UNIONBANCAL CORPORATION 
By UnionBanCal Corporation (NYSE:UB):
Second Quarter 2007 Highlights:
-- Strong year-over-year organic loan growth
-- Average total loans up 11 percent
-- Average core commercial loans up 9 percent
-- Average residential mortgage loans up 7 percent
-- Annualized average all-in cost of funds of 2.61 percent
-- Average noninterest bearing deposits comprised over 35 percent of
average total deposits
-- Nonperforming assets just 0.06 percent of total assets at
quarter-endUnionBanCal Corporation (NYSE:UB) today reported second quarter 2007 net income of $165.4 million, or $1.19 per diluted common share. Net income in the preceding quarter was $149.6 million, or $1.07 per diluted common share, while net income a year earlier was $182.9 million, or $1.26 per diluted common share.
First half 2007 net income was $315.0 million, or $2.26 per diluted common share, compared with income from continuing operations for first half 2006 of $364.1 million, or $2.51 per diluted common share.
Regulatory Matters
As previously reported in filings with the Securities & Exchange Commission, the Company's principal subsidiary, Union Bank of California N.A., entered into a Memorandum of Understanding (MOU) in 2005 with its principal regulator, the Office of the Comptroller of the Currency (OCC). The MOU requires the Bank to strengthen its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) controls and processes.
In response to the MOU, the Bank has committed significant resources to strengthen its BSA/AML controls and processes. During the course of the Bank's efforts to resolve issues raised by its regulators, additional BSA/AML compliance issues arose, which the Bank discussed with the OCC.
Recently, the Bank has been advised by the OCC that the OCC will institute a procedure for a cease and desist order against the Bank with respect to its BSA/AML controls and processes and will assess civil money penalties with respect to BSA/AML matters. The Bank also has received notice from the Financial Crimes Enforcement Network (FinCEN), a part of the U.S. Treasury Department, that it will assess civil money penalties with respect to BSA/AML matters. The Bank cannot be certain what final terms, conditions, or monetary penalties will be imposed by the agencies. However, the Company believes these pending regulatory actions will not have a material adverse effect on the Company's business operations, earnings, capital or liquidity. Based on preliminary discussions with the OCC and FinCEN, a reserve of $10 million has been established and is included in the Company's second quarter financial results.
?These regulatory actions relate to compliance issues that occurred in the past,? said Masaaki Tanaka, President and Chief Executive Officer. ?We have taken significant steps to improve our compliance program and continue to do so,? he added.
?The board of directors, executive management and I take very seriously our obligation to have an effective and comprehensive BSA/AML compliance program,? Tanaka stated. ?We will continue to work closely with our regulators to satisfy them as soon as possible that our enhanced BSA/AML program is effective and sustainable,? Tanaka concluded.
Commenting on the second quarter results, Vice Chairman and Chief Operating Officer Philip Flynn stated, ?The net interest margin declined only two basis points from first quarter, with core deposits increasing 1.4 percent and noninterest bearing balances down only slightly. Loan growth moderated, and asset quality continued to be excellent. The average annualized all-in cost of funds increased six basis points, but at 2.61 percent, remains among the lowest in the industry. In May, we increased the quarterly dividend rate 10.6 percent, to $0.52 per share, reflecting solid core profitability and strong capital. Our business outlook for the second half is unaffected by the pending regulatory actions,? Mr. Flynn concluded.
Summary of Second Quarter Results
Second quarter 2007 net income was $165.4 million, or $1.19 per diluted common share, compared with net income of $1.26 per diluted common share a year earlier. Total revenue compared with second quarter 2006 decreased 4 percent, primarily due to an 8 percent decrease in net interest income, which resulted from a deposit mix shift, reflecting customer decisions to shift balances from noninterest bearing and low-cost deposits into higher-cost deposits. The unfavorable deposit mix change offset strong loan growth, with average loans up 11 percent. Noninterest income grew 5 percent, primarily due to higher gains on private capital investments. The total provision for credit losses was $5 million, $10 million higher than the negative $5 million provision recorded in second quarter 2006. For second quarter 2007, noninterest expense was flat compared with the same quarter a year earlier.
Second quarter 2007 net income was $1.19 per diluted common share, compared with net income of $1.07 per diluted common share in the preceding quarter. Total revenue increased 1.2 percent in sequential quarters, with net interest income flat and noninterest income increasing 3.3 percent. The total provision for credit losses was $5 million in both quarters. Noninterest expense declined 2.4 percent in sequential quarters, primarily due to annual seasonal factors that result in lower payroll taxes and 401(k) matching contributions in the second quarter, and lower compliance-related expense.
Second Quarter Total Revenue
For second quarter 2007, total revenue (taxable-equivalent net interest income plus noninterest income) was $661 million, down 4 percent compared with second quarter 2006. Net interest income decreased 8.1 percent, and noninterest income increased 4.8 percent. Compared with first quarter 2007, total revenue increased 1.2 percent, with net interest income flat and noninterest income increasing 3.3 percent.
Second Quarter Net Interest Income (Taxable-equivalent)
Net interest income was $431.1 million in second quarter 2007, down $37.9 million, or 8.1 percent, from the same quarter a year ago, primarily due to a deposit mix shift from noninterest bearing and low-cost deposits into higher-cost deposits, partially offset by strong loan growth and higher yields on earning assets.
Average earning assets increased $4.1 billion, or 9.2 percent, compared to 2006, primarily due to a $3.7 billion, or 10.5 percent, increase in average loans. Average commercial loans increased $1.7 billion, or 12.8 percent, with $0.6 billion of the increase attributable to title and escrow loans, which are highly rate-advantaged loans and are more volatile than other commercial loans. Average core commercial loans, which exclude title and escrow loans, grew 8.9 percent, year over year. Average residential mortgage loans increased $0.9 billion, or 7.3 percent; average construction loans increased $0.6 billion, or 33.2 percent; and average commercial mortgage loans increased $0.6 billion, or 9.7 percent, year over year. Of the $0.6 billion increase in average construction loans, virtually all of the increase year over year was in income properties.
Compared to second quarter 2006, average interest bearing deposits increased $5.5 billion, or 25 percent, while average noninterest bearing deposits decreased $2.6 billion, or 14.6 percent. The decline in noninterest bearing deposits was primarily due to a $1.7 billion, or 13.9 percent, decrease in average other commercial noninterest bearing deposits and a $0.5 billion, or 19.1 percent, decrease in average title and escrow deposits. Average other commercial noninterest bearing deposits declined primarily due to changes in customer behavior in response to rising short-term interest rates, and average title and escrow deposits decreased due to lower residential real estate activity. Average consumer noninterest bearing deposits decreased $0.4 billion, or 13.4 percent.
Average noninterest bearing deposits represented 35.1 percent of average total deposits in second quarter 2007. The annualized average all-in cost of funds was 2.61 percent, reflecting the Company's strong average core deposit-to-loan ratio of 86 percent and the high proportion of noninterest bearing deposits to total deposits.
The average yield on earning assets of $48.4 billion was 6.11 percent, up 16 basis points over second quarter 2006, with the average loan yield increasing 13 basis points. The average rate on interest bearing liabilities of $32.2 billion was 3.83 percent, up 88 basis points compared with second quarter 2006, reflecting higher short-term interest rates, an unfavorable change in deposit mix, and heightened competition for deposits. The net interest margin in second quarter 2007 was 3.56 percent, compared with 4.23 percent in second quarter 2006.
Second quarter 2007 net interest income was flat compared with first quarter 2007. Average loans increased $382 million, or 1.0 percent. Average commercial loans decreased $71 million, or 0.5 percent, which was comprised of a decrease in core commercial loans of $122 million, offset by an increase in title and escrow loans of $51 million. Average residential mortgage loans increased $207 million, or 1.7 percent, and average commercial mortgage loans increased $149 million, or 2.5 percent. Average interest bearing deposits increased $1.3 billion, or 5.0 percent, while average noninterest bearing deposits decreased $0.1 billion, or 0.7 percent. The average yield on earning assets increased 5 basis points and the average rate on interest bearing liabilities increased 8 basis points. The net interest margin decreased 2 basis points to 3.56 percent.
Second Quarter Noninterest Income
In second quarter 2007, noninterest income was $229.8 million, up $10.6 million, or 4.8 percent, from the same quarter a year ago. Service charges on deposit accounts decreased $4.6 million, or 5.6 percent, primarily due to lower account analysis fees, caused by lower noninterest bearing deposit balances. Trust and investment management fees increased $3.2 million, or 6.6 percent, primarily due to an increase in trust assets. Gain on private capital investments, net, was $20.2 million, compared with $3.7 million in the same quarter a year ago.
Second quarter 2007 noninterest income increased $7.3 million, or 3.3 percent, compared with first quarter 2007. Service charges on deposit accounts increased $2.3 million, or 3.0 percent, primarily due to two additional processing days in second quarter. Trust and investment management fees increased $3.0 million, or 6.2 percent, primarily due to an increase in trust assets. Insurance commissions decreased $3.7 million, or 18.5 percent, primarily due to normal seasonal factors. Gain on private capital investments, net, was $20.2 million, compared with $9.1 million in the preceding quarter. Other noninterest income decreased $6.3 million, or 18.1 percent, primarily due to a gain on the sale of property recorded in first quarter 2007.
Second Quarter Noninterest Expense
Noninterest expense for second quarter 2007 was $411.9 million, a decrease of $1.2 million, or 0.3 percent, compared with second quarter 2006. Salaries and employee benefits expense increased $2.8 million, or 1.1 percent, primarily due to annual merit increases, partially offset by lower pension expense. Outside services expense decreased $11.9 million, or 38.6 percent, primarily due to lower cost of services related to title and escrow balances. Professional services expense decreased $5.1 million, or 29.8 percent, primarily due to lower compliance-related expense. Foreclosed asset expense was zero, compared with income of $7.8 million a year earlier, due to a $7.8 million gain on the sale of property. The provision for losses on off-balance sheet commitments in second quarter 2007 was zero, compared with negative $4.0 million in second quarter 2006. Other noninterest expense increased $3.5 million, or 12.1 percent, primarily due to a reserve of $10.0 million for pending regulatory actions, partially offset by a $7.8 million reserve reversal, reflecting a favorable outcome in a legal dispute.
Noninterest expense decreased $10.2 million, or 2.4 percent, compared with first quarter 2007. Salaries and employee benefits expense decreased $7.1 million, or 2.7 percent, primarily due to annual seasonal factors that result in lower payroll taxes and 401(k) matching contributions. Professional services expense decreased $5.1 million, or 30.0 percent, primarily due to lower compliance-related expense. The provision for losses on off-balance sheet commitments was zero, compared with $1.0 million in the prior quarter.
Income Tax Expense
The effective tax rate for second quarter 2007 was 31.6 percent, compared with an effective tax rate of 33.5 percent for second quarter 2006. The difference in rate was primarily due to the recognition of $8.4 million of tax benefits during second quarter, partially offset by $3.8 million in additional taxes due to the non-deductibility of the reserve for pending regulatory actions. Excluding these adjustments, the second quarter tax rate would have been 33.5 percent.
The effective tax rate for the first half of 2007 was 32.5 percent. Excluding the adjustments discussed above, the tax rate would have been 33.5 percent, compared with an effective tax rate of 33.8 percent for the first half of 2006.
Year-to-Date Results
Total revenue for the first half of 2007 was $1.31 billion, a decrease of $58 million, or 4.2 percent, compared with total revenue of $1.37 billion in the same period of 2006. Net interest income decreased $74 million, or 7.9 percent, and noninterest income increased $15 million, or 3.5 percent.
Net interest income was $862 million in the first half of 2007, a $74 million decrease from prior year, primarily due to a deposit mix shift from noninterest bearing and low-cost deposits into higher-cost deposits, partially offset by strong loan growth and higher yields on earning assets. Average loans increased $4.0 billion, or 11.7 percent, while average total deposits increased $2.8 billion, or 7.2 percent. A $5.3 billion, or 24.4 percent, increase in average interest bearing deposits was partially offset by a $2.5 billion, or 14.2 percent, decrease in average noninterest bearing deposits. The net interest margin was 3.57 percent, down 72 basis points.
Noninterest income in the first half of 2007 was $452 million, an increase of $15 million, or 3.5 percent, over the same period in 2006. Service charges on deposit accounts decreased $11 million, or 6.9 percent, primarily due to lower account analysis fees, caused by lower noninterest bearing deposit balances. Gain on private capital investments, net, was $29.3 million, compared with $6.5 million in the same period last year.
For the first half of 2007, noninterest expense increased $6.4 million, or 0.8 percent, over the first half of 2006. Salaries and employee benefits expense increased $8.8 million, or 1.8 percent, primarily due to annual merit increases, partially offset by lower pension expense. Outside services expense decreased $21 million, or 34.8 percent, primarily due to lower cost of services related to title and escrow balances. Foreclosed asset expense was zero, compared with income of $15 million last year, due to gains on the sale of other real estate owned. The provision for off-balance sheet commitments was $1 million in the first half of 2007, compared with negative $7 million in the first half of 2006.
Credit Quality
Nonperforming assets at June 30, 2007, were $30 million, or 0.06 percent of total assets. This compares with $42 million, or 0.08 percent of total assets, at March 31, 2007, and $36 million, or 0.07 percent of total assets, at June 30, 2006.
In second quarter 2007, the total provision for credit losses was $5 million. The total provision for credit losses was $5 million in first quarter 2007, and negative $5 million in second quarter 2006. In second quarter 2007, net charge-offs were $2 million, compared with net charge-offs of $2 million in first quarter 2007, and net charge-offs of $10 million in second quarter 2006.
At June 30, 2007, the allowance for credit losses as a percent of total loans and as a percent of nonaccrual loans was 1.11 percent and 1,457 percent, respectively. These ratios were 1.11 percent and 997 percent, respectively, at March 31, 2007, and 1.17 percent and 1,130 percent, respectively, at June 30, 2006.
Balance Sheet and Capital Ratios
At June 30, 2007, the Company had total assets of $53.2 billion. Total loans were $37.7 billion and total deposits were $42.1 billion, resulting in a period-end deposit-to-loan ratio of 112 percent. At period-end, total stockholders' equity was $4.6 billion, the tangible common equity ratio was 7.87 percent, and the ratio of tangible common equity to risk-weighted assets was 8.09 percent. Book value per share at June 30, 2007, was $33.45, up 3.4 percent from a year earlier. The Company's Tier I and total risk-based capital ratios at period-end were 8.58 percent and 11.54 percent, respectively.
Stock Repurchases
During second quarter 2007, the Company repurchased 30,000 shares of common stock at a total price of $2 million, or an average of $63.26 per repurchased share. During the first half of 2007, the Company repurchased 1.4 million shares of common stock at a total price of $87 million, or an average of $62.74 per repurchased share. At June 30, 2007, the Company had remaining repurchase authority of $62 million.
Common shares outstanding at June 30, 2007, were 138.3 million, a decrease of 4.2 million shares, or 3.0 percent, from one year earlier.
Third Quarter and Full Year 2007 Earnings Per Share Forecast
The Company currently estimates that third quarter 2007 fully diluted earnings per share will be in the range of $1.12 to $1.17, including a total provision for credit losses of approximately $5 million.
For the year, the Company estimates that fully diluted earnings per share will be in the range of $4.50 to $4.60, including a total provision for credit losses of approximately $25 million.
Non-GAAP Financial Measures
This press release contains certain references to financial measures identified as being stated on an ?adjusted basis? or that adjust for or exclude certain tax items, which are adjustments from comparable measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial measures, as used herein, differ from financial measures reported under GAAP in that they exclude unusual or non-recurring charges, losses, credits or gains. This press release identifies the specific items excluded from the comparable GAAP financial measure in the calculation of each non-GAAP financial measure. Because these items and their impact on the Company's performance are difficult to predict, management believes that financial presentations excluding the impact of these items provide useful supplemental information which is important to a proper understanding of the Company's core business results by investors. These presentations should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures presented by other companies.
Forward-Looking Statements
The following appears in accordance with the Private Securities Litigation Reform Act. This press release includes forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words ?believe,? ?continue,? ?expect,? ?target,? ?anticipate,? ?intend,? ?plan,? ?estimate,? ?potential,? ?project,? or words of similar meaning, or future or conditional verbs such as ?will,? ?would,? ?should,? ?could,? or ?may.? They may also consist of annualized amounts based on historical interim period results. Forward-looking statements in this press release include those related to earnings forecasts, provision for credit losses, trends in deposit rates and balances and competition for deposits and their impact on the Company, the Company's loan portfolio, business model, competitive positioning and earnings power, and certain regulatory matters relating to the Company.
There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in the Company's forward-looking statements. Many of these factors are beyond the Company's ability to control or predict and could have a material adverse effect on the Company's stock price, financial condition, and results of operations or prospects. Such risks and uncertainties include, but are not limited to, adverse economic and fiscal conditions in California; increased energy costs; global political and general economic conditions related to the war on terrorism and other hostilities; fluctuations in interest rates; the controlling interest in UnionBanCal Corporation of The Bank of Tokyo-Mitsubishi UFJ, Ltd., which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc.; competition in the banking and financial services industries; deposit pricing pressures; the levels of commercial and residential real estate activity in our market; adverse effects of current and future banking laws, rules and regulations and their enforcement, or governmental fiscal or monetary policies; legal or regulatory proceedings or investigations; declines or disruptions in the stock or bond markets which may adversely affect the Company or the Company's borrowers or other customers; changes in accounting practices or requirements; and risks associated with various strategies the Company may pursue, including potential acquisitions, divestitures and restructurings.
A complete description of the Company, including related risk factors, is discussed in the Company's public filings with the Securities and Exchange Commission, which are available by calling (415) 765-2969 or online at http://www.sec.gov. All forward-looking statements included in this press release are based on information available at the time of the release, and the Company assumes no obligation to update any forward-looking statement.
Conference Call and Webcast
The Company will conduct a conference call to review second quarter 2007 results at 8:30 AM Pacific Time (11:30 AM Eastern Time) on July 20, 2007. Interested parties calling from locations within the United States should call 800-230-1093 (612-234-9959 from outside the United States) 10 minutes prior to the beginning of the conference.
A live webcast of the call will be available at http://www.unionbank.com. You may access the Investor Relations section of the website via the ?About Union Bank? link from the homepage. The webcast replay will be available on the website within 24 hours after the conclusion of the call, and will remain on the website for a period of one year.
A recorded playback of the conference call will be available by calling 800-475-6701, (320-365-3844 from outside the United States) from approximately 12:00 PM Pacific Time (3:00 PM Eastern Time), July 20, through 11:59 PM Pacific Time, July 27 (2:59 AM Eastern Time, July 28). The reservation number for this playback is 879044.
Based in San Francisco, UnionBanCal Corporation is a bank holding company with assets of $53.2 billion at June 30, 2007. Its primary subsidiary, Union Bank of California, N.A., had 327 banking offices in California, Oregon and Washington, and 2 international offices at June 30, 2007.
| UnionBanCal Corporation and Subsidiaries | ||||||||||||||||||||||||||||||||||
| Financial Highlights (Unaudited) | ||||||||||||||||||||||||||||||||||
Exhibit 1 | ||||||||||||||||||||||||||||||||||
| Percent Change to June 30, 2007 from | ||||||||||||||||||||||||||||||||||
| As of and for the Three Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | March 31, | June 30, | June 30, | March 31, | ||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2006 | 2007 | 2007 | 2006 | 2007 | |||||||||||||||||||||||||||||
| Results of operations: | ||||||||||||||||||||||||||||||||||
| Net interest income (1) | $ 469,000 | $ 430,627 | $ 431,124 | (8.08%) | 0.12% | |||||||||||||||||||||||||||||
| Noninterest income | 219,228 | 222,558 | 229,845 | 4.84% | 3.27% | |||||||||||||||||||||||||||||
| Total revenue | 688,228 | 653,185 | 660,969 | (3.96%) | 1.19% | |||||||||||||||||||||||||||||
| Noninterest expense | 413,030 | 422,091 | 411,865 | (0.28%) | (2.42%) | |||||||||||||||||||||||||||||
| (Reversal of) provision for loan losses | (1,000) | 4,000 | 5,000 | nm | 25.00% | |||||||||||||||||||||||||||||
| Income from continuing operations before income taxes (1) | ||||||||||||||||||||||||||||||||||
| 276,198 | 227,094 | 244,104 | (11.62%) | 7.49% | ||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | 1,358 | 2,115 | 2,251 | 65.76% | 6.43% | |||||||||||||||||||||||||||||
| Income tax expense | 92,203 | 75,368 | 76,499 | (17.03%) | 1.50% | |||||||||||||||||||||||||||||
| Income from continuing operations | $ 182,637 | $ 149,611 | $ 165,354 | (9.46%) | 10.52% | |||||||||||||||||||||||||||||
| Income from discontinued operations | 274 | - | - | (100.00%) | - | |||||||||||||||||||||||||||||
| Net income | $ 182,911 | $ 149,611 | $ 165,354 | (9.60%) | 10.52% | |||||||||||||||||||||||||||||
| Per common share: | ||||||||||||||||||||||||||||||||||
| Basic earnings: | ||||||||||||||||||||||||||||||||||
| From continuing operations | $ 1.28 | $ 1.08 | $ 1.20 | (6.25%) | 11.11% | |||||||||||||||||||||||||||||
| Net income | 1.28 | 1.08 | 1.20 | (6.25%) | 11.11% | |||||||||||||||||||||||||||||
| Diluted earnings: | ||||||||||||||||||||||||||||||||||
| From continuing operations | 1.26 | 1.07 | 1.19 | (5.56%) | 11.21% | |||||||||||||||||||||||||||||
| Net income | 1.26 | 1.07 | 1.19 | (5.56%) | 11.21% | |||||||||||||||||||||||||||||
| Dividends (2) | 0.47 | 0.47 | 0.52 | 10.64% | 10.64% | |||||||||||||||||||||||||||||
| Book value (end of period) | 32.34 | 32.98 | 33.45 | 3.43% | 1.43% | |||||||||||||||||||||||||||||
| Common shares outstanding (end of period) (3) | 142,533,794 | 138,117,370 | 138,314,564 | (2.96%) | 0.14% | |||||||||||||||||||||||||||||
| Weighted average common shares outstanding - basic (3) | ||||||||||||||||||||||||||||||||||
| 142,723,271 | 137,942,320 | 137,476,765 | (3.68%) | (0.34%) | ||||||||||||||||||||||||||||||
| Weighted average common shares outstanding - diluted (3) | ||||||||||||||||||||||||||||||||||
| 144,878,447 | 139,729,681 | 139,137,955 | (3.96%) | (0.42%) | ||||||||||||||||||||||||||||||
| Balance sheet (end of period): | ||||||||||||||||||||||||||||||||||
| Total assets (4) | $ 50,800,136 | $ 54,616,849 | $ 53,173,833 | 4.67% | (2.64%) | |||||||||||||||||||||||||||||
| Total loans | 34,747,833 | 37,251,950 | 37,743,222 | 8.62% | 1.32% | |||||||||||||||||||||||||||||
| Nonperforming assets | 36,351 | 41,744 | 29,826 | (17.95%) | (28.55%) | |||||||||||||||||||||||||||||
| Total deposits | 40,544,251 |
43,797
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© Business Wire - 2007
MUFG Americas Holdings Corp, is located in New York, the United States, is a financial service provider.
Sector
Banks
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