average total deposits in the first quarter of 2011
compared to 21 percent in the first quarter of 2010; and
-
- For the first quarter of 2011, the annualized average all-in cost of funds was 0.51 percent and our average loan-to-total deposit ratio was 81 percent. For the first quarter of 2010, the annualized average all-in cost of funds was 0.62 percent and our average loan-to-total deposit ratio was 69 percent.
Noninterest Income and Noninterest Expense
The following tables detail our noninterest income and noninterest expense for the first quarters of 2011 and 2010.
Noninterest Income
|
For the Three Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Increase (Decrease) |
|||||||||||
|
March 31, 2011 |
March 31, 2010 |
||||||||||||
(Dollars in millions) | Amount | Percent | ||||||||||||
Service charges on deposit accounts |
$ | 57 | $ | 66 | $ | (9 | ) | (14 | )% | |||||
Trust and investment management fees |
34 | 31 | 3 | 10 | ||||||||||
Trading account activities |
33 | 21 | 12 | 57 | ||||||||||
Securities gains, net |
28 | 34 | (6 | ) | (18 | ) | ||||||||
Merchant banking fees |
19 | 14 | 5 | 36 | ||||||||||
Brokerage commissions and fees |
13 | 9 | 4 | 44 | ||||||||||
Card processing fees, net |
10 | 9 | 1 | 11 | ||||||||||
Other |
46 | 26 | 20 | 77 | ||||||||||
Total noninterest income |
$ | 240 | $ | 210 | $ | 30 | 14 | % | ||||||
11
Noninterest Expense
|
For the Three Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Increase (Decrease) |
|||||||||||
|
March 31, 2011 |
March 31, 2010 |
||||||||||||
(Dollars in millions) | Amount | Percent | ||||||||||||
Salaries and other compensation |
$ | 263 | $ | 225 | $ | 38 | 17 | % | ||||||
Employee benefits |
81 | 55 | 26 | 47 | ||||||||||
Salaries and employee benefits |
344 | 280 | 64 | 23 | ||||||||||
Net occupancy and equipment |
65 | 59 | 6 | 10 | ||||||||||
Professional and outside services |
44 | 39 | 5 | 13 | ||||||||||
Intangible asset amortization |
25 | 32 | (7 | ) | (22 | ) | ||||||||
Regulatory assessments |
21 | 30 | (9 | ) | (30 | ) | ||||||||
Software |
17 | 15 | 2 | 13 | ||||||||||
Low income housing credit investment amortization |
13 | 14 | (1 | ) | (7 | ) | ||||||||
Advertising and public relations |
13 | 10 | 3 | 30 | ||||||||||
Data Processing |
10 | 8 | 2 | 25 | ||||||||||
Communications |
10 | 10 | | | ||||||||||
(Reversal of) provision for losses on off-balance sheet commitments |
(13 | ) | (5 | ) | (8 | ) | 160 | |||||||
Other |
66 | 33 | 33 | 100 | ||||||||||
Total noninterest expense |
$ | 615 | $ | 525 | $ | 90 | 17 | % | ||||||
The primary contributors to the changes in our noninterest income and noninterest expense for the first quarter of 2011 compared to the first quarter of 2010 are presented below.
The increase in our noninterest income was the result of several factors:
-
- Other
revenue increased primarily due to a $15 million gain on the sale of MasterCard shares;
-
- Trading
account income increased due to a $7 million increase in interest rate derivatives trading income and an increase of
$5 million in credit derivative income; and
-
- Merchant
banking fees increased primarily due to a $3 million increase in syndicated loan activity and a $3 million increase in
referral fees; partially offset by
-
- Service
charges on deposit accounts decreased primarily due to lower overdraft fees resulting from changes in customer behavior and the impact of
changes to fee-related regulations; and
-
- Securities gains, net decreased primarily due to a $6 million reduction in gains on the sales of securities.
The increase in our noninterest expense was the result of several factors:
-
- Salaries
and other compensation expenses increased due to higher base salaries, largely driven by the growth in the number of employees partially
as a result of our Tamalpais and Frontier acquisitions, and incentive compensation accruals;
-
- Benefit
cost increased primarily due to higher taxes and pension costs; and
-
- Other
expenses increased primarily due to certain reserves for contingencies; partially offset by
-
- Regulatory assessments decreased $9 million due to a reduction in the assessment rate and lower deposit balances;
12
-
- Reversal
of provision for losses on off-balance sheet commitments increased $8 million, primarily due to improved credit
quality of our unfunded commitments; and
-
- Expenses related to our privatization transaction included an $8 million decrease in amortization of intangible assets and a decrease in other privatization-related costs of $5 million, primarily due to higher amortization of privatization-related compensation awards in the first quarter of 2010.
The core efficiency ratio, excluding the privatization transaction, is a non-GAAP financial measure that is used by management to measure the efficiency of our operations, focusing on those costs most relevant to our core activities. The following table shows the calculation of this ratio for the first quarters of 2011 and 2010.
|
For the Three Months Ended |
||||||||
---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | March 31, 2011 |
March 31, 2010 |
|||||||
Noninterest Expense |
$ | 615 | $ | 525 | |||||
Less: Foreclosed asset expense |
3 | | |||||||
Less: (Reversal of) provision for losses on off-balance sheet commitments |
(13 | ) | (5 | ) | |||||
Less: Low income housing credit investment amortization expense |
13 | 14 | |||||||
Less: Expenses of the consolidated variable interest entity (VIE) |
6 | 5 | |||||||
Less: Merger costs related to acquisitions |
13 | | |||||||
Net noninterest expense before privatization adjustments |
$ | 593 | $ | 511 | |||||
Net adjustments related to privatization adjustments |
26 | 39 | |||||||
Net noninterest expense, excluding privatization transaction (a) |
$ | 567 | $ | 472 | |||||
Total Revenue |
$ | 858 | $ | 784 | |||||
Add: Net interest income taxable-equivalent adjustment |
2 | 3 | |||||||
Total revenue, including taxable-equivalent adjustment |
860 | 787 | |||||||
Less: Accretion related to privatization-related fair value adjustments |
21 | 19 | |||||||
Total revenue, excluding impact of privatization transaction (b) |
$ | 839 | $ | 768 | |||||
Core efficiency ratio, excluding impact of privatization (a)/(b) |
67.47 | % | 61.51 | % |
Our effective tax rate in the first quarter of 2011 was 33 percent, compared to 17 percent for the first quarter of 2010. The change in the effective tax rate was primarily due to higher income before taxes in the first quarter of 2011 as compared to 2010. The amount of income tax credits remained consistent from year to year, but their impact on our effective tax rate decreased as our income before taxes increased.
For further information regarding income tax expense, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsIncome Tax Expense" and "Changes in our tax rates could affect our future results" in "Risk Factors" in Part I, Item 1A and Note 12 to the consolidated financial statements in our 2010 Form 10-K.
Management of the securities portfolio involves the maximization of return while maintaining prudent levels of quality, market risk and liquidity. At March 31, 2011, approximately 95 percent of our securities, based upon amortized cost, were investment grade. The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities are detailed in Note 4 to our consolidated financial statements included in this Form 10-Q.
13
Our securities available for sale are recorded at fair value with the change in fair value recognized in accumulated other comprehensive income. Our Asset and Liability Management (ALM) Securities portfolio consists of available for sale U.S. Government, state and municipal, mortgage-backed securities, and asset-backed securities held for ALM purposes. Our ALM Securities portfolio had a fair value of $20.1 billion and an expected weighted average maturity of 3.2 years.
Our securities held to maturity consist of collateralized loan obligations (CLO) securities, which primarily consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes from the cash flows generated by such loans. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral.
The following table shows loans held for investment outstanding by loan type and as a percentage of total loans held for investment at the end of each period presented.
|
|
|
Increase / (Decrease) March 31, 2011 From December 31, 2010 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31, 2011 |
December 31, 2010 |
|||||||||||||||
(Dollars in millions) | Amount | Percent | |||||||||||||||
Loans held for investment: |
|||||||||||||||||
Commercial, financial and industrial |
$ | 15,143 | $ | 15,162 | $ | (19 | ) | | % | ||||||||
Construction |
1,153 | 1,460 | (307 | ) | (21 | ) | |||||||||||
Residential mortgage |
18,110 | 17,531 | 579 | 3 | |||||||||||||
Commercial mortgage |
7,749 | 7,816 | (67 | ) | (1 | ) | |||||||||||
Consumer: |
|||||||||||||||||
Installment |
1,983 | 2,035 | (52 | ) | (3 | ) | |||||||||||
Revolving lines of credit |
1,804 | 1,823 | (19 | ) | (1 | ) | |||||||||||
Total consumer |
3,787 | 3,858 | (71 | ) | (2 | ) | |||||||||||
Lease financing |
773 | 757 | 16 | 2 | |||||||||||||
Total loans held for investment, excluding |
|||||||||||||||||
FDIC covered loans |
46,715 | 46,584 | 131 | | |||||||||||||
FDIC covered loans |
1,390 | 1,510 | (120 | ) | (8 | ) | |||||||||||
Total loans held for investment |
$ | 48,105 | $ | 48,094 | $ | 11 | | % | |||||||||
Commercial, Financial and Industrial Loans
The commercial, financial and industrial loan category is the second largest category in our loan portfolio. These loans are extended principally to corporations, middle-market businesses and small businesses. Our commercial market lending originates loans primarily through our commercial banking offices. These offices, which rely extensively on relationship-oriented banking, provide a variety of services including cash management services, lines of credit, accounts receivable and inventory financing. Separately, we originate or participate in a variety of financial services to major corporations. These services include traditional commercial banking and specialized financing tailored to the needs of each customer's specific industry. We are active in, among other sectors, power and utilities, oil and gas, manufacturing, wholesale trade, communications, entertainment, healthcare, retailing, and financial services. These industries comprise the majority of our commercial, financial and industrial portfolio. While loans extended within these sectors comprise the majority of our commercial, financial and industrial portfolio, no individual industry sector exceeded 10 percent of our total loans held for investment at either March 31, 2011 or December 31, 2010.
14
The commercial, financial and industrial portfolio has been essentially flat from December 31, 2010 to March 31, 2011, reflecting uneven growth in new loan opportunities coupled with continued low utilization rates on our existing revolving facilities. Overall portfolio credit quality continues to improve as borrowers' financial condition improves and as they have access to more refinancing options.
Construction and Commercial Mortgage Loans
We engage in real estate lending that includes commercial mortgage loans and construction loans secured by deeds of trust. The commercial mortgage loan portfolio consists of loans secured by commercial income properties primarily in California. The commercial mortgage portfolio decreased from December 31, 2010 to March 31, 2011 due primarily to early repayments and normal loan paydowns, partially offset by new originations.
Construction loans are extended primarily to commercial property developers and to residential builders. As of March 31, 2011, the construction loan portfolio consisted of approximately 85 percent in the commercial income producing real estate industry and 15 percent with residential homebuilders. The construction loan portfolio decreased 21 percent from December 31, 2010 to March 31, 2011 due to declines of $295 million, or 24 percent, in the income property portfolio and $17 million, or 9 percent, in the homebuilder portfolio. The income property portfolio reductions were concentrated mostly in the office and apartment property types. Geographically, the outstanding construction loan portfolio was concentrated 40 percent in California and 60 percent out-of-state as of March 31, 2011. The largest out-of-state concentration was 22 percent in Washington. The California outstandings are distributed as follows: 55 percent in the Los Angeles/Orange County region, including the Inland Empire, 14 percent in the San Francisco Bay Area, 11 percent in Sacramento and the Central Valley, 10 percent in San Diego, and 10 percent in the Central Coast region.
Residential Mortgage Loans
We originate residential mortgage loans, secured by one-to-four family residential properties, through our multiple channel network (including branches, private bankers, mortgage brokers, and telephone centers) throughout California, Oregon and Washington, and we periodically purchase loans in our market area.
At March 31, 2011, 73 percent of our residential mortgage loans were interest only, none of which are negative amortizing. At origination, these interest only loans had strong credit profiles and had weighted average loan-to-value (LTV) ratios of approximately 67 percent. The remainder of the portfolio consists of a small amount of balloon loans and regularly amortizing loans.
We do not have a program for originating or purchasing subprime loan products. The Bank's "no doc" and "low doc" loan origination programs were discontinued in 2008 (except for a streamlined refinance process for existing Bank mortgages, which represent only a small segment of the portfolio). At March 31, 2011, the outstanding balances of the "no doc" and "low doc" portfolios were approximately 36 percent of our total residential loan portfolio, and the loan delinquency rates with respect to these portfolios remained low compared to the industry average for California prime loans. At March 31, 2011, the aggregate balance of "no doc" and "low doc" loans past due 30 days or more was $163 million, compared to $175 million at December 31, 2010.
Total residential mortgage loans 30 days or more delinquent were $339 million at March 31, 2011, compared to $350 million at December 31, 2010. Our residential loan delinquency rates have remained low when 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 substantially all of the loans we originate; however, we do sell some of our 30-year, fixed rate loans.
15
Consumer Loans
We originate consumer loans, including home equity loans and lines, principally through our branch network and Private Banking Offices. Our total home equity loans and lines delinquent 30 days or more were $40 million at March 31, 2011, compared to $36 million at December 31, 2010. All equity secured lines are reviewed annually for creditworthiness, either manually or in an automated fashion, regardless of the line amount or when they were originated. Those equity lines that were originated since 2004 with a commitment amount over $200,000 are manually reviewed, which includes obtaining an updated credit report as well as an updated value on the property to reassess our LTV position. We typically reduce or freeze limits, as applicable and pursuant to applicable laws and regulations, to minimize additional exposure during periods of declining home prices.
Lease Financing
We offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. At March 31, 2011, we had leveraged leases of $535 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 for leveraged leases, the gross lease receivable is offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased assets for repayment in the event of lessee default.
FDIC Covered Loans
We acquired loans as part of the FDIC-assisted acquisitions of certain assets and assumption of certain liabilities of Frontier Bank (Frontier) and Tamalpais Bank (Tamalpais) during the second quarter of 2010. All of the acquired loans are covered under loss share agreements with the FDIC and are referred to as "FDIC covered loans." We will be reimbursed for a substantial portion of any future losses on the FDIC covered loans under the terms of the FDIC loss share agreements. Total FDIC covered loans outstanding at March 31, 2011 were $1.4 billion, which consisted of $707 million of commercial mortgage loans, $387 million of commercial, financial and industrial loans, $184 million of construction loans, and $112 million of other loans.
Cross-Border Outstandings
Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. Our total cross-border outstandings for Canada, the only country where such outstandings exceeded one percent of total assets, were $838 million and $804 million, as of March 31, 2011 and December 31, 2010, respectively. The cross-border outstandings are based on category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. For Canada, any significant local currency outstandings are funded by local currency borrowings.
Allowance Policy and Methodology
We maintain an allowance for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. Understanding our policies on the allowance for credit losses is fundamental to understanding our consolidated financial condition and consolidated results of operations.
16
Accordingly, our significant policies and methodology on the allowance for credit losses are discussed in detail in Note 1 to our consolidated financial statements and in the section "Allowances for Credit Losses" included in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2010 Form 10-K. Unless otherwise noted, all ratios that follow in this section include FDIC covered loans.
Comparison of the Total Allowances and Related Provision for Credit Losses Compared to December 31, 2010
At March 31, 2011 and December 31, 2010, our total allowance for credit losses, excluding FDIC covered loans, was $1.2 billion, or 2.48 percent of total loans held for investment, and $1.3 billion, or 2.85 percent of total loans held for investment, respectively. At March 31, 2011, total allowance for credit losses, excluding FDIC covered loans, of $1.2 billion consisted of $1 billion for loan losses and $0.2 billion for losses on off-balance sheet commitments, and was comprised of $0.9 billion of allocated allowance and $0.3 billion of unallocated allowance. At March 31, 2011 and December 31, 2010, our allowance for loan losses on FDIC covered loans was $23 million and $25 million, respectively.
We recorded a reversal of the provision for loan losses, excluding FDIC covered loans, of $102 million in the first quarter of 2011, compared to a provision for loan losses of $170 million during the first quarter of 2010. In the first quarter of 2011, the reversal of the provision, excluding FDIC covered loans, was primarily attributable to the improved credit quality of the loan portfolio and lower loss factors. The improved credit quality of the loan portfolio was particularly evident in lower levels of criticized credits in the commercial segment, which declined from $3.4 billion at December 31, 2010 to $2.9 billion at March 31, 2011, continuing the significant downward trend that was observed during the second half of 2010. The ratio of nonaccrual loans to total loans held for investment decreased to 1.81 percent at March 31, 2011 from 2.01 percent at December 31, 2010. In addition, annualized net loans charged off to average loans outstanding for the first quarter of 2011 decreased to 0.44 percent from 1.03 percent for the first quarter of 2010.
At March 31, 2011, the allocated portion of the allowance for credit losses included $395 million related to special mention and classified credits (criticized credits), compared to $468 million at December 31, 2010. Criticized credits are those that are internally risk graded as "special mention," "substandard" or "doubtful." Special mention credits are potentially weak, as the borrower has begun to exhibit deteriorating trends, which, if not corrected, could jeopardize repayment of the loan and result in further downgrade. Substandard credits have well-defined weaknesses, which, if not corrected, could jeopardize the full satisfaction of the debt. A credit classified as "doubtful" has critical weaknesses that make full collection improbable.
Changes in the Unallocated Allowance
The unallocated allowance at March 31, 2011 and December 31, 2010 was $251 million and $298 million, respectively. The decrease from December 31, 2010 to March 31, 2011 was primarily due to several key factors, including improvement in our commercial mortgage and residential mortgage loan portfolios. The unallocated allowance balance continues to reflect the negative impact of the persistent high unemployment (in particular in California), the adverse impact on the housing market from weak home prices, elevated foreclosure levels and extended collection periods for residential real estate loans, the fiscal challenges for the State of California and local governments, the impact of volatile natural gas prices and crude oil prices on energy companies, and on consumer discretionary spending, and the impact of the recent natural disasters in Japan on our commercial, financial and industrial loan portfolios.
17
Change in the Total Allowance for Credit Losses
The following table sets forth a reconciliation of changes in our allowance for credit losses.
|
March 31, | Increase/(Decrease) March 31, 2011 From March 31, 2010 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | 2011 | 2010 | Amount | Percent | ||||||||||||
Balance, beginning of period |
$ | 1,191 | $ | 1,357 | $ | (166 | ) | (12 | )% | |||||||
(Reversal of) provision for loan losses, excluding FDIC covered loans |
(102 | ) | 170 | (272 | ) | nm | ||||||||||
Decrease in allowance covered by FDIC indemnification |
(2 | ) | | (2 | ) | nm | ||||||||||
Loans charged off: |
||||||||||||||||
Commercial, financial and industrial |
23 | 67 | (44 | ) | (66 | ) | ||||||||||
Construction |
1 | 16 | (15 | ) | (94 | ) | ||||||||||
Residential mortgage |
14 | 10 | 4 | 40 | ||||||||||||
Commercial mortgage |
24 | 32 | (8 | ) | (25 | ) | ||||||||||
Consumer |
11 | 10 | 1 | 10 | ||||||||||||
Total loans charged off |
73 | 135 | (62 | ) | (46 | ) | ||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||
Commercial, financial and industrial |
7 | 13 | (6 | ) | (46 | ) | ||||||||||
Construction |
4 | 2 | 2 | 100 | ||||||||||||
Commercial mortgage |
8 | | 8 | nm | ||||||||||||
Consumer |
1 | 1 | | | ||||||||||||
Total recoveries of loans previously charged off |
20 | 16 | 4 | 25 | ||||||||||||
Net loans charged off |
53 | 119 | (66 | ) | (55 | ) | ||||||||||
Ending balance of allowance for loan losses |
1,034 | 1,408 | (374 | ) | (27 | ) | ||||||||||
Allowance for losses on off-balance sheet commitments |
150 | 171 | (21 | ) | (12 | ) | ||||||||||
Allowance for credit losses |
$ | 1,184 | $ | 1,579 | $ | (395 | ) | (25 | )% | |||||||
Components of allowance for loan losses: |
||||||||||||||||
Allowance for loan losses, excluding allowance on FDIC covered loans |
$ | 1,011 | $ | 1,408 | $ | (397 | ) | (28 | )% | |||||||
Allowance for loan losses on FDIC covered loans |
23 | | 23 | nm | ||||||||||||
Total allowance for loan losses |
$ | 1,034 | $ | 1,408 | $ | (374 | ) | (27 | )% | |||||||
Allowance for loan losses to total loans held for investment |
2.15 | % | 3.01 | % | ||||||||||||
Allowance for credit losses to total loans held for investment |
2.46 | 3.38 | ||||||||||||||
Net loans charged off to average loans outstanding for the period(2) |
0.44 | 1.03 | ||||||||||||||
Excluding FDIC covered loans(1): |
||||||||||||||||
Allowance for loan losses to total loans held for investment |
2.17 | % | 3.01 | % | ||||||||||||
Allowance for credit losses to total loans held for investment |
2.48 | 3.38 | ||||||||||||||
Net loans charged off to average loans outstanding for the period(2) |
0.46 | 1.03 |
- (1)
- These ratios exclude the impact of the FDIC covered loans, which are covered under loss share agreements between Union Bank, N.A. and the FDIC. Such agreements are related to the April 2010 acquisitions of certain assets and the assumption of certain liabilities of Frontier and Tamalpais.
- (2)
- Annualized.
- nm
- = not meaningful
18
Nonperforming assets consist of nonaccrual loans, including restructured loans that are nonperforming and OREO. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to our consolidated financial statements included in our 2010 Form 10-K.
OREO includes property where the Bank acquired title through foreclosure or "deed in lieu" of foreclosure.
The following table sets forth an analysis of nonperforming assets.
|
|
|
Increase/(Decrease) March 31, 2011 From December 31, 2010 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31, 2011 |
December 31, 2010 |
||||||||||||||
(Dollars in millions) | Amount | Percent | ||||||||||||||
Commercial, financial and industrial |
$ | 113 | $ | 115 | $ | (2 | ) | (2 | )% | |||||||
Construction |
71 | 140 | (69 | ) | (49 | ) | ||||||||||
Residential mortgage |
241 | 243 | (2 | ) | (1 | ) | ||||||||||
Commercial mortgage |
265 | 329 | (64 | ) | (19 | ) | ||||||||||
Consumer |
22 | 22 | | | ||||||||||||
Lease financing |
71 | | 71 | nm | ||||||||||||
Total nonaccrual loans, excluding FDIC covered loans |
783 | 849 | (66 | ) | (8 | ) | ||||||||||
FDIC covered loans |
90 | 116 | (26 | ) | (22 | ) | ||||||||||
Total nonaccrual loans |
873 | 965 | (92 | ) | (10 | ) | ||||||||||
OREO, excluding FDIC covered OREO |
32 | 41 | (9 | ) | (22 | ) | ||||||||||
FDIC covered OREO |
127 | 136 | (9 | ) | (7 | ) | ||||||||||
Total nonperforming assets |
$ | 1,032 | $ | 1,142 | $ | (110 | ) | (10 | )% | |||||||
Total nonperforming assets, excluding FDIC |
||||||||||||||||
covered assets |
$ | 815 | $ | 890 | $ | (75 | ) | (8 | )% | |||||||
Restructured loans that continue to accrue interest |
$ | 45 | $ | 22 | $ | 23 | 105 | % | ||||||||
Restructured nonaccrual loans (included in total nonaccrual loans above) |
$ | 189 | $ | 198 | $ | (9 | ) | (5 | ) | |||||||
Allowance for loan losses |
$ | 1,034 | $ | 1,191 | $ | (157 | ) | (13 | )% | |||||||
Allowance for credit losses |
$ | 1,184 | $ | 1,353 | $ | (169 | ) | (12 | )% | |||||||
Nonaccrual loans to total loans held for investment |
1.81 | % | 2.01 | % | ||||||||||||
Allowance for loan losses to nonaccrual loans |
118.50 | 123.40 | ||||||||||||||
Allowance for credit losses to nonaccrual loans |
135.61 | 140.23 | ||||||||||||||
Nonperforming assets to total loans held for investment and OREO |
2.14 | 2.37 | ||||||||||||||
Nonperforming assets to total assets |
1.28 | 1.44 | ||||||||||||||
Excluding FDIC covered assets:(1) |
||||||||||||||||
Nonaccrual loans to total loans held for investment |
1.68 | % | 1.82 | % | ||||||||||||
Allowance for loan losses to nonaccrual loans |
129.10 | 137.32 | ||||||||||||||
Allowance for credit losses to nonaccrual loans |
148.17 | 156.44 | ||||||||||||||
Nonperforming assets to total loans held for investment and OREO |
1.74 | 1.91 | ||||||||||||||
Nonperforming assets to total assets |
1.03 | 1.15 |
- (1)
- These ratios exclude the impact of the FDIC covered loans and FDIC covered OREO, which are covered under loss share agreements between Union Bank, N.A. and the FDIC. Such agreements are related to the April 2010 acquisitions of certain assets and the assumption of certain liabilities of Frontier and Tamalpais.
- nm
- = not meaningful
19
During the first quarters of 2011 and 2010, we sold nonperforming loans of $59 million and $34 million, respectively. Covered assets that were nonperforming at March 31, 2011 totaled $217 million, representing 0.27 percent of total assets. All covered assets are subject to loss share agreements with the FDIC. See Notes 1 and 2 in our consolidated financial statements included in our 2010 Form 10-K for more information on covered assets and FDIC loss share agreements.
Troubled Debt Restructurings
Troubled debt restructurings (TDRs) are those loans for which we have granted a concession to a borrower experiencing financial difficulty and consequently, we receive less than the current market-based compensation for loans with similar risk characteristics. Such loans are classified as impaired, and are reviewed for specific reserves either individually or in pools with similar risk characteristics. Our loss mitigation strategies are designed to minimize economic loss and, at times, may result in extensions of the maturity date, changes to loan-to-value requirements, rate reductions, forbearance or other actions, which may cause the related loan to be classified as a TDR. We evaluate whether these changes to the terms and conditions of our loans meet the TDR criteria after considering the specific situation of the borrower and all relevant facts and circumstances related to the modification. A TDR loan being considered for return to accrual status must have reasonable assurance of repayment and performance according to the modified terms and also be supported by a current well-documented credit evaluation under the revised terms. Generally, a minimum of six consecutive months of sustained performance is required in the evaluation of whether a TDR should be returned to accrual status.
Acquired loans restructured after acquisition are not considered TDRs for purposes of our accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools.
The following table provides a summary of total TDRs, including nonaccrual loans and loans that have been returned to accrual status, as of March 31, 2011 and December 31, 2010.
|
March 31, 2011 |
December 31, 2010 |
As a percentage of ending loan balances |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Amount | Number of loans |
Amount | Number of loans |
March 31, 2011 |
December 31, 2010 |
||||||||||||||
Commercial, financial and industrial |
$ | 24 | 8 | $ | 30 | 9 | 0.16 | % | 0.20 | % | ||||||||||
Residential mortgage |
101 | 179 | 79 | 138 | 0.56 | 0.45 | ||||||||||||||
Commercial mortgage |
107 | 16 | 111 | 15 | 1.39 | 1.41 | ||||||||||||||
Consumer |
2 | 20 | | | 0.04 | | ||||||||||||||
Total restructured loans |
$ | 234 | 223 | $ | 220 | 162 | 0.49 | % | 0.47 | % | ||||||||||
Loans 90 Days or More Past Due and Still Accruing
Loans held for investment 90 days or more past due and still accruing totaled $3 million and $2 million at March 31, 2011 and December 31, 2010, respectively. These amounts exclude $279 million and $312 million at March 31, 2011 and December 31, 2010, respectively, of FDIC covered loans accounted for in accordance with the accounting standards for purchased credit-impaired loans, that were 90 days or more past due and still accruing.
20
The table below presents our deposits as of March 31, 2011 and December 31, 2010.
|
|
|
Increase/(Decrease) March 31, 2011 From December 31, 2010 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31, 2011 | December 31, 2010 | ||||||||||||||
(Dollars in millions) | Amount | Percent | ||||||||||||||
Interest checking |
$ | 971 | $ | 931 | $ | 40 | 4 | % | ||||||||
Money market |
22,874 | 26,159 | (3,285 | ) | (13 | ) | ||||||||||
Total interest bearing transaction accounts |
23,845 | 27,090 | (3,245 | ) | (12 | ) | ||||||||||
Savings |
5,104 | 4,433 | 671 | 15 | ||||||||||||
Time |
11,666 | 12,088 | (422 | ) | (3 | ) | ||||||||||
Total interest bearing deposits(1) |
40,615 | 43,611 | (2,996 | ) | (7 | ) | ||||||||||
Noninterest bearing deposits |
18,062 | 16,343 | 1,719 | 11 | ||||||||||||
Total deposits |
$ | 58,677 | $ | 59,954 | $ | (1,277 | ) | (2 | )% | |||||||
(1)Total interest bearing deposits include: |
||||||||||||||||
Brokered deposits: |
||||||||||||||||
Interest bearing transaction accounts |
$ | 1,967 | $ | 2,354 | $ | (387 | ) | (16 | )% | |||||||
Time |
1,482 | 1,217 | 265 | 22 | ||||||||||||
Total brokered deposits |
3,449 | 3,571 | (122 | ) | (3 | ) | ||||||||||
Nonbrokered deposits |
37,166 | 40,040 | (2,874 | ) | (7 | ) | ||||||||||
Total interest bearing deposits |
$ | 40,615 | $ | 43,611 | $ | (2,996 | ) | (7 | )% | |||||||
Core Deposits: |
||||||||||||||||
Total deposits |
$ | 58,677 | $ | 59,954 | $ | (1,277 | ) | (2 | )% | |||||||
Less: Total interest bearing brokered deposits |
3,449 | 3,571 | (122 | ) | (3 | ) | ||||||||||
Less: Total nonbrokered time deposits of $100,000 and over |
7,210 | 7,716 | (506 | ) | (7 | ) | ||||||||||
Total core deposits |
$ | 48,018 | $ | 48,667 | $ | (649 | ) | (1 | )% | |||||||
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 as well as capital stability.
The Board of Directors (Board), directly or through its appropriate committee, approves our Asset Liability Management Policy (ALM Policy), which governs the management of market and liquidity risks and guides our investment, derivatives, trading and funding activities. The ALM Policy establishes the Bank's risk tolerance guidelines by outlining standards for measuring market and liquidity risks, creates Board-level limits for specific market risks, establishes guidelines for reporting market and liquidity risk and requires independent review and oversight of market and liquidity risk activities.
The Risk & Capital Committee (RCC), 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 defining the risk/return direction for the Bank, delegating to and reviewing market risk management activities of the Asset Liability Management Committee (ALCO) and by approving the investment, derivatives and trading policies that govern the Bank's activities. ALCO, as authorized by the RCC, is responsible for the management of market risk and approves specific risk management programs including those related to interest rate hedging, investment securities, wholesale funding and trading activities.
21
The Treasurer is primarily responsible for the implementation of risk management strategies approved by ALCO and for operational management of market risk through the funding, investment and derivatives hedging activities of Corporate Treasury. The manager of the Global Capital Markets Group (GCMG) is responsible for managing price risk through the trading activities conducted in GCMG. The Market Risk Management (MRM) unit is responsible for the monitoring of market risk and functions independently of all operating and management units.
The Bank has separate and distinct methods for managing the market risk associated with our asset and liability management activities and our trading activities, as described below.
Interest Rate Risk Management (Other Than Trading)
ALCO monitors interest rate risk monthly through a variety of modeling techniques that are used to quantify the sensitivity of Net Interest Income (NII) and of Economic Value of Equity (EVE) to changes in interest rates. In managing interest rate risk, ALCO monitors NII sensitivity over various time horizons and in response to a variety of interest rate changes.
Our NII policy measurement involves a simulation of "Earnings-at-Risk" (EaR) in which we estimate the earnings impact of gradual parallel shifts in the yield curve of up and down 200 basis points over a 12-month horizon, given our projected balance sheet profile. However, during the first quarter of 2010, under RCC delegated authority to approve temporary changes to risk measurement, the -200 basis point parallel scenario was replaced with a -100 basis point parallel scenario. This change reflected the low probability associated with rate reductions of 200 basis points in the current extremely low rate environment, and the acceptance of a scenario that better reflects historically low rate levels achieved in the past. The +200 basis point scenario was not changed. The RCC will monitor the rate environment and will consider restoring the -200 basis point measure in the future when deemed appropriate. Under the ALM Policy, the EaR in either the up or down scenarios is limited to a negative 4 percent change in NII as compared to a base case scenario that holds interest rates unchanged.
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 a calibrated 3rd party model that estimates prepayment speeds.
At March 31, 2011, EaR was asset sensitive to upward parallel rate shifts and liability sensitive to downward parallel rate shifts. We caution that the extremely low current interest rate environment and ongoing enhancements to our interest rate risk modeling may make prior year comparisons of EaR less meaningful.
Earnings (Accounting NII) at Risk
The table below presents the estimated increase (decrease) in Accounting NII given a gradual parallel shift in the yield curve up 200 basis points and down 100 basis points over a 12-month horizon.
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Effect on Accounting NII: |
||||||||
increase 200 basis points |
$ | 144.5 | $ | 108.8 | ||||
as a percentage of base case NII |
6.15 | % | 4.75 | % | ||||
decrease 100 basis points |
$ | (74.5 | ) | $ | (64.8 | ) | ||
as a percentage of base case NII |
(3.18 | )% | (2.83 | )% |
Generally, our short-term assets re-price faster than short-term non-maturity liabilities. As a result, higher short-term rates would improve Accounting NII. Alternatively, gradually lower short-term rates would contract
22
Accounting NII. With regard to the curve shape, curve steepening would improve Accounting NII while curve flattening would slightly decrease Accounting NII.
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 March 31, 2011 reflected a moderate but similar exposure to rising rates as compared to December 31, 2010. Additionally, our EVE-at-Risk showed moderate exposure to falling rates, due to the nature of the low rate environment.
We believe that, together, our EaR 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, over the measurement horizon. However, as with any financial model, the underlying assumptions are inherently uncertain and subject to refinement as modeling techniques and theory evolve. Consequently, our simulation models cannot predict with any degree of certainty how 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 the first quarter of 2011, the Bank's asset sensitive EaR profile increased largely due to changes in forecasted activity related to deposit composition, loan mix and a reduction of low yielding investments pending greater regulatory clarity on Basel III liquidity rules. 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.
ALM Securities
At March 31, 2011 and December 31, 2010, our available for sale securities portfolio included $20.1 billion and $20.6 billion, respectively, of securities for ALM purposes. At March 31, 2011, approximately $4.9 billion of the portfolio was pledged to secure trust and public deposits and for other purposes as required or permitted by law. During the first quarter of 2011, we purchased $2.9 billion and sold $1.9 billion par value of securities, as part of our investment portfolio strategy, while $1.3 billion par value of ALM securities matured or were called.
Based on current prepayment projections, the estimated ALM securities portfolio's effective duration was 2.2 at both March 31, 2011 and December 31, 2010. Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 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 the first quarter of 2011, the ALM derivatives portfolio decreased by $500 million notional amount due to terminations of $1 billion in pay fixed rate swaps associated with the issuance of fixed rate debt offset by the addition of $500 million of pay fixed rate swaps to hedge variable rate borrowings.
The fair value of the ALM derivatives portfolio decreased primarily due to the termination of pay fixed rate swaps and the erosion of time value on interest rate cap contracts. The decrease was partially offset by pay fixed rate interest rate swaps which benefit from the expectation of higher rates. For additional discussion of
23
derivative instruments and our hedging strategies, see Note 11 to our consolidated financial statements in this Form 10-Q and Note 18 to our consolidated financial statements included in our 2010 Form 10-K.
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
Increase/(Decrease) March 31, 2011 From December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Total gross notional amount of positions held for purposes other than trading: |
||||||||||||
Pay fixed interest rate swaps |
$ | 1,000 | $ | 1,500 | $ | (500 | ) | |||||
Interest rate caps purchased |
4,000 | 4,000 | | |||||||||
Total interest rate contracts |
$ | 5,000 | $ | 5,500 | $ | (500 | ) | |||||
Fair value of positions held for purposes other than trading: |
||||||||||||
Gross positive fair value |
11 | 21 | (10 | ) | ||||||||
Gross negative fair value |
| | | |||||||||
Positive fair value of positions, net |
$ | 11 | $ | 21 | $ | (10 | ) | |||||
Trading Activities
We enter into trading account activities primarily as a financial intermediary for customers and, to some extent, for our own account. By acting as a financial intermediary, we are able to provide our customers with access to a range of products supporting the securities, foreign exchange and derivatives markets. In acting for our own account, we may take positions in certain securities, foreign exchange and interest rate instruments, subject to various limits in amount, tenor and other respects, with the objective of generating trading profits.
We believe that the risks associated with these positions are conservatively managed. We utilize a combination of position limits, Value-at-Risk (VaR), and stop-loss limits, applied at an aggregated level and to various sub-components within those limits. Positions are controlled and reported both in notional and VaR terms. Our calculation of VaR estimates how high the loss in fair value might be, at a 99 percent confidence level, due to an adverse shift in market prices over a period of ten business days. VaR at the trading activity level is managed within the maximum limit of $14 million established by Board policy for total trading positions. The VaR model incorporates assumptions on key parameters, including holding period and historical volatility.
Consistent with our business strategy of focusing on the sale of capital markets products to customers, we manage our trading risk exposures at relatively low levels. Our foreign exchange business continues to derive the majority of its revenue from customer-related transactions. We take trading positions with other banks only on a limited basis and we do not take any large or long-term strategic positions in the market for our own portfolio. Similarly, we continue to generate most of our securities trading income from customer-related transactions.
As of March 31, 2011, we had $32.9 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 March 31, 2011, we had $2.8 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. As of March 31, 2011, we had $5.0 billion notional amount of commodity derivative contracts. We enter into such contracts to satisfy the needs of our customers, and remove our exposure to market risk by entering into matching contracts with other counterparties.
24
The following table provides the notional value and the fair value of our trading derivatives portfolio as of March 31, 2011 and December 31, 2010 and the change in fair value between March 31, 2011 and December 31, 2010.
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
Increase/(Decrease) March 31, 2011 From December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Total gross notional amount of positions held for trading purposes: |
||||||||||||
Interest rate contracts |
$ | 32,896 | $ | 28,820 | $ | 4,076 | ||||||
Commodity contracts |
5,018 | 4,679 | 339 | |||||||||
Foreign exchange contracts(1) |
2,795 | 2,594 | 201 | |||||||||
Equity contracts |
1,888 | 1,313 | 575 | |||||||||
Other contracts |
60 | 60 | | |||||||||
Total |
$ | 42,657 | $ | 37,466 | $ | 5,191 | ||||||
Fair value of positions held for trading purposes: |
||||||||||||
Gross positive fair value |
$ | 934 | $ | 922 | $ | 12 | ||||||
Gross negative fair value |
901 | 897 | 4 | |||||||||
Positive fair value of positions, net |
$ | 33 | $ | 25 | $ | 8 | ||||||
- (1)
- Excludes spot contracts with notional amounts of $0.3 billion and $0.4 billion at March 31, 2011 and December 31, 2010, 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 the 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 Contingency Funding Plan that identifies actions to be taken to help ensure adequate liquidity if an event should occur that disrupts or adversely affects the Bank's normal funding activities. In 2010, the federal bank regulators adopted an Interagency Policy Statement on Funding and Liquidity Risk Management, which sets forth the regulators' supervisory expectations for all insured depository institutions for management of funding and liquidity risk. The Bank's Board of Directors has approved a number of measures aimed at assuring compliance with the policy statement, including a formal ALM Policy with specific governance on liquidity risk management.
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 flows 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 remedial measures to help ensure that the Bank maintains adequate liquidity in adverse conditions. Such measures may include extending the maturity profile of liabilities,
25
optimizing liability levels through pricing strategies, adding new funding sources, altering dependency on certain funding sources and/or selling assets.
Our primary sources of liquidity are core deposits (described below), our securities portfolio and wholesale funding. Wholesale funding includes unsecured funds raised from interbank and other sources, both domestic and international. Also included are secured funds raised by selling securities under repurchase agreements and by borrowing from the FHLB. We evaluate and monitor the stability and reliability of our various funding sources to help ensure that we have sufficient liquidity in adverse circumstances. We generally view our core deposits to be relatively stable. Secured borrowings via repurchase agreements and advances from the FHLB are also recognized as highly reliable funding sources, and we therefore maintain these sources primarily to meet our contingency funding needs.
To support asset growth, wholesale funding increased by $2.7 billion from $8.8 billion at December 31, 2010 to $11.5 billion at March 31, 2011, more than offsetting the decline in deposit balances. Total deposits declined $1.3 billion from $60.0 billion at December 31, 2010 to $58.7 billion at March 31, 2011 largely due to planned interest bearing deposit declines resulting from targeted rate reductions.
Core deposits, which consist of total deposits excluding brokered deposits and time deposits of $100,000 and over, provide us with a sizable source of relatively stable and low-cost funds. At March 31, 2011, our core deposits totaled $48.0 billion and our total loan-to-total deposit ratio was 82 percent.
The Bank maintains a variety of other funding sources, secured and unsecured, which management believes will be adequate to meet the Bank's liquidity needs, including the following:
-
- The Bank has pledged collateral under secured borrowing facilities with the FHLB and the Federal Reserve Bank (FRB). As of
March 31, 2011, the Bank had $4.8 billion of borrowings outstanding with the FHLB, and the Bank had a remaining combined unused borrowing capacity from the FHLB and the FRB of
$18.0 billion.
-
- Our securities portfolio provides liquidity through either securities sales or repurchase agreements. Total unpledged
securities were $15.2 billion at March 31, 2011, unchanged from December 31, 2010.
-
- The Bank has a $4.0 billion unsecured Bank Note Program. Available funding under the Bank Note Program was
$2.2 billion at March 31, 2011, unchanged from December 31, 2010. We do not have any firm commitments in place to sell securities under the Bank Note Program.
-
- In addition to the funding provided by the Bank, we raise funds at the holding company level. UnionBanCal Corporation has in place a shelf registration with the SEC permitting ready access to the public debt markets. As of March 31, 2011, $1.5 billion of debt or other securities were available for issuance under this shelf registration. We do not have any firm commitments in place to sell securities under this shelf registration.
We believe that these sources, in addition to our core deposits and equity capital, provide a stable funding base. We have not historically relied on BTMU for our funding needs. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.
Our costs and ability to raise funds in the capital markets are influenced by our credit ratings. Our credit ratings could be impacted by changes in the credit ratings of BTMU and MUFG. For further information, see "The Bank of Tokyo Mitsubishi UFJ's and Mitsubishi UFJ Financial Group's credit ratings and financial or
26
regulatory condition could adversely affect our operations" in Part II, Item 1A. Risk Factors of this Form 10-Q. The following table provides our credit ratings as of March 31, 2011.
|
|
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) |
27
The following tables summarize our risk-based capital, risk-weighted assets, and risk-based capital ratios.
UnionBanCal Corporation
(Dollars in millions) | March 31, 2011 |
|
December 31, 2010 |
|
|
|
|
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Capital Components |
||||||||||||||||||||||||||||
Tier 1 capital |
$ | 8,280 | $ | 8,029 | ||||||||||||||||||||||||
Tier 2 capital |
1,654 | 1,656 | ||||||||||||||||||||||||||
Total risk-based capital |
$ | 9,934 | $ | 9,685 | ||||||||||||||||||||||||
Risk-weighted assets |
$ | 64,467 | $ | 64,516 | ||||||||||||||||||||||||
Quarterly average assets |
$ | 77,676 | $ | 77,659 | ||||||||||||||||||||||||
|
March 31, 2011 |
December 31, 2010 |
March 31, 2011 Minimum Regulatory Requirement |
|
|
|
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |
|
|
|||||||||||||||||||
Capital Ratios |
||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
$ | 9,934 | 15.41 | % | $ | 9,685 | 15.01 | % | ³$ | 5,157 | 8.0 | % | ||||||||||||||||
Tier 1 capital (to risk-weighted assets) |
8,280 | 12.84 | 8,029 | 12.44 | ³ | 2,579 | 4.0 | |||||||||||||||||||||
Leverage(1) |
8,280 | 10.66 | 8,029 | 10.34 | ³ | 3,107 | 4.0 |
- (1)
- Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
Union Bank, N.A.
(Dollars in millions) | March 31, 2011 |
|
December 31, 2010 |
|
|
|
|
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Capital Components |
||||||||||||||||||||||||||||
Tier 1 capital |
$ | 8,008 | $ | 7,377 | ||||||||||||||||||||||||
Tier 2 capital |
1,491 | 1,489 | ||||||||||||||||||||||||||
Total risk-based capital |
$ | 9,499 | $ | 8,866 | ||||||||||||||||||||||||
Risk-weighted assets |
$ | 64,267 | $ | 63,993 | ||||||||||||||||||||||||
Quarterly average assets |
$ | 77,643 | $ | 77,229 | ||||||||||||||||||||||||
|
March 31, 2011 |
December 31, 2010 |
March 31, 2011 Minimum Regulatory Requirement |
March 31, 2011 "Well-Capitalized" Regulatory Requirement |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||
Capital Ratios |
|||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
$ | 9,499 | 14.78 | % | $ | 8,866 | 13.85 | % | ³$ | 5,141 | 8.0 | % | ³$ | 6,427 | 10.0 | % | |||||||||
Tier 1 capital (to risk-weighted assets) |
8,008 | 12.46 | 7,377 | 11.53 | ³ | 2,571 | 4.0 | ³ | 3,856 | 6.0 | |||||||||||||||
Leverage(1) |
8,008 | 10.31 | 7,377 | 9.55 | ³ | 3,106 | 4.0 | ³ | 3,882 | 5.0 |
- (1)
- Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
We and Union Bank are subject to various regulations of the federal banking agencies, including minimum capital requirements. We are both required to maintain minimum ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the Leverage ratio). As of March 31, 2011, management believes the capital ratios of Union Bank met all regulatory requirements of "well-capitalized" institutions.
In addition to capital ratios determined in accordance with regulatory requirements, we consider various other measures when evaluating capital utilization and adequacy. These non-regulatory capital ratios are viewed by management, and presented below, to further facilitate the understanding of our capital structure and for use in assessing and comparing the quality and composition of UNBC's capital structure to other
28
financial institutions. These ratios are not defined by US GAAP or federal banking regulations. Therefore, these non-regulatory capital ratios disclosed are considered to be non-GAAP financial measures. Our tangible common equity ratio calculation methods for the Tangible common equity may differ from those used by other financial services companies. Refer to "Supervision and Regulation-Basel Committee Capital Standards" in Part I, Item 1 of our 2010 Form 10-K for additional information regarding the Basel Committee capital standards.
The following table summarizes the calculation of our tangible common equity ratio and Tier 1 common capital ratio as of March 31, 2011 and December 31, 2010.
|
|
|
Increase/(Decrease) March 31, 2011 From December 31, 2010 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31, 2011 |
December 31, 2010 |
||||||||||||
(Dollars in millions) | Amount | Percent | ||||||||||||
Total UNBC stockholder's equity |
$ | 10,355 | $ | 10,125 | $ | 230 | 2 | % | ||||||
Goodwill |
(2,447 | ) | (2,456 | ) | 9 | | ||||||||
Intangible assets |
(432 | ) | (457 | ) | 25 | (5 | ) | |||||||
Deferred tax liabilities related to goodwill and intangible assets |
159 | 168 | (9 | ) | (5 | ) | ||||||||
Tangible common equity (a) |
$ | 7,635 | $ | 7,380 | $ | 255 | 3 | |||||||
Tier 1 capital, determined in accordance with regulatory requirements |
$ | 8,280 | $ | 8,029 | $ | 251 | 3 | |||||||
Trust preferred securities |
| (13 | ) | 13 | (100 | ) | ||||||||
Tier 1 common equity (b) |
$ | 8,280 | $ | 8,016 | $ | 264 | 3 | |||||||
Total assets |
$ | 80,642 | $ | 79,097 | $ | 1,545 | 2 | |||||||
Goodwill |
(2,447 | ) | (2,456 | ) | 9 | | ||||||||
Intangible assets |
(432 | ) | (457 | ) | 25 | (5 | ) | |||||||
Deferred tax liabilities related to goodwill and intangible assets |
159 | 168 | (9 | ) | (5 | ) | ||||||||
Tangible assets (c) |
$ | 77,922 | $ | 76,352 | $ | 1,570 | 2 | |||||||
Risk-weighted assets, determined in accordance with regulatory requirements (d) |
$ | 64,467 | $ | 64,516 | $ | (49 | ) | | % | |||||
Tangible common equity ratio (a)/(c) |
9.80 | % | 9.67 | % | ||||||||||
Tier 1 common capital ratio (b)/(d) |
12.84 | 12.42 |
Our stockholder's equity increased 2 percent to $10.4 billion at March 31, 2011, from $10.1 billion at December 31, 2010. As of March 31, 2011 our tangible common equity ratio had improved to 9.80 percent from 9.67 percent at December 31, 2010. The increase was primarily due to the growth in tangible capital which outpaced the growth in the related tangible assets. Tier 1 common equity ratio increased to 12.84 percent at March 31, 2011 from 12.42 percent at December 31, 2010, primarily due to capital accumulation from earnings retention outpacing capital requirements to support our asset growth.
We have three operating segments: Retail Banking Group, Corporate Banking Group and Pacific Rim Corporate Group. The Pacific Rim Corporate Group is included in "Other." We have two reportable business segments: Retail Banking and Corporate Banking.
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 most of the market risk is not assumed by the business unit. Credit risk is the potential loss in
29
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, commodity prices and equity prices. RAROC may be one of several measures that is used to measure business unit compensation.
We reflect a "market view" perspective in measuring our business segments. The market view is a measurement of our customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are eliminated in "Reconciling Items." The market view approach fosters cross-selling with a total profitability view of the products and services being managed.
Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies, and they are not necessarily indicative of the results that would be reported by our business units if they were unique economic entities.
The table that follows reflects the condensed income statements, selected average balance sheet items, and selected financial ratios, including changes from the prior year, for each of our reportable business segments. Business unit results are prepared using various management accounting methodologies to measure the performance of the individual units. Our management accounting methodologies, which are enhanced from time to time, measure segment profitability by assigning balance sheet and income statement items to each operating segment. Methodologies that are applied to the measurement of segment profitability include:
-
- A funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on
their type, maturity or repricing characteristics. During the first quarter of 2011, we refined our transfer pricing methodology for non-maturity deposits to reflect expected balance
run-off and average life assumptions. During the first quarter of 2010, we refined our transfer pricing methodology with respect to reference rates for deposits and to include additional
assumptions about liquidity premiums, benefits granted for eligible loan collateral and charges for collateral requirements on deposits.
-
- An activity-based costing methodology, in which certain indirect costs, such as operations and technology expense, are
allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the segments based on a
predetermined percentage of usage.
-
- A RAROC methodology, in which credit expense is charged to an operating segment based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit and operational risks and, to a lesser extent, market risk. As a result of the methodology used in the RAROC model to calculate expected losses, differences between the provision for credit losses and credit expense in any one period could be significant. However, over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same.
30
The reportable business segment results for the prior periods have been adjusted to reflect changes in the transfer pricing methodology that have occurred.
|
Retail Banking | |
|
Corporate Banking | |
|
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of and for the Three Months Ended March 31, |
Increase/(Decrease) | As of and for the Three Months Ended March 31, |
Increase/(Decrease) | ||||||||||||||||||||||||
|
2011 | 2010 | Amount | Percent | 2011 | 2010 | Amount | Percent | ||||||||||||||||||||
Results of operationsMarket View (dollars in millions): |
||||||||||||||||||||||||||||
Net interest income (expense) |
$ | 265 | $ | 229 | $ | 36 | 16 | % | $ | 307 | $ | 295 | $ | 12 | 4 | % | ||||||||||||
Noninterest income (expense) |
65 | 66 | (1 | ) | (2 | ) | 130 | 115 | 15 | 13 | ||||||||||||||||||
Total revenue |
330 | 295 | 35 | 12 | 437 | 410 | 27 | 7 | ||||||||||||||||||||
Noninterest expense (income) |
262 | 215 | 47 | 22 | 230 | 235 | (5 | ) | (2 | ) | ||||||||||||||||||
Credit expense (income) |
6 | 7 | (1 | ) | (14 | ) | 52 | 78 | (26 | ) | (33 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||||||
Income (loss) before income taxes |
||||||||||||||||||||||||||||
and including noncontrolling interests |
62 | 73 | (11 | ) | (15 | ) | 155 | 97 | 58 | 60 | ||||||||||||||||||
Income tax expense (benefit) |
24 | 29 | (5 | ) | (17 | ) | 36 | 16 | 20 | 125 | ||||||||||||||||||
Net income (loss) including noncontrolling interests |
38 | 44 | (6 | ) | (14 | ) | 119 | 81 | 38 | 47 | ||||||||||||||||||
Less: Net loss from noncontrolling |
||||||||||||||||||||||||||||
interests(2) |
| | | | | | | | ||||||||||||||||||||
Net income (loss) attributable to UNBC |
$ | 38 | $ | 44 | $ | (6 | ) | (14 | )% | $ | 119 | $ | 81 | $ | 38 | 47 | % | |||||||||||
Average balancesMarket View (dollars in millions): |
||||||||||||||||||||||||||||
Total loans |
$ | 22,478 | $ | 21,631 | $ | 847 | 4 | $ | 26,316 | $ | 27,005 | $ | (689 | ) | (3 | ) | ||||||||||||
Total assets |
23,481 | 22,476 | 1,005 | 4 | 30,474 | 30,567 | (93 | ) | | |||||||||||||||||||
Total deposits |
24,394 | 20,349 | 4,045 | 20 | 30,389 | 41,158 | (10,769 | ) | (26 | ) | ||||||||||||||||||
Financial ratiosMarket View |
||||||||||||||||||||||||||||
Risk adjusted return on capital(1) |
26 | % | 32 | % | 15 | % | 11 | % | ||||||||||||||||||||
Return on average assets(1) |
0.66 | 0.79 | 1.58 | 1.07 | ||||||||||||||||||||||||
Core efficiency ratio, excluding impact of privatization(3) |
78.89 | 72.84 | 49.60 | 54.07 |
|
Other | |
|
Reconciling Items | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of and for the Three Months Ended March 31, |
Increase/(Decrease) | As of and for the Three Months Ended March 31, |
|||||||||||||||||
|
2011 | 2010 | Amount | Percent | 2011 | 2010 | ||||||||||||||
Results of operationsMarket View (dollars in millions): |
||||||||||||||||||||
Net interest income (expense) |
$ | 63 | $ | 68 | $ | (5 | ) | (7 | )% | $ | (18 | ) | $ | (18 | ) | |||||
Noninterest income (expense) |
61 | 44 | 17 | 39 | (16 | ) | (15 | ) | ||||||||||||
Total revenue |
124 | 112 | 12 | 11 | (34 | ) | (33 | ) | ||||||||||||
Noninterest expense (income) |
135 | 87 | 48 | 55 | (13 | ) | (12 | ) | ||||||||||||
Credit expense (income) |
(160 | ) | 85 | (245 | ) | nm | | | ||||||||||||
Income (loss) before income taxes and including noncontrolling interests |
149 | (60 | ) | 209 | nm | (21 | ) | (21 | ) | |||||||||||
Income tax expense (benefit) |
62 | (22 | ) | 84 | nm | (8 | ) | (8 | ) | |||||||||||
Net income (loss) including noncontrolling interests |
87 | (38 | ) | 125 | nm | (13 | ) | (13 | ) | |||||||||||
Less: Net loss from noncontrolling interests(2) |
4 | 3 | 1 | 33 | | | ||||||||||||||
Net income (loss) attributable to UNBC |
$ | 91 | $ | (35 | ) | $ | 126 | nm | % | $ | (13 | ) | $ | (13 | ) | |||||
Average balancesMarket View (dollars in millions): |
||||||||||||||||||||
Total loans |
$ | 1,509 | $ | 89 | $ | 1,420 | nm | $ | (2,021 | ) | $ | (1,877 | ) | |||||||
Total assets |
28,144 | 33,664 | (5,520 | ) | (16 | ) | (2,044 | ) | (1,897 | ) | ||||||||||
Total deposits |
6,689 | 7,959 | (1,270 | ) | (16 | ) | (2,002 | ) | (1,628 | ) | ||||||||||
Financial ratiosMarket View |
||||||||||||||||||||
Risk adjusted return on capital(1) |
na | na | na | na | ||||||||||||||||
Return on average assets(1) |
na | na | na | na | ||||||||||||||||
Core efficiency ratio, excluding impact of privatization(3) |
na | na | na | na |
31
|
UnionBanCal Corporation | |
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
As of and for the Three Months Ended March 31, |
Increase/(Decrease) | ||||||||||||
|
2011 | 2010 | Amount | Percent | ||||||||||
Results of operationsMarket View (dollars in millions): |
||||||||||||||
Net interest income (expense) |
$ | 617 | $ | 574 | $ | 43 | 7 | % | ||||||
Noninterest income (expense) |
240 | 210 | 30 | 14 | ||||||||||
Total revenue |
857 | 784 | 73 | 9 | ||||||||||
Noninterest expense (income) |
614 | 525 | 89 | 17 | ||||||||||
Credit expense (income) |
(102 | ) | 170 | (272 | ) | nm | ||||||||
Income (loss) before income taxes and including noncontrolling interests |
345 | 89 | 256 | 288 | ||||||||||
Income tax expense (benefit) |
114 | 15 | 99 | nm | ||||||||||
Net income (loss) including noncontrolling interests |
231 | 74 | 157 | 212 | ||||||||||
Less: Net loss from noncontrolling interests(2) |
4 | 3 | 1 | 33 | ||||||||||
Net income (loss) attributable to UNBC |
$ | 235 | $ | 77 | $ | 158 | 205 | % | ||||||
Average balancesMarket View (dollars in millions): |
||||||||||||||
Total loans |
$ | 48,282 | $ | 46,848 | $ | 1,434 | 3 | |||||||
Total assets |
80,055 | 84,810 | (4,755 | ) | (6 | ) | ||||||||
Total deposits |
59,470 | 67,838 | (8,368 | ) | (12 | ) | ||||||||
Financial ratiosMarket View |
||||||||||||||
Risk adjusted return on capital(1) |
9 | % | 3 | % | ||||||||||
Return on average assets(1) |
1.19 | 0.37 | ||||||||||||
Core efficiency ratio, excluding impact of privatization(3) |
67.47 | 61.51 |
- (1)
- Annualized.
- (2)
- Reflects net loss attributed to noncontrolling interest related to our consolidated variable interest entities (VIEs).
- (3)
- The core efficiency ratio, excluding impact of privatization, a non-GAAP financial measure, is net noninterest expense (noninterest expense excluding privatization-related expenses and fair value amortization/accretion, foreclosed asset expense, the (reversal of) provision for losses on off-balance sheet commitments, low income housing credit investment amortization expense, expenses of the consolidated Variable Interest Entities (VIEs), merger costs related to the acquisitions of certain assets and assumption of certain liabilities of Frontier Bank and Tamalpais Bank) as a percentage of total revenue (net interest income (taxable-equivalent basis) and noninterest income). Management discloses the core efficiency ratio as a measure of the efficiency of our operations, focusing on those costs most relevant to our core activities.
na = not applicable
nm = not meaningful
32
Retail Banking
Retail Banking provides deposit and lending products delivered through our branches and relationship managers to individuals and small businesses. Retail Banking is focused on executing a strategy that will identify targeted opportunities within the consumer and small business markets, and develop product, marketing and sales strategies to attract new customers in these identified target markets.
Retail Banking is comprised of the following major divisions: Community Banking and Consumer Lending.
-
- the Community Banking Division serves its customers through 348 full-service branches in California and 53 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.
-
- through
conveniently located banking branches and ATMs which serve consumers and businesses with checking and deposit products and services, as
well as various types of consumer financing and investment services;
-
- through
its call center and internet banking services, which augment its physical delivery channels by providing an array of customer transaction,
bill payment and loan payment services; and
-
- through
alliances with other financial institutions, the Community Banking Division offers additional products and services, such as credit cards
and merchant services.
-
- the Consumer Lending Division provides the centralized origination, underwriting, processing, servicing, collection and administration for consumer assets including residential mortgages.
The Community Banking Division is organized geographically and serves its customers in the following ways:
During the first quarter of 2011, net income of Retail Banking decreased compared to the same period in 2010, resulting from a 22 percent increase in noninterest expense, partially offset by a 16 percent increase in net interest income. Noninterest expense increased by 22 percent during the first quarter of 2011 compared to the same period in 2010, primarily due to increased overhead allocation costs, ongoing acquisition-related expenses, and staff costs. The increase in net interest income was primarily due to increased margin combined with the growth in loans and interest bearing deposits.
Average asset growth for the first quarter of 2011 compared to the first quarter of 2010 was primarily driven by a 4 percent growth in average loans, mainly in residential mortgages.
Average deposits increased 20 percent during the first quarter of 2011 compared to the same period in 2010. The key drivers for this increase include acquisition-related deposits and Retail Banking's strategy, which continues to focus on marketing activities to attract new consumer and small business deposits, customer cross-sell, and relationship management.
Noninterest income decreased by 2 percent during the first quarter of 2011 compared to the same period in 2010 primarily due to lower service charges on deposits driven by new fee-related regulations and changes in consumer behavior.
Corporate Banking
Corporate Banking offers a range of financial products to both middle market and corporate businesses headquartered throughout the U.S. Corporate Banking focuses its activities on specific specialized industries, such as power and utilities, petroleum, real estate, healthcare, equipment leasing and commercial finance as well as general corporate and middle-market lending in regional markets throughout the U.S. Corporate
33
Banking relationship managers provide credit services including commercial loans, accounts receivable and inventory financing, project financing, trade financing and real estate financing. In addition to credit services, Corporate Banking offers its customers a range of noncredit services, which include global treasury management solutions, foreign exchange and various interest rate risk and commodity risk management products. These products are delivered through deposit managers and product specialists with significant industry expertise and experience in businesses of all sizes including numerous vertical industry niches such as U.S. correspondent banks and certain government entities.
One of the primary strategies of our Corporate Banking business units is to target industries and companies for which we can reasonably expect to be one of a 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 "commercial bank." We also compete with a variety of other financial services companies as well as non-bank companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies and insurance companies.
Corporate Banking initiatives continue to expand commercial and loan relationship strategies that include originating, underwriting and syndicating loans in core competency markets, such as in our West Coast commercial lending markets, as well as our national specialty markets including real estate, energy, equipment leasing and commercial finance.
Corporate Banking is comprised of the following main divisions:
-
- the Commercial Banking Division, which includes the following operating
units:
-
- Commercial
Banking, which provides commercial lending products and treasury management services to middle market and corporate companies in
California, Oregon and Washington;
-
- Power
and Utilities, which provides treasury management products and commercial lending products including commercial lines of credit and project
financing to independent power producers as well as regulated utility companies;
-
- Petroleum,
which provides commercial lending products including reserve-based lines of credit, commercial lines of credit as well as treasury
management products to oil and gas companies; and
-
- National
Banking provides commercial lending and treasury management products to corporate clients on a national basis, in states outside of
California, Oregon, and Washington. National Banking also targets certain defined industries, such as healthcare, entertainment, food and beverage.
-
- Specialized
Industries provides commercial lending and treasury products to middle-market and corporate clients in specific industries on a
national basis including commercial finance, funds finance, environmental services and non-profits.
-
- the Real Estate Industries Division serves professional real estate
investors and developers with products such as construction loans, commercial mortgages and bridge financing. Additionally, through our Community Development Finance unit, we make tax credit
investments in affordable housing projects, as well as provide construction and permanent financing;
-
- the Global Capital Markets Division helps to serve our customers with their foreign exchange, interest rate and energy risk management needs in addition to facilitating merchant and investment banking related transactions. The division takes market risk when buying and selling securities, interest rate derivatives and foreign exchange contracts for its own account and accepts limited market risk when
34
-
- the Global Treasury Management Division targets numerous industry
relationship markets with deep industry and product expertise. The Global Treasury Management Division provides working capital solutions to meet deposit, investment and global treasury management
services to businesses of all sizes. This division manages Union Bank's web strategies for retail, small business, wealth management and commercial clients, as well as commercial product development.
Additionally, this division includes the Institutional Services operating unit, which provides custody, corporate trust, and retirement plan services. The client base of this operating unit includes
financial institutions, corporations, government agencies, unions, insurance companies, mutual funds, investment managers and non-profit organizations. Custody Services provides both
domestic and international safekeeping/settlement services in addition to securities lending. Corporate Trust acts as trustee for corporate and municipal debt issues, and provides escrow services and
trustee services for project finance. Retirement Plan Services provides defined benefit services, including trustee services and investment management.
-
- the Wealth Markets Division consists of the following operating
units:
-
- The
Private Bank focuses primarily on delivering financial services to high net worth individuals with sophisticated financial needs as well as to
professional service firms, foundations and endowments. Specific products and services include trust and estate services, financial planning, investment account management services, and deposit and
credit products;
-
- UnionBanc
Investment Services LLC (UBIS) is a subsidiary of Union Bank and is our registered broker-dealer and registered investment
advisor. UBIS provides services to retail and institutional clients in several core products areas, including annuities, mutual funds, and fixed income products. Retail services are delivered through
dedicated investment specialists located throughout the Bank's geographical footprint. Institutional services are delivered through a dedicated trading desk and sales force specializing in fixed
income products; and
-
- Asset Management, which consists of HighMark Capital Management, Inc., a subsidiary of Union Bank and a registered investment advisor, provides investment management and advisory services to institutional clients as well as investment advisory, administration and support services to our proprietary mutual funds, the affiliated HighMark Funds. It also provides investment management services to Union Bank with respect to most of its trust and agency clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc.'s strategy is to expand distribution, to broaden its client base and to increase its assets under management.
providing commodity and equity derivative contracts, since a significant portion of the market risk for these products is offset with third parties. Additionally, the division's Equipment Leasing arm provides lease financing services to corporate customers; and
During the first quarter of 2011, net income of Corporate Banking increased 47 percent, compared to the same period in 2010, resulting from a 4 percent increase in net interest income, a 13 percent increase in noninterest income and a 33 percent decrease in credit expense. During the first quarter of 2011, average loans decreased 3 percent compared to the same period in 2010 primarily due to decreases in our commercial mortgage portfolio and real estate construction portfolio, partially offset by an increase in our commercial and industrial loan portfolio.
During the first quarter of 2011, average deposits decreased 26 percent compared to the same period of 2010, primarily due to decreases in interest bearing core deposits and money market deposits. This planned deposit decline resulted primarily from targeted rate reductions. Noninterest income increased 13 percent during the first quarter of 2011, compared to the same period in 2010, primarily due to higher trading income, merchant banking fees, trust fees, brokerage commissions and fees and gains on the sale of private capital investments, partially offset by lower deposit fees. Noninterest expense decreased 2 percent during the first
35
quarter of 2011, compared to the same period of 2010, primarily due to decreased staff costs and regulatory assessments.
Other
"Other" includes the following:
-
- The Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services
to companies headquartered in either Japan or the U.S.;
-
- the funds transfer pricing results for our entire company, which allocates to the business segments their cost of funds on
all asset categories and credit for funds on all liability categories;
-
- Corporate Treasury, which is responsible for our ALM, wholesale funding and the ALM investment and derivatives hedging
portfolios. These Treasury management activities are carried out to manage the net interest rate and liquidity risks of our balance sheet and to manage those risks within the guidelines established by
ALCO. For additional discussion regarding these risk management activities, see "Quantitative and Qualitative Disclosures About Market Risk" in Part I, Item 2 of this
Form 10-Q;
-
- the adjustment between the credit expense 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; and
-
- the adjustment between the tax expense calculated using the adjusted statutory tax rate of 39.1 percent and our consolidated effective tax rate.
The increase in net income of $126 million for the first quarter of 2011 compared with the first quarter of 2010 is primarily due to the following factors:
-
- an increase in credit income of $245 million, which reflects the improvement in credit quality of our loan
portfolio. Credit income of $160 million for the first quarter of 2011 was due to the difference between the $102 million reversal of provision for loan losses calculated under our
US GAAP methodology and the $58 million in expected losses for the reportable business segments, which utilizes the RAROC methodology. This compares to a credit expense of
$85 million in the first quarter of 2010.
-
- noninterest income increased $17 million in the first quarter of 2011 compared to the first quarter of 2010. This
increase includes a $15 million gain on the sale of MasterCard shares, partially offset by lower gain on the sale of ALM investment securities;
-
- noninterest expense increased $48 million in the first quarter of 2011 compared to the first quarter of 2010. This increase includes higher staff costs, facility expense and outside services, partially offset by lower amortization related to our privatization transaction and an $8 million decrease in provision for losses on off-balance sheet commitments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion of our market risk exposure is incorporated by reference to Part I, Item 2 of this Form 10-Q under the caption "Quantitative and Qualitative Disclosures About Market Risk" and to Part II, Item 1A of this Form 10-Q under the caption "Risk Factors."
36
Item 4. Controls and Procedures
Disclosure Controls. Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of March 31, 2011. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is recorded, processed, summarized and reported in a timely manner and in accordance with SEC's rules and regulations and to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Controls Over Financial Reporting. During the first quarter of 2011, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
37
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
|
For the Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | 2011 | 2010 | |||||||
Interest Income |
|||||||||
Loans |
$ | 559 | $ | 540 | |||||
Securities |
143 | 143 | |||||||
Other |
1 | 5 | |||||||
Total interest income |
703 | 688 | |||||||
Interest Expense |
|||||||||
Deposits |
53 | 86 | |||||||
Commercial paper and other short-term borrowings |
1 | 1 | |||||||
Long-term debt |
31 | 27 | |||||||
Total interest expense |
85 | 114 | |||||||
Net Interest Income |
618 | 574 | |||||||
(Reversal of) provision for loan losses |
(102 | ) | 170 | ||||||
Net interest income after (reversal of) provision for loan losses |
720 | 404 | |||||||
Noninterest Income |
|||||||||
Service charges on deposit accounts |
57 | 66 | |||||||
Trust and investment management fees |
34 | 31 | |||||||
Trading account activities |
33 | 21 | |||||||
Securities gains, net |
28 | 34 | |||||||
Merchant banking fees |
19 | 14 | |||||||
Brokerage commissions and fees |
13 | 9 | |||||||
Card processing fees, net |
10 | 9 | |||||||
Other |
46 | 26 | |||||||
Total noninterest income |
240 | 210 | |||||||
Noninterest Expense |
|||||||||
Salaries and employee benefits |
344 | 280 | |||||||
Net occupancy and equipment |
65 | 59 | |||||||
Professional and outside services |
44 | 39 | |||||||
Intangible asset amortization |
25 | 32 | |||||||
Regulatory assessments |
21 | 30 | |||||||
(Reversal of) provision for losses on off-balance sheet commitments |
(13 | ) | (5 | ) | |||||
Other |
129 | 90 | |||||||
Total noninterest expense |
615 | 525 | |||||||
Income before income taxes and including noncontrolling interests |
345 | 89 | |||||||
Income tax expense |
114 | 15 | |||||||
Net Income including Noncontrolling Interests |
231 | 74 | |||||||
Deduct: Net loss from noncontrolling interests |
4 | 3 | |||||||
Net Income attributable to UNBC |
$ | 235 | $ | 77 | |||||
See accompanying notes to consolidated financial statements.
38
UnionBanCal Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||
Cash and due from banks |
$ | 1,247 | $ | 946 | ||||||
Interest bearing deposits in banks (includes $23 at March 31, 2011 and $11 at December 31, 2010 related to consolidated variable interest entities (VIEs)) |
1,912 | 217 | ||||||||
Federal funds sold and securities purchased under resale agreements |
24 | 11 | ||||||||
Total cash and cash equivalents |
3,183 | 1,174 | ||||||||
Trading account assets: |
||||||||||
Pledged as collateral |
6 | 43 | ||||||||
Held in portfolio |
870 | 956 | ||||||||
Securities available for sale: |
||||||||||
Pledged as collateral |
308 | 10 | ||||||||
Held in portfolio |
20,026 | 20,781 | ||||||||
Securities held to maturity (Fair value: March 31, 2011, $1,646; December 31, 2010, $1,560) |
1,339 | 1,323 | ||||||||
Loans: |
||||||||||
Loans, excluding Federal Deposit Insurance Corporation (FDIC) covered loans |
46,715 | 46,584 | ||||||||
FDIC covered loans |
1,390 | 1,510 | ||||||||
Total loans held for investment |
48,105 | 48,094 | ||||||||
Allowance for loan losses |
(1,034 | ) | (1,191 | ) | ||||||
Loans, net |
47,071 | 46,903 | ||||||||
Premises and equipment, net |
694 | 712 | ||||||||
Intangible assets |
432 | 457 | ||||||||
Goodwill |
2,447 | 2,456 | ||||||||
FDIC indemnification asset |
699 | 783 | ||||||||
Other assets (includes $277 at March 31, 2011 and $283 at December 31, 2010 related to consolidated VIEs) |
3,567 | 3,499 | ||||||||
Total assets |
$ | 80,642 | $ | 79,097 | ||||||
Liabilities |
||||||||||
Deposits: |
||||||||||
Noninterest bearing |
$ | 18,062 | $ | 16,343 | ||||||
Interest bearing |
40,615 | 43,611 | ||||||||
Total deposits |
58,677 | 59,954 | ||||||||
Commercial paper and other short-term borrowings |
3,260 | 1,356 | ||||||||
Long-term debt (includes $8 at March 31, 2011 and December 31, 2010 related to consolidated VIEs) |
6,078 | 5,598 | ||||||||
Trading account liabilities |
696 | 774 | ||||||||
Other liabilities (includes $2 at March 31, 2011 and December 31, 2010 related to consolidated VIEs) |
1,303 | 1,024 | ||||||||
Total liabilities |
70,014 | 68,706 | ||||||||
Commitments, contingencies and guaranteesSee Note 13 |
||||||||||
Equity |
||||||||||
UNBC Stockholder's Equity: |
||||||||||
Preferred stock: |
||||||||||
Authorized 5,000,000 shares; no shares issued or outstanding |
| | ||||||||
Common stock, par value $1 per share: |
||||||||||
Authorized 300,000,000 shares; 136,330,829 shares issued |
136 | 136 | ||||||||
Additional paid-in capital |
5,201 | 5,198 | ||||||||
Retained earnings |
5,703 | 5,468 | ||||||||
Accumulated other comprehensive loss |
(685 | ) | (677 | ) | ||||||
Total UNBC stockholder's equity |
10,355 | 10,125 | ||||||||
Noncontrolling interests |
273 | 266 | ||||||||
Total equity |
10,628 | 10,391 | ||||||||
Total liabilities and equity |
$ | 80,642 | $ | 79,097 | ||||||
See accompanying notes to consolidated financial statements.
39
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
(Unaudited)
|
UNBC Stockholder's Equity | |
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Common stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive income (loss) |
Noncontrolling interests(1) |
Total stockholder's equity |
|||||||||||||||
BALANCE DECEMBER 31, 2009 |
$ | 136 | $ | 5,195 | $ | 4,900 | $ | (651 | ) | $ | | $ | 9,580 | ||||||||
Cumulative effect from change in accounting for VIEs |
272 | 272 | |||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||
Net income (loss)For the three months ended March 31, 2010 |
77 | (3 | ) | 74 | |||||||||||||||||
Other comprehensive income (loss), net of tax: |
|||||||||||||||||||||
Net change in unrealized gains on cash flow hedges |
(13 | ) | (13 | ) | |||||||||||||||||
Net change in unrealized losses on securities |
57 | 57 | |||||||||||||||||||
Foreign currency translation adjustment |
1 | 1 | |||||||||||||||||||
Net change in pension and other benefits |
4 | 4 | |||||||||||||||||||
Total comprehensive income, net of tax |
123 | ||||||||||||||||||||
Other |
13 | 13 | |||||||||||||||||||
Net change |
| | 77 | 49 | 282 | 408 | |||||||||||||||
BALANCE MARCH 31, 2010 |
$ | 136 | $ | 5,195 | $ | 4,977 | $ | (602 | ) | $ | 282 | $ | 9,988 | ||||||||
BALANCE DECEMBER 31, 2010 |
$ | 136 | $ | 5,198 | $ | 5,468 | $ | (677 | ) | $ | 266 | $ | 10,391 | ||||||||
Comprehensive income: |
|||||||||||||||||||||
Net income (loss)For the three months ended March 31, 2011 |
235 | (4 | ) | 231 | |||||||||||||||||
Other comprehensive income (loss), net of tax: |
|||||||||||||||||||||
Net change in unrealized gains on cash flow hedges |
4 | 4 | |||||||||||||||||||
Net change in unrealized losses on securities |
(27 | ) | (27 | ) | |||||||||||||||||
Foreign currency translation adjustment |
2 | 2 | |||||||||||||||||||
Net change in pension and other benefits |
13 | 13 | |||||||||||||||||||
Total comprehensive income, net of tax |
223 | ||||||||||||||||||||
Compensation expenserestricted stock units |
3 | 3 | |||||||||||||||||||
Other |
11 | 11 | |||||||||||||||||||
Net change |
| 3 | 235 | (8 | ) | 7 | 237 | ||||||||||||||
BALANCE MARCH 31, 2011 |
$ | 136 | $ | 5,201 | $ | 5,703 | $ | (685 | ) | $ | 273 | $ | 10,628 | ||||||||
- (1)
- For additional information on the consolidated VIEs, refer to Note 6 to these consolidated financial statements.
See accompanying notes to consolidated financial statements.
40
UnionBanCal Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
For the three Months Ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | 2011 | 2010 | ||||||||
Cash Flows from Operating Activities: |
||||||||||
Net income including noncontrolling interests |
$ | 231 | $ | 74 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||
(Reversal of) provision for loan losses |
(102 | ) | 170 | |||||||
(Reversal of) provision for losses on off-balance sheet commitments |
(13 | ) | (5 | ) | ||||||
Depreciation, amortization and accretion, net |
37 | 63 | ||||||||
Stock-based compensationrestricted stock units |
3 | | ||||||||
Deferred income taxes |
93 | (17 | ) | |||||||
Net gains on sales of securities |
(28 | ) | (34 | ) | ||||||
Net decrease (increase) in trading account assets |
123 | (105 | ) | |||||||
Net decrease (increase) in prepaid expenses |
10 | (74 | ) | |||||||
Net increase in fees and other receivable |
(115 | ) | (86 | ) | ||||||
Net decrease (increase) in other assets |
43 | (60 | ) | |||||||
Net decrease in accrued expenses |
(45 | ) | (3 | ) | ||||||
Net increase (decrease) in trading account liabilities |
(78 | ) | 198 | |||||||
Net increase in other liabilities |
329 | 108 | ||||||||
Loans originated for resale |
(13 | ) | | |||||||
Net proceeds from sale of loans originated for resale |
8 | | ||||||||
Other, net |
(2 | ) | (9 | ) | ||||||
Total adjustments |
250 | 146 | ||||||||
Net cash provided by operating activities |
481 | 220 | ||||||||
Cash Flows from Investing Activities: |
||||||||||
Proceeds from sales of securities available for sale |
1,913 | 1,047 | ||||||||
Proceeds from matured and called securities available for sale |
1,482 | 1,100 | ||||||||
Purchases of securities available for sale |
(2,980 | ) | (1,668 | ) | ||||||
Proceeds from matured securities held to maturity |
5 | 2 | ||||||||
Purchases of premises and equipment, net |
(16 | ) | (15 | ) | ||||||
Proceeds from sales of loans |
81 | 80 | ||||||||
Net decrease (increase) in loans |
(177 | ) | 305 | |||||||
Proceeds from FDIC loss share agreements |
96 | | ||||||||
Other, net |
(1 | ) | (2 | ) | ||||||
Net cash provided by investing activities |
403 | 849 | ||||||||
Cash Flows from Financing Activities: |
||||||||||
Net decrease in deposits |
(1,277 | ) | (1,914 | ) | ||||||
Net increase in commercial paper and other short-term borrowings |
1,904 | 577 | ||||||||
Proceeds from issuance of long-term debt |
1,000 | 1,000 | ||||||||
Repayment of long-term debt |
(513 | ) | (500 | ) | ||||||
Other, net |
1 | 1 | ||||||||
Change in noncontrolling interests |
10 | 13 | ||||||||
Net cash provided by (used in) financing activities |
1,125 | (823 | ) | |||||||
Net increase in cash and cash equivalents |
2,009 | 246 | ||||||||
Cash and cash equivalents at beginning of period |
1,174 | 8,226 | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
| 1 | ||||||||
Cash and cash equivalents at end of period |
$ | 3,183 | $ | 8,473 | ||||||
Cash Paid During the Period For: |
||||||||||
Interest |
$ | 71 | $ | 102 | ||||||
Income taxes, net |
6 | (2 | ) | |||||||
Supplemental Schedule of Noncash Investing and Financing Activities: |
||||||||||
Net transfer of loans held for investment to loans held for sale |
$ | 94 | $ | 86 | ||||||
Transfer of loans held for investment to foreclosed assets (OREO) |
38 | 29 |
See accompanying notes to consolidated financial statements.
41
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1Basis of Presentation and Nature of Operations
The unaudited consolidated financial statements of UnionBanCal Corporation, its subsidiaries, and its consolidated variable interest entities (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission (SEC). However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the first quarter of 2011 are not necessarily indicative of the operating results anticipated for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in UnionBanCal Corporation's Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Although such estimates contemplate current conditions and management's expectations of how they may change in the future, it is reasonably possible that actual results could differ significantly from those estimates. This could materially affect the Company's results of operations and financial condition in the near term. Significant estimates made by management in the preparation of the Company's financial statements include, but are not limited to, the evaluation of other-than-temporary impairment on investment securities (Note 4), allowance for credit losses (Note 5), purchased credit-impaired loans (Note 5), annual goodwill impairment analysis, pension accounting (Note 7), valuing financial instruments (Note 10), and income taxes.
UnionBanCal Corporation is a financial holding company and commercial bank holding company whose major subsidiary, Union Bank, N.A. (the Bank), is a commercial bank. The Company provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, Washington, and Texas, as well as nationally and internationally.
Effective in the first quarter of 2011, payments received of $96 million related to the loss share agreements with the FDIC in conjunction with the Company's FDIC-assisted acquisitions are disclosed separately as proceeds from FDIC loss share agreements and are classified within cash flows from investing activities. These proceeds were previously classified under cash flows from operating activities and totaled $95 million and $165 million in the third quarter and full year 2010, respectively.
Note 2Recently Issued Accounting Pronouncements That Are Not Yet Effective
Determination of Whether a Restructuring is a Troubled Debt Restructuring
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The update provides additional guidance to creditors on evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (TDR) and clarifies the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a TDR. This guidance is effective beginning July 1, 2011. Management is currently assessing the impact of this guidance on the Company's financial position and results of operations.
42
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 2Recently Issued Accounting Pronouncements That Are Not Yet Effective (Continued)
Reconsideration of Effective Control for Repurchase Agreements
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The update removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. This guidance is effective beginning January 1, 2012. Management is currently assessing the impact of this guidance on the Company's financial position and results of operations.
On April 30, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain liabilities of Frontier Bank, a Washington state-chartered commercial bank headquartered in Everett, Washington (Frontier). Additionally, on April 16, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain liabilities of Tamalpais Bank of San Rafael, California (Tamalpais). For further information related to the Tamalpais and Frontier acquisitions, see Note 2 to the consolidated financial statements in the Company's 2010 Form 10-K. In the first quarter of 2011, the Company recorded an adjustment, which reduced goodwill by $9 million, related to the value of expected interest income on the acquired loans and FDIC indemnification assets. For further information related to goodwill and intangibles, see Note 5 to the consolidated financial statements in the Company's 2010 Form 10-K.
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of securities are presented below.
Securities Available for Sale
|
March 31, 2011 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||
U.S. government sponsored agencies |
$ | 5,260 | $ | 43 | $ | 1 | $ | 5,302 | ||||||
Residential mortgage-backed securities: |
||||||||||||||
U.S. government and government sponsored agencies |
13,373 | 121 | 137 | 13,357 | ||||||||||
Privately issued |
956 | 5 | 30 | 931 | ||||||||||
State and municipal |
65 | 1 | | 66 | ||||||||||
Asset-backed securities |
305 | | | 305 | ||||||||||
Other debt securities |
307 | 5 | 2 | 310 | ||||||||||
Equity securities |
62 | 1 | | 63 | ||||||||||
Total securities available for sale |
$ | 20,328 | $ | 176 | $ | 170 | $ | 20,334 | ||||||
43
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4Securities (Continued)
|
December 31, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||
U.S. Treasury |
$ | 150 | $ | | $ | | $ | 150 | ||||||
U.S. government sponsored agencies |
6,689 | 75 | | 6,764 | ||||||||||
Residential mortgage-backed securities: |
||||||||||||||
U.S. government and government sponsored agencies |
12,743 | 138 | 125 | 12,756 | ||||||||||
Privately issued |
710 | 4 | 32 | 682 | ||||||||||
State and municipal |
25 | 1 | | 26 | ||||||||||
Asset-backed securities |
240 | | | 240 | ||||||||||
Other debt securities |
129 | 5 | 1 | 133 | ||||||||||
Equity securities |
40 | 1 | 1 | 40 | ||||||||||
Total securities available for sale |
$ | 20,726 | $ | 224 | $ | 159 | $ | 20,791 | ||||||
Securities Held to Maturity
|
March 31, 2011 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Recognized in Other Comprehensive Income (OCI) |
|
Not Recognized in OCI | |
|||||||||||||||||
(Dollars in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Carrying Value |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||||
Collateralized loan obligations (CLOs) |
$ | 1,779 | $ | | $ | 440 | $ | 1,339 | $ | 307 | $ | | $ | 1,646 | ||||||||
|
December 31, 2010 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Recognized in OCI | |
Not Recognized in OCI | |
|||||||||||||||||
(Dollars in millions) | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Carrying Value |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||||
CLOs |
$ | 1,778 | $ | | $ | 455 | $ | 1,323 | $ | 238 | $ | 1 | $ | 1,560 | ||||||||
For securities held to maturity, the amount recognized in other comprehensive income (OCI) reflects the unrealized loss at date of transfer to the held to maturity classification, net of amortization, while the amount not recognized in OCI reflects the incremental change in value after such transfer. Amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of a purchase discount or premium, less payments and any impairment previously recognized in earnings.
The amortized cost, fair value and carrying value of securities, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, if applicable, with or without call or prepayment penalties.
44
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4Securities (Continued)
Maturity Schedule of Securities
Securities Available for Sale
|
March 31, 2011 | |||||||
---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Amortized Cost |
Fair Value |
||||||
Due in one year or less |
$ | 1,875 | $ | 1,883 | ||||
Due after one year through five years |
3,828 | 3,871 | ||||||
Due after five years through ten years |
961 | 992 | ||||||
Due after ten years |
13,602 | 13,525 | ||||||
No stated maturityequity securities |
62 | 63 | ||||||
Total securities available for sale |
$ | 20,328 | $ | 20,334 | ||||
Securities Held to Maturity
|
March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Amortized Cost |
Carrying Value | Fair Value | ||||||||
Due in one year or less |
$ | | $ | | $ | 1 | |||||
Due after one year through five years |
270 | 222 | 267 | ||||||||
Due after five years through ten years |
1,337 | 1,003 | 1,230 | ||||||||
Due after ten years |
172 | 114 | 148 | ||||||||
Total securities held to maturity |
$ | 1,779 | $ | 1,339 | $ | 1,646 | |||||
The proceeds from sales of securities available for sale, gross realized gains and gross realized losses are shown below. The specific identification method is used to calculate realized gains and losses on sales. The table below excludes losses from other-than-temporary impairment.
Sales of Securities Available for Sale
|
For the Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(Dollars in millions) | 2011 | 2010 | |||||
Proceeds from sales |
$ | 1,913 | $ | 1,047 | |||
Gross realized gains |
29 | 35 | |||||
Gross realized losses |
| |
Analysis of Unrealized Losses on Securities
At March 31, 2011 and December 31, 2010, the Company's securities with a continuous unrealized loss position are shown below, separately for periods less than 12 months and 12 months or more.
45
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4Securities (Continued)
Securities Available for Sale
|
March 31, 2011 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in millions) | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | Fair Value |
Unrealized Losses |
Count | ||||||||||||||||||||
U.S. government sponsored agencies |
$ | 455 | $ | 1 | 10 | $ | | $ | | | $ | 455 | $ | 1 | 10 | ||||||||||||||
Residential mortgage-backed securities: |
|||||||||||||||||||||||||||||
U.S. government and government sponsored agencies |
6,475 | 137 | 242 | 112 | | 7 | 6,587 | 137 | 249 | ||||||||||||||||||||
Privately issued |
403 | 4 | 31 | 101 | 26 | 6 | 504 | 30 | 37 | ||||||||||||||||||||
State and municipal |
1 | | 4 | | | 1 | 1 | | 5 | ||||||||||||||||||||
Asset-backed securities |
105 | | 11 | | | | 105 | | 11 | ||||||||||||||||||||
Other debt securities |
202 | 1 | 17 | 22 | 1 | 4 | 224 | 2 | 21 | ||||||||||||||||||||
Equity securities |
5 | | 2 | | | 2 | 5 | | 4 | ||||||||||||||||||||
Total securities available for sale |
$ | 7,646 | $ | 143 | 317 | $ | 235 | $ | 27 | 20 | $ | 7,881 | $ | 170 | 337 | ||||||||||||||
|
December 31, 2010 | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
(Dollars in millions) | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | ||||||||||||||||||||
U.S. government sponsored agencies |
$ | 240 | $ | | 6 | $ | | $ | | | $ | 240 | $ | | 6 | ||||||||||||||
Residential mortgage-backed securities: |
|||||||||||||||||||||||||||||
U.S. government and government sponsored agencies |
6,320 | 125 | 237 | 35 | | 2 | 6,355 | 125 | 239 | ||||||||||||||||||||
Privately issued |
140 | 1 | 16 | 165 | 31 | 11 | 305 | 32 | 27 | ||||||||||||||||||||
State and municipal |
1 | | 4 | | | 2 | 1 | | 6 | ||||||||||||||||||||
Asset-backed securities |
110 | | 11 | | | | 110 | | 11 | ||||||||||||||||||||
Other debt securities |
| | | 22 | 1 | 4 | 22 | 1 | 4 | ||||||||||||||||||||
Equity securities |
5 | 1 | 2 | | | 2 | 5 | 1 | 4 | ||||||||||||||||||||
Total securities available for sale |
$ | 6,816 | $ | 127 | 276 | $ | 222 | $ | 32 | 21 | $ | 7,038 | $ | 159 | 297 | ||||||||||||||
46
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4Securities (Continued)
Securities Held to Maturity
|
March 31, 2011 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||
(Dollars in millions) | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | |||||||||||||||||||
CLOs |
$ | | $ | | | $ | 1,634 | $ | 440 | 220 | $ | 1,634 | $ | 440 | 220 | |||||||||||||
|
December 31, 2010 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||
(Dollars in millions) | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | Fair Value | Unrealized Losses | Count | |||||||||||||||||||
CLOs |
$ | | $ | | | $ | 1,558 | $ | 456 | 221 | $ | 1,558 | $ | 456 | 221 | |||||||||||||
At March 31, 2011, the Company did not have the intent to sell temporarily impaired securities until a recovery of the amortized cost, which may be at maturity, and it is not more likely than not that the Company will have to sell the securities prior to recovery of amortized cost.
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.
Residential Mortgage-Backed SecuritiesU.S. Government and Government Sponsored Agencies
These residential mortgage-backed securities consist of securities guaranteed by the U.S. government or government sponsored agencies such as Fannie Mae and Freddie Mac. These securities are collateralized by residential mortgage loans and may be prepaid at par prior to maturity. The unrealized losses on these residential mortgage-backed securities resulted from changes in interest rates and not credit quality. As a result, the securities were not other-than-temporarily impaired at March 31, 2011.
Residential Mortgage-Backed SecuritiesPrivately Issued
These residential mortgage-backed securities are privately issued by financial institutions. 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 these privately issued residential mortgage-backed securities resulted from declining credit quality of underlying collateral and additional credit spread widening since purchase. The Company estimated loss projections for each security by assessing the loans collateralizing each security. The Company estimates the portion of loss attributable to credit based on the expected cash flows of the underlying collateral using industry consensus estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Based on this assessment of expected credit losses of each security, impairment recognized during the first quarter of 2011 was not significant. With respect to the remaining portfolio at March 31, 2011, the Company expects to recover the entire amortized cost basis of these securities.
47
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4Securities (Continued)
Collateralized Loan Obligations
The Company's CLOs primarily consist of Cash Flow CLOs. A Cash Flow CLO is a structured finance product that securitizes a diversified pool of loan assets into multiple classes of notes. Cash Flow CLOs pay the note holders through the receipt of interest and principal repayments from the underlying loans unlike other types of CLOs that pay note holders through the trading and sale of underlying collateral. Certain of these CLOs are 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. Based on the analysis performed as of March 31, 2011 to determine whether any of the unrealized losses related to CLOs were believed to be other-than-temporary, the Company expects to recover the entire amortized cost basis of these securities.
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 separately identifies in the consolidated balance sheets, securities pledged as collateral in secured borrowings and other arrangements when the secured party can sell or repledge the securities. If the secured party cannot resell or repledge the securities that have been placed as collateral, those securities are not separately identified. At March 31, 2011, the Company had $4.9 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 ($1.8 billion), to support unrealized losses on derivative transactions reported in trading liabilities ($0.4 billion) and to secure public and trust department deposits ($2.7 billion).
At March 31, 2011 and December 31, 2010, the Company accepted securities as collateral that it is permitted by contract to sell or repledge of $25 million ($14 million of which has been repledged to cover short sales) and $12 million ($1 million of which has been repledged to secure public agency or bankruptcy deposits and to cover short sales), respectively. These securities were received as collateral for secured lending and to obtain qualified securities to meet the Company's collateral needs.
48
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses
A summary of loans, net of unearned discount and deferred fees (costs) of $56 million and $70 million at March 31, 2011 and December 31, 2010, respectively, is as follows:
(Dollars in millions) | March 31, 2011 | December 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Loans held for investment, excluding FDIC covered loans: |
||||||||||||
Commercial, financial and industrial |
$ | 15,143 | $ | 15,162 | ||||||||
Construction |
1,153 | 1,460 | ||||||||||
Residential mortgage |
18,110 | 17,531 | ||||||||||
Commercial mortgage |
7,749 | 7,816 | ||||||||||
Consumer: |
||||||||||||
Installment |
1,983 | 2,035 | ||||||||||
Revolving lines of credit |
1,804 | 1,823 | ||||||||||
Total consumer |
3,787 | 3,858 | ||||||||||
Lease financing |
773 | 757 | ||||||||||
Total loans held for investment, excluding FDIC covered loans |
46,715 | 46,584 | ||||||||||
FDIC covered loans |
1,390 | 1,510 | ||||||||||
Total loans held for investment |
48,105 | 48,094 | ||||||||||
Allowance for loan losses |
(1,034 | ) | (1,191 | ) | ||||||||
Loans held for investment, net |
$ | 47,071 | $ | 46,903 | ||||||||
Loans Acquired in Business Combinations
The Company evaluated loans acquired in the Frontier and Tamalpais transactions in accordance with accounting guidance related to loans acquired with deteriorated credit quality as of the acquisition date. Management elected to account for all acquired loans, except for revolving lines of credit, within the scope of the accounting guidance using the same methodology. The following table reflects the carrying value of loans, pursuant to accounting standards for purchased credit-impaired loans and other acquired loans, as of March 31, 2011 and December 31, 2010:
|
March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Purchased credit-impaired loans | Other acquired loans | Total | ||||||||
Commercial, financial and industrial |
$ | 334 | $ | 53 | $ | 387 | |||||
Construction |
182 | 2 | 184 | ||||||||
Residential mortgage |
77 | | 77 | ||||||||
Commercial mortgage |
692 | 15 | 707 | ||||||||
Consumer |
16 | 19 | 35 | ||||||||
Total FDIC covered loans |
$ | 1,301 | $ | 89 | $ | 1,390 | |||||
49
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses (Continued)
|
December 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Purchased credit-impaired loans | Other acquired loans | Total | ||||||||
Commercial, financial and industrial |
$ | 356 | $ | 77 | $ | 433 | |||||
Construction |
220 | 2 | 222 | ||||||||
Residential mortgage |
81 | | 81 | ||||||||
Commercial mortgage |
717 | 16 | 733 | ||||||||
Consumer |
20 | 21 | 41 | ||||||||
Total FDIC covered loans |
$ | 1,394 | $ | 116 | $ | 1,510 | |||||
The acquired loans are referred to as "covered loans" as the Bank will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss share agreements. As of acquisition dates, the estimated fair value of the purchased credit-impaired loan portfolios of Frontier and Tamalpais subject to the loss share agreements was $1.7 billion, which represents the present value of expected cash flows from the portfolio. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents the estimated credit losses in the acquired loan portfolios at the acquisition date.
The accretable yield for purchased credit-impaired loans for the first quarter of 2011 was as follows:
(Dollars in millions) | March 31, 2011 |
||||
---|---|---|---|---|---|
Accretable yield, beginning of year |
$ | 231 | |||
Accretion |
(37 | ) | |||
Reclassifications from nonaccretable difference during the period |
104 | ||||
Accretable yield, end of period |
$ | 298 | |||
The carrying value and outstanding balance for the purchased credit-impaired loans as of March 31, 2011, December 31, 2010 and as of the respective acquisition dates were as follows:
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
Acquisition Date |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Total outstanding balance |
$ | 2,729 | $ | 2,829 | $ | 3,153 | ||||
Carrying value |
$ | 1,301 | $ | 1,394 | $ | 1,725 | ||||
Acquired loans were recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses was not carried over or recorded as of the respective acquisition dates. The acquired loans are subject to the Bank's internal credit review. When credit deterioration is noted subsequent to the respective acquisition dates, a provision for loan losses is charged to earnings, with a partial offset reflecting the increase to the FDIC indemnification asset for FDIC covered loans. At March 31, 2011, the allowance for loan losses on FDIC covered loans was $23 million, which consisted of an allowance for FDIC covered loan losses not subject to FDIC indemnification of $7 million, and an allowance covered by FDIC indemnification of $16 million, representing exposure for losses
50
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses (Continued)
expected to be recoverable under loss share agreements with the FDIC. There were no charge-offs or recoveries related to FDIC covered loans during the first quarter of 2011.
Allowance for Loan Losses
The following table shows the allowance for loans losses and related loan balances by portfolio segment as of March 31, 2011 and December 31, 2010.
|
March 31, 2011 | March 31, 2010 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Commercial | Consumer | FDIC covered loans |
Unallocated | Total | Total | ||||||||||||||
Allowance for loan losses, beginning of period |
$ | 683 | $ | 185 | $ | 25 | $ | 298 | $ | 1,191 | $ | 1,357 | ||||||||
(Reversal of) provision for loan losses |
(68 | ) | 13 | | (47 | ) | (102 | ) | 170 | |||||||||||
Decrease in allowance covered by FDIC indemnification |
| | (2 | ) | | (2 | ) | | ||||||||||||
Loans charged off |
48 | 25 | | | 73 | 135 | ||||||||||||||
Recoveries of loans previously charged off |
19 | 1 | | | 20 | 16 | ||||||||||||||
Allowance for loan losses, end of period |
$ | 586 | $ | 174 | $ | 23 | $ | 251 | $ | 1,034 | $ | 1,408 | ||||||||
Allowance for loan losses: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 106 | $ | 10 | $ | | $ | | $ | 116 | ||||||||||
Collectively evaluated for impairment |
480 | 164 | | 251 | 895 | |||||||||||||||
Purchased credit-impaired loans |
| | 23 | | 23 | |||||||||||||||
Total allowance for loan losses |
$ | 586 | $ | 174 | $ | 23 | $ | 251 | $ | 1,034 | ||||||||||
Loans held for investment: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 461 | $ | 103 | $ | 21 | $ | | $ | 585 | ||||||||||
Collectively evaluated for impairment |
24,357 | 21,794 | 68 | | 46,219 | |||||||||||||||
Purchased credit-impaired loans |
| | 1,301 | | 1,301 | |||||||||||||||
Total loans held for investment |
$ | 24,818 | $ | 21,897 | $ | 1,390 | $ | | $ | 48,105 | ||||||||||
51
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses (Continued)
|
December 31, 2010 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Commercial | Consumer | FDIC covered loans |
Unallocated | Total | ||||||||||||
Allowance for loan losses: |
|||||||||||||||||
Individually evaluated for impairment |
$ | 112 | $ | 8 | $ | | $ | | $ | 120 | |||||||
Collectively evaluated for impairment |
571 | 177 | | 298 | 1,046 | ||||||||||||
Purchased credit-impaired loans |
| | 25 | | 25 | ||||||||||||
Total allowance for loan losses |
$ | 683 | $ | 185 | $ | 25 | $ | 298 | $ | 1,191 | |||||||
Loans held for investment: |
|||||||||||||||||
Individually evaluated for impairment |
$ | 572 | $ | 79 | $ | 26 | $ | | $ | 677 | |||||||
Collectively evaluated for impairment |
24,623 | 21,310 | 90 | | 46,023 | ||||||||||||
Purchased credit-impaired loans |
| | 1,394 | | 1,394 | ||||||||||||
Total loans held for investment |
$ | 25,195 | $ | 21,389 | $ | 1,510 | $ | | $ | 48,094 | |||||||
The Company maintains an allowance for credit losses (defined as both the allowance for loan losses and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. The allowances are based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio and unused commitments to provide financing. The Company's methodology for measuring the appropriate level of the allowances relies on several key elements, which include the formula allowance, the specific allowance for impaired loans, the unallocated allowance and the allowance for off-balance sheet commitments.
Nonaccrual and Past Due Loans
Nonaccrual loans, excluding FDIC covered loans, totaled $0.8 billion, at each of March 31, 2011 and December 31, 2010. There were $234 million and $220 million of TDR loans at March 31, 2011 and December 31, 2010, respectively. Loans 90 days or more past due and still accruing totaled $3 million and $2 million at March 31, 2011 and December 31, 2010, respectively.
52
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses (Continued)
The following table presents nonaccrual loans as of March 31, 2011 and December 31, 2010.
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Commercial, financial and industrial |
$ | 113 | $ | 115 | |||||||
Construction |
71 | 140 | |||||||||
Residential mortgage |
241 | 243 | |||||||||
Commercial mortgage |
265 | 329 | |||||||||
Consumer: |
|||||||||||
Installment |
12 | 12 | |||||||||
Revolving lines of credit |
10 | 10 | |||||||||
Total consumer |
22 | 22 | |||||||||
Lease financing |
71 | | |||||||||
Total nonaccrual loans, excluding FDIC covered loans |
783 | 849 | |||||||||
FDIC covered loans |
90 | 116 | |||||||||
Total nonaccrual loans |
$ | 873 | $ | 965 | |||||||
Troubled debt restructured loans that continue to accrue interest |
$ | 45 | $ | 22 | |||||||
Troubled debt restructured nonaccrual loans (included in the total nonaccrual loans above) |
$ | 189 | $ | 198 | |||||||
The following table provides a summary of total TDRs, which include those that are on nonaccrual status and those that continue to accrue interest, as of March 31, 2011 and December 31, 2010.
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Commercial, financial and industrial |
$ | 24 | $ | 30 | ||||
Residential mortgage |
101 | 79 | ||||||
Commercial mortgage |
107 | 111 | ||||||
Consumer |
2 | | ||||||
Total troubled debt restructured loans |
$ | 234 | $ | 220 | ||||
53
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses (Continued)
The following table shows an aging of the balance of loans held for investment by class as of March 31, 2011 and December 31, 2010.
|
March 31, 2011 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Aging Analysis of Loans | 90 days or more past due and still accruing(1) |
||||||||||||||||||
(Dollars in millions) | Current | 30 to 89 days past due |
90 days or more past due |
Total past due |
Total | |||||||||||||||
Commercial, financial and industrial |
$ | 15,831 | $ | 71 | $ | 14 | $ | 85 | $ | 15,916 | $ | 3 | ||||||||
Construction |
1,133 | | 20 | 20 | 1,153 | | ||||||||||||||
Commercial mortgage |
7,612 | 105 | 32 | 137 | 7,749 | | ||||||||||||||
Residential mortgage |
17,771 | 160 | 179 | 339 | 18,110 | | ||||||||||||||
Consumer installment |
1,962 | 11 | 10 | 21 | 1,983 | | ||||||||||||||
Consumer revolving lines of credit |
1,783 | 12 | 9 | 21 | 1,804 | | ||||||||||||||
Total loans held for investment, excluding FDIC covered loans |
$ | 46,092 | $ | 359 | $ | 264 | $ | 623 | $ | 46,715 | $ | 3 | ||||||||
- (1)
- Excludes loans totaling $279 million that were 90 days or more past due and still accruing, which consisted of FDIC covered loans accounted for in accordance with accounting standards for purchased credit-impaired loans.
|
December 31, 2010 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Aging Analysis of Loans | 90 days or more past due and still accruing(1) |
||||||||||||||||||
(Dollars in millions) | Current | 30 to 89 days past due |
90 days or more past due |
Total past due |
Total | |||||||||||||||
Commercial, financial and industrial |
$ | 15,866 | $ | 22 | $ | 31 | $ | 53 | $ | 15,919 | $ | 2 | ||||||||
Construction |
1,378 | 41 | 41 | 82 | 1,460 | | ||||||||||||||
Commercial mortgage |
7,695 | 71 | 50 | 121 | 7,816 | | ||||||||||||||
Residential mortgage |
17,181 | 148 | 202 | 350 | 17,531 | | ||||||||||||||
Consumer installment |
2,033 | 9 | 11 | 20 | 2,053 | | ||||||||||||||
Consumer revolving lines of credit |
1,786 | 11 | 8 | 19 | 1,805 | | ||||||||||||||
Total loans held for investment, excluding FDIC covered loans |
$ | 45,939 | $ | 302 | $ | 343 | $ | 645 | $ | 46,584 | $ | 2 | ||||||||
- (1)
- Excludes loans totaling $312 million that were 90 days or more past due and still accruing, which consisted of FDIC covered loans accounted for in accordance with accounting standards for purchased credit-impaired loans.
Credit Quality Indicators
Management analyzes the Company's loan portfolios by applying specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics within the various loan portfolios. For further information related to the credit quality indicators the Company uses to monitor the portfolio, see Note 4 to the consolidated financial statements in the Company's 2010 Form 10-K.
54
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses (Continued)
The following tables summarize the loans in the commercial portfolio segment monitored for credit quality based on internal ratings, excluding $1.3 billion and $1.4 billion covered by FDIC loss share agreements, at March 31, 2011 and December 31, 2010, respectively. Amounts also exclude $596 million and $635 million at March 31, 2011 and December 31, 2010, respectively, of small business loans, which are monitored by business credit score and delinquency status, unamortized nonrefundable loan fees, and related direct loan origination costs.
|
March 31, 2011 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Commercial, financial and industrial |
Construction | Commercial mortgage | Total | ||||||||||
Pass |
$ | 14,084 | $ | 810 | $ | 6,284 | $ | 21,178 | ||||||
Criticized |
1,103 | 402 | 1,386 | 2,891 | ||||||||||
Total |
$ | 15,187 | $ | 1,212 | $ | 7,670 | $ | 24,069 | ||||||
|
December 31, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Commercial, financial and industrial |
Construction | Commercial mortgage | Total | ||||||||||
Pass |
$ | 13,982 | $ | 902 | $ | 6,205 | $ | 21,089 | ||||||
Criticized |
1,235 | 623 | 1,526 | 3,384 | ||||||||||
Total |
$ | 15,217 | $ | 1,525 | $ | 7,731 | $ | 24,473 | ||||||
The Company monitors the credit quality of its consumer segment based primarily on payment status. The following tables summarize the loans in the consumer portfolio segment, which excludes $112 million and $122 million of loans, covered by FDIC loss share agreements at March 31, 2011 and December 31, 2010, respectively.
|
March 31, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Accrual | Nonaccrual | Total | |||||||
Residential mortgage |
$ | 17,869 | $ | 241 | $ | 18,110 | ||||
Consumer installment |
1,971 | 12 | 1,983 | |||||||
Consumer revolving lines of credit |
1,794 | 10 | 1,804 | |||||||
Total |
$ | 21,634 | $ | 263 | $ | 21,897 | ||||
|
December 31, 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Accrual | Nonaccrual | Total | |||||||
Residential mortgage |
$ | 17,288 | $ | 243 | $ | 17,531 | ||||
Consumer installment |
2,023 | 12 | 2,035 | |||||||
Consumer revolving lines of credit |
1,813 | 10 | 1,823 | |||||||
Total |
$ | 21,124 | $ | 265 | $ | 21,389 | ||||
55
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 5Loans and Allowance for Loan Losses (Continued)
Loan Impairment
The Company's impaired loans generally include larger commercial, financial and industrial, construction, commercial mortgage, and TDRs where it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the value of an impaired loan is less than the recorded investment in the loan, the Company records an impairment allowance.
The following tables show information about impaired loans by class as of March 31, 2011 and December 31, 2010.
|
March 31, 2011 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Recorded Investment | |
|
Unpaid principal balance | |||||||||||||||||||
(Dollars in millions) | With an allowance |
Without an allowance |
Total | Allowance for impaired loans |
Average balance |
With an allowance |
Without an allowance |
||||||||||||||||
Commercial, financial and industrial |
$ | 170 | $ | 10 | $ | 180 | $ | 60 | $ | 147 | $ | 186 | $ | 56 | |||||||||
Construction |
61 | 8 | 69 | 16 | 104 | 68 | 9 | ||||||||||||||||
Residential mortgage |
101 | | 101 | 10 | 90 | 100 | | ||||||||||||||||
Commercial mortgage |
196 | 16 | 212 | 30 | 265 | 252 | 22 | ||||||||||||||||
Consumer |
2 | | 2 | | 1 | 2 | | ||||||||||||||||
Total, excluding FDIC covered loans |
530 | 34 | 564 | 116 | 607 | 608 | 87 | ||||||||||||||||
FDIC covered loans |
1 | 20 | 21 | | 24 | 12 | 41 | ||||||||||||||||
Total |
$ | 531 | $ | 54 | $ | 585 | $ | 116 | $ | 631 | $ | 620 | $ | 128 | |||||||||
|
December 31, 2010 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Recorded Investment | |
|
Unpaid principal balance | |||||||||||||||||||
(Dollars in millions) | With an allowance |
Without an allowance |
Total | Allowance for impaired loans |
Average balance |
With an allowance |
Without an allowance |
||||||||||||||||
Commercial, financial and industrial |
$ | 110 | $ | 3 | $ | 113 | $ | 31 | $ | 210 | $ | 138 | $ | 10 | |||||||||
Construction |
134 | 5 | 139 | 15 | 301 | 162 | 6 | ||||||||||||||||
Residential mortgage |
79 | | 79 | 8 | 40 | 79 | | ||||||||||||||||
Commercial mortgage |
308 | 12 | 320 | 66 | 434 | 371 | 18 | ||||||||||||||||
Total, excluding FDIC covered loans |
631 | 20 | 651 | 120 | 985 | 750 | 34 | ||||||||||||||||
FDIC covered loans |
1 | 25 | 26 | | 5 | 11 | 45 | ||||||||||||||||
Total |
$ | 632 | $ | 45 | $ | 677 | $ | 120 | $ | 990 | $ | 761 | $ | 79 | |||||||||
Interest income recognized for impaired loans during the first quarter of 2011 for the commercial, consumer and FDIC covered loan portfolio segments were $0.5 million, $1.0 million and $0.2 million, respectively.
The Company transferred $94 million of loans from held for investment to held for sale and sold $79 million in loans during the first quarter of 2011.
Note 6Variable Interest Entities, Private Capital and Other Investments
The Company is involved in various structures that are considered to be VIEs. Generally, a VIE is a corporation, partnership, trust or any other legal structure that has equity investors that: 1) do not have sufficient equity at risk for the entity to independently finance its activities; 2) lack the power to direct the
56
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 6Variable Interest Entities, Private Capital and Other Investments (Continued)
activities that significantly impact the entity's economic success; and/or 3) do not have an obligation to absorb the entity's losses or the right to receive the entity's returns. The Company's investments in VIEs primarily consist of equity investments in low income housing credit (LIHC) structures and renewable energy projects, which are designed to generate a return primarily through the realization of federal tax credits, and private capital investments. For further information related to the Company's consolidated VIEs and those that were not consolidated, see Note 7 to the consolidated financial statements in the Company's 2010 Form 10-K.
Consolidated VIEs
At March 31, 2011, assets of $300 million and liabilities of $10 million were consolidated by the Company on its consolidated balance sheet related to two LIHC investment fund structures because the Company sponsors, manages and syndicates the funds. The assets are included in other assets as well as interest bearing deposits in banks, the liabilities are primarily included in long-term debt, and third-party investor interests are included in stockholder's equity as noncontrolling interests. Neither creditors nor equity investors in the LIHC investments have any recourse to the general credit of the Company, and the Company's creditors do not have any recourse to the assets of the consolidated LIHC investments.
For the first quarters of 2011 and 2010, the Company recorded $6 million and $5 million of expenses related to its consolidated VIEs, respectively. These expenses are included in other noninterest expense on the Company's consolidated statements of income.
Unconsolidated VIEs in which the Company has a Variable Interest
The following table presents the Company's carrying amounts related to the unconsolidated VIEs and location on the consolidated balance sheet at March 31, 2011. The table also presents the Company's maximum exposure to loss resulting from its involvement with these VIEs. The maximum exposure to loss represents the carrying value of the Company's involvement plus any legally binding unfunded commitments in the unlikely event that all of the assets in the VIEs become worthless.
|
March 31, 2011 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Total Assets | Total Liabilities | Maximum Exposure to Loss |
||||||||
LIHC investments |
$ | 516 | $ | 27 | $ | 705 | |||||
Renewable energy investments |
298 | | 298 | ||||||||
Private capital investments |
111 | 177 | |||||||||
Total unconsolidated VIEs |
$ | 925 | $ | 27 | $ | 1,180 | |||||
57
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 6Variable Interest Entities, Private Capital and Other Investments (Continued)
Private Capital and Other Investments
The following table shows the balances of private capital and other investments as of March 31, 2011 and December 31, 2010.
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Private capital and other investments: |
|||||||||
Private capital investmentscost basis |
$ | 86 | $ | 85 | |||||
Private capital investmentsequity method |
38 | 40 | |||||||
LIHC investmentsguaranteed |
183 | 157 | |||||||
LIHC investmentsunguaranteed |
336 | 316 | |||||||
Consolidated VIEs |
277 | 283 | |||||||
Renewable energy investments |
298 | 300 | |||||||
Total private capital and other investments |
$ | 1,218 | $ | 1,181 | |||||
The Company evaluates these investments periodically for other-than-temporary impairment. During the first quarter of 2011, the Company did not record any impairment related to these investments. For further information on the Company's private capital and other investments, see Note 8 to the consolidated financial statements in the Company's 2010 Form 10-K.
Note 7Employee Pension and Other Postretirement Benefits
The following table summarizes the components of net periodic benefit cost for the first quarter of 2011 and 2010.
|
Pension Benefits | Other Benefits | Superannuation, SERP(1) and ESBP(2) |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
For the Three Months Ended March 31, |
For the Three Months Ended March 31, |
For the Three Months Ended March 31, |
|||||||||||||||||
(Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||||||
Service cost |
$ | 14 | $ | 12 | $ | 3 | $ | 3 | $ | | $ | | ||||||||
Interest cost |
24 | 22 | 3 | 3 | 1 | 1 | ||||||||||||||
Expected return on plan assets |
(37 | ) | (36 | ) | (3 | ) | (3 | ) | | | ||||||||||
Recognized net actuarial loss |
10 | 3 | 2 | 1 | | | ||||||||||||||
Total net periodic benefit cost |
$ | 11 | $ | 1 | $ | 5 | $ | 4 | $ | 1 | $ | 1 | ||||||||
- (1)
- Supplemental Executives Retirement Plan (SERP).
- (2)
- Executive Supplemental Benefit Plans (ESBP).
58
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 8Commercial Paper and Other Short-Term Borrowings
The following is a summary of the Company's commercial paper and other short-term borrowings:
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Federal funds purchased and securities sold under repurchase agreements with weighted average interest rates of 0.17% and 0.15% at March 31, 2011 and December 31, 2010, respectively |
$ | 426 | $ | 170 | |||||
Commercial paper, with weighted average interest rates of 0.23% and 0.22% at March 31, 2011 and December 31, 2010, respectively |
1,265 | 745 | |||||||
Other borrowed funds: |
|||||||||
Term federal funds purchased, with weighted average interest rates of 0.27% and 0.28% at March 31, 2011 and December 31, 2010, respectively |
689 | 335 | |||||||
Federal Home Loan Bank advances with a weighted average interest rate of 0.24% at March 31, 2011 |
750 | | |||||||
All other borrowed funds, with weighted average interest rates of 0.34% and 1.20% at March 31, 2011 and December 31, 2010, respectively |
130 | 106 | |||||||
Total commercial paper and other short-term borrowings |
$ | 3,260 | $ | 1,356 | |||||
The following is a summary of the Company's long-term debt:
(Dollars in millions) | March 31, 2011 |
December 31, 2010 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Senior debt: |
|||||||||
Fixed and floating rate Federal Home Loan Bank advances with maturities ranging from December 2011 to February 2016. These notes bear a combined weighted-average rate of 1.79% at March 31, 2011 and 1.72% at December 31, 2010 |
$ | 4,000 | $ | 3,000 | |||||
Floating rate notes due March 2011. These notes, which bear interest at 0.08% above 3-month LIBOR, had a rate of 0.38% at December 31, 2010 |
| 500 | |||||||
Floating rate notes due March 2012. These notes, which bear interest at 0.20% above 3-month LIBOR, had a rate of 0.51% at March 31, 2011 and 0.50% at December 31, 2010 |
500 | 500 | |||||||
Fixed rate 2.125% notes due December 2013 |
399 | 399 | |||||||
Note payable: |
|||||||||
Fixed rate 6.03% notes due July 2014 (related to consolidated VIE) |
8 | 8 | |||||||
Subordinated debt: |
|||||||||
Fixed rate 5.25% notes due December 2013 |
419 | 422 | |||||||
Fixed rate 5.95% notes due May 2016 |
752 | 756 | |||||||
Junior subordinated debt payable to subsidiary grantor trust: |
|||||||||
Fixed rate 10.875% notes due March 2030 |
| 10 | |||||||
Fixed rate 10.60% notes due March 2030 |
| 3 | |||||||
Total long-term debt |
$ | 6,078 | $ | 5,598 | |||||
59
UnionBanCal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Unaudited)