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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


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                                    FORM 10-Q

       /X/|X|         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF
                   THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2000

                         Commission file number 0-28118

                                   UNIONBANCAL CORPORATION

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                             UnionBanCal Corporation

State of Incorporation: California            I.R.S. Employer
       California Identification No.
                                                         94-1234979

                              
350 California Street San Francisco, California400 CALIFORNIA STREET SAN FRANCISCO, CALIFORNIA 94104-1476 Registrant's telephone numberREGISTRANT'S TELEPHONE NUMBER (415) 765-2969 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X|X| No __|_| Number of shares of Common Stock outstanding at April 28,July 31, 2000: 162,427,351 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------161,314,052
UNIONBANCAL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE NUMBER -------------- PART I FINANCIAL INFORMATION Consolidated Financial Highlights.........................Highlights..................................................... 2 Item 1. Financial Statements: Condensed Consolidated Statements of Income............. 3Income........................................ 4 Condensed Consolidated Balance Sheets................... 4Sheets.............................................. 5 Condensed Consolidated Statements of Changes in Shareholders' Equity................................... 5Equity............... 6 Condensed Consolidated Statements of Cash Flows......... 6Flows.................................... 7 Notes to Condensed Consolidated Financial Statements.... 7Statements............................... 8 Item 2. Management's Discussion and Analysis: Introduction............................................ 12 Summary................................................. 12Introduction....................................................................... 14 Summary............................................................................ 14 Mission Excel........................................... 14Excel...................................................................... 17 Business Segments....................................... 14Segments.................................................................. 18 Net Interest Income..................................... 21Income................................................................ 25 Noninterest Income...................................... 22Income................................................................. 28 Noninterest Expense..................................... 24Expense................................................................ 30 Income Tax Expense...................................... 24 Loans................................................... 25Expense................................................................. 31 Loans.............................................................................. 31 Cross-Border Outstandings............................... 26Outstandings.......................................................... 32 Provision for Credit Losses............................. 26Losses........................................................ 32 Allowance for Credit Losses............................. 27Losses........................................................ 33 Nonperforming Assets.................................... 31Assets............................................................... 37 Loans 90 Days or More Past Due and Still Accruing....... 31 Liquidity............................................... 31Accruing.................................. 37 Liquidity.......................................................................... 37 Regulatory Capital...................................... 32 Year 2000............................................... 33Capital................................................................. 38 Forward-looking Statements.............................. 33Statements......................................................... 39 Item 3. Market Risk....................................... 37Risk................................................................... 43 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................................................. 38Other Information............................................................. 44 Item 5. Other Information................................. 38 Item 6. Exhibits and Reports on Form 8-K.................. 39 Signatures................................................ 408-K.............................................. 44 Signatures............................................................................ 45
PART I. FINANCIAL INFORMATION
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED)
PERCENT CHANGE TO AS OF AND FOR THE THREE MONTHS JUNE 30, 2000 ENDED FROM: ------------------------------------------------ ------------------------- JUNE 30, MARCH 31, 2000 FROM: ------------------------------------------- --------------------------JUNE 30, JUNE 30, MARCH 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 2000 1999 2000 1999 1999 - ------------------------------------------------------- ----------------------------------------------------------- ------------- ------------------------- ------------- ---------- ----------------------- RESULTS OF OPERATIONS: Net interest income(1)..................................................... $ 340,711 $ 369,534348,014 $ 386,177 13.34% 4.50%$ 396,929 14.06% 2.78% Provision for credit losses.......................... 5,000 30,000losses................. 10,000 40,000 700.00 33.3370,000 600.00 75.00 Noninterest income................................... 139,308 154,304income.......................... 144,798 152,010 9.12 (1.49)173,070 19.53 13.85 Noninterest expense, excluding restructuring credit............................................. 301,164 291,281credit................................... 305,229 267,038 (11.33) (8.32)290,319 (4.88) 8.72 Restructuring credit................................. -- --credit........................ - (11,000) (8,000) nm nm(27.27)% ------------ ------------ ------------ --------- --------- Income before income taxes(1)........................ 173,855 202,557taxes]................. 177,583 242,149 39.28 19.55217,680 22.58 (10.10) Taxable-equivalent adjustment........................ 890 698adjustment............... 851 655 (26.40) (6.16)637 (25.15) (2.75) Income tax expense................................... 54,470 64,930expense.......................... 62,005 83,023 52.42 27.8775,628 21.97 (8.91) ------------ ------------ ------------ --------- --------- Net income...........................................income.................................. $ 118,495 $ 136,929114,727 $ 158,471 33.74% 15.73%$ 141,415 23.26% (10.76)% ============ ============ ============ ========= ========= PER COMMON SHARE: Net income--basic....................................income-basic............................ $ 0.69 $ 0.830.70 $ 0.97 40.58% 16.87%$ 0.87 24.29% (10.31)% Net income--diluted..................................income-diluted.......................... 0.69 0.83 0.96 39.13 15.66 Dividends............................................0.87 26.09 (9.38) Dividends].................................. 0.19 0.25 0.25 31.58 --- Book value (end of period)........................... 17.17 18.18.................. 17.50 18.73 9.09 3.0319.42 10.97 3.68 Common shares outstanding (end of period)............ 164,580,273 164,282,622... 164,600,997 162,585,365 (1.21) (1.03)161,604,417 (1.82) (0.60) Weighted average common shares outstanding--basic.... 171,825,589 164,596,949outstanding-basic........................ 164,588,227 163,803,054 (4.67) (0.48)162,231,696 (1.43) (0.96) Weighted average common shares outstanding--diluted............................... 172,465,676 165,629,012outstanding-diluted...................... 165,278,828 164,326,864 (4.72) (0.79)162,660,994 (1.58) (1.01) BALANCE SHEET (END OF PERIOD): Total assets.........................................assets................................ $ 32,347,577 $ 33,684,77632,386,153 $ 33,616,363 3.92% (0.20)%$ 33,895,037 4.66% 0.83% Total loans.......................................... 24,352,354 25,912,958loans................................. 24,586,658 25,983,684 6.70 0.2726,373,044 7.27 1.50 Nonaccrual loans............................ 90,908 144,400 203,201 123.52 40.72 Nonperforming assets................................. 109,837 169,780assets........................ 97,449 146,648 33.51 (13.62)228,981 134.98 56.14 Total deposits....................................... 23,996,023 26,256,607deposits.............................. 24,133,148 25,906,727 7.96 (1.33)25,733,981 6.63 (0.67) Trust preferred securities...........................securities.................. 350,000 350,000 350,000 -- --- - Common equity........................................ 2,825,730 2,987,468equity............................... 2,881,137 3,045,474 7.78 1.943,138,690 8.94 3.06 BALANCE SHEET (PERIOD AVERAGE): Total assets.........................................assets................................ $ 31,727,726 $ 32,829,80831,960,796 $ 33,021,747 4.08% 0.58%$ 33,846,445 5.90% 2.50% Total loans.......................................... 24,280,726 25,793,532loans................................. 24,854,844 26,013,718 7.14 0.8526,441,412 6.38 1.64 Earning assets....................................... 28,618,688 29,564,880assets.............................. 28,867,990 29,827,068 4.22 0.8930,575,062 5.91 2.51 Total deposits....................................... 23,305,935 24,974,188deposits.............................. 23,348,561 25,080,619 7.61 0.4325,476,764 9.11 1.58 Common equity........................................ 2,994,352 2,962,349equity............................... 2,872,991 3,014,743 0.68 1.773,085,227 7.39 2.34 FINANCIAL RATIOS: Return on average assets(2).......................... 1.51% 1.65%assets(3)................. 1.44% 1.93% 1.68% Return on average common equity(2)................... 16.05 18.34equity]............ 16.02 21.14 18.44 Efficiency ratio(3).................................. 62.75 55.62ratio(4)......................... 62.04 47.58 49.52 Net interest margin(1)............................... 4.83 4.96...................... 4.84 5.20 5.21 Dividend payout ratio................................ 27.54 30.12ratio....................... 27.14 25.77 28.74 Tangible equity ratio................................ 8.57ratio....................... 8.70 8.90 9.13 Tier 1 risk-based capital ratio...................... 9.90 9.94ratio............. 10.02 10.11 10.23 Total risk-based capital ratio....................... 11.86 11.79ratio.............. 11.96 11.96 12.05 Leverage ratio....................................... 9.78 10.10ratio.............................. 9.91 10.24 10.26 Allowance for credit losses to total loans........... 1.84 1.82loans.. 1.83 1.86 1.90 Allowance for credit losses to nonaccrual loans...... 446.10 281.00loans.................................... 495.45 334.63 246.42 Net loans charged off to average total loans(2)...... 0.27 0.26loans(3)................................. 0.12 0.42 0.80 Nonperforming assets to total loans, foreclosed assets, and foreclosed assets............................................. 0.45 0.66distressed loans held for sale............................ 0.40 0.56 0.87 Nonperforming assets to total assets................. 0.34 0.50 0.44
- ------------------------------ (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Annualized. (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable- equivalent) and noninterest income. Foreclosed asset expense (income) was $(0.1) million in the fourth quarter of 1999, and none in the first quarters of 1999 and 2000. nmassets........ 0.30 0.44 0.68 - --------------------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense (income) was $(0.5) million in the second quarter of 1999, and none in the first and second quarters of 2000. (nm) = not meaningful
2 ITEM
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED) AS OF AND FOR THE SIX MONTHS ENDED ------------------------------------------- JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 CHANGE - --------------------------------------------------------------------------------- ------------- ------------- -------- RESULTS OF OPERATIONS: Net interest income].......................................................... $ 688,725 $ 783,106 13.70% Provision for credit losses................................................... 15,000 110,000 633.33 Noninterest income............................................................ 284,106 325,080 14.42 Noninterest expense, excluding restructuring credit........................... 606,392 557,357 (8.09) Restructuring credit.......................................................... - (19,000) nm ------------- ------------- Income before income taxes]................................................... 351,439 459,829 30.84 Taxable-equivalent adjustment................................................. 1,741 1,292 (25.79) Income tax expense............................................................ 116,476 158,651 36.21 ------------- ------------- Net income.................................................................... $ 233,222 $ 299,886 28.58% ============= ============= PER COMMON SHARE: Net income-basic.............................................................. $ 1.39 $ 1.84 32.37% Net income-diluted............................................................ 1.38 1.83 32.61 Dividends].................................................................... 0.38 0.50 31.58 Book value (end of period).................................................... 17.50 19.42 10.97 Common shares outstanding (end of period)..................................... 164,600,997 161,604,417 (1.82) Weighted average common shares outstanding-basic.............................. 168,186,916 163,017,375 (3.07) Weighted average common shares outstanding-diluted............................ 168,842,537 163,606,186 (3.10) BALANCE SHEET (END OF PERIOD): Total assets.................................................................. $ 32,386,153 $ 33,895,037 4.66% Total loans................................................................... 24,586,658 26,373,044 7.27 Nonaccrual loans.............................................................. 90,908 203,201 123.52 Nonperforming assets.......................................................... 97,449 228,981 134.98 Total deposits................................................................ 24,133,148 25,733,981 6.63 Trust preferred securities.................................................... 350,000 350,000 - Common equity................................................................. 2,881,137 3,138,690 8.94 BALANCE SHEET (PERIOD AVERAGE): Total assets.................................................................. $ 31,844,898 $ 33,434,301 4.99% Total loans................................................................... 24,569,371 26,227,565 6.75 Earning assets................................................................ 28,744,028 30,201,073 5.07 Total deposits................................................................ 23,327,365 25,278,692 8.36 Common equity................................................................. 2,933,336 3,049,985 3.98 FINANCIAL RATIOS: Return on average assets]..................................................... 1.48% 1.80% Return on average common equity].............................................. 16.03 19.77 Efficiency ratio]............................................................. 62.39 48.58 Net interest margin].......................................................... 4.83 5.21 Dividend payout ratio......................................................... 27.34 27.17 Tangible equity ratio......................................................... 8.70 9.13 Tier 1 risk-based capital ratio............................................... 10.02 10.23 Total risk-based capital ratio................................................ 11.96 12.05 Leverage ratio................................................................ 9.91 10.26 Allowance for credit losses to total loans.................................... 1.83 1.90 Allowance for credit losses to nonaccrual loans............................... 495.45 246.42 Net loans charged off to average total loans]................................. 0.20 0.61 Nonperforming assets to total loans, foreclosed assets, and distressed loans held for sale.............................................................. 0.40 0.87 Nonperforming assets to total assets.......................................... 0.30 0.68 - --------------------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (3) Annualized. (4) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense (income) was $(0.6) million in the first six months of 1999 and none for the first six months of 2000. (nm) = not meaningful
3 Item 1. FINANCIAL STATEMENTS
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED MARCH 31, -------------------JUNE 30, ENDED JUNE 30, ----------------------- -------------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 1999 2000 - ------------------------------------------------------------ -------- ------------------------------------------------------------------------------- ---------- --------- ---------- ----------- INTEREST INCOME Loans..................................................... $451,492 $539,977 Securities................................................ 56,818 50,537Loans............................................................... $ 464,858 $ 562,075 $ 916,350 $ 1,102,052 Securities.......................................................... 54,213 56,446 111,031 106,983 Interest bearing deposits in banks........................ 3,188 2,184banks.................................. 3,068 2,563 6,256 4,747 Federal funds sold and securities purchased under resale agreements.............................................. 1,697 3,019agreements. 1,196 2,082 2,893 5,101 Trading account assets.................................... 3,898 3,258 -------- --------assets.............................................. 2,503 4,777 6,401 8,035 --------- --------- ---------- ----------- Total interest income................................... 517,093 598,975 -------- --------income............................................ 525,838 627,943 1,042,931 1,226,918 --------- --------- ---------- ----------- INTEREST EXPENSE Domestic deposits......................................... 106,147 128,750deposits................................................... 101,519 140,188 207,666 268,938 Foreign deposits.......................................... 16,632 26,925deposits.................................................... 17,181 24,441 33,813 51,366 Federal funds purchased and securities sold under repurchase agreements................................... 19,769 18,524agreements....................................................... 21,107 26,865 40,876 45,389 Commercial paper.......................................... 19,174 21,568paper.................................................... 18,020 23,364 37,194 44,932 Subordinated capital notes................................ 4,109 4,856notes.......................................... 4,036 5,081 8,145 9,937 UnionBanCal Corporation--obligatedCorporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust........ 3,291 6,884trust........................... 7,091 6,490 10,382 13,374 Other borrowed funds...................................... 8,150 5,946 -------- --------funds................................................ 9,721 5,222 17,871 11,168 --------- --------- ---------- ----------- Total interest expense.................................. 177,272 213,453 -------- --------expense........................................... 178,675 231,651 355,947 445,104 --------- --------- ---------- ----------- NET INTEREST INCOME......................................... 339,821 385,522INCOME.................................................... 347,163 396,292 686,984 781,814 Provision for credit losses............................... 5,000 40,000 -------- --------losses......................................... 10,000 70,000 15,000 110,000 --------- --------- ---------- ----------- Net interest income after provision for credit losses... 334,821 345,522 -------- --------losses............ 337,163 326,292 671,984 671,814 --------- --------- ---------- ----------- NONINTEREST INCOME Service charges on deposit accounts....................... 39,651 47,563accounts................................. 42,929 52,645 82,580 100,208 Trust and investment management fees...................... 32,271 38,800fees................................ 33,983 37,388 66,254 76,188 Merchant transaction processing fees...................... 14,512 17,095fees................................ 18,146 18,438 32,658 35,533 International commissions and fees........................ 17,631 17,036fees.................................. 18,080 18,415 35,711 35,451 Merchant banking fees..................................... 7,461 14,219fees............................................... 9,154 11,109 16,615 25,328 Brokerage commissions and fees............................ 5,596 9,430fees...................................... 6,080 9,263 11,676 18,693 Securities gains, (losses), net............................ 1,261 (4,318) Other..................................................... 20,925 12,185 -------- --------net............................................... 634 10,018 1,895 5,700 Other............................................................... 15,792 15,794 36,717 27,979 --------- --------- ---------- ----------- Total noninterest income................................ 139,308 152,010 -------- --------income......................................... 144,798 173,070 284,106 325,080 --------- --------- ---------- ----------- NONINTEREST EXPENSE Salaries and employee benefits............................ 167,667 139,194benefits...................................... 167,015 153,062 334,682 292,256 Net occupancy............................................. 22,461 22,684 Equipment................................................. 14,541 15,294occupancy....................................................... 21,917 22,010 44,378 44,694 Equipment........................................................... 15,475 16,710 30,016 32,004 Merchant transaction processing........................... 11,610 11,716 Communications............................................ 9,933 10,567processing..................................... 13,258 12,644 24,868 24,360 Communications...................................................... 10,618 10,745 20,551 21,312 Professional services............................................... 10,290 10,556 20,984 18,518 Data processing........................................... 8,001 8,647 Professional services..................................... 10,694 7,962processing..................................................... 7,661 8,975 15,662 17,622 Foreclosed asset income................................... (41) (35)expense (income)................................... (512) 56 (553) 21 Restructuring credit...................................... -- (11,000) Other..................................................... 56,298 51,009 -------- --------credit................................................ - (8,000) - (19,000) Other............................................................... 59,507 55,561 115,804 106,570 --------- --------- ---------- ----------- Total noninterest expense............................... 301,164 256,038 -------- --------expense........................................ 305,229 282,319 606,392 538,357 --------- --------- ---------- ----------- Income before income taxes................................ 172,965 241,494taxes.......................................... 176,732 217,043 349,698 458,537 Income tax expense........................................ 54,470 83,023 -------- --------expense.................................................. 62,005 75,628 116,476 158,651 --------- --------- ---------- ----------- NET INCOME.................................................. $118,495 $158,471 ======== ========INCOME............................................................. $ 114,727 $ 141,415 $ 233,222 $ 299,886 ========= ========= ========== =========== NET INCOME PER COMMON SHARE--BASIC..........................SHARE-BASIC...................................... $ 0.690.70 $ 0.97 ======== ========0.87 $ 1.39 $ 1.84 ========= ========= ========== =========== NET INCOME PER COMMON SHARE--DILUTED........................SHARE-DILUTED.................................... $ 0.69 $ 0.96 ======== ========0.87 $ 1.38 $ 1.83 ========= ========= ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC........... 171,826 163,803 ======== ========OUTSTANDING-BASIC....................... 164,588 162,232 168,187 163,017 ========= ========= ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED......... 172,466 164,327 ======== ========OUTSTANDING-DILUTED..................... 165,279 162,661 168,843 163,606 ========= ========= ========== =========== See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements. 34
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED) MARCH 31,JUNE 30, DECEMBER 31, MARCH 31,JUNE 30, (DOLLARS IN THOUSANDS) 1999 1999 2000 - ------------------------------------------------------------------------------------------------------------------------------------- ----------- ------------------------ ----------- ASSETS Cash and due from banks..................................... $2,313,357banks.................................................. $ 2,499,686 $ 2,141,964 $ 2,343,1112,232,750 Interest bearing deposits in banks.......................... 256,656banks....................................... 203,428 182,719 164,439182,408 Federal funds sold and securities purchased under resale agreements................................................ 355,050agreements...... 385,930 833,450 323,80064,980 ----------- ----------- ----------- Total cash and cash equivalents......................... 2,925,063equivalents.................................... 3,089,044 3,158,133 2,831,3502,480,138 Trading account assets...................................... 336,089assets................................................... 197,120 179,935 285,928273,797 Securities available for sale............................... 3,375,255sale............................................ 3,272,934 3,210,099 3,239,3033,470,780 Securities held to maturity (market value: March 31,June 30, 1999, $141,081;$138,269; December 31, 1999, $45,376; March 31,June 30, 2000, $24,580).................................................. 139,321$23,993)................... 138,267 46,526 25,80825,151 Loans (net of allowance for credit losses: March 31,June 30, 1999, $447,936;$450,403; December 31, 1999, $470,378; March 31,June 30, 2000, $483,206)................................................. 23,904,418$500,731)................. 24,136,255 25,442,580 25,500,47825,872,313 Due from customers on acceptances........................... 419,386acceptances........................................ 323,307 259,340 243,201256,834 Premises and equipment, net................................. 427,697net.............................................. 440,569 425,021 423,751424,898 Other assets................................................ 820,348assets............................................................. 788,657 963,142 1,066,5441,091,126 ----------- ----------- ----------- Total assets............................................ $32,347,577assets....................................................... $32,386,153 $33,684,776 $33,616,363$33,895,037 =========== =========== =========== LIABILITIES Domestic deposits: Noninterest bearing....................................... $9,332,370bearing................................................... $ 9,619,005 $ 9,395,925 $10,039,846$ 9,846,855 Interest bearing.......................................... 12,643,022bearing...................................................... 12,695,248 14,274,310 13,687,43914,003,065 Foreign deposits: Noninterest bearing....................................... 341,298bearing................................................... 231,964 325,415 386,461331,825 Interest bearing.......................................... 1,679,333bearing...................................................... 1,586,931 2,260,957 1,792,9811,552,236 ----------- ----------- ----------- Total deposits.......................................... 23,996,023deposits..................................................... 24,133,148 26,256,607 25,906,72725,733,981 Federal funds purchased and securities sold under repurchase agreements................................................ 1,073,376agreements.. 1,616,670 1,156,799 1,191,1431,640,265 Commercial paper............................................ 1,737,265paper......................................................... 1,344,156 1,108,258 1,488,0551,431,737 Other borrowed funds........................................ 962,416funds..................................................... 817,031 540,496 281,950262,662 Acceptances outstanding..................................... 419,386outstanding.................................................. 323,307 259,340 243,201256,834 Other liabilities........................................... 685,381liabilities........................................................ 622,704 727,808 811,813782,868 Subordinated capital notes..................................notes............................................... 298,000 298,000 298,000 UnionBanCal Corporation--obligatedCorporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust..........trust................................ 350,000 350,000 350,000 ----------- ----------- ----------- Total liabilities....................................... 29,521,847liabilities.................................................. 29,505,016 30,697,308 30,570,88930,756,347 ----------- ----------- ----------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares, no shares issued or outstanding as of March 31,June 30, 1999, December 31, 1999, and March 31, 2000...................................... -- -- --June 30, 2000..................... - - - Common stock--nostock-no stated value: Authorized 300,000,000 shares, issued 164,580,273164,600,997 shares as of March 31,June 30, 1999, 164,282,622 shares as of December 31, 1999, and 162,585,365161,604,417 shares as of March 31, 2000.......................................... 1,415,227June 30, 2000......................................... 1,415,104 1,404,155 1,349,0071,327,509 Retained earnings........................................... 1,403,180earnings........................................................ 1,487,481 1,625,263 1,743,5901,845,037 Accumulated other comprehensive income (loss)............... 7,323............................ (21,448) (41,950) (47,123)(33,856) ----------- ----------- ----------- Total shareholders' equity.............................. 2,825,730equity......................................... 2,881,137 2,987,468 3,045,4743,138,690 ----------- ----------- ----------- Total liabilities and shareholders' equity.............. $32,347,577equity......................... $32,386,153 $33,684,776 $33,616,363$33,895,037 =========== =========== =========== =========== See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements. 4
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREESIX MONTHS ENDED MARCH 31, ---------------------------------------------JUNE 30, ------------------------------------------------------ (DOLLARS IN THOUSANDS) 1999 2000 - ------------------------------------------------- --------------------- -------------------------------------------------------------------------------------------- ------------------------ ------------------------ COMMON STOCK Balance, beginning of period..................... $1,725,619 $1,404,155period........................................... $ 1,725,619 $ 1,404,155 Dividend reinvestment plan....................... 13 8plan............................................. 29 22 Deferred compensation--restrictedcompensation-restricted stock awards... (15) (38)awards (cancellations).......... (34) (68) Stock options exercised.......................... 594 656exercised................................................ 1,028 1,239 Common stock repurchased......................... (310,984) (55,774) ---------- ----------repurchased............................................... (311,538) (77,839) ----------- ----------- Balance, end of period......................... $1,415,227 $1,349,007 ---------- ----------period................................................. $ 1,415,104 $ 1,327,509 ----------- ----------- RETAINED EARNINGS Balance, beginning of period..................... $1,314,915 $1,625,263period........................................... $ 1,314,915 $ 1,625,263 Net income....................................... 118,495 $118,495 158,471 $158,471income............................................................. 233,222 $233,222 299,886 $299,886 Dividends on common stock(1)..................... (31,269) (40,931)........................................... (62,541) (81,433) Deferred compensation--restrictedcompensation-restricted stock awards... 1,039 787 ---------- ----------awards.......................... 1,885 1,321 ----------- ----------- Balance, end of period......................... $1,403,180 $1,743,590 ---------- ----------period................................................. $ 1,487,481 $ 1,845,037 ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of period.....................period........................................... $ 17,710 $ (41,950) Unrealized holding losses(losses) gains arising during the period on securities available for sale, net of tax benefit(benefit) expense of $6,071$(23,967) and $5,203$6,922 in the first threesix months of 1999 and 2000, respectively.... (9,797) (8,399)respectively........................................................ (38,566) 11,174 Less: reclassification adjustment for losses (gains)gains on securities available for sale included in net income, net of tax expense (benefit) of $482$678 and $(1,652)$2,180 in the first threesix months of 1999 and 2000, respectively.... (779) 2,666respectively (1,217) (3,520) -------- -------- Net unrealized losses(losses) gains on securities available for sale........................................... (10,576) (5,733)sale......... (39,783) 7,654 Foreign currency translation adjustment, net of tax expense (benefit)benefit (expense) of $(297)$25 and $347$(273) in the first threesix months of 1999 and 2000, respectively................................... (480) 560respectively........................................................ (44) 440 Minimum pension liability adjustment, net of tax expense of $414$373 in the first quartersix months of 1999...1999............................................ 669 --- -------- -------- Other comprehensive loss......................... (10,387) (10,387) (5,173) (5,173) ----------(loss) income...................................... (39,158) (39,158) 8,094 8,094 ----------- -------- --------------------- -------- Total comprehensive income....................... $108,108 $153,298income............................................. $194,064 $307,980 ======== ======== Balance, end of period.........................period.............................................. $ 7,323(21,448) $ (47,123) ---------- ----------(33,856) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY................... $2,825,730 $3,045,474 ========== ==========EQUITY....................................... $ 2,881,137 $ 3,138,690 =========== =========== - --------------------------- (1) Dividends per share were $0.38 and $0.50 for the first six months of 1999 and 2000, respectively. Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date. See accompanying notes to condensed consolidated financial statements.
- ------------------------ (1) Dividends per share were $0.19 and $0.25 for the first three months of 1999 and 2000, respectively. Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date. See accompanying notes to condensed consolidated financial statements. 56
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREESIX MONTHS ENDED MARCH 31, -----------------------JUNE 30, ----------------------------- (DOLLARS IN THOUSANDS) 1999 2000 - ------------------------------------------------------------ ---------- --------------------------------------------------------------------------------------------------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................income.................................................................................. $ 118,495233,222 $ 158,471299,886 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses............................. 5,000 40,000losses.............................................................. 15,000 110,000 Depreciation, amortization and accretion................ 17,815 19,410accretion................................................. 36,064 35,823 Provision (benefit) for deferred income taxes........... 9,135 22,991 Loss (Gain)taxes...................................................... 11,302 24,771 Gain on sales of securities available for sale... (1,261) 4,318sale........................................... (1,895) (5,700) Utilization in excess of restructuring charge........... -- (24,061)charge (credit)................................... - (39,335) Net increasedecrease (increase) in trading account assets.................. (68,371) (105,993)assets........................................ 70,598 (93,862) Other, net.............................................. (167,385) (19,596) ---------- ----------net............................................................................... (183,129) (46,412) ----------- ----------- Total adjustments....................................... (205,067) (62,931) ---------- ----------adjustments........................................................................ (52,060) (14,715) ----------- ----------- Net cash provided by (used in) operating activities....... (86,572) 95,540 ---------- ----------activities................................................... 181,162 285,171 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale...... 197,913 289,859sale........................................ 199,852 388,049 Proceeds from matured and called securities available for sale.................................................... 213,227 197,215sale.............................. 329,486 464,584 Purchases of securities available for sale................ (163,466) (529,499)sale.................................................. (224,325) (1,094,623) Proceeds from matured and called securities held to maturity................................................ 21,262 20,723maturity................................ 22,417 21,380 Net increase in loans..................................... (88,272) (98,078)loans....................................................................... (336,296) (562,725) Other, net................................................ (21,247) (15,188) ---------- ----------net.................................................................................. (50,643) (29,628) ----------- ----------- Net cash provided by (used in)used in investing activities..... 159,417 (134,968) ---------- ----------activities.................................................... (59,509) (812,963) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits.................................. (511,856) (349,880)deposits.................................................................... (374,731) (522,626) Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements............. (234,368) 34,344agreements..... 308,926 483,466 Net increase in commercial paper and other borrowed funds................................................... 923,771 121,251funds................................... 385,277 45,645 Common stock repurchased.................................. (310,984) (55,774)repurchased.................................................................... (311,538) (77,839) Proceeds from issuance of trust preferred securities......securities........................................ 350,000 --- Payments of cash dividends................................ (33,299) (41,172)dividends.................................................................. (64,568) (82,027) Other, net................................................ 127 1,224 ---------- ----------net.................................................................................. 1,013 1,701 ----------- ----------- Net cash provided by (used in) financing activities..... 183,391 (290,007) ---------- ----------activities...................................... 294,379 (151,680) =========== =========== Net increase (decrease) in cash and cash equivalents........ 256,236 (329,435)equivalents........................................... 416,032 (679,472) Cash and cash equivalents at beginning of period............period............................................... 2,678,478 3,158,133 Effect of exchange rate changes on cash and cash equivalents............................................... (9,651) 2,652 ---------- ----------equivalents................................... (5,466) 1,477 ----------- ----------- Cash and cash equivalents at end of period.................. $2,925,063 $2,831,350 ========== ==========period..................................................... $ 3,089,044 $ 2,480,138 =========== =========== CASH PAID DURING THE PERIOD FOR: Interest..................................................Interest.................................................................................... $ 173,138348,438 $ 222,439431,552 Income taxes.............................................. (34,486) 126,441taxes................................................................................ 33,178 91,202 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to foreclosed assets (OREO)............. and distressed loans held for sale............ $ 1,4693,892 $ 70625,286 Dividends declared but unpaid............................. 31,269 40,931unpaid............................................................... 31,312 40,530 See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements. 67 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,JUNE 30, 2000 (UNAUDITED) NOTE 1--BASIS1-BASIS OF PRESENTATION AND NATURE OF OPERATIONS The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission. However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. The results of operations for the period ended March 31,June 30, 2000 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 1999. The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. On March 3, 1999, the Company completed a secondary offering of 28.75 million shares of its Common Stock owned by The Bank of Tokyo-Mitsubishi, Ltd. (BTM). The Company received no proceeds from this transaction. Concurrent with the secondary offering, the Company repurchased 8.6 million shares of its outstanding Common Stock from BTM and 2.1 million shares owned by Meiji Life Insurance Company with $311 million of the net proceeds from the issuance of $350 million of 7 3/8 percent redeemable preferred securities that occurred on February 19, 1999. The Company completed the repurchase of $100 million in common stock between December 1999 and July 2000, under a stock repurchase plan authorized in November 1999. As of June 30, 2000 $95.7 million of stock had been repurchased under the plan. In November 1999July 2000, the Company announced aan additional $100 million stock repurchase plan. In the first quarter of 2000 the Company repurchased $55.8 million of common stock. On January 1, 2000, the Company changed the actuarial method it uses to calculate the market-related value of its pension plan assets. This change increased the value of plan assets on which the expected returns are based and, therefore, results in lower net periodic pension cost. This change in methodology resulted in a one-time credit to salaries and benefits of $16.0 million. The impact on future years is not considered significant. Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. NOTE 2--RECENTLY2-RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. SFAS No. 133 requires that derivative instruments used to hedge be identified specifically to assets, liabilities, firm commitments or anticipated transactions and measured as to effectiveness and ineffectiveness when hedging changes in fair value or cash flows. Derivative instruments that do not qualify as either a fair value or cash flow hedge will be valued at fair value with the resultant gain or loss recognized in current earnings. Changes in the effective portion of fair value hedges will be recognized in current earnings along with the change in fair value of the hedged item. Changes in the effective portion of the fair 8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED)(CONTINUED) NOTE 2-RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) value of cash flow hedges will be recognized in other comprehensive income until realization of the cash flows of the hedged item through current earnings. Any ineffective portion of hedges will be recognized in 7 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) (CONTINUED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) current earnings. In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133", to defer for one year the effective date of implementation of SFAS No. 133. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years beginning after June 15, 2000, with earlier application encouraged. Management believes that, depending upon the accumulated net gain or loss of the effective portion of cash flow hedges at the date of adoption, the impact of the adoption of SFAS No. 133 could have a material impact on other comprehensive income. However, management believes that any ineffective portion of cash flow hedges or any other hedges will not have a material impact on the Company's financial position or results of operations. The Company expects to adopt SFAS No. 133 as of January 1, 2001. NOTE 3--EARNINGS3-EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options are a common stock equivalent. The following table presents a reconciliation of basic and diluted EPS for the three months and six months ended March 31,June 30, 1999 and 2000:
THREE MONTHS ENDED MARCH 31, -----------------------------------------JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------------- ------------------------------------------- 1999 2000 -------------------1999 2000 -------------------- -------------------- -------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)DATA BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED - ------------------------------------------------------------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- Net Income.......................................... $118,495 $118,495 $158,471 $158,471 ======== ======== ======== ========Income....................... $114,727 $114,727 $141,415 $141,415 $233,222 $233,222 $299,886 $299,886 Weighted average common shares outstanding.......... 171,826 171,826 163,803 163,803outstanding................... 164,588 164,588 162,232 162,232 168,187 168,187 163,017 163,017 Additional shares due to: Assumed conversion of dilutive stock options...... -- 640 -- 524options.............. - 691 - 429 - 656 - 589 -------- -------- -------- -------- -------- -------- -------- -------- Adjusted weighted average common shares outstanding....................................... 171,826 172,466 163,803 164,327outstanding............ 164,588 165,279 162,232 162,661 168,187 168,843 163,017 163,606 ======== ======== ======== ======== ======== ======== ======== ======== Net income per share................................share............. $ 0.70 $ 0.69 $ 0.690.87 $ 0.970.87 $ 0.961.39 $ 1.38 $ 1.84 $ 1.83 ======== ======== ======== ======== ======== ======== ======== ========
9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED)(CONTINUED) NOTE 4--COMPREHENSIVE4-COMPREHENSIVE INCOME The following table presents a summary of the components of accumulated other comprehensive income (loss):
NET UNREALIZED MINIMUM GAINS (LOSSES) ON FOREIGN MINIMUM PENSION ACCUMULATED OTHER (LOSSES) ON SECURITIES CURRENCY LIABILITY COMPREHENSIVE AVAILABLE FOR SALE TRANSLATION ADJUSTMENT INCOME (LOSS) ------------------- ------------------- ------------------- ---------------------------------------- -------------------- -------------------- -------------------- FOR THE THREESIX MONTHS ENDED MARCH 31, -------------------------------------------------------------------------------------JUNE 30, -------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1999 2000 1999 2000 1999 2000 1999 2000 - ------------------------------------------------------------------- -------- -------- -------- -------- -------- --------------- ------- ------- ----- -------- -------- Beginning balance....................balance............. $ 29,109 $(32,548) $ (9,651)$(9,651) $(8,713) $(1,748) $(689) $ 17,710 $(41,950) Change during the period............. (10,576) (5,733) (480) 560period...... (39,783) 7,654 (44) 440 669 -- (10,387) (5,173)- (39,158) 8,094 -------- -------- --------------- ------- ------- ----- -------- -------- Ending balance....................... $ 18,533 $(38,281) $(10,131) $(8,153)balance................ $(10,674) $(24,894) $(9,695) $(8,273) $(1,079) $(689) $ 7,323 $(47,123)$(21,448) $(33,856) ======== ======== =============== ======= ======= ===== ======== ========
8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) (CONTINUED) NOTE 5--BUSINESS5-BUSINESS SEGMENTS The Company is organized based on the products and services that it offers and operates in four principal areas: -o The Community Banking and Investment Services Group provides loan products and depositoffers a full range of banking services, primarily to consumersindividuals and small businesses, delivered through a tri-state network of branches and ATMs. These services include commercial loans, mortgages and home equity lines of credit, consumer loans, deposit services and cash management as well as fiduciary, private banking, investment and asset management services for individuals and institutions. -o The Commercial Financial Services Group primarily provides tailored credit and cash management services to large corporate and middle market companies Services include commercial loans, asset based lending, commercial real estate lending, leasing, leveraged financing and a wide varietycomprehensive product array of banking services, principally loans, to commercial customers. -deposit and cash management services. o The International Banking Group provides trade-finance products to banks, and extends primarily short-term credit to corporations engaged in international business. The group's revenue predominately relates to foreign customers. -o The Global Markets Group manages the Company's securities portfolio, trading operations, wholesale funding needs, and interest rate and liquidity risk. The information set forth in the following table reflects the condensedselected income statementsstatement items and a selected balance sheet item by business unit. The information presented does not necessarily represent the business units' financial condition and results of operations as if they were independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. The information in this table is derived from the internal management reporting system used by management to measure the performance of the segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each segment based on internal management accounting policies. Net interest income is determined by the Company's internal funds 10 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED)(CONTINUED) NOTE 5-BUSINESS SEGMENTS (CONTINUED) transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to a segment are assigned to that business, other than restructuring charges (credits). Indirect costs, such as overhead, operations, and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. With the Company's adoption of a risk-adjusted return on capital (RAROC) methodology, credit expense is charged to businesses based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks. "Other" is comprised of goodwill, certain parent company non-bank subsidiaries, the elimination of the fully taxable-equivalent amounts, the unallocated allowance and related provision for credit losses in excess of that ascribed through our RAROC methodology, the net impact of transfer pricing, the earnings associated with the unallocated equity capital, and the residual costs of support groups, as well as certain other non-recurring items such as restructuring charges (credits) and merger and integration expenses. In addition, it includes two units, the Credit and ComplianceManagement Group, which manages nonperforming assets, and the Pacific Rim Group, which offers financial products to 9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) (CONTINUED) NOTE 5--BUSINESS SEGMENTS (CONTINUED) Asian-ownedJapanese-owned subsidiaries located in the U.S. On an individual basis, none of the business units in "Other" are significant to the Company's business.
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP --------------------- ---------------------- ------------------- --------------------- -------------------AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, -----------------------------------------------------------------JUNE 30, ------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- ----------------- -------- ------- -------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)................................... $262,030 $295,540 $178,416 $233,105 $24,938 $ 22,226 Net income......................................... $ 35,667 $ 63,109 $ 53,528 $ 82,461 $ 4,629 $ 3,893 Total assets at period end (dollars in millions)... $ 9,509 $ 8,920 $ 16,059 $ 18,975 $ 1,524 $ 1,538
GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ------------------ ---------------------- --------------------- AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------ 1999 2000 1999 2000 1999 2000 ------- ------ ------- --------- -------- -------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)........................ $247,057 $273,121 $167,415 $214,663 $27,296 $26,048..................................... $17,918 $7,587 $ 8,659 $ 10,904 $491,961 $569,362 Net income..............................income........................................... $ 28,374 $ 54,285 $ 44,752 $ 74,358 $ 6,005 $ 6,2327,461 $2,317 $13,442 $(10,365) $114,727 $141,415 Total assets at period end (dollars in millions)............................... $ 9,5843,723 $3,687 $ 8,8771,572 $ 15,525776 $ 18,417 $ 1,720 $ 1,52532,386 $33,895 - --------------------------- (1) Total revenue is comprised of net interest income and noninterest income
11 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED)(CONTINUED) NOTE 5-BUSINESS SEGMENTS (CONTINUED)
GLOBAL UNIONBANCAL MARKETSCOMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP OTHER CORPORATIONSERVICES GROUP BANKING GROUP ------------------- ------------------- ----------------------------------------- -------------------- AS OF AND FOR THE THREESIX MONTHS ENDED MARCH 31, ---------------------------------------------------------------JUNE 30, ------------------------------------------------------------------------ 1999 2000 1999 2000 1999 2000 -------- -------- -------- -------- -------- ------------------ RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)........................................................... $509,984 $568,028 $345,832 $447,767 $ 24,78252,233 $ 5,50048,279 Net income......................................... $ 12,57964,579 $116,983 $ 18,200 $479,129 $537,532 Net income..............................98,282 $156,819 $ 11,46810,634 $ 902 $ 27,896 $ 22,694 $118,495 $158,47110,158 Total assets at period end (dollars in millions)............................. $ 3,3579,509 $ 3,7638,920 $ 2,16216,059 $ 1,034 $32,348 $33,61618,975 $ 1,524 $ 1,538 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ------------------- -------------------- ---------------------- AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- -------- -------- ---------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Total revenue(1)..................................... $ 42,700 $ 9,438 $ 20,342 $ 33,382 $971,090 $1,106,894 Net income........................................... $ 18,929 $ 974 $ 40,798 $ 14,952 $233,222 $ 299,886 Total assets at period end (dollars in millions)..... $ 3,723 $ 3,687 $ 1,572 $ 775 $ 32,386 $ 33,895 - --------------------------- (1) Total revenue is comprised of net interest income and noninterest income
- ------------------------ (1) Total revenue is comprised of net interest income and noninterest income NOTE 6--RESTRUCTURING6-RESTRUCTURING CHARGE (CREDIT) A restructuring charge of $85 million was recorded in the third quarter of 1999. The restructuring charge was incurred in connection with a company-wide project referred to as "Mission Excel". Mission Excel is an initiative to slow the growth rate of growth of expenses, increase sustainable growth in revenues, and increase productivity through elimination of unnecessary or duplicate functions. The restructuring charge included only direct and incremental costs associated with the program. During the firstsecond quarter of 2000, the restructuring reserve was reduced by $11.0$8.0 million. Total reductions for the six months ended June 30, 2000 were $19.0 million. The reduction wasreductions were primarily inrelated to the severance portion of the reserve, reflecting a changecontinuing changes in attrition assumptions. ManagementAs a result of ongoing evaluations, management believes that the continuingcurrent strength of the California economy resulted in markedly higher attrition rates than the Company had originallypreviously anticipated and as a consequence,at the end of the first quarter 2000. Consequently, lower than expected severance payments resulting fromattributed to Mission Excel position eliminations. 10eliminations will be paid. 12 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31,JUNE 30, 2000 (UNAUDITED)(CONTINUED) NOTE 6--RESTRUCTURING6-RESTRUCTURING CHARGE (CREDIT) (CONTINUED) The table below provides details of the restructuring related liability.
PERSONNEL OCCUPANCY AND (DOLLARS IN THOUSANDS) EXPENSE ANDPERSONNEL OTHER TOTAL - -------------------------------------------------------------------------------------------------------------- --------- ---------- ----------------- --------- Balances at December 31, 1999...............................1999..................... $59,525 $9,834 $69,359 Less: Cash...................................................... 7,604 5,454 13,058 Noncash................................................... -- 3 3 ------- ------ -------Cash.............................................. 14,615 5,711 20,326 Noncash........................................... - 9 9 --------- --------- --------- Total utilization....................................... 7,604 5,457 13,061utilization.............................. 14,615 5,720 20,335 Restructuring credit...................................... 10,000credit.............................. 18,000 1,000 11,000 ------- ------ -------19,000 --------- --------- --------- Balances at March 31, 2000.................................. $41,921 $3,377 $45,298 ======= ====== =======June 30, 2000......................... $26,910 $3,114 $30,024 ========= ========= =========
Personnel expense consists of severance and related benefits to be paid under the Company's enhanced severance plan. The Company now expects to sever approximately 1,060800 employees under the plan of which 524620 employees have been severedterminated as of March 31,June 30, 2000. Occupancy and other consists of lease termination costs and the cost of professional services costs incurred during the assessment phase of the project. 1113 ITEMItem 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED. FOR A DISCUSSION OF FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER, PLEASE SEE THE DISCUSSION CONTAINED HEREIN ON PAGE 3339 AND IN OUR PUBLICLY AVAILABLE SECURITIES AND EXCHANGE COMMISSION FILINGS AND PRESS RELEASES. INTRODUCTION We are a California-based commercial bank holding company with consolidated assets of $33.6$33.9 billion at March 31,June 30, 2000. Our wholly-owned subsidiary, Union Bank of California, N.A., is the third largest commercial bank in California, based on total assets and total deposits in California, and one of the 30 largest commercial banks in the United States. At March 31,June 30, 2000, we operated 240241 banking offices in California, 6 banking offices in Oregon and Washington, and 18 overseas facilities. At March 31,June 30, 2000, we were 6465 percent owned by The Bank of Tokyo-Mitsubishi, Ltd. and 3635 percent owned by other shareholders. Our interim financial information should be read in conjunction with our Form 10-K for the year ended December 31, 1999. Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. SUMMARY To facilitate the discussion of the results of operations, the following table includes certain pro forma earnings disclosures and ratios. These presentations supplement the Condensed Consolidated Statements of Income on page 3,4, which are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), primarily with respect to the treatment of the restructuring credit,credits, which waswere recorded in the first quarterand second quarters of 2000, as well as reflecting the taxable equivalent adjustment. Management believes that it is meaningful to understand the operating results and trends excluding this creditthese credits and, therefore, has included information in this table and in the MD&Amanagement's discussion and analysis (MD&A) which follows, that presents income excluding this itemthese items and related pro 14 forma ratio and per share calculations. These proformapro forma earnings have not been adjusted for any other non-recurring items that may impact our ratios or trends.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED MARCH 31,JUNE 30, ENDED JUNE 30, ---------------------- -------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 1999 2000 - ---------------------------------------------------------------------------------------------------------------------------------------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES.................................. $173,855 $242,149TAXES.................................................. $177,583 $217,680 $351,439 $459,829 Restructuring credit...................................... -- (11,000)credit..................................................... - (8,000) - (19,000) Taxable equivalent adjustment............................. (890) (655)adjustment............................................ (851) (637) (1,741) (1,292) Income tax expense(1)..................................... (54,470) (78,878).................................................... (62,005) (72,614) (116,476) (151,492) -------- -------- -------- -------- PRO FORMA EARNINGS.......................................... $118,495 $151,616EARNINGS.......................................................... $114,727 $136,429 $233,222 $288,045 ======== ======== ======== ======== PER COMMON SHARE, EXCLUDING RESTRUCTURING CREDIT Pro forma earnings (basic)............................................................................... $ 0.690.70 $ 0.930.84 $ 1.39 $ 1.77 Pro forma earnings (diluted)........................................................................... 0.69 0.920.84 1.38 1.76 SELECTED FINANCIAL RATIOS, EXCLUDING RESTRUCTURING CREDIT Pro forma return on average assets........................ 1.51% 1.85%assets....................................... 1.44% 1.62% 1.48% 1.73% Pro forma return on average common equity................. 16.05 19.86equity................................ 16.02 17.78 16.03 18.99 Pro forma efficiency ratio(2)............................. 62.75 49.62ratio].............................................. 62.04 50.92 62.39 50.29 Pro forma dividend payout ratio........................... 27.54 26.88
- ------------------------ (1) Excludes the income tax credit of $4.145 million related to the restructuring credit.ratio.......................................... 27.14 29.76 27.34 28.41 - --------------------------- (1) Excludes the income tax credits of $3.014 million and $7.159 million in the three and six months ending June 30, 2000, respectively, related to restructuring credits. (2) The pro forma efficiency ratio is noninterest expense, excluding foreclosed asset income and restructuring charge, as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset expense/(income) was $(0.512) million and $0.056 million for the second quarter of 1999 and 2000, respectively, and ($0.553) million and $0.021 million for the first six months of 1999 and 2000, respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 Net income was $0.041$141.4 million, or $0.87 per diluted common share, in the firstsecond quarter of 1999 and $0.035 million in the first quarter of 2000. 12 Reported net income was $118.52000 compared with $114.7 million, or $0.69 per diluted common share, in the firstsecond quarter of 1999,1999. Return on average assets was 1.68 percent for the quarter ending June 30, 2000, compared with $158.5 million, or $0.96 per diluted1.44 percent for the same period in 1999, and return on average common share,equity was 18.44 percent for the quarter ending June 30, 2000, compared with 16.02 percent for the same period in the first quarter of 2000.1999. Excluding the effects of the $11$8.0 million restructuring credit ($6.95.0 million net of tax), which was recorded in the firstsecond quarter of 2000, pro forma net earnings were $151.6$136.4 million or $0.92$0.84 per diluted common share in the firstsecond quarter of 2000 compared to $118.5$114.7 million or $0.69 per diluted common share in the first quartersame period of 1999. This increase in pro forma diluted earnings per share of 33 percent over the first quarter of 2000 was due to a $12.7 million, or 9 percent, increase in noninterest income, a $45.5 million, or 13 percent, increase in net interest income (on a taxable-equivalent basis), and a $34.1 million, or 11 percent, decrease in noninterest expense, partially offset by a $35.0 million increase in provision for credit losses and a 3 percentage point increase in the effective tax rate. Other highlights of the first quarter of 2000 include: - Net interest income, on a taxable-equivalent basis, was $386.2 million in the first quarter of 2000, an increase of $45.5 million, or 13 percent, over the first quarter of 1999. Net interest margin in the first quarter of 2000 was 5.20 percent, an increase of 37 basis points from the first quarter of 1999. - Noninterest income was $152.0 million in the first quarter of 2000, an increase of $12.7 million, or 9 percent, from the first quarter of 1999. Service charges on deposit accounts grew $7.9 million, or 20 percent, merchant banking fees increased $6.8 million, or 91 percent, and trust and investment management fees rose $6.5 million, or 20 percent These increases were partially offset by a decrease in other noninterest income of $8.7 million, or 42 percent. - A provision for credit losses of $40.0 million was recorded in the first quarter of 2000, compared with $5.0 million in the first quarter of 1999. This resulted from management's regular assessment of overall credit quality, loan portfolio composition and growth, business and economic conditions in relation to the level of the allowance for credit losses. The allowance for credit losses was $447.9 million, or 446 percent of total nonaccrual loans, at March 31, 1999, compared with $483.2 million, or 335 percent of total nonaccrual loans, at March 31, 2000. - Noninterest expense, excluding the restructuring credit, was $267.0 million in the first quarter of 2000, a decrease of $34.1 million, or 11 percent, over the first quarter of 1999. Personnel-related expense decreased $28.5 million, or 17 percent, professional fees decreased $2.7 million, or 26 percent, and other noninterest expense decreased $5.3 million, or 9 percent. - The effective tax rates for the first quarter of 2000 and 1999 were 34 percent and 32 percent, respectively. During the first quarter of 1999, we recognized a tax benefit as the result of an IRS settlement of $6.3 million for refund claims we filed for the years 1992 through 1994. Excluding this tax benefit, our effective tax rate for the first quarter of 1999 would have been 35 percent compared to 34 percent for the first quarter of 2000. - Reported return on average assets was 1.93 percent and return on average common equity was 21.14 percent for the quarter ending March, 31, 2000. In the firstsecond quarter of 2000, our pro forma return on average assets increased to 1.721.62 percent from 1.511.44 percent a year earlier, and our pro forma return on average common equity increased to 18.5517.78 percent from 16.0516.02 percent a year earlier. -Major factors affecting the earnings trend were: o Total loans at March 31,interest income during the second quarter of 2000, on a taxable- equivalent basis, was $102.1 million or 19.4% higher than the same period in 1999. Increased average earning asset balances and the increasing interest rate environment were $26.0 billion,the main contributors to the higher total interest income. o Net interest margin for the second quarter of 2000 was 37 basis points or 7.6 percent higher than the same period in 1999. Increased yields on earning assets, partially offset by higher cost of funds 15 on interest bearing liabilities, both resulting from the increasing interest rate environment, were the main contributors to a higher net interest margin. o Growth in several fee revenue businesses was strong with service charges on deposit accounts up $9.7 million or 23 percent, trust and investment management fees up $3.4 million or 10 percent, brokerage fees and commission up $3.2 million or 52 percent, and merchant banking fees up $2.0 million or 21 percent. Overall fee revenue grew $18.2 million or 12.6 percent, excluding a net securities gain of $10.0 million. o The provision for loan losses increased to $70.0 million in the second quarter of 2000 from $10.0 million in the same period in 1999. The change is attributed to an increase in our criticized credits and in our impairment allowance. o Operating expenses, excluding a restructuring reserve credit of $1.6 billion,$8.0 million, decreased $14.9 million or 74.9 percent over March 31,from the same period in 1999. -The decrease is mainly attributed to lower direct expenses realized through our Mission Excel expense reduction efforts and higher prior year expenses related to the Year 2000 conversion. COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 Net income was $299.9 million or $1.83 per diluted common share, for the first six months of 2000 compared with $233.2 million or $1.38 per diluted common share, for the first six months of 1999, Return on average assets was 1.80 percent for the quarter ending June 30, 2000, compared with 1.48 percent for the same period in 1999, and return on average common equity was 19.77 percent for the quarter ending June 30, 2000, compared with 16.03 percent for the same period in 1999. Excluding the effects of the $19.0 million restructuring credit ($11.8 million net of tax), which was recorded in the first six months of 2000, pro forma earnings were $288.0 million or $1.76 per diluted common share for the first six months of 2000, compared to $233.2 million or $1.38 per diluted common share for the first six months of 1999. For the first six months of 2000, our pro forma return on average assets increased to 1.73 percent from 1.48 percent a year earlier, and our pro forma return on average common equity increased to 18.99 percent from 16.03 percent a year earlier. Major factors affecting the earnings trend were: o Total interest income during the first six months of 2000, on a taxable- equivalent basis, was $184.0 million or 17.6 percent higher than the same period in 1999. Increased average earning asset balances and the increasing interest rate environment were the main contributors to the higher total interest income. o Net interest margin for the first six months of 2000 was 38 basis points, or 7.9 percent higher than the same period in 1999. Increased yields on earning assets, partially offset by higher cost of funds on interest bearing liabilities, both resulting from the increasing interest rate environment, were the main contributors to a higher net interest margin. o Growth in several fee revenue businesses continued with service charges on deposit accounts up $17.6 million or 21 percent, trust and investment management fees up $9.9 million or 15 percent, merchant banking fees up $8.7 million or 52 percent, and brokerage fees and commission up $7.0 million or 60%. Overall, fee revenue grew $31.0 million or 10.9 percent, excluding the net securities gain of $10.0 million. o The provision for loan losses increased to $110.0 million in the first six months of 2000 from $15.0 million in the same period in 1999. The change is attributed to an increase in our criticized credits and in our impairment allowance. 16 o Operating expenses decreased $49.0 million or 8.0 percent, excluding a restructuring reserve credit of $19.0 million, from the same period in 1999. The decrease is mainly attributed to lower direct expenses realized through to our Mission Excel expense reduction efforts, higher prior year expenses related to the Year 2000 conversion. Nonperforming assets increased $36.8$131.5 million, or 34135 percent, from March 31,June 30, 1999 to $146.6$229.0 million at March 31,June 30, 2000. Nonperforming assets as a percentage of total assets increased to 0.440.68 percent at March 31,June 30, 2000, compared with 0.340.30 percent one year earlier. Total nonaccrual loans were $100.4$90.9 million at March 31,June 30, 1999, compared with $144.4$203.2 million at March 31,June 30, 2000, resulting in an increase in the ratio of nonaccrual loans to total loans from 0.410.37 percent at March 31,June 30, 1999 to 0.560.77 percent at March 31,June 30, 2000. 13 - Our Tier 1 and total risk-based capital ratios were 9.90 percent and 11.86 percent, respectively, at March 31, 1999, compared with 10.1110.02 percent and 11.96 percent, respectively, at March 31,June 30, 1999, compared with 10.20 percent and 12.04 percent, respectively, at June 30, 2000. Our leverage ratio was 9.789.91 percent at March 31,June 30, 1999 compared with 10.24 percent at March 31, 2000.June 30, 2000 MISSION EXCEL Mission Excel, a project begun in the second quarter 1999, is a company-wide initiative to slow the rate of growth of our expenses, increase sustainable growth in our revenues, and increase productivity through elimination of unnecessary or duplicate functions. The goal of this project iswas to help us achieve or exceed an efficiency ratio of 54% to 56% by the fourth quarter 2000. As of June 30, 2000, we achieved this goal both on a reported basis, as well as a pro forma basis. In connection with Mission Excel, we incurred an $85 million restructuring charge in the third quarter of 1999. The charge consisted of $70 million in personnel expense for approximately 1,400 employees to be severedterminated under the plan. The remaining $15 million related to lease termination costs for 8eight facilities that were to be vacated and professional servicesservice costs incurred in connection with Mission Excel. During the firstsecond quarter 2000, as part of our regular evaluation, we have reduced our restructuring reserve by $11$8 million. Total reductions for the six months ended June 30, 2000 were $19.0 million. The reduction, in the second quarter, arose primarily in the severance portion of our reserve due to a change in the attrition assumptions that were used when we establishedat the reserve.end of the first quarter 2000. The continuing strength of the California economy, coupled with a tight labor market, resulted in a markedly higher attrition rate than we had originally anticipated. As a result, we have reduced the total number of employees expected to be severed under the plan from 1,400 to 1,060. In addition, we have reduced our expected costs for redundant facilities and other expenses by $1 million due to our ability to sublet one location and to lower professional services costs.800. As we continue to evaluate the impact of the attrition assumptions utilized in estimating the severance reserve, further adjustments may be necessary. At the completion of the plan, we currently expect to sever approximately 1,060800 employees who are not concentrated in any one group or class of staff. Of the total, 524620 employees have been severed as of March 31,June 30, 2000 and the remaining 536180 employees are expected to be severed in the next 3three quarters. Most of these employees will have beenwere notified of their severance date by June 30, 2000. The following table presents the restructuring reserve for the period, the utilization and reduction of the reserve, and the resulting balance as of March 31,June 30, 2000.
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED (DOLLARS IN THOUSANDS) TOTALJUNE 30, 2000 JUNE 30, 2000 - ------------------------------------------------------------ -------------------------------------------------------- ------------- ------------- Balance, at December 31, 1999................................ $ 69,359beginning of period.................... $45,298 $69,359 Restructuring credit........................................ (11,000) Utilization................................................. (13,061) --------credit............................ (8,000) (19,000) Utilization..................................... (7,274) (20,335) ------- ------- Balance, at March 31, 2000................................... $ 45,298 ========end of period.......................... $30,024 $30,024 ======= =======
17 BUSINESS SEGMENTS We segregate our operations into four primary business units for the purpose of management reporting, as shown in the table on the following pages. The results show the financial performance of our major business units. During the firstsecond quarter of 1999, we introduced a new method for measuring the contribution provided by each of our business units. The Risk-Adjusted Return on Capital (RAROC) methodology seeks to attribute economic capital to business units consistent with the level of risk they assume. These risks are primarily credit risk, market risk and operational risk. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and volatilities. Operational risk is the potential loss due to failures in internal control, system failures, or external events. 14 The following table reflects the condensed income statements, selected average balance sheet items and selected financial ratios for each of our primary business units. The information presented does not necessarily represent the business units' financial condition and results of operations as if they were independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. The significant changes in the RAROC measurement methodology concern the recognition of credit expense for expected losses arising from credit risk and the attribution of economic capital related to unexpected losses arising from credit, market and operational risks. Business unit results are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal Corporation as a whole. The management reporting system identifies balance sheet and income statement items to each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing system, which assigns a cost of funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. 18 We have restated the business units' results for the prior periods to reflect the new RAROC methodology, as well as any reorganizational changes that have occurred. 15
COMMUNITY BANKING COMMERCIAL AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP ------------------- ------------------- ----------------------------------------- ---------------------- --------------------- AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------------------------------------------JUNE 30, ---------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- --------- -------- -------- ----------------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income....................................... $164,763 $178,206 $137,702 $172,667 $11,889 $8,620income........................... $169,213 $183,171 $146,122 $ 182,265 $ 10,977 $ 8,147 Noninterest income........................................ 82,294 94,915 29,713 41,996 15,407 17,428income............................ 92,817 112,369 32,294 50,840 13,961 14,079 -------- -------- -------- --------- -------- ------- -------------- Total revenue............................................. 247,057 273,121 167,415 214,663 27,296 26,048revenue................................. 262,030 295,540 178,416 233,105 24,938 22,226 Noninterest expense(2).................................... 188,123 173,369 72,868 70,446 14,537 13,074expense(1)........................ 191,327 180,772 70,897 74,461 14,558 14,081 Credit expense (income)................................... 12,907 11,841 22,809 28,304 2,979 2,882....................... 13,014 12,563 22,036 29,377 2,899 1,840 -------- -------- -------- --------- -------- ------- -------------- Income before income tax expense (benefit)................ 46,027 87,911 71,738 115,913 9,780 10,092.... 57,689 102,205 85,483 129,267 7,481 6,305 Income tax expense (benefit).............................. 17,653 33,626 26,986 41,555 3,775 3,860.................. 22,022 39,096 31,955 46,806 2,852 2,412 -------- -------- -------- --------- -------- ------- -------------- Net income................................................income.................................... $ 28,37435,667 $ 54,28563,109 $ 44,75253,528 $ 74,35882,461 $ 6,005 $6,2324,629 $ 3,893 ======== ======== ======== ========= ======== ======= ============== AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)............................................loans................................... $ 8,3368,300 $ 8,0027,978 $ 13,73514,569 $ 16,47017,047 $ 1,1461,036 $ 993939 Total assets.............................................. 9,298 8,967 15,093 18,144 1,779 1,564assets.................................. 9,281 8,888 15,908 18,893 1,584 1,543 Total deposits(1)......................................... 13,797 14,399 5,840 6,019 781 892deposits................................ 14,000 14,134 5,722 6,238 789 875 FINANCIAL RATIOS: Return on risk adjusted capital........................... 20% 44% 17% 23%capital(2)............ 24% 42% 19% 22%21% 18% 16% Return on average assets.................................. 1.24% 2.43% 1.20% 1.64% 1.37% 1.60%assets(2)................... 1.54 2.86 1.35 1.76 1.17 1.01 Efficiency ratio(3)....................................... 76.15 63.48 43.53 32.82 53.26 50.19
........................... 73.02 61.17 39.74 31.94 58.38 63.35
GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ------------------- ------------------- ----------------------------------------- ---------------------- --------------------- AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------------------------------------------JUNE 30, ---------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- --------- -------- -------- ----------------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income....................................... $19,405 $15,667income........................... $ 6,062 $10,362 $339,821 $385,52214,892 $ 10,073 $ 5,959 $ 12,636 $347,163 $396,292 Noninterest income........................................ 5,377 (10,167) 6,517 7,838 139,308 152,010 ------- -------income............................ 3,026 (2,486) 2,700 (1,732) 144,798 173,070 -------- --------------- -------- -------- -------- -------- Total revenue............................................. 24,782 5,500 12,579 18,200 479,129 537,532revenue................................. 17,918 7,587 8,659 10,904 491,961 569,362 Noninterest expense(2).................................... 6,127 4,039 19,509 (4,890) 301,164 256,038expense(1)........................ 5,847 3,822 22,600 9,183 305,229 282,319 Credit expense (income)................................... -- -- (33,695) (3,027) 5,000 40,000 ------- -------....................... - - (27,949) 26,220 10,000 70,000 -------- --------------- -------- -------- -------- -------- Income before income tax expense (benefit)................ 18,655 1,461 26,765 26,117 172,965 241,494.... 12,071 3,765 14,008 (24,499) 176,732 217,043 Income tax expense (benefit).............................. 7,187 559 (1,131) 3,423 54,470 83,023 ------- -------.................. 4,610 1,448 566 (14,134) 62,005 75,628 -------- --------------- -------- -------- -------- -------- Net income................................................ $11,468 $ 902 $ 27,896 $22,694 $118,495 $158,471 ======= =======income.................................... $7,461 $2,317 $13,442 $(10,365) $114,727 $141,415 ======== =============== ======== ======== ======== ======== AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans(1)............................................loans................................... $ --- $ --- $ 1,064950 $ 549477 $ 24,28124,855 $ 26,01426,441 Total assets.............................................. 4,118 3,507 1,440 840 31,728 33,022assets.................................. 3,789 3,713 1,399 809 31,961 33,846 Total deposits(1)......................................... 2,891 3,431 (3) 340 23,306 25,081deposits................................ 2,748 3,389 90 841 23,349 25,477 FINANCIAL RATIOS: Return on risk adjusted capital........................... 30% 2%capital(2)............ 14% 6% na na na na Return on average assets.................................. 1.13% 0.10%assets(2)................... 0.79 0.25 na na 1.51% 1.93%1.44% 1.68% Efficiency ratio(3)....................................... 24.72 73.44........................... 32.63 50.38 na na 62.75 47.5862.04 49.52 - --------------------------- (1) "Other" includes a second quarter restructuring credit of $8.0 million ($5.1 million, net of tax). (2) Annualized. (3) The efficiency ratio is noninterest expense, excluding foreclosed asset income and restructuring charge, as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset income/(expense) was $0.512 million and ($0.056) million for the second quarter of 1999 and 2000, respectively. (na) = not applicable
- ------------------------------ (1) Represents loans and deposits for each business segment before allocation between the segments of loans and deposits originated in one segment but managed by another segment. (2) "Other" includes first quarter 2000 restructuring credit of $11.0 million ($6.9 million, net of tax). (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income), as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset income was $0.041 million in the first quarter of 1999 and $0.035 million in the first quarter of 2000.19
COMMUNITY BANKING AND INVESTMENT COMMERCIAL FINANCIAL INTERNATIONAL SERVICES GROUP SERVICES GROUP BANKING GROUP ---------------------- ---------------------- --------------------- AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- --------- -------- --------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income........................... $333,986 $360,031 $283,824 $ 354,932 $ 22,866 $ 16,772 Noninterest income............................ 175,998 207,997 62,008 92,835 29,367 31,507 -------- -------- -------- --------- -------- -------- Total revenue................................. 509,984 568,028 345,832 447,767 52,233 48,279 Noninterest expense(1)........................ 379,475 354,179 143,765 144,907 29,095 27,107 Credit expense (income)....................... 25,921 24,404 44,845 57,681 5,877 4,722 -------- -------- -------- --------- -------- -------- Income before income tax expense (benefit).... 104,588 189,445 157,222 245,179 17,261 16,450 Income tax expense (benefit).................. 40,009 72,462 58,941 88,360 6,627 6,292 -------- -------- -------- --------- -------- -------- Net income.................................... $ 64,579 $116,983 $ 98,282 $ 156,819 $ 10,634 $ 10,158 ======== ======== ======== ========= ======== ======== AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans................................... $ 8,318 $ 7,990 $ 14,154 $ 16,758 $ 1,091 $ 966 Total assets.................................. 9,290 8,927 15,503 18,519 1,681 1,554 Total deposits................................ 13,899 14,266 5,781 6,128 785 884 FINANCIAL RATIOS: Return on risk adjusted capital(2)............ 22% 43% 18% 22% 18% 20% Return on average assets(2)................... 1.40 2.64 1.28 1.70 1.25 1.31 Efficiency ratio(3)........................... 74.41 62.35 41.57 32.36 55.70 56.15 GLOBAL UNIONBANCAL MARKETS GROUP OTHER CORPORATION ---------------------- ---------------------- --------------------- AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------- 1999 2000 1999 2000 1999 2000 -------- -------- -------- --------- -------- ---------- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income........................... $ 34,297 $ 22,092 $ 12,011 $ 27,987 $686,984 $ 781,814 Noninterest income............................ 8,403 (12,654) 8,330 5,395 284,106 325,080 -------- -------- ---------- --------- -------- --------- Total revenue................................. 42,700 9,438 20,341 33,382 971,090 1,106,894 Noninterest expense(1)........................ 11,974 7,861 42,083 4,303 606,392 538,357 Credit expense (income)....................... - - (61,643) 23,193 15,000 110,000 -------- -------- --------- --------- -------- --------- Income before income tax expense (benefit).... 30,726 1,577 39,901 5,886 349,698 458,537 Income tax expense (benefit).................. 11,797 603 (897) (9,066) 116,476 158,651 -------- -------- --------- --------- -------- -------- Net income.................................... $ 18,929 $ 974 $ 40,798 $ 14,952 $233,222 $ 299,886 ======== ======== ========= ========= ======== ========== AVERAGE BALANCES (DOLLARS IN MILLIONS): Total loans................................... $ - $ - $ 1,006 $ 514 $ 24,569 $ 26,228 Total assets.................................. 3,952 3,610 1,419 824 31,845 33,434 Total deposits................................ 2,819 3,410 43 591 23,327 25,279 FINANCIAL RATIOS: Return on risk adjusted capital(2)............ 21% 1% na na na na Return on average assets(2)................... 0.97 0.05 na na 1.48% 1.80% Efficiency ratio(3)........................... 28.04 83.29 na na 62.39 48.58 - --------------------------- (1) "Other" includes restructuring credits of $19.0 million ($11.8 million, net of tax). (2) Annualized. (3) The efficiency ratio is noninterest expense, excluding foreclosed asset income and restructuring charge, as a percentage of net interest income (taxable-equivalent) and noninterest income. Foreclosed asset income/(expense) was $0.553 million and ($0.021) million for the first six months of 1999 and 2000, respectively. (na) = not applicable 16
20 COMMUNITY BANKING AND INVESTMENT SERVICES GROUP The Community Banking and Investment Services Group strives to provide the best possible financial products to individuals and small businesses including a complete set of credit, deposit and trust products delivered through branches, relationship managers, private bankers and trust administrators. The Community Banking and Investment Services Group provides its customers with high quality customer service executed through a full linenumber of checkingresponsive and savings, investment, trust, loan and fee-based banking products. During 1999, and as part of the Mission Excel initiatives, we merged the Community Banking Group with the Trust and Private Financial Services Groupefficient delivery channels. In addition to formour traditional network channels, the Community Banking and Investment Services Group. The mergingGroup announced earlier this year the establishment of a unique alliance with NIX Check Cashing and Operation Hope designed to bring convenient banking services to a broader community. This alliance will allow our small business and consumer clients access to a unique blend of financial services combining the NIX Check Cashing services, Union Bank of California Banking Services and Operation Hope, Inc small business education services. Checking and savings account services are available today through selected NIX locations with future services planned to include applications for consumer loans, credit cards, new and used car loans, home equity loans and residential mortgages. Continued success in these two groups under one leadership provides our consumerstrategies has resulted in increased revenues, reduced costs, improved efficiency ratios and business client base with a full range of products and services through one coordinated and responsive delivery channel. It is expected that when this strategy is fully implemented, we will further improve customer service, increase revenues and lower expenses.higher returns on capital. In the firstsecond quarter of 2000, net income increased $25.9$27.4 million, an increase of over 75% compared to the firstsecond quarter of 1999. Total revenue increased $26.1$33.5 million in the first quarter of 2000 compared to a year ago. The revenueago with the majority of that increase coming from a $19.6 million increase in noninterest income. Noninterest income increases relate to higher netarose from a strategic repricing effort initiated through Mission Excel, and from the purchase of trust assets of the Imperial Trust Company, which occurred in mid-1999. Net interest income trust fees, investment management feesincreased $14.0 million over the prior year due to a combination of higher earning asset volume and brokerage commissions. Noninterest expensea higher rate environment. Operating expenses decreased in the first quarterCommunity Banking and Investment Services Group by $10.6 million, due to a combination of 2000 decreased $14.8 millionthe continued implementation of Mission Excel cost reduction efforts and the introduction of technology improvements in back office operations and call centers. With the completion of organizational changes resulting from Mission Excel, the prior year. Credit expense for the first quarterCommunity Banking and Investment Services Group is comprised of 2000 decreased $1.1 million from a year ago. Organizational changes will continue in the near term as our strategy is implemented. However, at March 31, 2000, the group was divided into three major divisions: Community Banking, Wealth Management, and Institutional Services and Asset Management. COMMUNITY BANKING serves over one million consumer households and businesses through its 240241 full-service branches in California, six6 full-service branches in Oregon and Washington, three3 full-service branches in Guam and Saipan and its network of over 425 proprietary ATMs. Customers may also access our services 24 hours a day by telephone or personal computer.through our Bank@Home product at www.UBOC.com. In addition, the division offers automated teller and point-of-sale debit services through our founding membership in the Star System-Registered Trademark-System(R), the largest shared ATM network in the Western United States. This division is organized by service delivery method, by markets and by geography. We serve our customers in the following ways: -o Through community banking branches, which serve consumers and businesses with checking and deposit services, as well as various types of indirect and direct financing, including auto leasing and residential real estate lending, -o Through on-line access our internet banking services augment our physical delivery channels by providing a wide array of customer transaction, bill payment and loan payment services, -o Through business banking centers, which serve businesses with sales up to $5 million, and -o Through in-store branches, which also serve consumers and businesses. WEALTH MANAGEMENT provides private banking services to our affluent clientele as well as brokerage products and services. -21 o The Private Bank focuses primarily on delivering integrated and customized financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms. Specific products and services include trust and estate services, investment account management services, offshore trust services and customized deposit and credit products. The Private Bank's strategy is to expand its business by leveraging existing Bank client relationships, increasing its geographic market coverage and the breadth of its products and services. Through its 8 locations, the Private Bank relationship managers offeralloffer all of the Bank's available products and services. -o Our brokerage products and services are provided through UBOC Investment Services, Inc., a registered broker/dealer offering a full line of investment products to individuals and institutional clients. Its primary strategy is to further penetrate our existing client base. 17 INSTITUTIONAL SERVICES AND ASSET MANAGEMENT provides investment management and administration services for a broad range of individuals and institutions. -o HighMark Capital Management, Inc., a registered investment advisor, manages our proprietary HighMark family of mutual funds. It also providesoffers investment management services to all UBOC clients, including institutions, pension plansfunds and individuals, including to clients of other divisions.individuals. HighMark Capital Management's strategy is to expand distribution of its mutual funds by targeting its marketing efforts at registered investment advisors and regional broker/dealers. In addition, HighMark Capital Management, Inc. is working with The Bank of Tokyo-Mitsubishi,Tokyo- Mitsubishi, Ltd. and other third parties to establish mutual funds offshore that HighMark will advise and which will be offeredoffer to non-U.S. investors. HighMark also serves as a sub-advisor for funds managed by Tokyo-Mitsubishi Asset Management, Ltd. in Japan. -o Business Trust provides businesses, government agencies, unions and non-profit organizations with trustee services, investment management and 401(k) valuation and recordkeeping services. Business Trust's strategy is to expand its third-party distribution network to include insurance companies, investment managers, brokers and mutual funds. -o Securities Services is engaged in domestic and global securities custody, safekeeping, mutual fund accounting, securities lending, and corporate trust services. Its client base includes financial institutions, businesses, government agencies, union,unions, investment managers and non-profit organizations. Securities Services is the only West Coast based provider of a full range of institutional financial services. Through alliances with other financial institutions, the group offers additional products and services, such as credit cards, leasing, and asset-based and leveraged financing. The group competes with larger banks by providing service quality superior to that of its major competitors. We are recognized as among the highest rated banks in California for customer service quality and satisfaction. The group's primary means of competing with community banks include its large and convenient branch network and its reputation for innovative use of technology to deliver banking services. We have the fifth largest branch network among depository institutions in California. We also offer convenient banking hours to consumers through our drive-through banking locations and selected branches that are open seven days a week. The group competes with a number of commercial banks, internet banks, savings associations and credit unions, as well as more specialized financial service providers such as investment brokerage companies, consumer finance companies, and residential real estate lenders. The group's primary competitors are other major depository institutions such as Bank of America, California Federal, Washington Mutual and Wells Fargo, as well as smaller community banks in the markets in which we operate. 22 COMMERCIAL FINANCIAL SERVICES GROUP The Commercial Financial Services Group offers a variety of commercial financial services, including: - commercialcustomized financing and project loans, - real estate financing, - commercial financing based on accounts receivable, inventory, or other short term assets, - trade financing, which is the short-term extension of credit to support export/import transactions, including letters of credit, - lease financing, 18 - customized cash management services to middle market and - selected capitallarge corporate business primarily headquartered in the western United States. The Commercial Financial Services Group has continued to produce strong earnings growth by focusing on customer segmentation, allowing the group to provide specialized financing expertise to specific geographic markets products.and industry segments such as Communications, Energy, Entertainment, and Retailers. Relationship managers and credit executives in the Commercial Financial Services Group provide credit services including commercial loans, accounts receivables and inventory financing, project financing, lease financing, trade financing and real estate financing. In addition to credit services, the group offers its customers access to high quality cash management services delivered through specialized deposit managers with extensive experience in cash management solutions for businesses. The group's customers provide a significant source of opportunities for uscontinued success in their focused approach to sell products and services of other units of the bank, including treasury, trust, and retail banking services. In the firstwholesale market has led to second quarter of 2000 net income growth of $28.9 million over a year ago. Revenues increased $29.6by $54.7 million comparedprimarily due to strong loan growth, higher interest rates and improved noninterest income. Operating expenses increased $3.6 million over the second quarter last year due to higher expenses to support increased deposit volume. Despite this increase, the group continues to improve efficiency with revenue growth significantly outpacing expense growth. Credit expenses increased $7.3 million in response to the first quarter of 1999. Total revenuestrong loan growth over the prior year. The Commercial Financial Services Group is organized in the first quarter of 2000 increased $47.2 million, due to the $2.5 billion growth in average loans and leases year over year, which contributed to the significant increase in net interest income accompanied by increases in fee income. Noninterest expense in the first quarter of 2000 decreased $2.4 million. Credit expense in the first quarter of 2000 increased $5.5 million from a year ago, due to the loan growth mentioned above.following five business units: o The group is divided into the following business units, which serve specific markets and industries: - the Commercial Banking Group,Division which serves California middle-market companies, o The Specialized Lending Group which serves clients in specific industries such as Oil and larger companies most oftenGas, Utilities, Telecommunications, clients requiring access to asset based lending, lease financing and real estate financing or large corporate clients headquartered in the Western United States, -o The Corporate Deposit Services Division which provides deposit and cash management expertise to clients in the Real Estate Industries Group, which serves real estate developersmiddle market, large corporate market and real estate investment trusts, - the Specialized Lending Group, which serves companies operating in variousspecialized industries, including oil and gas, utilities, media, communications, healthcare, finance, and retailing, and - theo The Institutional and Deposit Services Division which provides deposit and cash management expertise to clients in specific deposit intensive industries, and o The Corporate Capital Markets Group, which serves titleDivision that provides merchant and escrow companies, domestic financial institutions, retailers, bankruptcy trustees,investment banking related products and other customers with large pools of deposits. Theservices. In addition, the Commercial Customer Service Unit supports thesethe business units described above by providing centralized customer service support. The group competes with other banks primarily on the basis of its reputation as a "business bank," the quality of its relationship managers, and the delivery of superior customer service. We are recognized in California as having a superior "business banking" reputation relative to other large banks. We are also highly rated among financial institutions for our cash management services and systems. The group's main strategy is to target industries and companies for which the group can reasonably expect to be one of a customer's primary banks. Consistent with its strategy, the group attempts to serve a large part of its targeted customers' credit and depository needs. The group competes with a variety of other financial services companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, we compete with investment banks, commercial finance companies, leasing companies, and insurance companies. INTERNATIONAL BANKING GROUP The International Banking Group mainly provides correspondent banking and trade finance-related products and services to international financial institutions worldwide, primarily in Asia. This includes providing products and services that facilitate trade finance transactions, including payments, collection and the extension of short-term credit. The group also serves selected foreign firms and U.S. corporate 23 clients in selected countries worldwide, particularly in Asia. In the U.S., the group serves subsidiaries and affiliates of non-Japanese Asian companies and U.S. branches and agencies of foreign banks. The group also provides international services to domestic corporate clients along the West Coast. The group's revenue predominately relates to foreign customers. In the firstsecond quarter of 2000, net income increased $0.2decreased $0.7 million compared to the firstsecond quarter of 1999. Total revenueEconomic recovery has put pressure on spreads in Asia, and this pressure, along with a decline in portfolio exposure, has reduced net interest income. Noninterest expenses for the firstsecond quarter of 2000 decreased $1.2were $0.5 million due to continuing reductions in credit exposures, narrower credit spreads, and lower market pricings on those exposures. Noninterest expense inthan the first quarter of 2000 decreased $1.5 million primarily due to personnel expenses. Credit expense in the first quarter of 2000 decreased $0.1 million 19 from asame period last year ago, due to the reduction in credit exposures. Expected losses related to credit risk on foreign exposures have not been finalized and results could change in the future.as Mission Excel initiatives were implemented. The group has a long and stable history of providing correspondent and trade-relatedtrade- related services to international financial institutions. We believe that we have achieved a leading market position and strong customer loyalty in the Asia/Pacific correspondent banking market because we provide high quality, customized products, and services at competitive prices. The group maintains branches in Tokyo, Taipei, Seoul, Manila and Hong Kong, representative offices in other parts of Asia and Latin America, and an international banking subsidiary in New York. One of the group's primary services is international trade finance. Trade finance is typically short-term, which means it generally has a lower credit risk. GLOBAL MARKETS GROUP The Global Markets Group conducts business activities primarily to support the previously described business groups and their customers. This group offers a broad range of risk management products, such as foreign exchange and interest rate swaps, caps and floors. Additionally, it places debt securities, including Union Bank of California, N.A.'s own liabilities, with institutional investors and trades debt instruments in the secondary market. ThisAt the same time, this group also manages our market-related risks as part of its responsibilities for asset/liability management. The group is also responsible for maintaining Union Bank of California, N.A.'smanagement including wholesale funding, liquidity, securities portfolio.portfolio, and off-balance sheet interest rate risk hedges. In the firstsecond quarter of 2000, net income decreased $10.6$5.1 million compared to the firstsecond quarter of 1999. Total revenue in the firstsecond quarter of 2000 decreased $19.3$10.3 million primarily due to the sale of securities in our portfolio in order to replace low yielding with higher yielding securities.securities compared to the second quarter of 1999. Noninterest expense in the firstsecond quarter of 2000 decreased $2.1$2.0 million largely due to personnel expense reductions. The group manages our securities portfolio, trading operations, wholesale funding needs, and interest rate and liquidity risk. The group includes products that support corporate lending, customer interest rate risk management needs and foreign exchange.reductions compared to the second quarter of 1999. OTHER "Other" includes the following items: -o Corporate activities that are not directly attributable to one of the four major business units. Included in this category are goodwill and certain other non-recurring items such as restructuring charges (credits), merger and integration expense, certain parent company non-bank subsidiaries, and the elimination of the fully taxable-equivalent amounts. -o The adjustment between the credit expense under RAROC and the provision for credit losses under US GAAP, the net impact of transfer pricing, and earnings associated with unallocated equity capital. -o The Credit Management Group, which includes $172$97 million and $159$229 million of average nonperforming assets at March 31,June 30, 1999 and 2000, respectively. -o The Pacific Rim Corporate Group, which offers a range of credit, deposit, and investment management products and services to companies in the U.S., which are affiliated with companies headquartered outside the U.S., mostly in Japan. -o The residual costs of support groups. 2024 NET INTEREST INCOME The table below shows the major components of net interest income and net interest margin.
FOR THE THREE MONTHS ENDED ------------------------------------------------------------------------- MARCH 31,-------------------------- JUNE 30, 1999 MARCH 31,JUNE 30, 2000 ----------------------------------- ---------------------------------------------------------------------------- ----------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) - ---------------------------------------------------------------------------- ----------- ---------- -------- ----------- ---------- --------------- ASSETS Loans:(2) Domestic............................................ $23,140,810 $433,113 7.57% $24,916,310 $521,671 8.42%Domestic........................ $23,798,981 $448,704 7.56% $25,385,864 $544,700 8.63% Foreign(3).......................................... 1,139,916 18,530 6.59 1,097,408 18,376 6.73 Securities--taxable................................... 3,534,633 55,387 6.29 3,122,072 49,334 6.33 Securities--tax-exempt................................ 84,883 2,130 10.04 70,292 1,765 10.05...................... 1,055,863 16,284 6.19 1,055,548 17,441 6.65 Securities-taxable................. 3,385,289 52,798 6.24 3,400,563 55,269 6.51 Securities-tax-exempt.............. 80,378 2,076 10.33 68,992 1,725 10.00 Interest bearing deposits in banks.................... 215,568 3,188 6.00 180,286 2,184 4.87banks. 204,783 3,068 6.01 224,542 2,563 4.59 Federal funds sold and securities 96,976 1,196 4.95 130,551 2,082 6.41 purchased under resale agreements................................... 139,274 1,697 4.94 209,951 3,019 5.78agreements Trading account assets................................ 363,604 3,938 4.39 230,749 3,281 5.72assets............. 245,720 2,563 4.18 309,002 4,800 6.25 ----------- -------- ----------- -------- Total earning assets.............................. 28,618,688 517,983 7.34 29,827,068 599,630 8.08assets......... 28,867,990 526,689 7.32 30,575,062 628,580 8.26 -------- -------- Allowance for credit losses........................... (457,277) (475,546)losses........ (444,775) (502,637) Cash and due from banks............................... 1,982,326 2,076,988banks............ 1,992,353 2,148,274 Premises and equipment, net........................... 427,603 426,675net........ 434,916 424,321 Other assets.......................................... 1,156,386 1,166,562assets....................... 1,110,312 1,201,425 ----------- ----------- Total assets...................................... $31,727,726 $33,021,747assets................. $31,960,796 $33,846,445 =========== =========== LIABILITIES Domestic deposits: Interest bearing.................................... $ 5,509,002 34,707 2.56 $ 5,883,802 37,065 2.53bearing................ $5,642,605 35,065 2.49 $5,966,563 39,077 2.63 Savings and consumer time........................... 3,335,641 27,261 3.31 3,396,181 28,571 3.38time....... 3,349,783 26,423 3.16 3,408,870 29,778 3.51 Large time.......................................... 3,998,778 44,179 4.48 4,451,793 63,114 5.70time...................... 3,780,046 40,031 4.25 4,691,132 71,333 6.12 Foreign deposits(3)................................... 1,521,529 16,632 4.43 2,061,391 26,925 5.25................ 1,588,022 17,181 4.34 1,782,915 24,441 5.51 ----------- -------- ----------- -------- Total interest bearing deposits................... 14,364,950 122,779 3.47 15,793,167 155,675 3.96deposits 14,360,456 118,700 3.32 15,849,480 164,629 4.18 ----------- -------- ----------- -------- Federal funds purchased and securities sold under repurchase agreements............................... 1,703,531 19,769 4.71 1,326,892 18,524 5.61agreements...................... 1,810,742 21,107 4.68 1,747,380 26,865 6.18 Commercial paper...................................... 1,596,643 19,174 4.87 1,514,620 21,568 5.73paper................... 1,513,389 18,020 4.78 1,508,552 23,364 6.23 Other borrowed funds.................................. 637,065 8,150 5.19 453,468 5,946 5.27funds............... 809,688 9,721 4.82 403,730 5,222 5.20 Subordinated capital notes............................notes......... 298,000 4,109 5.594,036 5.43 298,000 4,856 6.555,081 6.86 UnionBanCal Corporation--obligatedCorporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust....................................... 159,444 3,291 8.26trust........................... 350,000 6,884 7.857,091 8.11 350,000 6,490 7.41 ----------- -------- ----------- -------- Total borrowed funds.............................. 4,394,683 54,493funds......... 4,781,819 59,975 5.03 3,942,980 57,778 5.894,307,662 67,022 6.25 ----------- -------- ----------- -------- Total interest bearing liabilities................ 18,759,633 177,272 3.83 19,736,147 213,453 4.3519,142,275 178,675 3.74 20,157,142 231,651 4.62 -------- ------------------- Noninterest bearing deposits.......................... 8,940,985 9,287,452deposits....... 8,988,105 9,627,284 Other liabilities..................................... 1,032,756 983,405liabilities.................. 957,425 976,792 ----------- ----------- Total liabilities................................. 28,733,374 30,007,004liabilities............ 29,087,805 30,761,218 SHAREHOLDERS' EQUITY Common equity......................................... 2,994,352 3,014,743equity...................... 2,872,991 3,085,227 ----------- ----------- Total shareholders' equity........................ 2,994,352 3,014,743equity... 2,872,991 3,085,227 ----------- ----------- Total liabilities and shareholders' equity........ $31,727,726 $33,021,747equity....... $31,960,796 $33,846,445 =========== =========== Net interest income/margin (taxable-equivalent basis).............................................. 340,711 4.83% 386,177 5.20%...... 348,014 4.84% 396,929 5.21% Less: taxable-equivalent adjustment................... 890 655adjustment. 851 637 -------- -------- Net interest income............................... $339,821 $385,522income.......... $347,163 $396,292 ======== ======== ========- --------------------------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
- ------------------------------ (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches. 2125 NET INTEREST INCOME (CONTINUED)
FOR THE SIX MONTHS ENDED -------------------------- JUNE 30, 1999 JUNE 30, 2000 ----------------------------------------- ----------------------------------------- INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1) BALANCE EXPENSE(1) RATE(1) - ---------------------- ----------- ---------- -------- ----------- ---------- ------- ASSETS Loans:(2) Domestic........................ $23,471,714 $881,817 7.57% $25,151,087 $1,066,371 8.53% Foreign(3)...................... 1,097,657 34,814 6.40 1,076,478 35,817 6.69 Securities-taxable................. 3,459,548 108,185 6.26 3,261,317 104,603 6.42 Securities-tax-exempt.............. 82,618 4,206 10.18 69,642 3,490 10.02 Interest bearing deposits in banks. 210,146 6,256 6.00 202,414 4,747 4.72 Federal funds sold and securities purchased under resale agreements 118,008 2,893 4.94 170,251 5,101 6.03 Trading account assets............. 304,337 6,501 4.31 269,884 8,081 6.02 ----------- --------- ----------- ---------- Total earning assets......... 28,744,028 1,044,672 7.33 30,201,073 1,228,210 8.17 --------- ---------- Allowance for credit losses........ (450,991) (489,092) Cash and due from banks............ 1,987,361 2,112,631 Premises and equipment, net........ 431,280 424,376 Other assets....................... 1,133,220 1,185,313 ----------- ----------- Total assets................. $31,844,898 $33,434,301 =========== =========== LIABILITIES Domestic deposits: Interest bearing................ $5,576,172 69,772 2.52 $5,925,182 76,142 2.58 Savings and consumer time....... 3,342,751 53,684 3.24 3,402,526 58,349 3.45 Large time...................... 3,888,808 84,210 4.37 4,571,463 134,447 5.91 Foreign deposits(3)................ 1,554,959 33,813 4.39 1,922,153 51,366 5.37 ----------- --------- ----------- ---------- Total interest bearing deposits 14,362,690 241,479 3.39 15,821,324 320,304 4.07 ----------- --------- ----------- ---------- Federal funds purchased and securities sold under repurchase agreements...................... 1,757,433 40,876 4.69 1,537,135 45,389 5.94 Commercial paper................... 1,554,786 37,194 4.82 1,511,586 44,932 5.98 Other borrowed funds............... 723,847 17,871 4.98 428,599 11,168 5.24 Subordinated capital notes......... 298,000 8,145 5.51 298,000 9,937 6.71 UnionBanCal Corporation-obligated mandatorily redeemable preferred securities of subsidiary grantor trust........................... 255,249 10,382 8.15 350,000 13,374 7.63 ----------- --------- ----------- ---------- Total borrowed funds......... 4,589,315 114,468 5.03 4,125,320 124,800 6.08 ----------- --------- ----------- ---------- Total interest bearing liabilities................ 18,952,005 355,947 3.79 19,946,644 445,104 4.49 --------- ---------- Noninterest bearing deposits....... 8,964,675 9,457,368 Other liabilities.................. 994,882 980,304 ----------- ----------- Total liabilities............ 28,911,562 30,384,316 SHAREHOLDERS' EQUITY Common equity...................... 2,933,336 3,049,985 ----------- ----------- Total shareholders' equity... 2,933,336 3,049,985 ----------- ----------- Total liabilities and shareholders' equity....... $31,844,898 $33,434,301 =========== =========== Net interest income/margin (taxable-equivalent basis) 688,725 4.83% 783,106 5.21% Less: taxable-equivalent adjustment 1,741 1,292 --------- -------- Net interest income................ $686,984 $781,814 ======== ======== - --------------------------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Average balances on loans outstanding include all nonperforming and renegotiated loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (3) Foreign loans and deposits are those loans and deposits originated in foreign branches.
26 Net interest income is interest earned on loans and investments less interest expense on deposit accounts and borrowings. Primary factors affecting the level of net interest income include the margin between the yield earned on interest earning assets and the rate paid on interest bearing liabilities, as well as the volume and composition of average interest earning assets and average interest bearing liabilities. THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 Net interest income, on a taxable-equivalent basis, was $340.7$348.0 million in the firstsecond quarter of 1999, compared with $386.2$396.9 million in the firstsecond quarter of 2000. This increase of $45.5$48.9 million, or 1314 percent, was attributable primarily to a $1.2$1.7 billion, or 46 percent, increase in average earning assets, partially funded by a $346.5$639.2 million, or 47 percent, increase in average noninterest bearing deposits. In addition, the net interest margin was favorably impacted by the interest rate environment that contributed to higher yields on loans and other interest bearing assets, partially offset by higher rates on deposits and other average interest bearing liabilities, as well as a lower effective cost of funding the increased assets. The net interest margin increased 37 basis points to 5.20%5.21%. Average earning assets were $28.6$28.9 billion in the firstsecond quarter of 1999, compared with $29.8$30.6 billion in the second quarter of 2000. This growth was attributable to a $1.6 billion, or 6 percent, increase in average loans. The growth in average loans was mostly due to the increase in average commercial, financial and industrial loans of $972.1 million, real estate mortgage loans of $479.5 million, and real estate construction loans of $256.2 million, partially offset by lower average consumer loans of $160.0 million. The higher interest rate environment resulted in higher yields on average earning assets of 94 basis points, partially offset by higher rates paid on average interest bearing liabilities of 88 basis points. The decision to maintain an asset sensitive balance sheet contributed to the higher yields. The $1.0 billion, or 5 percent, increase in average interest bearing liabilities over the second quarter of 1999 was due to an increase in average interest bearing deposits of $1.5 billion, primarily large time deposits. Average noninterest bearing deposits increased $639.2 million, or 7 percent, over the second quarter of 1999. This large base of interest-free funding continues to benefit our lower cost of funds. SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 Net interest income, on a taxable-equivalent basis, was $688.7 million in the first six months of 1999, compared with $783.1 million in the first six months of 2000. This increase of $94.4 million, or 14 percent, was attributable primarily to a $1.5 billion, or 5 percent, increase in average earning assets, partially funded by a $492.7 million, or 5 percent, increase in average noninterest bearing deposits. In addition, the net interest margin was favorably impacted by the interest rate environment that contributed to higher yields on loans and other interest bearing assets, partially offset by higher rates on deposits and other average interest bearing liabilities, as well as a lower effective cost of funding the increased assets. The net interest margin increased 38 basis points to 5.21%. Average earning assets were $28.7 billion in the first quartersix months of 1999, compared with $30.2 billion in the first six months of 2000. This growth was attributable to a $1.7 billion, or 7 percent, increase in average loans, partially offset by a $132.9$211.2 million, or 37 percent, decrease in average trading account assets and $427.2 million, or 126 percent decrease in average securities. The growth in average loans was mostly due to the increase in average commercial, financial and industrial loans of $974.8$991.3 million, real estate mortgage loans of $559.1$522.9 million, and real estate construction loans of $246.5$251.2 million, partially offset by lower average consumer loans of $153.0$154.5 million. Lower average trading account assets primarily resulted from the discontinuance of our municipal underwriting activity in April 1999. The decrease in average securities, which comprised primarily fixed rate available for sale securities, reflected liquidity and interest rate risk management actions. The higher interest rate environment resulted in higher yields on average earning assets of 7484 basis points, partially offset by higher rates paid on average interest bearing liabilities of 5270 basis points. The $976.5decision to maintain an asset sensitive balance sheet contributed to the higher yields. The $994.6 million, 27 or 5 percent, increase in average interest bearing liabilities over the first quartersix months of 1999 was due to an increase in average interest bearing deposits of $1.4$1.5 billion, or 10 percent, primarily large time deposits. Average noninterest bearing deposits increased $346.5$492.7 million, or 45 percent, over the first quartersix months of 1999. This large base of interest-free funding continues to benefit our lower cost of funds.
NONINTEREST INCOME
FOR THE THREE MONTHS ENDED --------------------------------------------- INCREASE (DECREASE) MARCH 31, MARCH 31, -------------------FOR THE SIX MONTHS ENDED ---------------------------------- ----------------------------------- JUNE 30, JUNE 30, PERCENT JUNE 30, JUNE 30, PERCENT 1999 2000 CHANGE 1999 2000 CHANGE (DOLLARS IN THOUSANDS) 1999 2000 AMOUNT CHANGE - ------------------------------------------------------- ---------- ---------- -------- -------- -------- -------- -------- ------- Service charges on deposit accounts.................... $ 39,651 $ 47,563 $ 7,912 19.95%accounts................ $42,929 $52,645 22.63% $82,580 $100,208 21.35% Trust and investment management fees................... 32,271 38,800 6,529 20.23fees............... 33,983 37,388 10.02 66,254 76,188 14.99 Merchant transaction processing fees................... 14,512 17,095 2,583 17.80fees............... 18,146 18,438 1.61 32,658 35,533 8.80 International commissions and fees..................... 17,631 17,036 (595) (3.37)fees................. 18,080 18,415 1.85 35,711 35,451 (0.73) Merchant banking fees.................................. 7,461 14,219 6,758 90.58fees.............................. 9,154 11,109 21.36 16,615 25,328 52.44 Brokerage commissions and fees......................... 5,596 9,430 3,834 68.51fees..................... 6,080 9,263 52.35 11,676 18,693 60.10 Foreign exchange trading gains, net.................... 5,112 7,043 1,931 37.77 Assets gains (losses), net............................. 1,761 (7,896) (9,657) nmnet................ 4,494 7,869 75.10 9,606 14,912 55.24 Securities gains, (losses), net......................... 1,261 (4,318) (5,579)net.............................. 634 10,018 nm Other.................................................. 14,052 13,038 (1,014) (7.22)1,895 5,700 200.79 Other.............................................. 11,298 7,925 (29.85) 27,111 13,067 (51.80) -------- -------- ------- -------- -------- ------- Total noninterest income............................. $139,308 $152,010 $12,702 9.12%income........................ $144,798 $173,070 19.53% $284,106 $325,080 14.42% ======== ======== =======
- ------------------------======== ======== - --------------------------- nm = not meaningful
THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 In the firstsecond quarter of 2000, noninterest income was $152.0$173.1 million, an increase of $12.7$28.3 million, or 920 percent, over the same period in 1999. This increase was primarily dueattributed to a $7.9 million increasegrowth in 22 servicedeposit- related income, net gains from securities sales, trust and investment fees, merchant banking and brokerage revenues, and net gains from foreign exchange trading. Service charges on deposit accounts a $6.8 million increase in merchant banking fees, a $6.5 million increase in trust and investment management fees, a $3.8 million increase in brokerage commissions and fees, and a $2.6 million increase in merchant transaction processing fees, partially offset by a $9.7 million increase in assets losses and higher net securities losses of $5.6 million. Revenue from service charges on deposit accountsrevenue was $47.6$52.6 million, an increase of 20$9.7 million or 23 percent over the firstsecond quarter of 1999. The increase was primarily attributable to a 59 percent increase in average deposits, higher overdraft fees due to a change in fee structure, and the expansion of several products and services. Trust and investment management fees were $38.8$37.4 million for the quarter, an increase of $3.4 million or 10% over same period 1999. The increase was attributed to the purchase of the trust assets of Imperial Trust Company, which occurred in mid-1999 and growth in the institutional trust business, offset by a small decline in personal trust fees. Managed assets have grown 11% over the prior year and currently stand at $20.9 billion, while total assets have increased 19% to $130.1 billion. Merchant banking fees were $11.1 million, an increase of 20$2.0 million or 21 percent over the first quarter of 1999. The increase was due to growth in trust accounts and assets under management, some of which came from our purchase of Imperial Trust Company in the second quarter of 1999, which resulted in higher mutual fund management fees and higher institutional account fees. Merchant transaction processing fees were $17.1 million, an increase of 18 percent over the first quarter of 1999. The increase was primarily duerelated to an increase inincreased syndication and investment banking activities for the volume of credit card drafts deposited by merchants, coupled with a higher merchant discount rate. Merchant bankingperiod. Brokerage commissions and fees were $14.2$9.3 million, an increase of 91$3.2 million or 52 percent over the firstsecond quarter of 1999. The increase was primarily due to higher syndication and investment banking activities. Brokerage commissions and fees were $9.4 million, an increase of 69 percent over the first quarter of 1999. The increase was primarily duerelated to brokerage commissions on sales of non-proprietary mutual funds, annuities, and insurance products and growth in corporate sweep products. Assets losses,Foreign exchange trading gains, net were $7.9 million, an increase of $9.7$3.4 million or 75% over the firstsecond quarter of 1999. The increase was dueattributed to an increase in exporters' cross border transactions, reflecting the gradual recovery of the Asian and European economies and a $12.5 million charge related to residual auto lease valuations, partially off-set by a $4.1 million gain on sale of a property.strong US dollar that resulted in an increase in overseas direct investments and capital market securities' investments. 28 Securities losses,gains, net were $4.3$10.0 million, an increase of $5.6$9.4 million over the firstsecond quarter of 1999. This increase was primarily related to a single venture capital securities gain. Other noninterest income was $7.9 million, a decrease of $3.4 million or 30 percent from the second quarter of 1999. The decrease was attributed to lower trading gains on money market securities and on the sale of a portion of the healthcare industry related loans in the portfolio. SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 In the first six months of 2000, noninterest income was $325.1 million, an increase of $41.0 million, or 14 percent, over the same period in 1999. This increase was primarily attributed to growth in deposit-related income, trust and investment fees, merchant banking and brokerage revenues, net gains from foreign exchange trading, and net gains from securities sales. Service charges on deposit accounts revenue was $100.2 million, an increase of $17.6 million or 21 percent over the first six months of 1999. The increase was primarily attributable to a 8 percent increase in average deposits, higher overdraft fees due to a change in fee structure, and the expansion of several products and services. Trust and investment management fees were $76.2 million, an increase of $9.9 million or 15 percent over the first six months of 1999. The acquisition of Imperial Trust Company accounted for just over 33% of the increase with the rest attributable to growth in institutional trust business, institutional asset management accounts, and a 20% increase in retail HighMark Fund balances. Merchant banking fees were $25.3 million, an increase of $8.7 million or 52 percent over the first six months of 1999. The increase was primarily related to higher syndication and investment banking activities for the period. Brokerage commissions and fees were $18.7 million, an increase of $7.0 million or 60 percent over the first six months of 1999. The increase was primarily related to brokerage commissions on sales of non-proprietary mutual funds, annuities, and insurance products and growth in corporate sweep products. Foreign exchange trading gains, net were $14.9 million, an increase of $5.3 million or 55% over the first six months of 1999. The increase was attributed to an increase in exporters' cross border transactions, reflecting the gradual recovery of the Asian and European economies and a strong US$ which resulted in an increase in overseas direct investments and capital market securities' investments. Securities gains, net were $5.7 million, an increase of $3.8 million or 201 percent over the first six months of 1999. This increase was primarily related to a single venture capital securities gain, partially offset by the sale of certain lowlower yielding securities in our portfolio in orderwhere the proceeds were used to replace them withpurchase higher yielding securities. 23Other noninterest income was $13.1 million, a decrease of $14.0 million or 52 percent over the first six months of 1999. The decrease was attributed to lower trading gains on money market securities and on the sale of a portion of the healthcare industry related loans in the portfolio, partially offset by a $4.1 million gain on the sale of a property. 29
NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED ---------------------------------- INCREASE (DECREASE) MARCH 31, MARCH 31, -------------------FOR THE SIX MONTHS ENDED ------------------------------------ ----------------------------------- JUNE 30, JUNE 30, PERCENT JUNE 30, JUNE 30, PERCENT (DOLLARS IN THOUSANDS) 1999 2000 AMOUNT PERCENTCHANGE 1999 2000 CHANGE - ------------------------------------------------------- ---------- -------------------------------- -------- -------- -------- -------- -------- -------- Salaries and other compensation........................ $131,074 $129,615 $ (1,459) (1.11)compensation................ $135,202 $127,711 (5.54)% $266,276 $257,326 (3.36)% Employee benefits...................................... 36,593 9,579 (27,014) (73.82)benefits.............................. 31,813 25,351 (20.31) 68,406 34,930 (48.94) -------- -------- -------- -------- Personnel-related expense............................ 167,667 139,194 (28,473) (16.98)expense...................... 167,015 153,062 (8.35) 334,682 292,256 (12.68) Net occupancy.......................................... 22,461 22,684 223 0.99 Equipment.............................................. 14,541 15,294 753 5.18occupancy.................................. 21,917 22,010 0.42 44,378 44,694 0.71 Equipment...................................... 15,475 16,710 7.98 30,016 32,004 6.62 Merchant transaction processing........................ 11,610 11,716 106 0.91 Communications......................................... 9,933 10,567 634 6.38processing................ 13,258 12,644 (4.63) 24,868 24,360 (2.04) Communications................................. 10,618 10,745 1.20 20,551 21,312 3.70 Professional services.......................... 10,290 10,556 2.59 20,984 18,518 (11.75) Data processing........................................ 8,001 8,647 646 8.07 Professional services.................................. 10,694 7,962 (2,732) (25.55) Software............................................... 6,413 5,834 (579) (9.03)processing................................ 7,661 8,975 17.15 15,662 17,622 12.51 Advertising and public relations....................... 6,106 5,746 (360) (5.90)relations............... 9,390 6,758 (28.03) 15,496 12,504 (19.31) Software....................................... 6,264 5,147 (17.83) 12,677 10,981 (13.38) Printing and office supplies........................... 6,672 4,957 (1,715) (25.70) Travel................................................. 4,079 3,703 (376) (9.22)supplies................... 6,025 4,933 (18.12) 12,697 9,890 (22.11) Travel......................................... 5,822 4,417 (24.13) 9,901 8,120 (17.99) Intangible asset amortization..........................amortization.................. 3,509 3,338 (171)(4.87) 7,018 6,676 (4.87) Armored car............................................ 3,227 3,141 (86) (2.67)car.................................... 3,241 3,143 (3.02) 6,468 6,284 (2.84) Foreclosed asset income................................ (41) (35) 6 (14.63)expense (income).............. (512) 56 nm (553) 21 nm Restructuring credit................................... -- (11,000) (11,000)credit........................... - (8,000) nm Other.................................................. 26,292 24,290 (2,002) (7.61)- (19,000) nm Other.......................................... 25,256 27,825 10.17 51,547 52,115 1.10 -------- -------- -------- -------- Total noninterest expense............................ 301,164 $256,038 $(45,126) (14.98)%expense................... $305,229 $282,319 (7.51) $606,392 $538,357 (11.22) ======== ======== ======== ======== ========
- ------------------------- --------------------------- nm = not meaningful
THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 In the firstsecond quarter of 2000, noninterest expense, excluding the restructuring credit, was $267.0$290.3 million, a decrease of $34.1$14.9 million, or 115 percent, over the same period in 1999. This decrease was mostly duemainly attributed to a $12.4 million decreaselower direct expenses realized through our Mission Excel expense reduction efforts and higher expenses in personnel-related expense, a $2.7 million decrease in professional services, a $1.7 million decrease in printing and office supplies, and a $2.0 million decrease in other noninterest expense.the prior year related to the Year 2000 conversion. Personnel-related expense was $139.2$153.1 million, a decrease of 17$14.0 million or 8 percent over the firstsecond quarter of 1999. This decrease was attributed to lower staff expense due to personnel reductions achieved through Mission Excel and changes to our pension plan assumptions. Advertising and public relations expense was $6.8 million, a decrease $2.6 million or 28 percent over the second quarter of 1999. This decrease was primarily duerelated to a major outdoor-related advertising campaign sponsored in the prior year, as well as to the timing of current projects in the current year. SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 In the first six months of 2000, noninterest expense, excluding the restructuring credit, was $557.4 million, a decrease of $49.0 million, or 8 percent, over the same period in 1999. This decrease was attributed to lower direct expenses realized through our Mission Excel expense reduction efforts, higher expenses in the prior year related to the Year 2000 conversion, and a one-time credit of $16.0 million related to an accounting change in recognizing pension expense. Personnel-related expense was $292.3 million, a decrease of $42.4 million or 13 percent over the first six months of 1999. This decrease was attributed to a one-time credit for an accounting methodology change in recognizing pension expense of $16.0 million, and personnel reductions achieved through Mission Excel, partially off-set by incentive and merit increases.changes to our pension plan assumptions. 30 Professional services were $8.0$18.5 million, a decrease of 26$2.5 million or 12 percent over the first quartersix months of 1999. This decrease was primarily dueattributed to higher Y2KYear 2000 conversion cost in the first quartersix months of 1999. Printing and office supplies expense was $5.0$9.9 million, a decrease of 26$2.8 million or 22 percent over the first quartersix months of 1999 primarily due1999. This improvement was attributed to Mission Excel efficiency achievements. INCOME TAX EXPENSE The effective tax ratesrate for each of the first quartersecond quarters of 1999 and 2000 were 3235 percent. The effective tax rate for the first six months of 1999 and 2000 were 33 percent and 3435 percent, respectively. During the first quarter of 1999, we recognized a tax benefit as the result of an IRS settlement of $6.3 million for refund claims we filed for the years 1992 through 1994. Excluding this tax benefit, our effective tax rate for the first quarter of 1999 would have been 35 percent compared to 34 percent for the first quarter ofsix months ended June 30, 1999 and June 30, 2000. 24 LOANS The following table shows loans outstanding by loan type.
PERCENT CHANGE TO MARCH 31,JUNE 30, 2000 FROM: -------------------------- MARCH 31,--------------------------- JUNE 30, DECEMBER 31, MARCH 31, MARCH 31,JUNE 30, JUNE 30, DECEMBER 31, (DOLLARS IN THOUSANDS) 1999 1999 2000 1999 1999 - ------------------------------------------------------- ----------- ------------- ----------- ---------- ------------------------ -------- ------------ Domestic: Commercial, financial and industrial................... $13,393,019industrial.... $13,440,720 $14,176,630 $14,300,485 6.78% 0.87% Construction................... 535,015$14,716,318 9.49% 3.81% Construction............................ 559,906 648,478 796,424 48.86 22.81844,632 50.85 30.25 Mortgage: Residential.................. 2,543,801Residential.......................... 2,567,584 2,581,141 2,605,979 2.44 0.96 Commercial................... 3,011,7192,684,010 4.53 3.99 Commercial........................... 3,132,623 3,572,347 3,467,765 15.14 (2.93)3,418,277 9.12 (4.31) ----------- ----------- ----------- Total mortgage............. 5,555,520mortgage..................... 5,700,207 6,153,488 6,073,744 9.33 (1.30)6,102,287 7.05 (0.83) Consumer: Installment.................. 1,968,849Installment.......................... 1,969,685 1,922,158 1,842,469 (6.42) (4.15) Home equity.................. 744,7831,785,146 (9.37) (7.13) Revolving lines of credit............ 732,758 727,776 711,675 (4.45) (2.21)740,822 1.10 1.79 ----------- ----------- ----------- Total consumer............. 2,713,632consumer..................... 2,702,443 2,649,934 2,554,144 (5.88) (3.61)2,525,968 (6.53) (4.68) Lease financing................ 1,066,134financing......................... 1,142,180 1,148,542 1,144,492 7.35 (0.35)1,139,978 (0.19) (0.75) ----------- ----------- ----------- Total loans in domestic offices.................. 23,263,320offices.... 23,545,456 24,777,072 24,869,289 6.90 0.3725,329,183 7.58 2.23 Loans originated in foreign branches....................... 1,089,034branches....... 1,041,202 1,135,886 1,114,395 2.33 (1.89)1,043,861 0.26 (8.10) ----------- ----------- ----------- Total loans................ $24,352,354loans................................ $24,586,658 $25,912,958 $25,983,684 6.70% 0.27%$26,373,044 7.27% 1.78% =========== =========== ===========
Our lending activities are predominantly domestic, with such loans comprising 96 percent of the total loan portfolio at March 31,June 30, 2000. Total loans at March 31,June 30, 2000 were $26.0$26.4 billion, an increase of $1.6$1.8 billion, or 7 percent, over March 31,June 30, 1999. The increase was attributable to growth in the commercial, financial and industrial loan portfolio, which increased $907.5 million,$1.3 billion, the commercial mortgage loan portfolio, which increased $456.0$285.7 million, the construction loan portfolio, which increased $261.4 million, the lease financing loan portfolio, which increased $78.4$284.7 million, the residential mortgage loan portfolio, which increased $62.2 million, and the loans originated in foreign branches, which increased $25.4$116.4 million, partially offset by, the consumer loan portfolio, which decreased $159.5$176.5 million. Commercial, financial and industrial loans represent the largest category in the loan portfolio. These loans are extended principally to corporations, middle market businesses, and small businesses, with no industry concentration exceeding 10 percent of total commercial, financial and industrial loans. At March 31,June 30, 1999 and 2000, the commercial, financial and industrial loan portfolio was $13.4 billion, or 55 percent of total loans, and $14.3$14.7 billion, or 5556 percent of total loans, respectively. The increase of $907.5 million,$1.3 billion, or 79 percent, from March 31,June 30, 1999 was primarily attributable to loans extended to businesses with revenues exceeding $20 million. The growth continued to reflect the results of initiatives to increase participation in larger syndicated loan positions as lead manager and as agent, especially in the communications, media, 31 and entertainment and energy capital services industries in which we have developed specialized lending expertise. The construction loan portfolio totaled $535.0$560.0 million, or 2 percent of total loans, at March 31,June 30, 1999, compared with $796.4$884.6 million, or 3 percent of total loans, at March 31,June 30, 2000. This growth of $261.4$284.7 million, or 4951 percent, from March 31,June 30, 1999 was primarily attributable to the continuing favorable California real estate market coupled with a strong West Coast economy. Mortgage loans were $5.6$5.7 billion, or 23 percent of total loans, at March 31,June 30, 1999, compared with $6.1 billion, or 23 percent of total loans, at March 31,June 30, 2000. The mortgage loan portfolio consists of loans 25 on commercial and industrial projects and residential loans, secured by one-to-four family residential properties, primarily in California. The increase in commercial mortgage loans of $456.0$285.7 million, or 159 percent and in residential mortgage loans of $62.2$116.4 million, or 25 percent, from March 31,June 30, 1999, reflected both the favorable California real estate market and a strong West Coastwest coast economy. Consumer loans totaled $2.7 billion, or 11 percent of total loans, at March 31,June 30, 1999, compared with $2.6$2.5 billion, or 10 percent of total loans, at March 31,June 30, 2000. The decrease of $159.5$176.5 million, or 67 percent, was primarily attributable to a reduction in home equityauto dealer loans as customers refinanced,mainly due to increased competition in the first halfbusiness and the maturities of last year,to take advantage of favorable long-term, fixed mortgage rates. Lease financing totaled $1.1 billion, or 4 percent of total loans at March 31, 1999, compared with $1.1 billion, or 4 percent of total loans, at March 31, 2000. Loans originated in foreign branches totaled $1.1 billion, or 4 percent of total loans, at March 31, 1999 and $1.1 billion, or 4 percent of total loans, at March 31, 2000.during peak years. CROSS-BORDER OUTSTANDINGS Our cross-border outstandings reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of March 31,June 30, 1999, December 31, 1999, and March 31,June 30, 2000 for each country where such outstandings exceeded 1 percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding for each country exclude local currency outstandings. For those individual countries shown in the table below, most of our local currency outstandings are hedged or are funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL (DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS - ----------------------------------------------------------------------- ------------ -------- ------------ ------------ March 31,June 30, 1999 Japan........................................... $182 $ -- $445 $627 Korea........................................... 472 2 119 593Japan....................................................... $72 $- $448 $520 Korea....................................................... 353 - 122 475 December 31, 1999 Japan...........................................Japan....................................................... 82 --- 339 421 Korea...........................................Korea....................................................... 422 --- 53 475 March 31,June 30, 2000 Japan........................................... 110 -- 344 454 Korea........................................... 362 -- 55 417Korea....................................................... 336 - 52 388
The economic condition and the ability of some countries, to which we have cross-border exposure, to manage their external debt obligations have been impacted by the Asian economic crisis that began in the second half of 1997. The Asian economic crisis appears to have stabilized somewhat, though the timing of full recovery is still uncertain. Our exposure in all affected countries continues to be primarily short-term in nature and substantially related to the finance of trade and, in the case of Japan, the provisions of short term working capital facilities to subsidiaries of Japanese companies operating in the United States. For further discussion on the actions taken by management to reduce our credit exposure in Asia, see "Allowance for Credit Losses" below. PROVISION FOR CREDIT LOSSES We recorded a $5.0$10.0 million provision for credit losses in the firstsecond quarter of 1999, compared with a $40.0$70 million provision for credit losses in the firstsecond quarter of 2000. The provision for credit losses for the six months ended June 30, 2000 was $110.0 million compared to $15.0 million for the six months ended June 30, 1999. Provisions for credit losses are charged 26 to income to bring our allowance for credit losses to a level deemed appropriate by management based on the factors discussed under "Allowance for Credit Losses" below. 32 The significant increase in our provision for credit losses in the second quarter of 2000 resulted in large part from our normal credit process that identified increasing levels of criticized assets while applying tighter standards to the definitions of potential and well-defined weaknesses in our loan portfolio. ALLOWANCE FOR CREDIT LOSSES We maintain an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio, and to a lesser extent, unused commitments to provide financing. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans, pools of loans, leases and commitments. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Loss factors are developed in the following ways: -o Problem graded loan loss factors are derived from a migration model that tracks historical loss experience over a six-year period, we believe is reflective of a business cycle, -o Pass graded loan loss factors are based on the average annual net charge-off rate over a period we believe is reflective of a business cycle, -o Pooled loan loss factors (not individually graded loans) are based on expected net charge-offs for one year. Pooled loans are loans that are homogeneous in nature, such as consumer installment and residential mortgage loans and automobile leases. We believe that a business cycle is a period in which both upturns and downturns in the economy have been reflected. The current economic expansion has required us to extend our historical perspective to capture the highs and lows of a typical economic cycle. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred. This amount may be determined either by a method prescribed by Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", or by a method which identifies certain qualitative factors. The unallocated allowance is composed of two elements. The first element consists of an amount between 20 percent to 25 percent of the total of the formula and specific allowances. This element recognizes the model and estimation risk associated with the formula and specific allowances. The second element is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following, which existed at the balance sheet date: -o General economic and business conditions affecting our key lending areas, -o Credit quality trends (including trends in nonperforming loans expected to result from existing conditions), -o Collateral values, -o Loan volumes and concentrations, -33 o Seasoning of the loan portfolio, 27 -o Specific industry conditions within portfolio segments, -o Recent loss experience in particular segments of the portfolio, -o Duration of the current business cycle, -o Bank regulatory examination results, and -o Findings of our internal credit examiners. Executive management reviews these conditions quarterly in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the probable loss related to such condition is reflected in the unallocated allowance. The allowance for credit losses is based upon estimates of probable losses inherent in the loan portfolio. The amount actually observed for these losses can vary significantly from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The loss migration model that is used to establish the loan loss factors for problem graded loans is designed to be self-correcting by taking into account our recent loss experience. Similarly, by basing the pass graded loan loss factors over a period reflective of a business cycle, the methodology is designed to take our recent loss experience into account. Pooled loan loss factors are adjusted quarterly based upon the level of net charge-offs expected by management in the next twelve months. Furthermore, our methodology permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management's judgment, significant factors, which affect the collectibility of the portfolio as of the evaluation date, are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information that has become available. COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES FROM DECEMBER 31, 1999 At December 31, 1999, our allowance for credit losses was $470 million, or 1.82 percent of total loans, and 281 percent of total nonaccrual loans, compared with an allowance for credit losses at March 31,June 30, 2000 of $483$501 million, or 1.861.90 percent of total loans, and 335246 percent of total nonaccrual loans. In addition, the allowance incorporates the results of measuring impaired loans as provided in SFAS No. 114 and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--IncomeLoan-Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. At December 31, 1999, total impaired loans were $167.4 million and the associated impairment allowance was $42.4 million, compared with $144.4$203.2 million and $43.2$67.2 million, respectively, at March 31,June 30, 2000. During the firstsecond quarter of 2000, there were no changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the allowance for credit losses. Changes in assumptions regarding the effects of economic and business conditions on borrowers and other factors, which are described below, have affected the assessment of the unallocated allowance. In our assessment as of March 31, 2000, management focused, in particular, on factors affecting elements of the health care, communications/media, and technology industries, and the continuing instability of companies and financial institutions in domestic and foreign markets in which we operate and the growth in, and changesWe are presently in the compositionprocess of reviewing all of our risk grades and their related risk grade factors in order to determine whether or not model and estimation risk is present. Our intent is to complete this review by the loan portfolio. 28fourth quarter of 2000. 34 CHANGES IN THE FORMULA, SPECIFIC AND UNALLOCATED ALLOWANCES FROM DECEMBER 31, 1999 At March 31,June 30, 2000, the formula allowance was $289$308 million compared to $257 million at December 31, 1999, an increase of $32$51 million. This was primarily due to higher levelsincreases in criticized credits and downward migration within the criticized grades. Regulatory examiners are currently reviewing shared national credits, the outcome of which is expected in mid-August 2000. Further increases in criticized assets.credits could result. At March 31,June 30, 2000, the specific allowance was $55$81 million compared to $51 million at December 31, 1999, an increase of $4$30 million. This was primarily caused by both higher impairment allowances on our nonaccrual loans and higher levels of nonaccrual loans. At March 31,June 30, 2000, the unallocated allowance was $139$111 million compared to $162 million at December 31, 1999, a decrease of $23$51 million. Management believes that the inherent losses related to certain conditions considered in its evaluation of the unallocated allowance have improved moderately or have been recognized in the formula allowance during the threesix months ended March 31,June 30, 2000. As a result, $51 million of the unallocated allowance has been incorporated in the formula or specific allowances. At March 31,June 30, 2000, we had a $139$111 million unallocated allowance in our allowance for credit losses. In evaluating the appropriateness of the unallocated allowance, we considered the following factors: -o the approximately $69$78 million to $86$97 million margin for model and estimation risk prescribed by our credit policy, -o the effects of changes in the economic, regulatory, and technology environments on borrowers in the communications/media industry, which could be in the range of $6 million to $13$11 million, -o the effects of export market conditions and cyclical overcapacityover- capacity on borrowers in the technology industry, which could be in the range of $4 million to $8 million, to $15 million, -o the continued but decreasing effects of the instability in certain Asian countries on borrowers, which could be in the range of $14$5 to $23 million, o the continued but decreasing effects of weather conditions on borrowers in the agricultural industry, which could be in the range of $3 million to $32$6 million, and -o the adverse effects on borrowers in the health carehealthcare industry from reduced reimbursements from government medical insurance programs, which have been reduced as a result of their incorporation into our formula allowance, which could be in the range of $10$3 million to $15$5 million. There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth above. See forward-looking statements on page 33. 2939. 35 CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES The following table sets forth a reconciliation of changes in our allowance for credit losses.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED MARCH 31,JUNE 30, ENDED JUNE 30, ---------------------- --------------------- (DOLLARS IN THOUSANDS) 1999 2000 1999 2000 - ---------------------------------------------------------------------------------- -------- -------- -------- -------- Balance, beginning of period................................period................................................ $447,936 $483,206 $459,328 $470,378 Loans charged off: Commercial, financial and industrial...................... 3,732 31,329 Mortgage.................................................. 409 36 Consumer.................................................. 4,397 2,895industrial..................................... 8,758 53,445 12,490 84,774 Mortgage................................................................. 231 79 640 115 Consumer................................................................. 3,415 3,099 7,812 5,994 Lease financing........................................... 892 600financing.......................................................... 882 731 1,774 1,331 Foreign(1)............................................................................................................... - - 14,127 --- -------- -------- -------- -------- Total loans charged off................................. 23,557 34,860off............................................... 13,286 57,354 36,843 92,214 Recoveries of loans previously charged off: Commercial, financial and industrial...................... 4,562 5,952 Mortgage.................................................. 96 39 Consumer.................................................. 2,414 1,539industrial..................................... 3,008 2,691 7,570 8,643 Mortgage................................................................. 307 88 403 127 Consumer................................................................. 2,223 1,974 4,637 3,513 Lease financing........................................... 149 190financing.......................................................... 194 137 343 327 -------- -------- -------- -------- Total recoveries of loans previously charged off........ 7,221 7,720off...................... 5,732 4,890 12,953 12,610 -------- -------- -------- -------- Net loans charged off................................. 16,336 27,140off............................................... 7,554 52,464 23,890 79,604 Provision for credit losses................................. 5,000 40,000losses................................................. 10,000 70,000 15,000 110,000 Foreign translation adjustment and other net additions (deductions).............................................. (56) (32)......... 21 (11) (35) (43) -------- -------- -------- -------- Balance, end of period...................................... $447,936 $483,206period...................................................... $450,403 $500,731 $450,403 $500,731 ======== ======== ======== ======== Allowance for credit losses to total loans.................. 1.84% 1.86%loans.................................. 1.83% 1.90% 1.83% 1.90% Provision for credit losses to net loans charged off........ 30.61 147.38 Recoveries of loans to loans charged off in the previous period.................................................... 30.53 29.79off........................ 132.38 133.42 62.79 138.18 Net loans charged off to average loans outstanding for the period(2)................................................. 0.27 0.42
- ------------------------........ 0.12 0.80 0.20 0.61 - --------------------------- (1) Foreign loans are those loans originated in foreign branches. (2) Annualized.
Total loans charged off in the firstsecond quarter of 2000 increased by $11.3$44.1 million from the firstsecond quarter of 1999, primarily due to a decrease in foreign loans charged off of $14.1which $24 million mainly due to a single foreign relationship in the first quarter of 1999, partially offset by a $27.6 million increase in commercial, financial and industrial loans charged off,was related to several large credits.distressed loan sales. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through provisions for credit losses. The firstsecond quarter's recoveries of loans previously charged off increaseddecreased by $0.5$0.8 million from the same period in 1999. The percentage of net loans charged off to average loans increased by .15567 percent, from the same period in 1999. At March 31,June 30, 2000, the allowance for credit losses exceeded the net loans charged off during the firstsecond quarter of 2000, reflecting management's belief, based on the foregoing analysis, that there are additional losses inherent in the portfolio. Historical net charge-offs are not necessarily indicative of the amount of net charge-offs that we will realize in the future. 3036 NONPERFORMING ASSETS
MARCH 31,JUNE 30, DECEMBER 31, MARCH 31,JUNE 30, (DOLLARS IN THOUSANDS) 1999 1999199 199 2000 - ------------------------------------------------------------ ---------- ------------- -------------------------------- -------- ------------ -------- Commercial, financial and industrial........................ $ 89,814industrial................................................ $81,441 $159,479 $136,968 Construction................................................ 4,370$190,397 Construction........................................................................ 4,352 4,286 4,1844,078 Commercial mortgage......................................... 6,227mortgage................................................................. 5,115 3,629 3,2483,352 Foreign............................................................................. - - 5,374 -------- -------- -------- Total nonaccrual loans.................................. 100,411loans........................................................ 90,908 167,394 144,400203,201 Foreclosed assets........................................... 9,426assets................................................................... 6,541 2,386 2,2481,792 Distressed loans held for sale...................................................... - - 23,988 -------- -------- -------- Total nonperforming assets.............................. $109,837assets.................................................... $97,449 $169,780 $146,648$228,981 ======== ======== ======== Allowance for credit losses................................. $447,936losses......................................................... $450,403 $470,378 $483,206$500,731 ======== ======== ======== 0.37% 0.65% 0.77% Nonaccrual loans to total loans............................. 0.41% 0.65% 0.56%loans..................................................... Allowance for credit losses to nonaccrual loans............. 446.10loans..................................... 495.45 281.00 334.63246.42 Nonperforming assets to total loans, foreclosed assets and foreclosed assets... 0.45distressed loans held for 0.40 0.66 0.560.87 sale............................................................................. Nonperforming assets to total assets........................ 0.34assets................................................ 0.30 0.50 0.440.68
At March 31,June 30, 2000, nonperforming assets totaled $146.6$229.0 million, an increase of $36.8$131.5 million, or 34135 percent, from a year earlier. The increase was concentrated among several large credits in different industry sectors. Although the percentage increase is significant, the actual amount ofIncluded in nonperforming assets remains relatively low.are $24 million in distressed loans that are being held for accelerated disposition. During the second quarter of 2000, we sold $66.7 million of distressed loans under this accelerated disposition program. Nonaccrual loans as a percentage of total loans were 0.560.77 percent at March 31,June 30, 2000, compared with 0.410.37 percent at March 31,June 30, 1999. Nonperforming assets as a percentage of total loans, and foreclosed assets, and distressed loans held for sale increased to 0.440.87 percent at March 31,June 30, 2000 from 0.340.40 percent at March 31,June 30, 1999.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
MARCH 31,JUNE 30, DECEMBER 31, MARCH 31,JUNE 30, (DOLLARS IN THOUSANDS) 1999 1999199 199 2000 - ------------------------------------------------------------ ---------- ------------- -------------------------------- -------- ------------ -------- Commercial, financial and industrial........................ $ 1,241 $ 2,729 $ 6,872industrial................................................ $409 $2,729 $2,552 Mortgage: Residential............................................... 8,767Residential...................................................................... 5,843 5,830 4,041 Commercial................................................ 8312,837 Commercial....................................................................... 5,535 442 176875 ------- ------- ------------- Total mortgage.......................................... 9,598mortgage................................................................ 11,378 6,272 4,2173,712 Consumer and other.......................................... 3,420other.................................................................. 3,364 2,932 3,3063,217 ------- ------- ------------- Total loans 90 days or more past due and still accruing... $14,259accruing.......................... $15,151 $11,933 $14,395$9,481 ======= ======= =============
LIQUIDITY Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust our future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The ALMAsset & Liability Management (ALM) Policy approved by theour Board requires quarterly reviews of our liquidity by the ALCO,Asset & Liability Management Committee (ALCO), which is composed of bank senior executives. Our liquidity management draws upon the strengths of our extensive retail and commercial market business franchise, coupled with the ability to obtain funds for various terms in a variety of domestic and international money markets. Liquidity is managed through the funding and investment functions of the Global Markets Group. 37 Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our average core deposits, which include demand deposits, money market demand accounts, and savings and consumer time deposits, combined with average common shareholders' equity, funded 6665 percent of average total assets of $33.0$33.8 billion for the firstsecond quarter ended March 31,June 30, 2000. Most of the remaining funding was provided by short-term borrowings in the form of negotiable certificates of deposit, foreign deposits, 31 federal funds purchased and securities sold under repurchase agreements, commercial paper and other borrowings. In the first quarter of 1999, we issued $350 million in trust preferred securities the proceeds of which were utilized to repurchase our common stock. Liquidity may also be provided by the sale or maturity of assets. Such assets include interest bearinginterest-bearing deposits in banks, federal funds sold and securities purchased under resale agreements, and trading account securities. The aggregate of these assets averaged $0.6$0.7 billion during the firstsecond quarter of 2000. Additional liquidity may be provided by investment securities available for sale that amounted to $3.2$3.5 billion at March 31,June 30, 2000, and by loan maturities. REGULATORY CAPITAL The following table summarizes our risk-based capital, risk-weighted assets, and risk-based capital ratios.
UNIONBANCAL CORPORATION
MINIMUM "WELL-CAPITALIZED" MARCHMinimum "Well-Capitalized" June 30, December 31, DECEMBER 31, MARCH 31, REGULATORY REGULATORY (DOLLARS IN THOUSANDS)June 30, Regulatory Regulatory (Dollars in thousands) 1999 1999 2000 REQUIREMENT REQUIREMENTRequirement Requirement - ------------------------------------------------- ----------- ------------------------- ----------- ----------- ------------------------------------- ------------------ CAPITAL COMPONENTS Tier 1 capital............. $ 3,097,234 $ 3,308,912 $ 3,376,094capital......... $3,160,230 $3,308,912 $3,468,456 Tier 2 capital............. 611,254capital......... 614,712 616,772 618,397618,790 ----------- ----------- ----------- Total risk-based capital... $ 3,708,488 $ 3,925,684 $ 3,994,491capital $3,774,942 $3,925,684 $4,078,246 =========== =========== =========== Risk-weighted assets....... $31,276,042assets... $31,553,704 $33,288,167 $33,406,941$33,907,287 =========== =========== =========== Quarterly average assets... $31,667,763 $32,763,347 $32,962,471assets $31,889,889 $32,765,347 $33,790,732 =========== =========== =========== AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- ------ ----- CAPITAL RATIOS Total risk-based capital... 11.86%capital (to $3,774,942 11.96% $3,925,684 11.79% 11.96%$4,087,246 12.05% > $2,712,583 8.0% n/ana risk-weighted assets) - Tier 1 risk-based capital.................. 9.90capital (to 3,160,230 10.02 3,308,912 9.94 10.113,468,456 10.23 > 1,356,291 4.0 n/ana risk-weighted assets) - Leverage ratio(1).......... 9.78ratio (1)...... 3,160,230 9.91 3,308,912 10.10 10.243,468,456 10.26 > 1,351,629 4.0 n/a
- ------------------------na - - --------------------------- (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
UNION BANK OF CALIFORNIA, N.A.
MINIMUM "WELL-CAPITALIZED" MARCHMinimum "Well-Capitalized" June 30, December 31, DECEMBER 31, MARCH 31, REGULATORY REGULATORY (DOLLARS IN THOUSANDS)June 30, Regulatory Regulatory (Dollars in thousands) 1999 1999 2000 REQUIREMENT REQUIREMENTRequirement Requirement - ------------------------------------------------- ----------- ------------------------- ----------- ----------- ------------------------------------- ------------------ CAPITAL COMPONENTS Tier 1 capital............. $ 2,984,636 $ 3,103,324 $ 3,217,239capital......... $3,047,190 $3,103,324 $3,207,626 Tier 2 capital............. 506,633capital......... 509,703 511,327 511,571510,959 ----------- ----------- ----------- Total risk-based capital... $ 3,491,269 $ 3,614,651 $ 3,728,810capital $3,556,893 $3,614,651 $3,718,585 =========== =========== =========== Risk-weighted assets....... $30,904,666assets... $31,151,170 $32,850,575 $32,857,742$33,276,287 =========== =========== =========== Quarterly average assets... $31,406,367assets $31,587,511 $32,507,079 $32,666,845$33,342,936 =========== =========== =========== CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total risk-based capital... 11.30%capital (to $3,556,893 11.42% $3,614,651 11.00% 11.35%$3,718,585 11.17% > $2,662,103 8.0% > $3,327,629 10.0% risk-weighted assets).. - - Tier 1 risk-based capital.................. 9.66capital (to 3,047,190 9.78 3,103,324 9.45 9.793,207,626 9.64 > 1,331,051 4.0 > 1,996,577 6.0 risk-weighted assets).. - - Leverage ratio(1).......... 9.50......... 3,047,190 9.65 3,103,324 9.55 9.853,207,626 9.62 > 1,333,717 4.0 > 1,667,147 5.0 - - - --------------------------- (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
- ------------------------ (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets). 32 We and Union Bank of California, N.A. are subject to various regulations issued by federal banking agencies, including minimum capital requirements. We and Union Bank of California, N.A. are required to 38 maintain minimum ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the leverage ratio). Compared with December 31, 1999, our Tier 1 risk-based capital ratio at March 31,June 30, 2000 increased 1726 basis points to 10.1110.20 percent, our total risk-based capital ratio increased 1726 basis points to 11.9612.05 percent, and our leverage ratio increased 1416 basis points to 10.2410.26 percent. The increases in the capital ratios were primarily attributable to a higher money market assets of $140.0 million.growth rate in tier 1 capital attributed to higher growth in net income. As of March 31,June 30, 2000, management believes the capital ratios of Union Bank of California, N.A. met all regulatory minimums of a "well-capitalized" institution. YEAR 2000 We achieved a successful transition to the Year 2000. In addition to successful processing over the year-end period, daily, month-end and quarter-end operations have also been normal. We have largely completed the extensive effort that made this possible. The total cost of the Year 2000 Program is $44 million. This cost includes capital expenditures, which we have capitalized and which are being depreciated over their estimated useful lives. As of March 31, 2000, we have spent $44 million on the year 2000 project, $2 million in 1997, $22 million in 1998, $17 million in 1999 and $3 million in 2000. Of the $44 million spent as of March 31, 2000, $7 million related to capital expenditures, $1 million in 1997, $5 million in 1998, and $1 million in 1999. We have funded the cost of the year 2000 Program with normal operating cash and staffed it with external resources as well as internal staff re-deployed from other assignments. OTHER RELATED DISCLOSURES HighMark Capital Management, Inc. is a registered investment advisor and UBOC Investment Services, Inc. is a broker-dealer. Each of these subsidiaries makes publicly available separate year 2000 reports. You can find additional year 2000 information in those reports. FORWARD-LOOKING STATEMENTS Our management frequently makes forward-looking statements in Securities and Exchange Commission filings, such as this one, press releases, news articles, conference calls with Wall Street analysts and when we are speaking on behalf of UnionBanCal Corporation. The forward-looking statements we make 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. There are numerous factors that could and will cause actual results to differ from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our stock price, financial position, or results of operations. Some, but not all, of these factors are discussed below. ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS A substantial majority of our assets and deposits are generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. In the early 1990's, the California economy experienced an economic recession that resulted in increases in the level of delinquencies and losses for us and many of the state's other financial institutions. If California were to experience another recession, it is expected that our level of problem assets would increase accordingly. The current economic crisis in Asia is expected to continue to negatively impact the economic conditions in California, which could adversely affect our business. 33 ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES COULD HAVE AN ADVERSE EFFECT ON OUR CUSTOMERS AND THEIR ABILITY TO MAKE PAYMENTS TO US We are also subject to certain industry-specific economic factors. For example, a portion of our total loan portfolio is related to real estate obligations, and a portion of our recent growth has been fueled by the general real estate recovery in California. Accordingly, a downturn in the real estate industry in California could have an adverse effect on our operations. Similarly, a portion of our total loan portfolio is to borrowers in the agricultural industry. Adverse weather conditions, combined with low commodity prices, may adversely affect the agricultural industry and, consequently, may impact our business negatively. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, a decrease in interest rates could result in an acceleration in the prepayment of loans. In addition, changes in market interest rates, or changes in the relationships between short-term and long-term market interest rates, or changes in the relationships between different interest rate indices, could affect the interest rates charged on interest earning assets differently than the interest rates paid on interest bearing liabilities. This difference could result in an increase in interest expense relative to interest income. An increase in market interest rates also could adversely affect the ability of our floating-rate borrowers to meet their higher 39 payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs, which could adversely affect our business. SHAREHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD. A majority of our directors are not officers or employees of UnionBanCal Corporation or any of our affiliates, including The Bank of Tokyo-Mitsubishi.Tokyo-Mitsubishi, Ltd. However, because of The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s control over the election of our directors, The Bank of Tokyo-Mitsubishi, Ltd. could change the composition of our Board of Directors so that the Board would not have a majority of outside directors. The Bank of Tokyo-Mitsubishi, Ltd. owns a majority of the outstanding shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi, Ltd. can elect all of our directors and as a result can control the vote on all matters, including determinations such as: approval of mergers or other business combinations; sales of all or substantially all of our assets; any matters submitted to a vote of our shareholders; issuance of any additional common stock or other equity securities; incurrence of debt other than in the ordinary course of business; the selection and tenure of our Chief Executive Officer; payment of dividends with respect to common stock or other equity securities; and matters that might be favorable to The Bank of Tokyo-Mitsubishi.Tokyo-Mitsubishi, Ltd. The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s ability to prevent an unsolicited bid for us or any other change in control could have an adverse effect on the market price for our common stock. THE BANK OF TOKYO-MITSUBISHI'STOKYO-MITSUBISHI, LTD.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS Although we fund our operations independently of The Bank of Tokyo-Mitsubishi, Ltd. and believe our business is not necessarily closely related to The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s business or outlook, The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi. Ltd.'s credit ratings may affect our credit ratings. The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd's credit ratings were downgraded in October 1998 by Standard and Poor's Corporation and are currently on Moody's Investors Service, Inc.'s credit watch with negative implications. Any future downgrading of The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s credit rating could adversely affect our credit ratings. Therefore, as long as The Bank of Tokyo-Mitsubishi, Ltd. maintains a majority interest in us, deterioration in The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s financial condition could result in an increase in our borrowing costs and could impair our access to the public and private capital markets. The Bank of Tokyo-Mitsubishi, Ltd. is also subject to regulatory oversight and review. Our business operations and expansion plans could be negatively affected by regulatory concerns related to the Japanese financial system and The Bank of Tokyo-Mitsubishi. 34 Tokyo-Mitsubishi, Ltd.. POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT US As part of The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s normal risk management processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit exposures and concentrations on an aggregate basis, including us. Therefore, at certain levels, our ability to approve certain credits and categories of customers is subject to concurrence by The Bank of Tokyo-Mitsubishi.Tokyo-Mitsubishi, Ltd.. We may wish to extend credit to the same customer as The Bank of Tokyo-Mitsubishi.Tokyo-Mitsubishi, Ltd.. Our ability to do so may be limited for various reasons, including The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd's aggregate credit exposure and marketing policies. Certain directors' and officers' ownership interests in The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s common stock or service as a director or officer or other employee of both us and The Bank of Tokyo-MitsubishiTokyo-Mitsubishi. Ltd. could create or appear to create potential conflicts of interest, especially since both of us compete in the United States banking industry. SUBSTANTIAL COMPETITION IN THE CALIFORNIA BANKING MARKET COULD ADVERSELY AFFECT US Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions and major foreign-affiliated or foreign banks, as well 40 as many financial and non-financial firms that offer services similar to those offered by us. Some of our competitors are community banks that have strong local market positions. Other competitors include large financial institutions (such as Bank of America, California Federal, Washington Mutual, and Wells Fargo) that have substantial capital, technology and marketing resources. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. In addition, there have been a number of recent mergers involving financial institutions located in California. Some of the merged banks, such as Norwest/Wells Fargo, employ a strong community-based banking model of doing business that may increase competition with our distinctive combination of traditional community bank service coupled with a large branch network. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS PAYABLE TO US A substantial portion of our cash flow typically comes from dividends our bank and nonbank subsidiaries pay to us. Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any of our subsidiaries liquidates, that subsidiary's creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary. If, however, we are a creditor of the subsidiary with recognized claims against it, we would be in the same position. ADVERSE EFFECTS OF BANKING REGULATIONS OR CHANGES IN BANKING REGULATIONS COULD ADVERSELY AFFECT US We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by any future changes in laws, regulations, policies or interpretations. Additionally, our international activities may be subject to the laws and regulations of the jurisdiction where business is being conducted. International laws, regulations and policies affecting us and our subsidiaries may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s controlling ownership of us, laws, regulations and policies adopted or enforced by the Government of Japan may adversely affect our activities and investments and those of our subsidiaries in the future. Under long-standing policy of the Board of Governors of the Federal Reserve System, a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. 35 POSSIBLE FUTURE SALES OF SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK Although The Bank of Tokyo-Mitsubishi, Ltd. has announced its intention to maintain its majority ownership in us, The Bank of Tokyo-Mitsubishi, Ltd. may sell shares of our common stock in compliance with the federal securities laws. By virtue of The Bank of Tokyo-Mitsubishi'sTokyo-Mitsubishi, Ltd.'s current control of us, The Bank of Tokyo-Mitsubishi, Ltd. could sell large amounts of shares of our common stock by causing us to file a registration statement that would allow them to sell shares more easily. In addition, The Bank of Tokyo-Mitsubishi, Ltd. could sell shares of our common stock without registration pursuant to Rule 144 under the Securities Act. Although we can make no prediction as to the effect, if any, that such sales would have on the market price of our common stock, sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect our market price. If The Bank of Tokyo-Mitsubishi, Ltd. sells or transfers shares of our common stock as a block, another person or entity could become our controlling shareholder. 41 STRATEGIES In connection with our strategic repositioning, we have developed long-term financial performance goals, which we expect to result from successful implementation of our operating strategies. We cannot assure you that we will be successful in achieving these long-term goals or that our operating strategies will be successful. Achieving success in these areas is dependent on a number of factors, many of which are beyond our direct control. Factors that may adversely affect our ability to attain our long-term financial performance goals include: -o deterioration of our asset quality, -o our inability to reduce noninterest expenses, -o our inability to increase noninterest income, -o our inability to decrease reliance on asset revenues, -o our ability to sustain loan growth, -o regulatory and other impediments associated with making acquisitions, -o deterioration in general economic conditions, especially in our core markets, -o decreases in net interest margins, -o increases in competition, -o adverse regulatory or legislative developments, -o unexpected increases in costs related to potential acquisitions,acquisi- tions, and -o unexpected increased costs associated with implementation of our efficiency improvement project. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR RESTRUCTURING We may acquire or invest in companies, technologies, services or products that complement our business. In addition, we continue to evaluate performance of all of our businesses and business lines and may sell a business or business lines. Any acquisitions, divestitures or restructuring may result in potentially dilutive issuance of equity securities, significant write-offs, the amortization of expenses related to goodwill and other intangible assets and/or the incurrence of debt, any of which could have a material adverse effect on our business, financial condition and results of operations. Acquisitions, divestitures or restructuring 36 could involve numerous additional risks including difficulties in the assimilation or separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of our business, and the potential loss of key employees. There can be no assurance that we would be successful in overcoming these or any other significant risks encountered. WE MIGHT BE UNABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD SLOW THE DEVELOPMENT OF OUR BUSINESS. Our performance is substantially dependent on the performance of our key managerial, marketing and technical personnel. We are dependent both on our ability to retain and motivate our key personnel and to attract new personnel. However, the labor markets in California are extremely tight and we cannot be sure that we will be able to attract, motivate and retain such personnel. Competition for qualified personnel in California is intense both within our industry and other industry sectors, including high technology. Competitors and others, including high technology companies, have in the past and may in the future attempt to recruit our employees. Inability to attract, retain and motivate the personnel necessary to 42 support the growth of our business could have a material adverse effect upon our business, results of operations, and financial condition. ITEM 3. MARKET RISK. Information concerning our exposure to market risk, which has remained relatively unchanged from December 31, 1999, is incorporated by reference from the text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in the Form 10-K for the year ended December 31, 1999. 3743 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Set forth below is information concerning each matter submitted to a vote at the Annual Meeting of Shareholders on April 26, 2000 ("Annual Meeting"): DIRECTORS: Each of the following persons was elected as a director to hold office until the 2001 Annual Meeting of Shareholders or until earlier retirement, resignation or removal.
DIRECTOR'S NAME FOR WITHHELD - --------------- ----------- --------- David R. Andrews..................................... 155,200,278 283,183 Richard D. Farman.................................... 155,215,208 268,253 Stanley F. Farrar.................................... 155,208,621 274,840 Herman E. Gallegos................................... 155,208,102 275,359 Jack L. Hancock...................................... 155,215,398 268,063 Richard C. Hartnack.................................. 155,198,345 285,116 Kaoru Hayama......................................... 155,212,909 270,552 Satoru Kishi......................................... 147,525,318 7,958,143 Harry W. Low......................................... 155,215,722 267,739 Mary S. Metz......................................... 155,214,772 268,689 Raymond E. Miles..................................... 155,211,972 271,489 Takahiro Moriguchi................................... 150,257,951 5,225,510 J. Fernando Niebla................................... 155,200,222 283,239 Sidney R. Petersen................................... 155,202,819 280,642 Carl W. Robertson.................................... 155,190,024 293,437 Yoshihiko Someya..................................... 151,794,459 3,689,002 Henry T. Swigert..................................... 155,215,372 268,089 Robert M. Walker..................................... 155,199,302 284,159 Hiroshi Watanabe..................................... 155,212,902 270,559 Kenji Yoshizawa...................................... 147,068,308 8,415,153
AUDITORS: Proposal No. 2 to ratify the selection of Deloitte & Touche LLP as independent auditors of UnionBanCal Corporation received the following votes: FOR: 155,325,584 AGAINST: 88,305 ABSTAIN: 69,572
ITEM 5. OTHER INFORMATION SHAREHOLDER PROPOSALS: Shareholders who expect to present a proposal at the 2001 Annual Meeting of Shareholders should notify the Secretary of the Company at 400 California Street, Mail Code 1-001-18, San Francisco, CA 94104 by December 1, 2000. Without such notice, proxy holders appointed by the Board of Directors of the Company will be entitled to exercise their discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the proposal in the proxy statement. Note that the December 31, 2000 deadline for submitting shareholder proposals for presentation at the 2001 Annual Meeting of Shareholders, for publication in the Company's proxy statement and action on the proxy form or otherwise, as stated on page 23 of the Company's Proxy Statement dated March 30,31, 2000, is incorrect. The correct deadline is December 1, 2000. 38 ITEM 6.5. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits:
NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1 Restated Articles of Incorporation of the Registrant, as amended(1) 3.2 By-laws of the Registrant, as amended January 27, 1999(2) 10.1 Management Stock Plan. (As restated effective June 1, 1997)*(3) 10.2 Union Bank of California Deferred Compensation Plan. (January 1, 1997, Restatement, as amended November 21, 1996)*(4) 10.3 Union Bank of California Senior Management Bonus Plan. (Effective January 1, 1999)*(5) 10.4 Richard C. Hartnack Employment Agreement. (Effective January 1, 1998)*(6) 10.5 Robert M. Walker Employment Agreement. (Effective January 1, 1998)*(6) 10.6 Union Bank of California Supplemental Executive Retirement Plan. (Effective January 1, 1988) (Amended and restated as of January 1, 1997)*(3) 10.7 Union Bank Executive Wellness Plan. (Effective January 1, 1994)*(7) 10.8 Union Bank Financial Services Reimbursement Program. (Effective January 1, 1996)*(8) 10.9 Performance Share Plan. (Effective January 1, 1997)*(3) 10.10 Service Agreement Between Union Bank of California and The Bank of Tokyo-Mitsubishi Ltd. (Effective October 1, 1997)*(3) 10.11 Management Stock Plan. (As restated effective January 1, 2000)*(5) 27.1 Financial Data Schedule(9)
- --------------------------- ----------- 3.1 Restated Articles of Incorporation of the Registrant, as amended(1) 3.2 By-laws of the Registrant, as amended January 27, 1999(2) 10.1 Management Stock Plan. (As restated effective June 1, 1997)*(3) 10.2 Union Bank of California Deferred Compensation Plan. (January 1, 1997, Restatement, as amended November 21, 1996)*(4) 10.3 Union Bank of California Senior Management Bonus Plan. (Effective January 1, 2000)*(5) 10.4 Richard C. Hartnack Employment Agreement. (Effective January 1, 1998)* (6) 10.5 Robert M. Walker Employment Agreement. (Effective January 1, 1998)*(6) 10.6 Union Bank of California Supplemental Executive Retirement Plan. (Effective January 1, 1988) (Amended and restated as of January 1, 1997)*(3) 10.7 Performance Share Plan. (Effective January 1, 1997) *(3) 10.8 Service Agreement Between Union Bank of California and The Bank of Tokyo-Mitsubishi Ltd. (Effective October 1, 1997)*(3) 10.9 Management Stock Plan. (As restated effective January 1, 2000)*(7) 10.10 Union Bank of California, N.A. Supplemental Retirement Plan for Policy Making Officers (effective November 1, 1999)*(5) 27.1 Financial Data Schedule(5) - --------------------------- (1) Incorporated by reference to Form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to Form 10-Q for the quarter ended March 31, 1999. (3) Incorporated by reference to Form 10-K for the year ended December 31, 1997. (4) Incorporated by reference to Form 10-K for the year ended December 31, 1996. (5) Incorporated by reference to Form 10-Q for the quarter ended June 30, 1999.Filed herewith. (6) Incorporated by reference to Form 10-Q for the quarter ended September 30, 1998. (7) Incorporated by reference to Form 8-K dated April 1, 1996 (filed as exhibit 10.12). (8) Incorporated by reference to Form 8-K dated April 1, 1996 (filed as exhibit 10.14). (9) Filed herewith.10-Q for the quarter ended June 30, 1999. * Management contract or compensatory plan, contract or arrangement. (b) Reports on Form 8-K: None 39We filed a report on Form 8-K on June 16, 2000 under Item 5 to report UnionBanCal Corporation's June 15, 2000 press release concerning estimated operating earnings for second quarter 2000. 44 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIONBANCAL CORPORATION (Registrant) By: /s/ DAVID I. MATSON ----------------------------------------- David I. Matson EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER By: /s/ DAVID A. ANDERSON ----------------------------------------- David A. Anderson SENIOR VICE PRESIDENT AND CONTROLLER Dated: May 15,UNIONBANCAL CORPORATION (Registrant) By: /s/ DAVID I. MATSON ---------------------------------------- David I. Matson Executive Vice President and Chief Financial Officer By: /s/ DAVID A. ANDERSON ---------------------------------------- David A. Anderson Senior Vice President and Controller Dated: August 14, 2000
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