UnionBanCal Corporation (NYSE:UB):

Third Quarter 2006 Highlights:

-- Strong year-over-year organic loan growth
    -- Average total loans up 12 percent
    -- Average commercial loans up 16 percent
    -- Average residential mortgage loans up 11 percent
-- Annualized average all-in cost of funds of 2.11 percent
-- Average noninterest bearing deposits comprised 42 percent of
   average total deposits
-- Nonperforming assets were 0.09 percent of total assets at
   quarter-end

UnionBanCal Corporation (NYSE:UB) today reported third quarter 2006 net income of $170.7 million, or $1.20 per diluted common share, compared with $1.26 per diluted common share a year earlier. Income from continuing operations was $171.9 million, or $1.21 per diluted common share, compared with $1.36 per diluted common share a year earlier. Income from continuing operations for third quarter 2005 included a $10 million, or $0.04 per diluted common share, negative loan loss provision associated with the sale of the international correspondent banking business and $9 million, or $0.06 per diluted common share, in income tax adjustments. Adjusting for these two items, income from continuing operations for third quarter 2005 was $1.26 per diluted common share.

For the first nine months of 2006, net income was $527 million, or $3.65 per diluted common share, compared with $3.74 per diluted common share for the first nine months of 2005. Income from continuing operations was $536 million, or $3.71 per diluted common share, compared with $3.84 per diluted common share for the first nine months of 2005. Income from continuing operations for the first nine months of 2006 included stock option expense of $17.3 million, or $0.07 per diluted common share, versus none in the comparable period in 2005.

?Third quarter results were generally in line with our expectations,? stated Takashi Morimura, President and Chief Executive Officer. ?We continued to generate strong loan growth, and credit quality continued to be excellent. At the same time, we continued to be adversely impacted by unfavorable deposit mix and deposit pricing trends.?

Added Chief Operating Officer Philip Flynn, ?We are pleased with the balanced growth we are generating in the loan portfolio. However, excellent lending results for the quarter were offset by the effects of a very competitive deposit market. Short-term profitability is being negatively affected as customers shift deposit balances to higher rate products, and as deposit rates continue to increase faster than loan yields. Despite these current challenges, our deposit franchise remains healthy and profitable, and well-positioned for the long run. We continue to be among the industry leaders in noninterest bearing deposit mix, core deposit mix, average all-in cost of funds, and net interest margin. We believe our balanced business model will continue to produce solid long-term results.?

Summary of Third Quarter Results from Continuing Operations

For third quarter 2006, income from continuing operations was $171.9 million, or $1.21 per diluted common share, compared with $1.36 per diluted common share a year earlier. Total revenue was flat, compared with third quarter 2005. A 2.4 percent increase in noninterest income was offset by a 1 percent decrease in net interest income. The decrease in net interest income was primarily due to 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. The total provision for credit losses was zero, compared with negative $15 million in third quarter last year. Of the negative $15 million total provision for credit losses recognized in third quarter 2005, negative $10 million was related to the sale of the international correspondent banking business, now a discontinued operation. For third quarter 2006, noninterest expense was up 5 percent from the same quarter a year ago. Adjusting for the impact of stock option expense, which commenced January 1, 2006, and a $3.2 million decline in foreclosed asset income, noninterest expense increased 3 percent. The effective tax rate was higher in third quarter 2006 due to $9 million in income tax adjustments recorded in third quarter 2005.

Adjusting for the negative $10 million provision related to the discontinued operation, $3.4 million in foreclosed asset income, and the $9 million of tax adjustments, income from continuing operations was $1.25 per diluted common share for third quarter 2005. Adjusting for the $6 million of stock option expense and $0.2 million in foreclosed asset income recorded in third quarter this year, income from continuing operations was $1.23 per diluted common share for third quarter 2006. Therefore, on an adjusted basis, income from continuing operations for third quarter 2006 declined 2 cents, or 1.6 percent, compared with third quarter 2005.

Third Quarter Total Revenue From Continuing Operations

For third quarter 2006, total revenue (taxable-equivalent net interest income plus noninterest income) was $678 million, flat compared with third quarter 2005. Net interest income decreased 1.0 percent, and noninterest income increased 2.4 percent. Compared with second quarter 2006, total revenue decreased 1.5 percent, with net interest income decreasing 1.8 percent and noninterest income decreasing 0.9 percent.

Third Quarter Net Interest Income (Taxable-equivalent) From Continuing Operations

Net interest income was $461 million in third quarter 2006, down $5 million, or 1.0 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 solid growth in loans and higher yields on earning assets.

Average earning assets increased $2.5 billion, or 5.7 percent, compared to last year, primarily due to a $3.8 billion, or 11.8 percent, increase in average loans. Average commercial loans increased $1.8 billion, or 15.6 percent; average residential mortgages increased $1.2 billion, or 11.2 percent; and average construction loans increased $0.7 billion, or 53.3 percent. The increase in construction loans is primarily related to income properties, where business fundamentals continue to be very healthy. Average securities declined $1.4 billion, or 14.2 percent.

Compared to third quarter 2005, average interest bearing deposits increased $2.7 billion, or 12.8 percent, while average noninterest bearing deposits decreased $2.4 billion, or 12.4 percent. The decline in noninterest bearing deposits was primarily due to a $1.1 billion, or 8.2 percent, decrease in average other commercial noninterest bearing deposits and a $1.0 billion, or 29.8 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 $311 million, or 9.6 percent.

Average noninterest bearing deposits represented 41.9 percent of average total deposits in third quarter 2006. The annualized average all-in cost of funds was 2.11 percent, reflecting the Company's strong average core deposit-to-loan ratio of 94 percent and the high proportion of noninterest bearing deposits to total deposits.

The average yield on earning assets of $45.9 billion was 6.06 percent, up 85 basis points over third quarter 2005, with the average loan yield increasing 66 basis points. The average rate on interest bearing liabilities of $27.7 billion was 3.41 percent, up 165 basis points compared with third quarter 2005, reflecting higher short-term interest rates, an unfavorable change in deposit mix, and heightened competition for deposits. Average interest bearing deposits were $23.6 billion and the weighted average rate was 3.07 percent. Average core deposits funded 73.9 percent of average earning assets in the third quarter. The net interest margin in third quarter 2006 was 4.00 percent, compared with 4.27 percent in third quarter 2005.

On a sequential quarter basis, net interest income decreased $8 million, or 1.8 percent. Average loans increased $0.8 billion, or 2.3 percent. Average commercial loans increased $282 million, or 2.2 percent; average residential mortgages increased $238 million, or 2.0 percent; and average construction loans increased $267 million, or 15.5 percent. Average noninterest bearing deposits decreased $553 million, or 3.2 percent, with commercial noninterest bearing deposits decreasing $316 million, partially due to a $59 million decrease in title and escrow deposits, and consumer noninterest bearing deposits decreasing $237 million, or 7.5 percent. The average yield on earning assets increased 11 basis points and the average rate on interest bearing liabilities increased 46 basis points. The net interest margin decreased 23 basis points to 4.00 percent.

Third Quarter Noninterest Income From Continuing Operations

In third quarter 2006, noninterest income was $217 million, up $5 million, or 2.4 percent, from the same quarter a year ago. Service charges on deposit accounts decreased $6 million, or 6.8 percent, primarily due to lower account analysis fees, stemming from an increase in the earnings credit rate on deposit balances and lower noninterest bearing deposit balances. Trust and investment management fees increased $4 million, or 9.3 percent, primarily due to an increase in trust assets.

Compared with the preceding quarter, third quarter 2006 noninterest income decreased $2 million, or 0.9 percent, primarily due to declines in service charges on deposit accounts.

Third Quarter Noninterest Expense From Continuing Operations

Noninterest expense for third quarter 2006 was $417 million, an increase of $20 million, or 5.1 percent, over third quarter 2005. Salaries and employee benefits expense increased $8.5 million, or 3.6 percent, primarily due to higher stock option expense, annual merit increases and higher employee count, partially offset by lower incentive and bonus expense and lower accruals for workers' compensation expense. Stock option expense was $5.7 million, compared with none in third quarter 2005. Outside services expense increased $3.4 million, or 11.8 percent, primarily due to higher trust administration expenses. Advertising and public relations expense increased $2.6 million, or 28.7 percent, primarily due to increased advertising and marketing activity in response to the competitive deposit market. Foreclosed asset income was $3.2 million lower than in prior year. There was no provision for off-balance sheet commitments in third quarter 2006 or third quarter 2005.

Excluding the effect of stock option expense and lower foreclosed asset income, noninterest expense increased $11.4 million, or 2.9 percent, compared with prior year.

Compared with second quarter 2006, noninterest expense increased $4 million, or 1.0 percent. Salaries and employee benefits expense decreased $4.0 million, or 1.6 percent, primarily due to a $4.4 million decrease in incentive and bonus expense in the third quarter. Professional services expense decreased $4.9 million, or 28.6 percent, partially due to lower compliance-related expense. Foreclosed asset income was $7.6 million lower than in second quarter 2006. There was no provision for off-balance sheet commitments, compared with negative $4 million in second quarter 2006.

Excluding the $7.6 million decrease in foreclosed asset income and the $4 million negative off-balance sheet commitment provision in second quarter, noninterest expense declined $7.6 million, or 1.8 percent, on a sequential quarter basis.

Income Tax Expense From Continuing Operations

The effective tax rate for third quarter 2006 was 33.6 percent, compared with an effective tax rate of 31.7 percent for third quarter 2005. Third quarter 2005 income tax expense was reduced by approximately $9 million, primarily as a result of the adjustment of California state taxes to reflect tax returns filed on the worldwide unitary method, and the recognition of California Enterprise Zone tax credits for which the Company qualified during the quarter.

Year-to-Date Results From Continuing Operations

Total revenue was $2.1 billion in the first nine months of 2006, an increase of $67 million, or 3.4 percent, compared with the same period of 2005. Net interest income increased 2.5 percent, and noninterest income increased 5.3 percent.

Net interest income was $1.4 billion in the first nine months of 2006, a $34 million, or 2.5 percent, increase from prior year, primarily due to growth in earning assets. Average loans increased $4.3 billion, or 13.8 percent, while the net interest margin decreased 8 basis points, to 4.19 percent. Average total deposits increased $0.4 billion, or 1.1 percent, primarily due to a $1.9 billion increase in average interest bearing deposits, offset by a $1.4 billion, or 7.7 percent, decrease in average noninterest bearing deposits. This deposit mix shift was due to changes in customer behavior in response to rising short-term interest rates.

Noninterest income in the first nine months of 2006 was $654 million, an increase of $33 million, or 5.3 percent, over the same period in 2005. Service charges on deposit accounts decreased $1 million, or 0.5 percent. Trust and investment management fees increased $19 million, or 15.0 percent, primarily due to growth in trust assets and a refinement in accrual methodology implemented in first quarter 2006. Insurance commissions decreased $5 million, or 7.8 percent, partially due to lower contingent commissions. Merchant banking fees decreased $7 million, or 20.6 percent, primarily due to a lower volume of transactions completed in 2006. Securities gains (losses), net, were $1.8 million, compared with $(13.3) million in the same period in 2005.

For the first nine months of 2006, noninterest expense increased $67 million, or 5.6 percent, over the first nine months of 2005. Salaries and employee benefits expense increased $44 million, or 6.3 percent, primarily due to $17.3 million in stock option expense in the current year, merit increases, higher employee count, and higher contract labor expense, reflecting compliance-related initiatives. Outside services expense increased $15 million, or 19.6 percent, primarily due to higher trust administration expenses and higher cost of services related to title and escrow balances, stemming from a higher earnings credit rate in the first nine months of 2006. Professional services expense increased $8 million, or 21.1 percent, primarily due to higher compliance-related expense. The provision for off-balance sheet commitments was negative $7 million, compared with negative $1 million in the first nine months of 2005.

Credit Quality

Nonperforming assets at September 30, 2006, were $48 million, or 0.09 percent of total assets. This compares with $36 million, or 0.07 percent of total assets, at June 30, 2006, and $38 million, or 0.07 percent of total assets, at September 30, 2005.

In third quarter 2006, the total provision for credit losses was zero. The total provision for credit losses was negative $5 million in second quarter 2006 and negative $15 million in third quarter 2005. In third quarter 2006, net charge-offs were $2 million, compared with net charge-offs of $10 million in second quarter 2006, and net charge-offs of $16 million in third quarter 2005.

At September 30, 2006, the allowance for credit losses as a percent of total loans and as a percent of nonaccrual loans was 1.14 percent and 850 percent, respectively. These ratios were 1.17 percent and 1130 percent, respectively, at June 30, 2006, and 1.39 percent and 1272 percent, respectively, at September 30, 2005.

Balance Sheet and Capital Ratios

At September 30, 2006, the Company had total assets of $52 billion. Total loans were $35.7 billion and total deposits were $41.8 billion, resulting in a period-end deposit-to-loan ratio of 117 percent. Core deposits totaled $34.6 billion at quarter-end, representing 97 percent of total loans. At period-end, total stockholders' equity was $4.7 billion, the tangible equity ratio was 8.09 percent, and the ratio of tangible common equity to risk-weighted assets was 8.50 percent. Book value per share at September 30, 2006, was $33.17, up 10.3 percent from a year earlier. The Company's Tier I and total risk-based capital ratios at period-end were 8.69 percent and 11.75 percent, respectively.

Stock Repurchases

During third quarter 2006, the Company repurchased 2.3 million shares of common stock at a total price of $143 million, or an average of $61.04 per repurchased share. For the first nine months of 2006, the Company repurchased 5.3 million shares of common stock at a total price of $344 million, or an average of $65.29 per repurchased share. At September 30, 2006, the Company had remaining repurchase authority of $259 million.

Common shares outstanding at September 30, 2006, were 140.3 million, a decrease of 4.3 million shares, or 2.9 percent, from one year earlier.

Discontinued Operations

On September 22, 2005, the Company announced the signing of a definitive agreement to sell its international correspondent banking business to Wachovia Bank, N.A. Commencing in third quarter 2005, all results of the international correspondent banking business have been reported as a discontinued operation and all prior periods have been restated to reflect this accounting treatment. All of the assets and liabilities of the discontinued operations have been separately identified on the consolidated balance sheets (see Exhibit 4) and the average net assets or liabilities of the discontinued operations are reflected in the analysis of net interest margin (see Exhibits 6, 7 and 8).

In the third quarter of 2006, the Company recorded a net loss from discontinued operations of $1.2 million, or $0.01 per diluted common share.

Fourth Quarter 2006 Earnings Per Share Forecast

The Company currently estimates that fourth quarter 2006 fully diluted earnings per share from continuing operations will be in the range of $1.03 to $1.08, including estimated stock option expense of $0.02 per share and a total provision for credit losses of $5 million, or $0.02 per share. The Company currently estimates income from discontinued operations of $0.01 per fully diluted share in the fourth quarter of 2006. Therefore, net income per diluted common share is expected to be in the range of $1.04 to $1.09.

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 stock option expense, foreclosed asset income, negative off-balance sheet commitment provision, negative loan loss provision associated with the sale of the international correspondent banking business, a discontinued operation, and tax adjustments, 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,? ?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, trends in deposit rates and balances and their impact on the Company, and the Company's loan portfolio, business model, competitive positioning and earnings power.

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; adverse effects of current and future banking laws, rules and regulations and their enforcement, or governmental fiscal or monetary policies; legal or regulatory proceedings; 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 third quarter results at 8:30 AM Pacific Time (11:30 AM Eastern Time) on October 20, 2006. Interested parties calling from locations within the United States should call 800-230-1059 (612-332-0530 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.uboc.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), October 20, through 11:59 PM Pacific Time, October 27 (2:59 AM Eastern Time, October 28). The reservation number for this playback is 843391.

Based in San Francisco, UnionBanCal Corporation is a bank holding company with assets of $52 billion at September 30, 2006. Its primary subsidiary, Union Bank of California, N.A., had 320 banking offices in California, Oregon and Washington, and 2 international offices at September 30, 2006.

© Business Wire - 2006
UnionBanCal Corporation and Subsidiaries
Financial Highlights (Unaudited) (1)

Exhibit 1

 
Percent Change to
As of and for the Three Months Ended September 30, 2006 from

Sept. 30,

June 30,

Sept. 30,

Sept. 30,

June 30,
(Dollars in thousands, except per share data) 2005  2006  2006  2005  2006 

Results

of oper-
ations:

Net interest income (2) $ 465,193  $ 469,000  $ 460,596  (0.99%) (1.79%)
Noninterest income 212,188  219,228  217,255  2.39% (0.90%)
Total revenue 677,381  688,228  677,851  0.07% (1.51%)
Noninterest expense 396,696  413,030  417,021  5.12% 0.97%
Reversal of allowance for loan losses (15,000) (1,000) (100.00%) (100.00%)
Income from continuing operations before income taxes (2)
295,685  276,198  260,830  (11.79%) (5.56%)
Taxable-equivalent adjustment 1,051  1,358  1,872  78.12% 37.85%
Income tax expense 93,388  92,203  87,048  (6.79%) (5.59%)
Income from continuing operations $ 201,246  $ 182,637  $ 171,910  (14.58%) (5.87%)

Income/
(loss) from dis-
continued operations

(15,961) 274  (1,204) 92.46%

nm

Net income $ 185,285  $ 182,911  $ 170,706  (7.87%) (6.67%)
 
Per common share:
Basic earnings:

From continuing operations

$ 1.39  $ 1.28  $ 1.22  (12.23%) (4.69%)
Net income 1.28  1.28  1.21  (5.47%) (5.47%)
Diluted earnings:
From continuing operations 1.36  1.26  1.21  (11.03%) (3.97%)
Net income 1.26  1.26  1.20  (4.76%) (4.76%)
Dividends (3) 0.41  0.47  0.47  14.63% 0.00%
Book value (end of period) 30.07  32.34  33.17  10.31% 2.57%

Common shares out-
standing (end of period)

144,584,972  142,533,794  140,326,737  (2.95%) (1.55%)

Weighted average common shares out-
standing - basic

144,459,465  142,723,271  140,941,823  (2.44%) (1.25%)

Weighted average common shares

outstanding - diluted

147,613,377  144,878,447  142,568,400  (3.42%) (1.59%)
 

Balance sheet (end of period):

Total assets (4) $ 51,298,842  $ 50,800,136  $ 52,013,256  1.39% 2.39%
Total loans 32,004,747  34,747,833  35,673,469  11.46% 2.66%

Non-
performing assets

37,507  36,351  47,803  27.45% 31.50%
Total deposits 41,648,355  40,544,251  41,820,206  0.41% 3.15%

Stock-
holders' equity

4,346,956  4,608,908  4,654,789  7.08% 1.00%
 
Balance sheet (period average):
Total assets $ 48,212,029  $ 49,329,374  $ 50,777,419  5.32% 2.94%
Total loans 32,177,816  35,146,976  35,965,823  11.77% 2.33%
Earning assets 43,371,177 
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