EDGAR 10-K Filing

Company CIK: 1011659
Filing Year: 2021
Filename: 1011659_10-K_2021_0001628280-21-003748.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
General
We are a financial holding company, bank holding company and intermediate holding company whose principal subsidiaries are MUFG Union Bank, N.A. (MUB or the Bank) and MUSA. We are owned by MUFG Bank, Ltd. and MUFG. MUFG Bank, Ltd. is a wholly-owned subsidiary of MUFG. As used in this Form 10-K, terms such as "the Company," "we," "us" and "our" refer to MUFG Americas Holdings Corporation (MUAH), one or more of its consolidated subsidiaries, or to all of them together.
We provide a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, both nationally and internationally. The Company also provides various business, banking, financial, administrative and support services, and facilities for MUFG Bank, Ltd. in connection with the operation and administration of MUFG Bank, Ltd.'s business in the U.S. (including MUFG Bank, Ltd.'s U.S. branches). The Bank and MUFG Bank, Ltd. are parties to a master services agreement whereby the Bank earns fee income in exchange for services and facilities provided.
The Company has four reportable segments: Regional Bank, Global Corporate & Investment Banking - U.S., Transaction Banking and MUSA. We service Global Corporate & Investment Banking - U.S., certain Transaction Banking, and MUSA customers through the MUFG brand and serve Regional Bank and Transaction Banking customers through the Union Bank brand. The Company’s leadership team is bicoastal with Regional Bank and Transaction Banking leaders on the West Coast while Global Corporate & Investment Banking - U.S. and MUSA leaders are based in New York City. The corporate headquarters (principal executive office) for MUB, MUSA and MUAH is in New York City. MUB's main banking office is in San Francisco. The Company had consolidated assets of $167.8 billion at December 31, 2020.
All reports that we file or furnish electronically with the SEC, including the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to those reports, are accessible at no cost at www.unionbank.com as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. These filings are also accessible on the SEC's website at www.sec.gov.
Lines of Business
Our operations are organized into four reportable segments: Regional Bank, Global Corporate & Investment Banking - U.S., Transaction Banking and MUSA. These segments and their financial information are described more fully in Note 22 to our consolidated financial statements included in this Form 10-K.
Employees
At December 31, 2020, we had approximately 13,900 full-time equivalent employees.
Competition
Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business both nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions, credit unions, finance companies, mortgage banks and major foreign-affiliated or foreign banks, as well as many financial and nonfinancial firms that offer services similar to those offered by us, including many large securities firms, financial services subsidiaries of commercial and manufacturing companies and marketplace lenders. Many of these competitors enjoy fewer regulatory restraints and some may have lower cost structures. Some of our competitors are community or regional banks that have strong local market positions, while others include large financial institutions that have substantial capital, technology and marketing resources.
The financial services industry is also becoming more competitive as further technological advances enable more companies to provide financial services. These technological advances increasingly allow parties to complete financial transactions electronically and may diminish the importance of depository institutions and other financial intermediaries.
Current federal law has made it easier for out-of-state banks to enter and compete in the states in which we operate. Competition in our principal markets may further intensify as a result of the Dodd-Frank Act which, among other things, permits out-of-state de novo branching by national banks, state banks, and foreign banks from other states.
The primary factors in competing for business include pricing, convenience of office locations and other delivery methods, range of products offered, customer relationships, and level of services offered.
Supervision and Regulation
BHCs, banks and securities broker-dealers are extensively regulated under federal and state law. This regulation is intended primarily for the safety and soundness of banks, the protection of bank depositors, brokerage and other customers, the Federal Deposit Insurance Fund, the Securities Investors Protection Fund and the U.S. banking and financial system as a whole, and not for the benefit of investors in securities issued by a BHC or bank or creditors other than depositors. Set forth below is a summary description of significant laws and regulations and other legal authorities that relate to our operations and those of our subsidiaries, including MUB and MUSA. This summary description of applicable legal authorities is not complete and is qualified by reference to such legal authorities and does not address every legal authority. Financial statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies, and a change in them, including changes in how they are interpreted, implemented or applied in a specific instance, could have a material effect on our business and operations.
Principal Federal Banking Laws
BHCA and the GLBA. The Company, MUFG and MUFG Bank, Ltd. are subject to regulation under the BHCA, which subjects us to Federal Reserve reporting, supervision and examination and other requirements. Generally, the BHCA restricts our ability to invest in non-banking entities, and we may not acquire more than five percent of the voting shares of any domestic bank or bank holding company without the prior approval of the Federal Reserve. Our activities are limited, with some exceptions, to the business of banking, managing or controlling banks, and other activities that the Federal Reserve deems to be so closely related to banking as to be a proper incident thereto.
The GLBA allows “financial holding companies” to offer banking, insurance, securities and other financial products. Among other things, the GLBA provides a framework for BHCs to engage in new financial activities under certain conditions. MUAH, MUFG Bank, Ltd. and MUFG are financial holding companies under the BHCA. A financial holding company is authorized to engage in activities beyond those permissible for a BHC that are deemed to be financial in nature or incidental to such financial activity as well as certain specified non-banking activities deemed to be closely related to banking. In order to maintain its status as a financial holding company, a BHC must continue to meet certain standards established by the Federal Reserve. Those standards require that a financial holding company exceed the minimum standards applicable to BHCs that have not elected to become financial holding companies. These higher standards include meeting the “well capitalized” and “well managed” standards for financial holding companies as defined in the regulations of the Federal Reserve. The Federal Reserve has the authority to limit the ability of a financial holding company (or any of its affiliates) to conduct otherwise permissible activities if the financial holding company or any of its depository institution subsidiaries ceases to meet these standards. If the deficiencies are not corrected, the Federal Reserve may require that the financial holding company either terminate any activity that is not permissible for a BHC or divest control of a deficient depository institution subsidiary. Failure to comply can also result in the assessment of civil money penalties against the financial holding company. In addition, a financial holding company must ensure that its U.S. banking subsidiaries meet certain standards under the Community Reinvestment Act of 1977.
National Bank Act. MUB, our principal U.S. banking subsidiary, is chartered under and subject to the National Bank Act which, together with the regulations of the OCC, governs many aspects of the corporate activities and banking operations of national banks, including the powers and duties of national banks, the payment of dividends on capital stock, conduct of loan, investment and fiduciary activities, minimum capital ratios, the opening and closing of branches, the acquisition of other banking entities or financial companies and many other matters.
Principal Federal Banking Regulatory Agencies
Federal Reserve. As a BHC and financial holding company, we are subject to the extensive regulation, supervision and examination authority of the Federal Reserve. The Federal Reserve also has extensive enforcement authority over all BHCs. Such authority includes the power to assess civil monetary penalties against any BHC violating any provision of the BHCA or any regulation or order of the Federal Reserve under the BHCA. The Federal Reserve also has the power to order termination of activities or ownership of non-bank subsidiaries of the holding company if it determines there is reasonable cause to believe that the activities or ownership of the non-bank subsidiaries constitutes a serious risk to the financial safety, soundness or stability of banks owned by the BHC. Willful violations of the BHCA or regulations or orders of the Federal Reserve can also result in criminal penalties for the BHC and any individuals participating in such conduct.
Office of the Comptroller of the Currency. MUB, as a national banking association, is subject to broad regulation and oversight of all its operations by the OCC, its primary federal banking regulator, and also by the Federal Reserve and the FDIC. MUB is required to file periodic reports with the OCC and is subject to ongoing supervision and examination by the OCC.
The OCC has extensive enforcement authority over national banks. If, during an examination of a bank or otherwise, the OCC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, interest rate sensitivity, or other aspects of the bank’s operations are unsatisfactory or that the bank or its management is violating or has violated any laws or regulations, various remedies are available to the OCC, including the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced to increase capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors and/or ultimately to terminate the bank’s charter. The OCC also has broad authority to address bank activity it deems to constitute an unsafe or unsound practice.
The OCC has adopted guidelines that establish minimum standards for the design and implementation of a risk governance framework for large national banks with average total consolidated assets of $50 billion or more, such as MUB. The guidelines establish specific risk management-related roles
and responsibilities for three designated functions: a bank’s “front line” public-facing business; independent risk management; and internal audit.
The OCC has also provided additional guidance to national banks for assessing and managing risks associated with third-party relationships, including any business relationship between a bank and another entity, by contract or otherwise. The guidance includes regulatory expectations for planning, due diligence, third-party selection, contract negotiation and ongoing monitoring of third-party relationships that banks should consider when outsourcing bank functions. The guidance could have an impact on MUB’s selection of vendors to which it outsources certain functions and on MUB’s contract negotiations, particularly with respect to representations and warranties and indemnification by the vendors it may select.
Consumer Financial Protection Bureau. The CFPB has direct supervision and examination authority over banks with more than $10 billion in assets, including MUB. The CFPB’s responsibilities include implementing and enforcing federal consumer financial protection laws, reviewing the business practices of financial services providers for legal compliance, monitoring the marketplace for transparency on behalf of consumers and reviewing complaints and responding to questions from consumers about consumer financial products and services. The Dodd-Frank Act added prohibitions on unfair, deceptive or abusive acts and practices to the scope of consumer protection regulations overseen and enforced by the CFPB. In various public pronouncements and enforcement actions, the CFPB has focused on a variety of practices it deems to be unfair, deceptive or abusive, including the following: credit-card add-on products, including billing of consumers for credit-monitoring services without prior consent; failing to accept or timely post payments; failure to honor loan modifications after the loan servicing is transferred; various debt collection practices, including sending foreclosure notices to borrowers who were current on their loans; and various practices relating to debts owed by military service members, such as threatening to contact the service members’ commanding officers about loan arrears or burying the contractual authorization for this practice in the lending contract. The CFPB has also focused on automobile dealer discretionary interest rate markups and on holding banks and other purchasers of such contracts responsible for unlawful disparities in markups charged by dealers to borrowers of different races or ethnicities. The CFPB also has adopted rules that impact many aspects of residential mortgage loans and lending practices, including a requirement that banks develop and implement procedures to ensure compliance with a borrower’s “reasonable ability to repay” test, make new or revised disclosures and revise policies and procedures for originating and servicing residential mortgage loans.
Financial Stability Oversight Council. The Financial Stability Oversight Council (consisting of the Secretary of the Treasury, heads of the federal bank regulatory agencies and the SEC, and certain other officials) provides oversight of all risks created within the U.S. economy from the activities of financial services companies and supports enhanced prudential regulation. It also has the authority to recommend stricter standards for the largest, most interconnected financial services and other firms. Where it determines that certain practices or activities pose a threat to financial stability, it may make recommendations to the primary financial regulatory agencies for new or heightened regulatory standards. The Financial Stability Oversight Council must determine which BHCs and non-bank financial companies pose risks to U.S. financial stability, and subject those companies to the supervision and regulation of the Federal Reserve. The Dodd-Frank Act automatically subjected all bank holding companies and foreign banks with $50 billion or more in total consolidated assets designated by the Financial Stability Oversight Council as “systemically important” to enhanced prudential regulation. The Company falls within this category, and therefore, is subject to heightened prudential standards including enhanced capital, leverage, and liquidity standards, as well as credit exposure reporting, concentration limits, stress testing and resolution plan requirements. In 2018, the President signed into law the EGRRCPA, which created a more “tiered” and “tailored” enhanced prudential standards regime for banks. See “Dodd-Frank Act and Related Regulations” below, for additional information.
Dodd-Frank Act and Related Regulations
The Dodd-Frank Act, enacted in 2010, has resulted in sweeping changes to the U.S. financial system. Many provisions of the law have been implemented by rules and regulations of the federal banking agencies. The Dodd-Frank Act also provides authority to the FDIC to serve as receiver in the liquidation of systemically important non-bank financial companies, including BHCs. Liquidation proceedings for such companies will be funded by borrowings from the U.S. Treasury and risk-based assessments on covered financial companies.
In circumstances where there is a shortfall after assessments on creditors of a failed company, there may be assessments on BHCs with consolidated assets of $10 billion or more, such as the Company.
As required by the Dodd-Frank Act, the Federal Reserve adopted rules regarding stress testing requirements for large BHCs such as the Company. The OCC also adopted similar rules for large national banks such as MUB. The stress testing rules govern the timing and type of stress testing activities required of large BHCs and banks as well as rules governing testing controls, oversight and disclosure requirements.
As also required by the Dodd-Frank Act, the Federal Reserve adopted final rules regarding enhanced prudential standards for both large U.S. BHCs, such as the Company, and FBOs operating in the U.S., such as MUFG Bank, Ltd. These integrated rules included the Federal Reserve’s resolution plan, capital plan and stress testing rules, as well as a final rule regarding enhanced prudential standards. The final enhanced prudential standards rule, inclusive of subsequent amendments including Tailoring Rules amendments discussed below, address a diverse array of regulatory subjects, each of which is highly complex. In some instances, the rule imposes new financial regulatory requirements and in other instances it overlapped other regulatory reforms already in existence (such as the Basel III capital and liquidity reforms and stress testing requirements discussed elsewhere in this report). For large domestic BHCs, such as the Company, and FBO’s operating in the U.S., such as MUFG Bank, Ltd., the final enhanced prudential standards rule formalized governance and oversight processes with respect to various prudential standards already in place through the Federal Reserve’s other rule-makings, as described in this section, but also imposed certain additional requirements such as an internal liquidity stress testing regime (intended to be complementary to the Federal Reserve’s liquidity coverage ratio proposal discussed below) and maintenance of a related liquidity buffer.
In 2018, the President signed into law the EGRRCPA, which amended various provisions of the Dodd-Frank Act as well as other federal banking statutes. Among other things, the EGRRCPA raised the threshold for designation as a systemically important financial institution from $50 billion to $250 billion in assets, removed BHCs with less than $100 billion in assets from the application of enhanced prudential standards and eliminated the applicability of enhanced prudential standards to BHCs with between $100 billion and $250 billion in assets 18 months after enactment unless the Federal Reserve by order or rule determined to apply enhanced prudential standards to any such institution.
In October 2019, the federal banking agencies issued two final rules related to the implementation of the EGRRCPA (the “Tailoring Rules”). The final rules assign banks with $100 billion or more in total assets, including U.S. intermediate holding companies of certain foreign banking organizations, such as MUAH, to one of four risk-based categories that increased stringency based on risk-based indicators, such as measures of size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure, with each category assigned its own tailored requirements based on the risk profile of its combined U.S. operations or its bank or intermediate holding company-level assets. These rules became effective on December 31, 2019. The Tailoring Rules introduce significant regulatory reporting requirements for liquidity-related regulatory reporting on a U.S. operations basis but do not have an impact on MUAH from a capital planning, capital management and liquidity perspective.
Based on MUAH’s analysis of the Tailoring Rules’ capital and liquidity requirements as measured on a bank and intermediate holding company basis (excluding additional U.S. operations), which are based, in part, on the size and complexity of an FBO’s activities in the U.S., MUAH believes that it falls within the least restrictive of those risk-based categories (“Category IV”). Under the Tailoring Rules, Category IV institutions generally have lower risk profiles than those subject to Category I, II, or III standards.
In one of the Tailoring Rules, the federal banking agencies amended certain elements of their regulatory capital rules and standardized liquidity requirements to apply tailored capital and liquidity requirements to large banking organizations in each of the four risk-based categories of institutions described in the Tailoring Rules. Under the final rules, the capital requirements applicable to U.S. intermediate holding companies, such as MUAH, are generally consistent with those applicable to U.S. bank holding companies and savings and loan holding companies of a similar size and risk profile. The final Tailoring Rules determine the applicability of liquidity standards with respect to a U.S. intermediate holding company, such as MUAH, based on its risk profile, rather than the combined U.S. operations of the FBO. Under this rule, Category IV
firms (such as MUAH) will be required to conduct internal liquidity stress tests quarterly rather than monthly and will be subject to simplified liquidity risk management requirements. Category IV firms will still be required to maintain a liquidity buffer that is sufficient to meet the projected net stressed cash-flow need over a 30-day planning horizon under the firm’s internal liquidity stress test and will remain subject to monthly tailored liquidity reporting requirements. Also, under this Tailoring Rule, Category IV firms (like MUAH) are no longer required to conduct and publicly disclose the results of company-run capital stress tests and are subject to a supervisory capital stress test conducted by the Federal Reserve every other year rather than every year.
The final Tailoring Rules adopted by the federal banking agencies also provide that Category IV firms will not be subject to the countercyclical capital buffer or the supplementary leverage ratio and will be allowed to opt out of including most elements of accumulated other comprehensive income (“AOCI”) in regulatory capital. The Tailoring Rules also eliminate or apply a reduced LCR requirement to banking organizations subject to Category IV standards. See “Regulatory Capital and Liquidity Standards - Liquidity Coverage Ratio” below, for additional information.
Effective October 2018, the Federal Reserve adopted a final rule to establish single-counterparty credit limits for BHCs and foreign banking organizations with $250 billion or more in total consolidated assets, including any U.S. intermediate holding company of such a foreign banking organization with $50 billion or more in total consolidated assets, such as MUAH (together, “covered foreign entities”), and any BHC identified as a GSIB under the Federal Reserve’s capital rules. The Tailoring Rules removed U.S. intermediate holding companies subject to Category IV standards from the applicability of single-counterparty credit limits. A foreign banking organization with total consolidated assets that equal or exceed $250 billion, such as MUFG, is still subject to the single-counterparty credit limits; however, it may comply with single-counterparty credit limits applicable to its combined U.S. operations by certifying that it meets, on a consolidated basis, standards established by its home country supervisor that are consistent with the BCBS large exposure standard.
The Federal Reserve's enhanced prudential standards rules relating to FBOs are similar in various respects to those adopted for large domestic BHCs, such as enhanced requirements relating to risk management, including liquidity risk management and capital adequacy and liquidity stress testing. However, the final FBO rules differ in various respects from the domestic BHC rules. For example, a large FBO must certify to the Federal Reserve that it meets capital adequacy standards established by its home country supervisor that are consistent with the BCBS framework. If the FBO does not satisfy such requirements, the Federal Reserve may impose requirements, conditions or restrictions on its U.S. activities.
In addition, the final FBO rules require that an FBO with $50 billion or more of non-branch assets in the U.S. (such as MUFG Bank, Ltd.) operate in the U.S. through an IHC structure. The FBO is required to hold its interest in any U.S. subsidiary through the IHC, which will be its top-tier U.S. subsidiary. U.S. branches of FBOs, such as those of MUFG Bank, Ltd., are excluded from this requirement. MUAH became the IHC for the U.S. operations of MUFG and MUFG Bank, Ltd. on July 1, 2016.
The Federal Reserve's rules impose certain TLAC requirements on GSIBs with operations in the U.S., such as MUFG. The Company, which serves as MUFG’s designated IHC in the U.S., is required to maintain a minimum amount of total loss-absorbing capacity, which must be met with a combination of Tier 1 regulatory capital and long-term debt. Due to MUFG’s single point of entry resolution approach, the Company is subject to a minimum level of internal TLAC, which must be issued either to a foreign company that controls the Company (in this case MUFG Bank, Ltd. or MUFG) or to another directly or indirectly wholly-owned foreign subsidiary of MUFG. TLAC Tier 1 regulatory capital is intended to absorb ongoing losses, while the conversion of TLAC eligible long-term debt into common equity is intended to recapitalize the Company prior to any bankruptcy or insolvency proceedings.
Under the Dodd-Frank Act and Federal Reserve regulations, a BHC is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. Under these requirements, a BHC may be required to contribute additional capital to an undercapitalized subsidiary bank. However, this additional capital may be required at times when the BHC may not have the resources to provide such support, or may not be inclined to provide such support under the then existing circumstances.
The federal financial regulatory agencies adopted final rules implementing Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The final rule generally prohibits banking entities from engaging in short-term proprietary trading of securities, derivatives, commodity futures and associated options for their own account. The final rule provides exemptions for certain activities, including certain types of market making, underwriting, hedging of specific, identifiable risks of individual or aggregated positions and trading in U.S. government, agency, state and municipal obligations. These exemptions are limited if they involve a material conflict of interest, a material exposure to high-risk assets or trading strategies or a threat to the institution’s safety and soundness or to that of the U.S. financial system. The rules also exempt trading for customers in a fiduciary capacity or in riskless principal trades, subject to certain requirements.
The Volcker Rule also prohibits banking entities from owning or sponsoring hedge funds and private equity funds (covered funds), subject to certain exclusions.
The Volcker Rule also provides compliance requirements generally requiring banking entities to establish an internal compliance program reasonably designed to ensure and monitor compliance with the final rules. As a larger banking entity, the Company was required to establish a more detailed compliance program.
As a result of the Volcker Rule, we have not incurred a material adverse impact to our financial results as revenue from prohibited proprietary trading and covered fund investment activities has not contributed, and is expected to continue not to contribute, significantly to our financial results.
The Dodd-Frank Act also changed the previous standard for the federal preemption of state consumer financial laws to allow a court or the OCC to preempt a state consumer financial law only if it discriminates against national banks, prevents or significantly interferes with the exercise by the national bank of its powers or the state law is preempted by another federal law. This change was intended to allow greater regulation of national banks under state law and may result in increased consumer protection requirements being imposed on national banks. The Dodd-Frank Act also eliminated the extension of federal preemption under the National Bank Act to operating subsidiaries of national banks negating certain OCC regulations and court decisions. The Act also authorized state law enforcement authorities to bring lawsuits under state law against national banks, thus subjecting national banks to varying and potentially conflicting interpretation of law by state attorneys general and state agencies. This could result in increased compliance costs for national banks. The Act also required the OCC to make preemption determinations on particular state consumer financial laws on a case-by-case basis, rather than making preemption determinations on broad categories of laws.
Regulatory Capital and Liquidity Standards
The federal bank regulatory agencies have adopted risk-based capital standards under which a banking organization’s capital is compared to the risks associated with assets reflected on its balance sheet as well as its off-balance sheet exposures, such as letters of credit.
Regulatory Capital Rules. The Federal Reserve and the other U.S. federal banking agencies have adopted rules to implement the Basel III capitalization rules of the BCBS for banking organizations located in the United States (U.S. Basel III Rules). The U.S. Basel III Rules replace the U.S. federal banking agencies’ general risk-based capital rules, advanced approaches rule, market-risk rule, and leverage rules, in accordance with certain transition provisions. The U.S. Basel III Rules generally establish more restrictive capital definitions, create additional categories and higher risk-weightings for certain asset classes and off-balance sheet exposures, and higher leverage ratios and capital conservation buffers that are added to the minimum capital requirements and must be satisfied for banking organizations to avoid becoming subject to certain limitations on dividends and discretionary bonus payments to executive officers. The U.S. Basel III Rules also implement higher minimum capital requirements. Under the Tailoring Rules, MUAH as a Category IV firm, retains the ability to exclude certain components of AOCI from its regulatory capital calculations. The Tailoring Rules enacted capital simplification rules amending aspects of the U.S. Basel III Rules which took effect April 1, 2020 for banks not subject to advanced approaches risk-based capital rules.
The U.S. Basel III Rules also provide for various adjustments and deductions to the definitions of regulatory capital. Under these rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, MUAH must hold a standardized capital conservation buffer above its minimum risk based capital requirements (equal to 4.4% of its total risk-weighted assets). Effective October 1, 2020, MUAH's standardized capital conservation buffer was updated as informed by its firm specific supervisory stress testing results released in June 2020. The capital conservation buffer is designed to absorb losses during periods of economic stress.
In January 2014, the BCBS issued an updated version of its leverage ratio and disclosure guidance (the “Basel III leverage ratio”). The BCBS guidance continues to set a minimum Basel III leverage ratio of 3%. In April 2016, the BCBS proposed, among other things, that for purposes of calculating the denominator of the leverage ratio, off-balance sheet exposures of banks to securitization transactions should be treated the same as such exposures are treated under the BCBS revisions to its securitization framework for risk-based capital. The BCBS further amended the leverage ratio, among other revisions to its Basel III capital framework, in December 2017 (“Basel IV”). The Basel IV revisions refined the definition of the leverage ratio “exposure measure” (the Basel III term for total non-risk-weighted assets), and introduced a leverage ratio buffer applicable to GSIBs, requiring GSIBs to maintain a higher leverage ratio. Beginning January 1, 2022, the updates to the leverage ratio will be implemented and the BCBS leverage ratio buffer will apply to GSIBs.
Prompt Corrective Action. Under the OCC’s prompt corrective action regulations (established pursuant to Section 38 of the Federal Deposit Insurance Act), a bank is assigned to one of five capital categories ranging from “well-capitalized” to “critically under-capitalized.” Institutions that are “under-capitalized” or lower are subject to increasingly more restrictive mandatory supervisory corrective actions. At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. Failure to meet regulatory capital guidelines can result in a bank being required to raise additional capital. An “under-capitalized” bank must develop a capital restoration plan and its parent holding company must generally assure the bank’s compliance with the plan. The OCC has amended its prompt corrective action regulations to reflect the changes made to the regulatory capital requirements by the U.S. Basel III Rules.
For additional information regarding the regulatory capital positions of MUAH and MUB, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Management” in Part II, Item 7 of this Report on Form 10-K and Note 18 to our consolidated financial statements in this Report on Form 10-K.
Capital Planning and Comprehensive Capital Analysis and Review Program. MUAH is subject to regulatory requirements to develop and maintain a capital plan which must be reviewed and approved by its Board of Directors (or designated subcommittee thereof) and which must include internal enterprise-wide stress testing evaluations and assessments of capital adequacy levels under baseline and economic stressed scenarios. Under the Tailoring Rules, as a Category IV firm, MUAH is subject to supervisory stress testing and CCAR every other year in even years (e.g. MUAH will next be subject to required FRB supervisory stress testing in 2022). CCAR evaluates capital planning processes and assesses capital adequacy levels under various scenarios to determine if BHCs and IHCs would have sufficient capital to continue operations throughout times of economic and financial market stress. Depending on the circumstances, failure to attain a non-objection of a BHC’s or IHC's annual capital plan submission as part of the CCAR process from the Federal Reserve could have a variety of adverse consequences for the institution, including a requirement to augment capital, restrain growth or other adverse consequences. The Federal Reserve’s capital plan and stress testing rules for bank holding companies provide that the Federal Reserve may only issue an objection to a capital plan on the basis of qualitative deficiencies in the BHC’s or IHC's capital planning process if a firm subject to CCAR has not yet had their capital plans evaluated on qualitative grounds for four consecutive years. After December 31, 2020, the Federal Reserve has ceased objecting to capital plans on qualitative grounds entirely, other than for firms receiving a qualitative objection in 2020. MUAH continues not to be subject to the CCAR qualitative objection. Under these rules, such bank holding companies’ capital planning processes will be evaluated during the Federal Reserve’s regular ongoing supervisory activities.
Liquidity Coverage Ratio. The U.S. banking agencies adopted a rule implementing a standardized quantitative liquidity requirement generally consistent with the LCR standard, which was included in the Basel III framework of the BCBS. This LCR rule was designed to ensure that covered banking organizations
maintain an adequate level of cash and HQLA, such as central bank reserves and government and corporate debt, to meet estimated net liquidity needs in a short-term stress scenario using specified liquidity inflow and outflow assumptions (that produce net cash outflow). An institution’s LCR is the amount of its HQLA, as defined and calculated in accordance with the reductions and limitations in the rules, divided by its net cash outflow, with the quotient expressed as a percentage. While the LCR standard generally applies to all internationally active banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures, the rule also applied a less stringent, reduced LCR to BHCs that are not internationally active, and have $50 billion or more in total assets (such as the Company). The Tailoring Rules, discussed above, apply a reduced LCR requirement to a banking organization subject to Category IV standards with weighted short-term wholesale funding of at least $50 billion, but less than $75 billion, calibrated at 70% of the full LCR requirement. The reduced LCR requirement does not apply to a depository institution subsidiary of a banking organization subject to Category IV standards. Further, the LCR rule does not apply to banking organizations subject to Category IV standards with less than $50 billion in weighted short-term wholesale funding. MUAH’s most recent short-term wholesale funding amount as reported in form FR Y-15 does not meet the $50 billion threshold and, therefore, the Company is not subject to the LCR requirement.
Other Federal and State Laws and Regulations Affecting Banks
There are additional requirements and restrictions in the laws and regulations of the U.S. and states in which MUB and its subsidiaries conduct operations. The consumer lending and other banking activities of MUB are subject to extensive regulation under various state laws as well as the federal laws discussed above. Furthermore, due to MUFG Bank, Ltd.’s controlling ownership of the Company, regulatory requirements adopted or enforced by the Government of Japan may have an impact on the activities and investments of the Company in the future.
Deposit Insurance. Customer deposits maintained by MUB are insured up to statutory limits (currently $250,000 per depositor, subject to certain exceptions) by the FDIC and, accordingly, are subject to deposit insurance assessments. Deposit insurance assessment rates are subject to change by the FDIC and can be impacted by the overall economy and the stability of the banking industry as a whole.
As required by the Dodd-Frank Act, the FDIC adopted a comprehensive, long-range restoration plan for the FDIC's deposit insurance fund to increase the fund’s reserves relative to total insured deposits in the U.S. The ultimate effect on our business of legislative, regulatory and economic developments on the deposit insurance fund cannot be predicted with certainty.
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of its depositors (including claims by the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as receiver would be afforded a priority over other general unsecured claims against such an institution. If an insured depository institution fails, claims of insured and uninsured depositors and the FDIC will be placed ahead of unsecured, non-deposit creditors, in order of priority of payment.
If any insured depository institution becomes insolvent and the FDIC is appointed its conservator or receiver, the FDIC may, in most cases, disaffirm or repudiate any contract to which such institution is a party if the FDIC determines that performance of the contract would be burdensome and that disaffirmance or repudiation of the contract would promote the orderly administration of the institution’s affairs. In addition, the FDIC as conservator or receiver may enforce most contracts entered into by the institution notwithstanding any provision providing for termination, default, acceleration or exercise of rights upon or solely by reason of insolvency of the institution, appointment of a conservator or receiver for the institution, or exercise of rights or powers by a conservator or receiver for the institution.
Under provisions of the FDIA, an FDIC-insured bank under common control with another FDIC-insured bank is generally liable for any loss incurred or reasonably expected to be incurred, by the FDIC upon the actual or reasonably likely failure of such other bank. Thus, MUB could incur liability to the FDIC under these provisions in the event of failure of another bank controlled by the Company or MUFG. This liability
would be subordinated to deposit liabilities and certain other senior liabilities. At present, neither the Company nor MUFG have such other bank subsidiaries.
Pursuant to the Dodd-Frank Act and related regulations, BHCs and insured depository institutions with $50 billion or more in assets were required to develop and annually file with the bank regulators resolution plans or so-called “living wills” to facilitate the FDIC’s ability to liquidate such banks in a prompt and orderly fashion upon a failure. MUFG's U.S. operations are covered under the Federal Reserve and FDIC's joint Section 165(d) of the Dodd-Frank Act, and MUB as an insured depository institution is subject to the FDIC's insured depository institution rule, which requires certain insured depository institutions to submit resolution plans, with respect to specification of supervisory requirements for maintaining compliance with "living will" regulations. If the bank regulators determine that the resolution plan is not credible or would not facilitate the orderly resolution of the institution, they may require the institution to submit a revised resolution plan that addresses the deficiencies identified by the regulators. If the regulators determine that the revised plan remains deficient, they may decide to subject the institution to more stringent capital, leverage, or liquidity requirements or restrictions on growth, activities or operations and may impose other sanctions. In addition to the Tailoring Rules discussed above, the FRB and FDIC issued amended guidance for resolution plan submissions of certain foreign-based covered companies in December 2020 which amended the 165(d) resolution planning rule. Under the amended guidance and Tailoring Rules, MUFG's U.S. operations are included within required filings by MUFG, alternating between full and targeted resolution plans on a three-year cycle. As specified under the recently issued amended guidance, MUFG will have a transition period to consider the application of the final amended guidance to its resolution plan submission as it was not subject to the 2018 foreign-based owned guidance for its last submission; MUFG will not be expected to have taken the final guidance into consideration in developing its next targeted plan submission due December 17, 2021 and will become subject to full compliance for its next required full resolution plan filing due in 2024.
Community Reinvestment Act. MUB is subject to the CRA. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the needs of local communities, including low- and moderate-income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and the CRA into account when regulating and supervising other activities and in evaluating whether to approve applications for permission to engage in new activities or to acquire other banks or companies or de novo branching. An unsatisfactory CRA rating may be the basis for denying the application. In 2020, the OCC adopted new rules intended to modernize and strengthen the CRA regulations to better achieve their underlying statutory purpose by clarifying which activities qualify for CRA credit, updating where activities count for CRA credit, creating a more transparent and objective method for measuring CRA performance, and providing for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. The final rule became effective on October 1, 2020, but set mandatory compliance dates based on applicable performance standards. Banks subject to the general performance standards, such as MUB, must comply with the new CRA framework by January 1, 2023. Until compliance with the final rule, national banks must continue to comply with the OCC’s current CRA rules. The new rule can be expected to have a significant impact on the CRA framework of national banks, including MUB.
Fair Lending and Other Consumer Protection Laws. MUB is subject to the Equal Credit Opportunity Act of 1974 and the implementing regulations thereunder. The statute requires financial institutions and other firms engaged in the extension of credit to make credit equally available to all creditworthy customers and makes it unlawful for any creditor to discriminate against any applicant with respect to any aspect of a credit transaction: (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. In addition, a creditor may not make any oral or written statement, in advertising or otherwise, to customers or prospective customers that would discourage on a prohibited basis an application for credit.
MUB is also subject to the Federal Housing Act, which makes discrimination in home lending illegal, as well as the Americans with Disabilities Act, which requires banks to reasonably accommodate individuals with disabilities.
Banks are periodically examined for compliance with these fair lending laws and other related laws. The banking regulators are required to refer matters relating to these fair lending laws to the Department of Justice for possible investigation and further appropriate action under civil penalty statutes whenever the regulator has reason to believe that a creditor has engaged in a pattern or practice of conduct that may violate these laws.
MUB is also subject to other consumer protection laws including the Home Mortgage Disclosure Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act and the Truth in Savings Act. These laws are generally enforced by the CFPB.
Bank Secrecy Act and Office of Foreign Assets Control Regulations. The banking industry is subject to extensive regulatory controls and processes under the Bank Secrecy Act and related anti-money laundering laws. Under the USA PATRIOT Act, federal banking regulators must consider the effectiveness of a financial institution’s anti-money laundering program prior to approving an application for a merger, acquisition or other activities requiring regulatory approval. The U.S. also imposes economic sanctions that affect transactions with designated foreign countries, nationals and others. These rules are administered by OFAC. Included among OFAC restrictions are limitations or prohibitions on engaging in financial transactions involving a sanctioned country, entity or person and prohibitions on transfers of blocked property and bank deposits subject to U.S. jurisdiction. Failure to comply with these requirements may adversely affect the Company’s ability to obtain regulatory approvals for future initiatives requiring regulatory approval, including acquisitions, and additionally could result in substantial monetary fines, penalties and other sanctions.
Affiliate Transactions. MUB and its affiliates are subject to certain restrictions under the Federal Reserve Act and related regulations, including restrictions on loans by MUB to, and other transactions with, its affiliates (including requirements that such transactions with MUB be collateralized and on arm’s-length terms). Dividends payable by MUB to MUAH are subject to restrictions under a formula imposed by the OCC unless express approval is given by the OCC to exceed these limitations.
Customer Information Security. The federal bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. The guidelines require each financial institution to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. MUB has adopted a customer information security program. In addition, each agency has published its standards and expectations for banks to protect their own data, information technology and other assets and operations from unauthorized intrusion and vulnerability to malicious cyber attack to the greatest degree possible.
Privacy. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the banks’ policies and procedures and applicable law. The GLBA also allows consumers to opt-out of the sharing of certain information among non-affiliates, and imposes other requirements. Federal financial regulators have issued regulations under the Fair and Accurate Credit Transactions Act, which increased the length of the waiting period, after privacy disclosures are provided to new customers, before information can be shared among affiliated companies for the purpose of cross-marketing products and services between those affiliated companies. Certain state laws and regulations designed to protect the privacy and security of customer information also apply to us and our other subsidiaries, including laws requiring notification to affected individuals and regulators of data security breaches. The State of California has also enacted laws providing consumers with expansive rights and control over their personal information which is obtained by or shared with “covered businesses” (which includes MUB and most other banking institutions subject to California law). It has also created a California Privacy Protection Agency to enforce privacy rights for Californians and impose fines for violations of such rights.
For additional information regarding federal and California laws and regulations regarding privacy, see “Increasing regulation of data privacy could adversely affect our business" in Part I, Item 1A. "Risk Factors" in this Report on Form 10-K.
Overdraft and Interchange Fees; Interest on Demand Deposits. Regulation E restricts a bank's ability to charge overdraft services and fees. The rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to an overdraft service for those types of transactions. The Dodd-Frank Act's "Durbin Amendment" also required the Federal Reserve to establish standards for interchange fees that are “reasonable and proportional” to the cost of processing the debit card transaction and imposes other requirements on card networks.
Federal Reserve Control Regulations. On January 30, 2020, the Federal Reserve adopted a final rule, effective on September 30, 2020, revising the Federal Reserve’s regulations relating to determinations of whether a company has the ability to exercise a controlling influence over a banking organization or other entity for purposes of the BHCA. This rule outlines a tiered framework that is designed to incorporate the major factors and thresholds, or combinations of factors, that the Federal Reserve will use to determine if a company has control over a bank or other entity, including a company's total voting and non-voting equity investment in the entity; director, officer and employee interlocks between a company and the entity; and the scope of business relationships between a company and the entity. This rule, while generally consistent with the Federal Reserve’s historical practice, in some respects expands on or adds additional rebuttable presumptions of control. This rule could impact the manner in which MUFG makes investments in companies, in particular those that have a presence in the United States.
Regulation of MUSA
MUSA is a registered broker-dealer with the SEC and is a member of FINRA. MUSA is also registered with the MSRB as a broker-dealer.
Much of the regulation of broker-dealers has been delegated to self-regulatory organizations such as FINRA of which MUSA is a member. The principal purpose of regulating broker-dealers is the protection of clients and the securities markets. The regulations cover many aspects of the securities business, including, among other things, sales and trading practices, publication of research, margin lending, uses and safekeeping of clients’ funds and securities, capital adequacy, recordkeeping and reporting, fee arrangements, disclosure to clients, fiduciary duties owed to advisory clients, and the conduct of directors, officers and employees.
MUSA is subject to Rule 15c3-1 under the Exchange Act (the Uniform Net Capital Rule), Rule 15c3-3 (Customer Protection Rule) and related SRO requirements. The Uniform Net Capital Rule specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers. The Customer Protection Rule provides requirements for customer cash reserves and the custody of customer securities.
The Uniform Net Capital Rule prohibits a broker-dealer subsidiary from paying cash dividends, or making unsecured advances or loans to its parent company or repaying subordinated loans to its parent company if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $1,000,000.
In addition to the net capital requirements as a self-clearing broker-dealer, MUSA is subject to cash deposit and collateral requirements with clearing houses, such as the Depository Trust & Clearing Corporation, Options Clearing Corporation and Fixed Income Clearing Corporation, which may fluctuate significantly from time to time based upon the nature and size of clients’ trading activity and market volatility.
Future Legislation or Regulatory Initiatives
The economic and political environment of the past several years has led to a number of proposed legislative, governmental and regulatory initiatives, at both the federal and state levels, certain of which are described above, that may significantly impact our industry. These and other initiatives could significantly
change the competitive and operating environment in which we and our subsidiaries operate. We cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such initiatives on our operations, competitive situation, financial condition or results of operations.
The results of the 2020 national elections with the change of the U.S. President and the shift of control in the U.S. Senate could lead to new legislative and regulatory initiatives or the roll-back of initiatives of the previous Administration which could have significant impact on the banking and financial services industry and on our business. We cannot assess at this time the degree to which this may occur.
The change of Administration in Washington, D.C. is also likely to result in changes in the leadership and other senior positions at the federal bank regulatory agencies. We cannot assess at this time the impact such changes will have on the banking and financial services industry and on our business.
Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934
We are disclosing the following information pursuant to Section 13(r) of the Securities Exchange Act of 1934 (Exchange Act), which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified Executive Orders. The scope of activities that must be reported includes activities not prohibited by U.S. law and conducted outside the United States in compliance with applicable local law. Because we are indirectly wholly-owned by MUFG, a Japanese corporation, our disclosure is required to include, in addition to our activities, transactions or dealings, those conducted outside the United States by non-U.S. affiliates of MUFG which are not controlled by us. We have requested that MUFG provide us a description of reportable activity under Section 13(r) and have received the following information:
During the fiscal year ended December 31, 2020, MUFG’s non-U.S. subsidiary, MUFG Bank, engaged in certain limited business activities with entities in, or affiliated with, Iran, including counterparties owned or controlled by the Iranian government. MUFG Bank has a limited number of previously issued letters of credit and guarantees and in some cases, provided limited remittance and other settlement services mainly in connection with its Japanese customer transactions with counterparties in Iran, which transactions are reviewed to assess whether they are exempt from applicable Iran-related sanctions or otherwise permitted by OFAC. These transactions did not involve U.S. dollars or clearing services of U.S. banks for the settlement of payments. For the fiscal year ended December 31, 2020, the aggregate fee income relating to these transactions was less than ¥5 million, representing less than 0.001 percent of MUFG’s total fee income. In addition, some Iranian financial institutions and other entities in, or affiliated with, Iran maintained non-U.S. dollar correspondent accounts and other similar settlement accounts with MUFG Bank outside the United States. In addition to such accounts, MUFG Bank received deposits in Japan from, and provided settlement services in Japan to, fewer than 10 Iranian government-related entities and fewer than 100 Iranian government-related individuals such as Iranian diplomats, and maintains settlement accounts outside the United States for certain other financial institutions specified in Executive Order 13382, which settlement accounts were frozen in accordance with applicable laws and regulations. For the fiscal year ended December 31, 2020, the average aggregate balance of deposits held in these accounts represented less than 0.1 percent of the average balance of MUFG’s total deposits. The fee income from the transactions attributable to these account holders was less than ¥5 million, representing less than 0.001 percent of MUFG’s total fee income.
We understand that MUFG Bank recognizes that following the withdrawal in May 2018 by the United States from the Joint Comprehensive Plan of Action, the United States has imposed secondary sanctions against non-U.S. persons who engage in or facilitate a broad range of transactions and activities involving Iran. We understand that MUFG Bank has taken the recent sanctions related developments into account and will continue to monitor transactions relating to Iran in order to comply with applicable U.S. and Japanese regulations as well as U.S., Japanese and other international sanctions.
Financial Information
See our consolidated financial statements beginning on page 73 of this Form 10-K for financial information about MUAH and its subsidiaries.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The following discussion sets forth material risk factors that could affect our financial condition and operations:
Industry Factors
The effects of the COVID-19 pandemic have adversely impacted and will likely continue to adversely impact our business, results of operations and financial condition; the ultimate impact of the pandemic on the U.S. and global economies, and on our business, results of operations and financial condition, remain uncertain
The COVID-19 pandemic has severely disrupted economic activity in the U.S., and has adversely impacted our business, results of operation and financial condition. The ultimate impact of the pandemic on the U.S. economy and our business will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic. Responsive actions taken by governmental and regulatory authorities to the pandemic have negatively impacted the U.S. and global economies, disrupted supply chains, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has significantly increased economic uncertainty, reduced economic activity, and resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including many markets where we have operations. We, and other financial services companies, are impacted to a significant degree by current economic conditions.
The economic effects of the pandemic have adversely affected and will continue to adversely affect our revenue, as well as continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. We provide financing to businesses in a number of industries that may be particularly vulnerable to industry-specific economic factors that can adversely impact the performance of our commercial real estate and commercial and industrial credit portfolios. Certain of these industries, such as the retail, hospitality, aviation and energy industries, among others, have been, and can expected to continue to be, adversely impacted by the disruptive and recessionary market conditions caused by the pandemic, which could result in higher nonperforming assets for us and elevated loan charge-offs. Because of changing economic and market conditions affecting issuers, we also may be required to recognize impairments on the securities we hold.
In response to the pandemic, among other actions, MUB has offered payment relief options to customers that include the option to select a forbearance plan for our mortgage and home equity line of credit clients, business loan support through participation in the SBA PPP or other relief borrowing or lending programs, flexible relief programs for our consumer and business credit card clients, including payment deferral, delinquency removal and late fee waivers, and fee refunds, and waivers for our consumer and business deposit customers. The overall impact of these measures on our results of operations has been and will continue to be material and adverse. Future governmental and regulatory actions may require us to provide these and additional types of customer-related responses. Various banks, including MUB, that participated in the SBA PPP program or other relief borrowing or lending programs have or may become the subject of purported class-action or other litigation or government investigations regarding their activities under the program.
A substantial majority of our assets, deposits and revenues are generated in California, Oregon and Washington. At the outset of the pandemic, these states issued orders generally requiring residents to shelter in place and to keep non-essential businesses closed. These states have each adopted phase-in plans for reopening with certain standards for each phase.
We may also experience financial losses due to operational factors, including: challenges to the availability and reliability of our network due to changes to normal operations or third party disruptions,
including potential outages at network providers, call centers and other suppliers; increased cyber fraud risk related to COVID-19, given increased online banking and e-commerce; new or additional regulatory requirements, which could require additional resources and costs to address; or the inability of our work force and third-party vendors to operate from remote locations due to illness, quarantines, government actions, or other restrictions related to the pandemic. Remote work platforms may exacerbate certain risks to our business, including an increased demand for information technology resources, increased risk of cyber attacks, and increased information security risk involving, among other risks, the unauthorized dissemination of sensitive personal information or proprietary or confidential information about us, our customers or other third parties.
Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the national and global economic impact of the virus, including the availability of credit, adverse impacts on our liquidity, and any recession that has occurred or may occur in the future, or litigation, enforcement, and/or investigation activity. Given the many challenges and uncertainties resulting from the pandemic, there is a risk that conditions will be substantially different than we are currently expecting. However, the effects of the pandemic can be reasonably expected to have an adverse impact, which could be material, on our business, results of operations and financial condition, and heighten many of our known risks described in this “Risk Factors” section.
The governmental stimulus measures introduced in response to the COVID-19 pandemic have increased, and can be expected to continue to increase, federal budget deficits and the national debt level, while federal, state and local tax revenue can be expected to decline along with economic activity. These events can be expected to adversely affect the long-term sovereign credit rating of United States debt, and downgrades by the credit rating agencies with respect to the obligations of the U.S. federal government could occur. Any such downgrades could increase the U.S. government’s cost of borrowing, which may worsen its fiscal challenges, as well as generate upward pressure on interest rates generally, which could, in turn, have adverse consequences for our borrowers and the level of business activity. These developments could also create further challenges for MUSA’s securities business, which relies upon both the credit quality of bonds issued by the U.S. federal government and the smooth functioning of the markets using such bonds as collateral, as the COVID-19 pandemic has created significant volatility and disruption in financial markets.
The phase-out of LIBOR could adversely impact our business and results of operations, and the value of certain financial instruments we hold or have issued
In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (FCA), which regulates the process of setting LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. In November 2020, LIBOR’s administrator, ICE Benchmark Administration Limited (IBA) announced that it will consult on its intention to cease the publication of the one week and two month U.S. dollar LIBOR settings as of the end of 2021 and the remaining U.S. dollar LIBOR settings as of June 30, 2023. The FCA and the U.S. bank regulators concurrently expressed their support of this proposal, indicating that the June 30, 2023, cessation date would allow time for legacy contracts executed before January 1, 2022 to mature. The U.S. bank regulators also encouraged banks to stop entering into LIBOR-based contracts by the end of 2021.
The phase-out of LIBOR creates a broad range of risks and challenges (including financial, operational, legal, reputational, compliance and market risks) for the banking industry and could adversely impact our businesses and results of operations, and the value of certain financial instruments originated or held by us that use LIBOR as a reference rate. LIBOR is used as a reference rate for many of our transactions, including derivatives and other contracts used for hedging and trading account purposes, loans to commercial customers and consumers (including mortgage loans and other loans), and long-term borrowings. For additional information, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Management - LIBOR Transition” in Part II, Item 7. in this Form 10-K.
There are ongoing efforts to establish an alternative reference rate. The Secured Overnight Financing Rate (or SOFR) published by the Federal Reserve Bank of New York is considered a likely alternative reference rate suitable for replacing LIBOR and similar benchmarks. SOFR is a broad measure of the cost of overnight borrowings collateralized by U.S. Treasury securities. As a result, the scope of its ultimate
acceptance and the impact on rates, pricing and the ability to manage risk, including through derivatives, remain uncertain.
Even if SOFR or another reference rate ultimately replaces LIBOR, risks and challenges will remain for us with respect to outstanding loans, derivatives or other instruments using LIBOR, which will need to be transitioned to a new reference rate that is unlikely to exactly track, or produce the economic equivalent of, LIBOR. Risks related to transitioning instruments to a new reference rate or to how LIBOR is calculated and its availability are likely to vary by asset class and contract and will require considerable effort and expense to renegotiate contracts for outstanding financial assets and liabilities and include impacts on the yield on loans or securities held by us, amounts paid on securities we have issued, or amounts received and paid on derivative instruments we have entered into. While some of our existing products or contracts include fallback provisions to alternative reference rates, other products or contracts may not include adequate fallback provisions and may require consent of all parties to any modification. The market transition from LIBOR and similar benchmarks could adversely affect the return on and pricing, liquidity and value of our outstanding products and contracts, cause market dislocations, increase the cost of and access to capital and increase the risk of disputes and litigation, including in connection with the interpretation and enforceability of our outstanding products and contracts.
Difficult market conditions adversely affect the U.S. banking industry
Economic pressure on consumers and lack of confidence in the financial markets have adversely affected our business, financial condition and results of operations and could do so again. Turbulent political and economic conditions in foreign countries and trade policy differences with major U.S. trading partners may negatively impact the U.S. financial markets and economy in general. Additionally, global markets may be adversely affected by natural disasters, widespread health emergencies or pandemics, cyber attacks, military conflict, terrorism or other geopolitical events. In particular, we may face the following risks in connection with these events:
•Our ability to assess the creditworthiness of our customers and counterparties may be impaired if the methods and approaches we use to select, manage, and underwrite our customers and counterparties become less predictive of future behaviors.
•We may not be able to accurately estimate credit exposure losses because the process we use to estimate these losses requires difficult, subjective, and complex judgments which may not be amenable to precise estimates.
•Our ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
•Downgrades in the credit ratings of major U.S. or foreign banks or other financial difficulties affecting such major banks could have adverse consequences for the financial markets generally, including possible negative effects on the available sources of market liquidity and increased pricing pressures in such markets which, in turn, could make it more difficult or expensive for banks generally and for us to access such markets.
•Significant fluctuations in the prices of equity and fixed income securities could adversely impact our asset management and trust businesses. MUSA is exposed to the price risk of such securities where it holds inventory to meet expected customer demand. MUSA's debt capital markets fee income would also be detrimentally impacted from sustained periods of fixed income price volatility. MUB's fee income may also decline since its asset management and trust business fees are primarily based on the values of assets it manages, and declines in those asset values reduces the amount of fees charged.
•We may incur goodwill impairment losses in future periods. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Goodwill Impairment Analysis” in Part II, Item 7. and Note 5 to our consolidated financial statements included in this Form 10-K.
•Given the inter-connectivity of the global economy, pandemic disease and health events, such as the COVID-19 pandemic, have the potential to negatively impact economic activities in many countries, including the U.S., with consequent adverse effects on our customers and business.
•Acts or threats of terrorism and actions taken by the U.S. or other governments as a result of such acts or threats and other international hostilities have the potential to disrupt global and U.S. economic activity with consequent adverse effects on our business.
The effects of changes or increases in, or supervisory enforcement of, banking, securities, competition or other laws and regulations or governmental fiscal, monetary, or tax policies could adversely affect us or make strategic planning more difficult
We are subject to extensive federal and state regulation, supervision and legislation that governs almost all aspects of our operations. These laws and regulations are intended primarily for the benefit and protection of our depositors and other customers, and the FDIC and the banking system as a whole, and less so for the benefit or protection of investors in our securities. In the past, our business has been materially affected by these regulations. We expect this will continue in the future. Laws or regulations, including accounting standards and interpretations, currently affecting us and our subsidiaries may change over time. Regulatory authorities may change their interpretation of, and intensify their examination of compliance with, these regulations. Therefore, our business may be adversely affected by changes in laws, regulations, or interpretations or regulatory approaches to compliance and enforcement. Changes in laws and regulations may also increase our expenses by imposing additional supervision, fees, taxes or restrictions on our operations. Compliance with laws and regulations, especially new laws and regulations, increases our operating expenses and may require additional management time and attention. To the extent state and local laws and regulations are not preempted by federal laws or regulations, our regulatory compliance could become more challenging.
We maintain systems and procedures designed to comply with applicable laws and regulations. Some legal and regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if reasonably designed compliance systems and procedures were in place. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation. Legal or regulatory compliance failure may also adversely affect our ability to obtain regulatory approvals for future strategic initiatives. Furthermore, failure to take necessary corrective action or the discovery of other violations of laws in the process of implementing any corrective measures could result in further regulatory sanctions.
Reform of the financial services industry resulting from the Dodd-Frank Act enacted in 2010 and EGRRCPA, signed into law in May 2018 which amended various provisions of the Dodd-Frank Act, have affected U.S. financial institutions, including us, in many ways, some of which have increased, or may increase in the future, the cost of doing business and present other challenges. For additional information, see "Supervision and Regulation - Dodd-Frank Act and Related Regulations" in Part I, Item 1. "Business" in this Form 10-K.
The need to maintain more and higher quality capital and greater liquidity under applicable bank regulatory agency rules could limit the Company’s lending and other business activities and its ability to expand, either organically or through acquisitions. It could also result in the Company taking steps to increase its capital or being limited in its ability to pay dividends or otherwise return capital to its shareholders, or selling or refraining from acquiring assets. In addition, the regulatory liquidity standards could limit the Company’s ability to invest in longer-term or less liquid assets even if more desirable from a balance sheet management perspective.
Our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies. We are particularly affected by the policies of the Federal Reserve, which regulates the supply of money and credit in the U.S. Under federal law, a BHC is expected to act as a source of financial and managerial strength for its subsidiary banks. As a result, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. The monetary policies of the Federal Reserve can be expected to have a material effect on our business, prospects, results of operations and financial condition. For additional information regarding the impact of the Federal Reserve’s monetary policies on interest rates and our net interest margin, see “Fluctuations in interest rates on loans and deposits could adversely affect our business” below in this “Risk Factors” section. Refer to
"Supervision and Regulation" in Part I, Item 1. "Business" in this Form 10-K for discussion of certain additional existing and proposed laws and regulations that may affect our business.
Increased regulation of the financial services industry has required and can be expected to continue to require significant investments in technology, personnel or other resources. Our competitors may be subject to different or reduced regulation due to their asset size or types of products offered and may also be able to more efficiently utilize resources to comply with regulations and to more efficiently absorb increased regulatory compliance costs into their cost structures.
Higher credit losses could require us to increase our allowance for credit losses resulting in a charge to earnings
When we loan money or commit to loan money, we incur credit risk or the risk of losses if our borrowers do not repay their loans. We reserve for credit losses by establishing an allowance for credit losses through a charge to earnings. The allowance amount is based on an estimate of the credit losses that are expected over the life of the loan or unfunded credit commitment. The process for determining the allowance amount is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the future impact of current economic conditions that might impair the ability of our borrowers to repay their loans.
The need to account for assets at market prices may adversely affect our results of operations
We report certain assets, including securities, at fair value. Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that utilize market data inputs and assumptions to estimate that value. Because generally accepted accounting principles in the U.S. require fair value measurements to reflect appropriate adjustments for risks related to liquidity and the use of unobservable assumptions, we may recognize unrealized losses even if we believe that the asset in question presents minimal credit risk. During periods of adverse conditions in the capital markets, we may be required to recognize impairments with respect to securities in our investment portfolio and such conditions could also result in mark-to-market losses in our trading portfolios at MUSA.
Fluctuations in interest rates on loans and deposits could adversely affect our business
Significant increases in market interest rates on loans or other fixed income investments, or the perception that an increase may occur, could adversely affect our loan and investment portfolios, our ability to originate new loans and our ability to grow. An increase in market interest rates could adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations and could result in an increase in nonperforming assets and charge-offs. Conversely, decreases in interest rates could result in an acceleration of loan prepayments that could negatively affect our profitability. Increases in interest rates could also diminish the flow of corporate debt offerings in the securities markets generally and adversely impact the investment banking business of MUSA which is dependent on the sales of debt securities issued by its customers.
Changes in market interest rates on deposits or other funding sources, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact, and has in past years impacted, our net interest margin (that is, the difference between the interest rates we charge on interest earning assets, such as loans, and the interest rates we pay on interest-bearing liabilities, such as deposits or other borrowings). This impact could result in a decrease in our interest income relative to interest expense. In 2020, as a result of the impact of the COVID-19 pandemic, the Federal Reserve reduced the federal funds rate dramatically (to .00 to .25 percent) and has indicated that such low rates can be expected to continue for the next several years. The long-term impact of these measures on the U.S. economy and financial markets cannot be predicted with certainty at this time. For additional information, see "Supervision and Regulation" in Part I, Item 1. "Business" in this Form 10-K.
Our deposit customers may pursue alternatives to bank deposits or seek higher yielding deposits, which may increase our funding costs and adversely affect our liquidity position
Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market, other non-depository investments or higher yielding deposits, as providing superior expected returns or as being more secure. Technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts, including products offered by other financial institutions or non-bank service providers. Future increases in short-term interest rates could increase such transfers of deposits to higher-yielding deposits or other investments either with us or with other providers. These consumer preferences may force us to pay higher interest rates or reduce fees to retain certain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.
If interest rates rise from the historically low levels of recent years, our deposits may not be as stable or as interest rate insensitive as similar deposits may have been in the past and, if the expansion of the U.S. economy resumes after the pandemic subsides, some existing or prospective deposit customers of banks generally, including MUB, may be inclined to pursue other investment alternatives.
Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of deposits in favor of alternative investments or into higher-yielding deposits, we can lose a relatively inexpensive source of funds, increasing our funding cost. As our assets grow, we may face increasing pressure to seek new deposits through expanded channels from new customers at unfavorable pricing, further increasing our costs.
Substantial competition could adversely affect us; and there are an increasing number of non-bank competitors providing financial services
Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in the West Coast states as well as nationally and internationally. Our competitors include financial and non-financial services firms, such as traditional banks, online banks, financial technology companies and others. Competition in our industry may further intensify as a result of the recent and increasing level of consolidation of financial services companies. Larger financial institutions may have greater access to capital at a lower cost than ours, which may adversely affect our ability to compete effectively. In addition, some of our current commercial banking customers may seek alternative banking sources if they develop credit needs larger than we may be able to accommodate. Many of our non-bank competitors have lower overhead costs and are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. Additionally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and payment systems. If consumers and small businesses do not use banks for their financial transactions, we could potentially lose interest and fee income, deposits and income generated from those deposits and other financial transactions. We also experience competition, especially for deposits, from internet-based banking institutions and other financial companies, which do not always have a physical presence in our market footprint and have grown rapidly.
Company Factors
Adverse economic factors affecting certain industries we serve could adversely affect our business
We provide financing to businesses in a number of industries that may be particularly vulnerable to industry-specific economic factors that can adversely impact the performance of our commercial real estate and commercial and industrial credit portfolios. The commercial real estate industry in the U.S., and in California in particular, has been impacted in the past by adverse economic markets and could be adversely impacted by the current pandemic. The home building and mortgage industries in California also were especially adversely impacted by the deterioration in residential real estate markets. Our commercial and industrial credit portfolio, and the communications and media, retail, and energy industries in particular, were also adversely impacted by recessionary market conditions and other emerging developments that are disruptive to their customary business models. Poor economic conditions and financial access for commercial
real estate developers and homebuilders could adversely affect property values, resulting in higher nonperforming assets and charge-offs in this sector.
A significant portion of our loan portfolio is related to residential real estate, especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on our operations by depressing new mortgage loan originations, and could negatively impact our title and escrow deposit levels. California markets have experienced a strong recovery in home prices since the post-2008 housing market crisis. A renewed downturn could have an adverse effect on our operations and the quality of our real estate loan portfolio. These factors could adversely impact the quality of our residential construction and residential mortgage portfolios in various ways, including by decreasing the value of the collateral for our mortgage loans. These factors could also negatively affect the economy in general and thereby our overall loan portfolio.
MUSA provides financing through repurchase transactions to mortgage real estate investment trusts (REITs) collateralized by U.S. agency-backed mortgages held by such trusts. MUSA also has established a trading business in U.S. agency mortgage-backed securities. A down-turn in the real estate sector in the U.S. could adversely impact the creditworthiness of these mortgage REITs and could adversely impact MUSA’s business and results of operations.
Industry-specific risks are beyond our control and could adversely affect our loan portfolio, potentially resulting in an increase in nonperforming loans or charge-offs and a slowing of growth or reduction in our loan portfolio.
California economic conditions, have been, and can reasonably be expected to continue to be, adversely affected by the COVID-19 pandemic, which could adversely affect our business
A substantial majority of our assets, deposits and revenue is generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher loan default rates and decreased collateral values in our loan portfolio. In response to the COVID-19 pandemic, the California state government has taken a number of actions and instituted restrictions on economic and social activities, which continue to be updated with the changing conditions. The COVID-19 pandemic has significantly increased economic uncertainty, reduced economic activity and increased unemployment levels, especially in California. The various economic and health measures introduced by the State of California in response to the COVID-19 pandemic have increased state spending at a time when the current economic slowdown can be expected to result in reduced state tax revenues, perhaps for a prolonged period.
In recent years, municipalities and other governmental units in California have experienced budgetary difficulties and several California municipalities filed for protection under the Bankruptcy Code. As a result, concerns have arisen regarding the outlook for the governmental obligations of California municipalities and other governmental units. If the budgetary and fiscal difficulties of the California state government and California municipalities and other governmental units recur or economic conditions in California significantly decline, we expect that our problem assets could increase and our prospects for growth could be impaired.
For a number of years in the past decade, California has also experienced severe drought, wildfires or other natural disasters. It can be expected that these events will continue to occur from time to time in the areas served by MUB, and that the consequences of these natural disasters, including programs of public utility public safety power outages when weather conditions and fire danger warrant, may adversely affect MUB’s business and that of its customers. It is also possible that climate change may be increasing the severity or frequency of adverse weather conditions, thus increasing the impact of these types of natural disasters on our business and that of our customers.
Our credit ratings are important in order to maintain liquidity; our credit ratings could be adversely affected by negative changes in the credit ratings of our parent companies
Credit rating agencies regularly evaluate and provide credit ratings of the securities of MUAH and the securities and deposits of MUB and also provide entity ratings for MUAH, MUB and MUSA. These ratings are based on a number of factors including our financial strength, ability to generate earnings, and other factors,
some of which are not entirely within our control, such as conditions affecting the financial services industry and the economy. Additionally, changes in the credit ratings, operations, financial condition or prospects of our parent companies, MUFG Bank, Ltd. and MUFG, could also adversely impact our credit ratings. No assurance can be given that we will maintain our current ratings. Further, as a result of the COVID-19 pandemic and concerns over its financial impacts on the U.S. and global economies and the credit effects on companies, credit rating agencies continue to reevaluate and revise the outlook or credit ratings for many companies, including MUAH, which could result in a negative ratings action or downgrade.
If our long-term or short-term credit ratings suffer substantial downgrades, particularly if lowered below investment grade, such downgrades could adversely affect access to liquidity and could significantly increase our cost of funds (especially our wholesale funding), trigger additional collateral or funding requirements and decrease the number of commercial depositors, investors and counterparties willing or permitted to lend to us or enter into derivative transactions with us, thereby curtailing our business operations and reducing our ability to generate income. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Liquidity Risk Management" in Part II, Item 7. of this Form 10-K.
Our stockholder votes are controlled by MUFG Bank, Ltd. and Mitsubishi UFJ Financial Group, Inc.
MUFG Bank, Ltd., and MUFG own all of the outstanding shares of our common stock. As a result, MUFG Bank, Ltd. and MUFG can elect all of our directors and can control the vote on all matters, including: approval of business combinations; a sale of all or substantially all of our assets; issuance of any additional common stock or other equity or debt securities; incurring debt other than in the ordinary course of business; the selection and tenure of our Chief Executive Officer; payment of dividends with respect to our common stock or other equity securities; and other matters that might be favorable to MUFG Bank, Ltd. or MUFG.
A majority of our directors are independent of MUFG and MUFG Bank, Ltd. and are not officers or employees of MUAH or any of our affiliates, including MUFG or MUFG Bank, Ltd. However, because of our parents' control over the election of our directors, they could at any time change the composition of our Board of Directors so that it would not have a majority of independent directors.
We could be adversely affected by the regulatory condition of MUFG Bank, Ltd. or MUFG, litigation affecting them or conflicts of interest with our parents
Adverse changes in the regulatory condition or litigation affecting our parents could adversely affect us, due to the reputational impact of such matters or in other ways. MUFG Bank, Ltd. and MUFG are subject to regulatory oversight, review and supervisory action (which can include fines or penalties) by Japanese, U.S. and other regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns or supervisory action any such authority might take against MUFG Bank, Ltd. or MUFG.
The views of MUFG Bank, Ltd. and MUFG regarding customers, new businesses, strategies, acquisitions, divestitures or other initiatives, including compliance and risk management, may differ from ours. This may prevent or hinder us from pursuing individual initiatives or cause us to incur additional costs and subject us to additional oversight. MUSA receives a significant portion of its business from referrals from our parents and their affiliated entities. If such referrals diminish, this could materially adversely impact MUSA’s business.
MUFG Bank, Ltd.’s risk management processes manage global credit and other types of exposures and concentrations on an aggregate basis, including exposures and concentrations at MUAH or its subsidiaries. Therefore, at certain levels or in certain circumstances, our ability to approve certain credits, other banking transactions, or certain customers is subject to the concurrence of MUFG Bank, Ltd. We may wish to extend credit or furnish other banking services to the same customers as MUFG Bank, Ltd. Our ability to do so may be limited for various reasons, including MUFG Bank, Ltd.’s aggregate exposure and marketing policies.
Since MUB, MUSA, MUAH and MUFG Bank, Ltd. all compete in U.S. banking or investment banking markets, ownership interests in MUFG’s common stock held by certain of our directors or officers, or services provided by those individuals to MUFG Bank, Ltd. or MUFG, could create or appear to create potential conflicts of interest. A number of the executive officers of MUAH and MUB also serve as executive officers of MUFG Bank, Ltd.’s U.S. branch operations, which could increase or appear to increase potential conflicts of interests with our parents. While the corporate governance policies adopted by MUAH, MUB, MUSA, MUFG and MUFG Bank, Ltd. address potential conflicts of interest, there can be no assurance that these policies will prevent conflicts of interest which may have an adverse impact on our business.
We rely on third parties for important products and services
Third-party vendors provide key components of our business infrastructure such as internet connections, network access and mutual fund distribution and, although we monitor their performance, we do not control their actions. Third-party vendors have played and will continue to play a key role in the implementation of our technology enhancement and replacement projects, including our Transformation and Rewiring Programs. Any problems caused by these third parties, including those as a result of their not providing us their services for any reason or their performing their services poorly or failing to meet legal and regulatory requirements, could adversely affect our ability to deliver products and services to our customers, implement our technology enhancement and replacement projects or otherwise conduct our business, and also could result in disputes with such vendors over the performance of their services to us, as well as adverse regulatory consequences for us. Replacing these third-party vendors on economically feasible terms may not always be possible or within our control and could also entail significant delay and expense. In recent years, there has been consolidation in the number of major vendors supporting financial institutions such as MUB, resulting in increased concentration risk for such institutions. This risk could be increased if the COVID-19 pandemic results in failures or additional combinations of such vendors.
Restrictions on dividends and other distributions could limit amounts payable to us
As a holding company, a portion of our cash flow comes from dividends our bank and non-bank subsidiaries pay to us. Various regulations restrict the amount of dividends MUB can pay to us without prior regulatory approval. MUSA is also subject to regulatory net capital rules which limit its ability to pay dividends. In addition, if any of our subsidiaries were to liquidate, that subsidiary’s creditors will be entitled to receive distributions from the assets of that subsidiary to satisfy their claims against it before we, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary.
Risks from potential acquisitions, divestitures, integrations or restructurings may adversely affect us
We have in the past sought, and may in the future seek, to expand our business by acquiring other businesses. There can be no assurance that our acquisitions will have the anticipated positive results, including results related to: the total cost of integration; the retention of key personnel; the time required to complete the integration; the amount of longer-term cost savings; or the overall performance of the acquired company or combined entity. We also may encounter difficulties in obtaining required regulatory approvals due to operational limitations, regulatory restrictions on our own activities, or other reasons. Unexpected contingent liabilities can arise from the businesses we acquire. Acquisitions may also lead us to enter geographic and product markets in which we have limited or no direct experience. Further, the asset quality or other financial characteristics of a business or assets we may acquire may deteriorate after an acquisition closes, which could result in impairment or other expenses and charges which would reduce our operating results.
In addition, we continue to evaluate the performance of all of our businesses and may sell or restructure one or more of them. Any divestitures or restructurings may result in significant expenses and write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition and may involve additional risks, including difficulties in obtaining any required regulatory approvals, the diversion of management’s attention from other business concerns, the disruption of our business and the potential loss of key employees.
Increasing regulation of data privacy could adversely affect our business
Laws and regulations related to data privacy and data security are increasing, as Federal, state and foreign governments continue to adopt new laws and regulations addressing the collection, processing, storage, use, and security of personal and confidential information. Further, these laws and regulations are aimed at the use of personal information for marketing purposes in some cases. Laws and regulations designed to protect the privacy and security of customer information apply to us and our subsidiaries. These laws limit the handling and sharing of data. Our business model relies, in part, upon cross-marketing the products and services offered by us and our subsidiaries to our customers. Laws that restrict our ability to share information about customers between our affiliated companies or impose additional compliance costs could adversely affect our business, results of operations and financial condition. For additional discussion, see “Supervision and Regulation” in Part I, Item 1. "Business" in this Form 10-K.
On January 1, 2020, the California Consumer Privacy Act of 2018 (the “CCPA”) became effective. This law provides consumers with expansive rights and control over their personal information which is obtained by or shared with “covered businesses” (which includes MUB and most other banking institutions subject to California law). The CCPA gives consumers the right to request disclosure of information collected about them and whether that information has been sold or shared with others, the right to request deletion of personal information subject to certain exceptions, the right to opt out of the sale of the consumer’s personal information and the right not to be discriminated against because of choices regarding the consumer’s personal information.
In November 2020, California voters approved state-wide Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (the “CPREA”) which expanded and amended certain provisions of the CCPA and created the California Privacy Protection Agency to enforce privacy rights for Californians and impose fines for violations of such rights. The CPREA requires businesses to not share a consumer’s personal information upon the consumer’s request, provides consumers with an opt-out option for having their sensitive personal information used or disclosed for advertising or marketing, to obtain permission for collecting data on certain minors, and to correct a consumer’s inaccurate information upon the consumer’s request. It also removed the ability of businesses to remedy violations before being penalized for violations and increased the penalties for such violations. Most of the provisions of the CPREA will take effect in 2023 but some portions, such as the creation of the new state agency, will go into effect immediately. The impact of these laws on the business of MUB is yet to be determined, but they could result in increased operating expenses as well as additional exposure to the risk of litigation by or on behalf of consumers. It is possible that other states where we have customers could enact similar laws. For additional information, see “Supervision and Regulation - Other Federal Laws and Regulations Affecting Banks - Privacy” in Part I, Item 1. "Business" in this Form 10-K.
Our business could suffer if we fail to attract, develop, retain and successfully integrate skilled personnel
Our success depends, in large part, on our ability to attract, develop and retain key personnel. Any of our current employees, including our senior management, may terminate their employment with us at any time. Competition for qualified personnel in our industry can be intense. We may not be successful in attracting, developing and retaining sufficient qualified personnel. We may also incur increased expenses and be required to divert the attention of other senior executives to recruit replacements for the loss of any key or other personnel. We may experience turnover among members of management and must successfully integrate any new management personnel into the organization to achieve our operating objectives as new management becomes familiar with our business.
We need to effectively integrate technological change to maintain and enhance our competitive position; our current technological and other operational initiatives may strain our available resources
The financial services industry is undergoing rapid technological change which includes the introduction of new products and services based on new or enhanced technologies. Examples include cloud computing, artificial intelligence and machine learning, biometric authentication and data protection enhancements, as well as increased online and mobile device interaction with customers. We have been
investing in technology to facilitate the ability of our customers to engage in financial transactions and for many other purposes, including our Transformation Program (see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview” in Part II, Item 7. in this Form 10-K). The maintenance of our competitive position depends, in part, upon our ability to meet the needs of our customers through the application of new technologies. If we fail to maintain or enhance our competitive position with regard to technology, whether because we fail to anticipate customer needs and expectations or because our technological initiatives fail to perform as desired or are not timely implemented, we may lose market share or incur additional expense.
In addition to our technology programs and initiatives, there are a number of other operational and other initiatives which require our attention and resources. These include implementation of our Rewiring Program (see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview” in Part II, Item 7. in this Form 10-K), various other regulatory or strategic initiatives, and integration of new employees and key management personnel. Our ability to execute our core operations and to implement technology and other important initiatives may be adversely affected if our resources are insufficient or if we are unable to allocate available resources effectively.
Significant legal or regulatory proceedings could subject us to adverse financial and reputational risks
We are from time to time subject to claims and proceedings related to our present or previous operations including claims by customers, our current or former employees and our contractual counterparties. These claims, which could include supervisory or enforcement actions by bank regulatory and other authorities, or criminal proceedings by prosecutorial authorities, could involve demands for large monetary amounts, including civil money penalties or fines imposed by government authorities, and significant defense costs. Such claims also can divert the attention of senior management. We may be exposed to substantial liabilities which could adversely affect our business, prospects, results of operations, reputation and financial condition.
Our effective tax rates and our future results can also be affected by our participation for state income tax purposes as a member of MUFG’s unitary group in the U.S. and by other factors
Under a tax election we have made, we are required to file our California franchise tax returns as a member of a unitary group that includes MUFG’s U.S. operations, including its U.S. branches and other affiliates. Increases or decreases in the taxable profits of MUFG’s U.S. operations could increase or decrease our effective tax rate for California state income tax purposes. We review MUFG’s financial information on a quarterly basis to determine the rate at which to recognize our California income taxes. However, all of the information relevant to determining the effective California tax rate may not be available until after the end of the period to which the tax relates, primarily due to MUFG’s March 31 fiscal year-end. Our California effective tax rate can change during the calendar year or between calendar years as additional information becomes available. We could be subject to penalties and interest if we understate our tax obligations. Our effective tax rates for both federal and state income tax purposes also could be affected by valuation changes in our deferred tax assets and liabilities, changes in tax laws or their interpretations and by the outcomes of examinations of our income tax returns by tax authorities.
We are subject to a wide array of operational risks
We are subject to many types of operational risks throughout our organization. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events, that do not fall into the market risk or credit risk categories described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management” in Part II, Item 7. of this Form 10-K. Operational risk includes execution risk related to operational initiatives, such as implementation of our technology enhancement and replacement projects, including our Transformation and Rewiring Programs, increased reliance on internally developed models for risk and finance management and compliance, including models associated with regulatory capital requirements, the pricing of various products, grading loans, measuring interest rate and other market risks, predicting losses, and other activities and risks; the risk of fraud or theft by employees, customers or outsiders; unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled
computer or telecommunications systems; and operational risks related to use of third party service providers. To the extent that any such models which we use are not correctly designed or are poorly implemented, our business could be at risk and information we furnish to the public or regulators could be rendered inaccurate or misleading, which, in turn, could have adverse consequences for our regulatory relations and public perceptions of our Company. A discussion of risks associated with regulatory compliance appears above in these “Risk Factors” under the caption “The effects of changes or increases in, or supervisory enforcement of, banking, securities, competition or other laws and regulations or governmental fiscal, monetary, or tax policies could adversely affect us or make strategic planning more difficult”.
We depend on the continued efficacy of our data management and governance policies, technical systems, operational infrastructure, relationships with third parties and our employees in our day-to-day and ongoing operations. Our increasing dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect or data which are not reliable. We are also exposed to the risk that, notwithstanding our data management and governance policies, data in our system may become corrupted, inaccurate or out-of-date, any of which can impair the integrity of our decision-making processes. With regard to the physical infrastructure that supports our operations, we have taken measures to implement backup systems and other safeguards, but our ability to conduct business may be adversely affected by any disruption to that infrastructure. Failures in our internal control or operational systems, security breaches or service interruptions, or those of our third-party service providers could impair our ability to operate our business and result in potential liability to customers, reputational damage and regulatory intervention, any of which could harm our operating results and financial condition. Although we carefully review the risk management standards and processes of our third-party service providers, there can be no assurance that the risk management efforts of our providers will be successful in preventing all cybersecurity incidents.
Our operations rely on the secure processing, storage, transmission and reporting of personal, confidential and other sensitive information or data in our computer systems, networks and business applications. Our systems as well as our third-party service providers may be vulnerable to cyber attacks, breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could have significant negative consequences to us. The various forms of cyber attacks or other information security breaches are referred to herein as “cybersecurity incidents”. Such cybersecurity incidents could result in interruptions or malfunctions in our operations or our customers’ operations; interception, misuse or mishandling of personal, confidential or proprietary information and data; or processing of unauthorized transactions or loss of funds. These events could result in litigation, government investigation activity, regulatory enforcement actions, and /or financial losses that are either not insured against or not fully covered by our insurance or result in regulatory consequences or reputational harm, any of which could harm our competitive position, operating results and financial condition. We maintain cyber insurance, but this insurance may not cover all costs associated with cybersecurity incidents or the consequences of personal or confidential information being compromised. These types of incidents can remain undetected for extended periods of time, thereby increasing the associated risks. We may also be required to expend significant resources to modify our protective measures or to investigate and remediate vulnerabilities or exposures arising from cybersecurity risks.
We may also be subject to disruptions of our business from external events such as power, internet and communications outages, natural disasters (such as earthquakes or wildfires) and terrorist attacks. While we maintain business recovery plans, they may not work as intended.
Our business and operations are subject to a wide array of cybersecurity risks
Like other financial institutions, we have been the target of various denial-of-service or other cybersecurity incidents (including attempts to inject malicious code and viruses into computer systems) as part of what appears to be a coordinated effort to disrupt the operations of financial institutions and potentially test their cybersecurity in advance of future and more advanced cybersecurity incidents. These cybersecurity incidents originate from a variety of sophisticated sources who may be involved with organized crime, linked to terrorist organizations or hostile countries and have extensive resources to disrupt our operations or the financial system more generally. The potential for denial-of-service and other cybersecurity incidents requires substantial resources to defend and may affect customer satisfaction and behavior. To date, we have not
experienced any material losses relating to cybersecurity incidents, but there can be no assurance that we will not suffer such losses or information security breaches in the future. A successful cybersecurity incident could result in a material disruption of our operations, exposure of confidential information and financial loss to us, our clients, customers and counterparties and could lead to significant exposure to litigation, government investigations, and/or regulatory fines, penalties and other sanctions as well as reputational damage. While we have a variety of cybersecurity measures in place, the consequences to our business of such cybersecurity incidents cannot be predicted with any certainty.
In addition, there have been increasing efforts on the part of cyber criminals to breach data security at financial institutions and other companies, such as large retailers, including through the use of social engineering schemes such as “phishing.” The ability of our customers to bank remotely, including online and through mobile devices, requires secure transmissions of confidential information and increases the risk of data security breaches which would expose us to claims by customers or others and could adversely affect our reputation and could lead to a material loss. A breach or failure of our information systems or controls could lead to the unauthorized release or loss or destruction of personal or confidential information about our customers, employees or other third parties in our possession. There has also been a significant increase in consumer information available on the internet arising from breaches of third-party entities. This can create a vulnerability for our customers if their log-in credentials at the Bank are the same or similar to those that have been compromised on other sites, including the risk of illicit account access, data loss and fraud. Even if cybersecurity incidents are not directed specifically at MUB or our third-party service providers, such attacks on other large financial institutions could disrupt the overall functioning of the financial system and undermine consumer confidence in banks generally, to the detriment of other financial institutions, including MUB. For additional information regarding our obligations to provide for the security of our customers' data, see "Supervision and Regulation - Other Federal and State Laws and Regulations Affecting Banks - Customer Information Security" and "Privacy" in Part I, Item 1. "Business" in this Form 10-K.
We, and other banking institutions, are also at risk of increased losses from fraudulent conduct of criminals or criminal organizations using increasingly sophisticated techniques. This criminal activity is taking many forms, including debit/credit card fraud, check fraud, mechanical devices affixed to ATM’s, phishing attacks to obtain personal information, or impersonation of customers through falsified or stolen credentials, or business email compromise. We, and other banking institutions, are also at risk of fraudulent or criminal activities by employees, contractors, vendors and others with whom we do business. There is also the risk of errors by our employees and others responsible for the systems and controls on which we depend and any resulting failures of these systems and controls could significantly harm our Company.
Under the applicable Federal regulatory guidance, financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate the identity of customers accessing internet-based services of the financial institution. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to a cybersecurity incident. Failure to observe this regulatory guidance could subject us to various regulatory sanctions, including financial penalties. Additionally, our business recovery plan may not work as intended or may not prevent significant interruptions of our operations. Any such event could adversely impact our results of operations, liquidity or financial condition. Further, as cyber threats continue to evolve, we may be required to apply substantial additional resources to modify or enhance our systems, investigate and remediate any cyber vulnerabilities or incidents and develop our ability to respond and recover.
The risks associated with cybersecurity are also increasing due to the proliferation of new technologies and the use of the internet and telecommunications technologies to conduct financial transactions.
Negative public opinion could damage our reputation and adversely impact our business and revenues
As a financial institution, our business and revenues are subject to risks associated with negative public opinion. Negative public opinion about us could result from our actual or alleged conduct in any number of activities, including our lending practices, the failure of any product or service we provide to meet our customers’ expectations or applicable regulatory requirements, governmental enforcement actions, corporate governance deficiencies, business acquisitions, use of social media, cybersecurity breaches or from actions taken by regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep, attract and retain lending, deposit and other customers and employees and can expose us to claims, litigation, government investigations and/or regulatory actions, as well as increased liquidity risk. Actual or alleged misconduct by one of our businesses can result in negative public opinion about our other businesses.
Our framework for managing risks may not be effective in mitigating risk and loss to the Company
Our risk management framework is made up of various processes and strategies to manage and mitigate our risk exposure. Types of risk to which we are subject include liquidity risk, credit risk, market and investment risk, interest rate risk, operational risk (including, but not limited to, information and model risk), legal risk, compliance risk, reputation risk, fiduciary risk, counterparty risk and strategic risk (including risks to our financial position and resilience arising from adverse business decisions or poorly implemented decisions or lack of responsiveness to industry changes and the operating environment), among others. Our framework to manage risk, including its underlying assumptions, such as our modeling methodologies, may not be effective under all conditions and circumstances. In our industry’s complex and rapidly evolving operating environment, certain risks, especially operational risk and strategic risk, can present significant challenges to our risk management framework. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition, results of operations or prospects could be materially adversely affected and there also could be consequent adverse regulatory implications in any such event.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Certain accounting policies are critical to presenting our financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include allowance for credit losses, transfer pricing, goodwill impairment analysis and income taxes. Because of the uncertainty of estimates involved in deciding these matters, we may be required to significantly increase or decrease the allowance for credit losses, sustain loan losses that are significantly different than the reserve provided, recognize significant impairment on goodwill, or significantly increase or decrease our accrued tax liability. Any one or more of these actions could adversely affect our business, results of operations and financial condition.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
MUAH's headquarters is located at 1251 Avenue of the Americas, in New York, New York. The Company leases approximately 319,000 square feet of building space at this location. The Company also owns or leases significant administrative or operational facilities in the San Francisco, Los Angeles, New York and Phoenix areas and owns or leases 348 branches, primarily located in California.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain liabilities for losses from legal actions that are recorded when they are determined to be both probable in their occurrence and can be reasonably estimated. In addition, we believe the disposition of all claims currently pending, including potential losses from claims that may exceed the liabilities recorded, and claims for loss contingencies that are considered reasonably possible to occur, will not have a material effect, either individually or in the aggregate, on our consolidated financial condition, operating results or liquidity.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On November 4, 2008, the Company became a wholly-owned subsidiary of MUFG Bank, Ltd. and the Company's common stock was delisted from the New York Stock Exchange. All of the Company's issued and outstanding shares of common stock are now held by MUFG Bank, Ltd. and MUFG, and there is presently no established public trading market for the Company's common stock.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7. to this Form 10-K begins on page 39 of this report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. to this Form 10-K begins on page 63 of this report.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. to this Form 10-K begins on page 73 of this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective.
Internal Control Over Financial Reporting. Management's Report on Internal Control Over Financial Reporting is presented on page 145. The Report of Independent Registered Public Accounting Firm is presented on page 149. During the quarter ended December 31, 2020, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.
Code of Ethics
We have adopted a Code of Ethics applicable to senior financial officers, including our Chief Executive Officer, Chief Financial Officer and Controller & Chief Accounting Officer. A copy of this Code of Ethics is posted on our website. To the extent required by SEC rules, we intend to disclose promptly any amendment to, or waiver from any provision of, the Code of Ethics applicable to senior financial officers on our website. Our website address is www.unionbank.com.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this item has been omitted pursuant to General Instruction I(2) of Form 10-K.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The following is a description of the fees billed to MUAH by Deloitte & Touche LLP for 2020 and 2019. All fees were pre-approved by our Audit & Finance Committee.
(Dollars in thousands) 2020 2019
Audit Fees(1)
$ 9,089 $ 7,271
Audit-Related Fees(2)
2,726 2,704
Tax Fees(3)
261 410
Total $ 12,076 $ 10,385
(1)Audit fees relate to services rendered in connection with the annual audit of MUAH's consolidated financial statements, quarterly reviews of financial statements included in MUAH's quarterly reports on Form 10-Q, fees for consultation on new accounting and reporting requirements and SEC registration statement services, and the attestation assessment related to the effectiveness of MUAH's financial reporting controls, as required by Section 404 of the Sarbanes-Oxley Act. 2020 includes costs associated with the adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments (CECL), and additional fees for scope changes and audit fees.
(2)Audit-related fees consist of assurance and other such services that are reasonably related to the performance of the audit or review of MUAH's financial statements and are not included in Audit Fees. Amounts include fees for services provided in connection with service auditors reports and audits of employee benefit plans and Statement on Standards for Attestation Engagements 18.
(3)Tax fees include fees for tax compliance, advice and planning services. Fees related to tax compliance and preparation for 2020 and 2019 were $23,000 and $24,000, respectively. For 2020 and 2019, fees related to tax advice and planning were $238,000 and $386,000, respectively.
The Audit & Finance Committee also considered whether the provision of the services other than audit services is compatible with maintaining Deloitte & Touche LLP's independence. All of the services described above were approved by the Audit & Finance Committee in accordance with the following policy.
Pre-approval of Services by Deloitte & Touche LLP
The Audit & Finance Committee has adopted a policy for pre-approval of audit and permitted non-audit services by Deloitte & Touche LLP. The Audit & Finance Committee will periodically consider and, if appropriate, approve, the provision of audit services by its independent registered public accounting firm and consider and, if appropriate, pre-approve, the provision of certain defined audit and non-audit services. The policy provides that:
•the pre-approval request must be detailed as to the particular services to be provided;
•the pre-approval may not result in a delegation of the Audit & Finance Committee's responsibilities to the management of MUAH; and
•the pre-approved services must be commenced within twelve months of the Audit & Finance Committee's pre-approval decision.
Any proposed engagement may be presented to the Audit & Finance Committee for consideration at its next regular meeting or, if earlier consideration is required, to the Audit & Finance Committee Chair. The Chair reports any specific approval of services at the Audit & Finance Committee's next regular meeting. The Audit & Finance Committee regularly reviews summary reports detailing all services being provided by its independent registered public accounting firm.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Our consolidated financial statements, Management's Report on Internal Control Over Financial Reporting and Reports of Independent Registered Public Accounting Firm are set forth beginning on page 73 of this Form 10-K.
(a)(2) Financial Statement Schedules
All schedules to our consolidated financial statements are omitted because of the absence of the conditions under which they are required or because the required information is included in our consolidated financial statements or accompanying notes.
(a)(3) Exhibits
A list of exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated into this item by reference.