UNITED STATES

SECURITIES AND EXCHANGE COMMISSION WASHINGTON,

Washington, D.C. 20549

FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 COMMISSION FILE NUMBER

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

Commission file number 1-15081 UNIONBANCAL CORPORATION (Exact

UnionBanCal Corporation

(Exact name of registrant as specified in its charter) DELAWARE 94-1234979 (State of Incorporation) (I.R.S. Employer Identification No.)

Delaware

94-1234979

(State of Incorporation)

(I.R.S. Employer Identification No.)

400 CALIFORNIA STREET SAN FRANCISCO, CALIFORNIACalifornia Street
San Francisco, California 94104-1302 (Address

(Address and zip code of principal executive offices) Registrant's

Registrant’s telephone number: (415) 765-2969

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X] No[ ] þ   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Act.

Large accelerated filer  þAccelerated filer  o             Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [ ]o   No  [X] þ

Number of shares of Common Stock outstanding at October 31, 2005: 144,585,174 UNIONBANCAL CORPORATION AND SUBSIDIARIES April 28, 2006: 143,864,056




UnionBanCal Corporation and Subsidiaries

TABLE OF CONTENTS PAGE NUMBER ------

Page
Number

PART I

Financial Information

Consolidated Financial Highlights

5

ITEM 1. FINANCIAL STATEMENTS:

Condensed Consolidated Statements of Income

6

Condensed Consolidated Balance Sheets

7

Condensed Consolidated Statements of Changes in Stockholders’ Equity

8

Condensed Consolidated Statements of Cash Flows

9

Notes to Condensed Consolidated Financial Statements

10

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Introduction

30

Executive Overview

30

Discontinued Operations

31

Critical Accounting Policies

32

Financial Performance

33

Net Interest Income

35

Noninterest Income

36

Noninterest Expense

37

Income Tax Expense

37

Loans

38

Cross-Border Outstandings

39

Provision for Loan Losses

40

Allowances for Credit Losses

40

Nonperforming Assets

43

Loans 90 Days or More Past Due and Still Accruing

44

Quantitative and Qualitative Disclosures About Market Risk

44

Liquidity Risk

46

Regulatory Capital

47

Business Segments

48

Regulatory Matters

55

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

56

ITEM 4. CONTROLS AND PROCEDURES

56

PART II

Other Information

ITEM 1.   LEGAL PROCEEDINGS

57

ITEM 1A. RISK FACTORS

57

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

57

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

58

ITEM 5.   OTHER INFORMATION

59

ITEM 6.   EXHIBITS

59

SIGNATURES

60

2




NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements, which include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly from our forecasts and expectations. For a discussion of risk factors relating to the Company’s business, please refer to Item 1A “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005 which is incorporated by reference herein and Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q.

This document includes forward-looking information, which is subject to the “safe harbor” created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our SEC filings, press releases, news articles, conference calls with analysts and stockholders and when we are speaking on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may.” These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made.

In this document, for example, we make forward-looking statements, which discuss our expectations about:

·       Our business strategies, the growth of our business and our competitive position

·       Our assessment of significant factors and developments that have affected and may affect our results

·       Pending legal and regulatory actions, and future legislative and regulatory developments

·       Increased regulatory controls and processes regarding Bank Secrecy Act and anti-money laundering matters, and their costs and impact on our business

·       The costs and effects of litigation, investigations, regulatory actions, or similar matters, or adverse facts and developments related thereto

·       Our ability to meet regulatory requirements

·       Credit quality and provision for credit losses, including the need to provide for credit losses due to anticipated loan growth

·       The unallocated portion of our allowances for credit losses

·       Net interest income and effects on net interest income, including expense from derivative hedges

·       The impact of increases in interest rates and growth in our commercial loan portfolio on our net interest margin

·       Loan growth rates, including residential mortgage loans

·       Disintermediation of noninterest bearing deposits to interest bearing deposits or other investment alternatives

·       Deposit renewals

3




·       Our ability and intent to hold various assets

·       The formation of financial subsidiaries

·       Our sensitivity to and management of market risk, including changes in interest rates, and the economic outlook of any particular region of the U.S.

·       The composition and market sensitivity of our securities portfolios, our hedging strategies and the asset sensitivity of our balance sheet

·       Potential dividend restrictions

·       Taxes, including the possible effect of the level of earnings at The Bank of Tokyo-Mitsubishi UFJ, Ltd. on our California State tax obligations

·       Off-balance sheet arrangements

·       Critical accounting policies and estimates and the impact of recent accounting pronouncements

·       Our insurance coverage

·       Estimated pension and health costs and the investment objectives and asset allocation strategy of our pension plan and health plan

·       Decisions to downsize, sell or close units or otherwise reorganize or change our business mix

·       Our strategies and expectations regarding capital levels, returning excess capital to stockholders and strategic or other acquisitions

·       The relationship between our business and that of The Bank of Tokyo-Mitsubishi UFJ, Ltd.

·       The impact of strategic investments on our business and benefits of marketing alliances

·       The impact of the sale of our international correspondent banking business and the timing and transition of the business and customers

There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our stock price, financial condition, and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed in Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q and in Item 1A “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005.

Readers of this document should not rely unduly on forward-looking information and should consider all uncertainties and risks disclosed throughout this document and in our other reports to the SEC, including, but not limited to, those discussed below. Any factor described in this report could by itself, or together with one or more other factors, adversely affect our business, future prospects, results of operations or financial condition. There are also other factors that we have not described in this report and our other reports that could cause our results to differ from our expectations.

4




PART I. FINANCIAL INFORMATION
UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Financial Highlights......................................... 2 Highlights
(1)
(Unaudited)

 

 

As of and for the

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

March 31,

 

Percent

 

(Dollars in thousands, except per share data)

 

2005

 

2006

 

Change

 

Results of operations:

 

 

 

 

 

 

 

 

 

Net interest income(2)

 

$

436,717

 

$

466,341

 

 

6.78

%

 

Reversal of allowance for loan losses

 

(12,119

)

(7,000

)

 

(42.24

)

 

Noninterest income

 

205,625

 

217,910

 

 

5.97

 

 

Noninterest expense

 

392,952

 

414,544

 

 

5.49

 

 

Income before income taxes(2)

 

261,509

 

276,707

 

 

5.81

 

 

Taxable-equivalent adjustment

 

1,055

 

1,248

 

 

18.29

 

 

Income tax expense

 

80,703

 

94,004

 

 

16.48

 

 

Income from continuing operations

 

179,751

 

181,455

 

 

0.95

 

 

Income (loss) from discontinued operations, net of taxes

 

2,226

 

(8,510

)

 

nm

 

 

Net income

 

$

181,977

 

$

172,945

 

 

(4.96

)

 

Per common share:

 

 

 

 

 

 

 

 

 

Basic earnings:

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

1.22

 

$

1.26

 

 

3.28

%

 

Net income

 

1.24

 

1.20

 

 

(3.23

)

 

Diluted earnings:

 

 

 

 

 

 

 

 

 

From continuing operations

 

1.20

 

1.24

 

 

3.33

 

 

Net income

 

1.21

 

1.18

 

 

(2.48

)

 

Dividends(3)

 

0.36

 

0.41

 

 

13.89

 

 

Book value (end of period)

 

28.41

 

31.94

 

 

12.43

 

 

Common shares outstanding (end of period)(4)

 

144,575,615

 

143,402,332

 

 

(0.81

)

 

Weighted average common shares outstanding—basic(4)

 

146,997,649

 

143,878,106

 

 

(2.12

)

 

Weighted average common shares outstanding—diluted(4)

 

149,915,503

 

146,026,188

 

 

(2.59

)

 

Balance sheet (end of period):

 

 

 

 

 

 

 

 

 

Total assets(5)

 

$

49,432,871

 

$

48,800,945

 

 

(1.28

)%

 

Total loans

 

29,778,461

 

33,528,868

 

 

12.59

 

 

Nonperforming assets

 

101,226

 

42,392

 

 

(58.12

)

 

Total deposits

 

40,414,979

 

39,155,904

 

 

(3.12

)

 

Stockholders’ equity

 

4,107,223

 

4,579,878

 

 

11.51

 

 

Balance sheet (period average):

 

 

 

 

 

 

 

 

 

Total assets

 

$

46,313,053

 

$

48,016,643

 

 

3.68

%

 

Total loans

 

29,714,206

 

34,052,067

 

 

14.60

 

 

Earning assets

 

41,667,831

 

43,084,349

 

 

3.40

 

 

Total deposits

 

38,199,718

 

38,856,033

 

 

1.72

 

 

Stockholders’ equity

 

4,208,650

 

4,538,679

 

 

7.84

 

 

Financial ratios(6):

 

 

 

 

 

 

 

 

 

Return on average assets(7):

 

 

 

 

 

 

 

 

 

From continuing operations

 

1.57

%

1.53

%

 

 

 

 

Net income

 

1.59

 

1.46

 

 

 

 

 

Return on average stockholders’ equity(7):

 

 

 

 

 

 

 

 

 

From continuing operations

 

17.32

 

16.21

 

 

 

 

 

Net income

 

17.54

 

15.45

 

 

 

 

 

Efficiency ratio(8)

 

60.64

 

62.10

 

 

 

 

 

Net interest margin(2)

 

4.22

 

4.36

 

 

 

 

 

Dividend payout ratio

 

29.51

 

32.54

 

 

 

 

 

Tangible equity ratio

 

7.36

 

8.46

 

 

 

 

 

Tier 1 risk-based capital ratio(5)

 

9.06

 

9.09

 

 

 

 

 

Total risk-based capital ratio(5)

 

11.41

 

10.94

 

 

 

 

 

Leverage ratio(5)

 

7.79

 

8.80

 

 

 

 

 

Allowances for credit losses to total loans(9)

 

1.63

 

1.26

 

 

 

 

 

Allowances for credit losses to nonaccrual loans(9)

 

506.96

 

1,003.48

 

 

 

 

 

Net loans charged off (recovered) to average total loans(7)

 

(0.19

)

0.06

 

 

 

 

 

Nonperforming assets to total loans and foreclosed assets

 

0.34

 

0.13

 

 

 

 

 

Nonperforming assets to total assets(5)

 

0.20

 

0.09

 

 

 

 

 


(1)In September 2005, Union Bank of California, N.A. committed to a plan for disposal of its international correspondent banking business. All periods presented have been restated to reflect discontinued operations.

(2)Taxable-equivalent basis.

(3)Dividends per share reflect dividends declared on UnionBanCal Corporation’s common stock outstanding as of the declaration date.

(4)Common shares outstanding reflect common shares issued less treasury shares.

(5)End of period total assets and assets used to calculate all regulatory capital ratios include those of discontinued operations.

(6)Average balances used to calculate our financial ratios are based on continuing operations data only, unless otherwise indicated.

(7)Annualized.

(8)The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the (reversal of) provision for losses on off-balance sheet commitments, as a percentage of net interest income (taxable-equivalent basis) and noninterest income and is calculated for continuing operations only.

(9)The allowances for credit losses ratios include the allowances for loan losses and losses on off-balance sheet commitments. These ratios relate to continuing operations only.

nm = not meaningful

5




Item 1.   Financial Statements: Statements

UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Statements of Income............................. 4 Condensed Consolidated Balance Sheets................................... 5 Condensed Consolidated StatementsIncome
(1)
(Unaudited)

 

 

For the Three Months

 

 

 

Ended March 31,

 

(Dollars in thousands, except per share data)

 

2005

 

2006

 

Interest Income

 

 

 

 

 

Loans

 

$

404,630

 

$

512,323

 

Securities

 

100,769

 

96,867

 

Interest bearing deposits in banks

 

733

 

736

 

Federal funds sold and securities purchased under resale agreements

 

2,373

 

3,845

 

Trading account assets

 

842

 

1,431

 

Total interest income

 

509,347

 

615,202

 

Interest Expense

 

 

 

 

 

Deposits

 

55,828

 

115,309

 

Federal funds purchased and securities sold under repurchase agreements

 

4,998

 

8,802

 

Commercial paper

 

4,560

 

12,448

 

Medium and long-term debt

 

6,532

 

10,397

 

Trust notes

 

238

 

238

 

Other borrowed funds

 

1,529

 

2,915

 

Total interest expense

 

73,685

 

150,109

 

Net Interest Income

 

435,662

 

465,093

 

Reversal of allowance for loan losses

 

(12,119

)

(7,000

)

Net interest income after reversal of allowance for loan losses

 

447,781

 

472,093

 

Noninterest Income

 

 

 

 

 

Service charges on deposit accounts

 

79,267

 

81,635

 

Trust and investment management fees

 

41,963

 

50,115

 

Insurance commissions

 

22,017

 

19,518

 

Merchant banking fees

 

6,266

 

8,229

 

Foreign exchange gains, net

 

8,170

 

7,818

 

Brokerage commissions and fees

 

8,972

 

7,795

 

Card processing fees, net

 

5,607

 

6,697

 

Securities gains (losses), net

 

344

 

(214

)

Other

 

33,019

 

36,317

 

Total noninterest income

 

205,625

 

217,910

 

Noninterest Expense

 

 

 

 

 

Salaries and employee benefits

 

231,758

 

252,495

 

Net occupancy

 

32,362

 

32,837

 

Outside services

 

21,247

 

28,609

 

Equipment

 

17,403

 

17,922

 

Software

 

13,975

 

16,344

 

Professional services

 

11,741

 

14,547

 

Communications

 

10,380

 

10,552

 

Foreclosed asset expense (income)

 

406

 

(7,367

)

(Reversal of) provision for losses on off-balance sheet commitments

 

3,000

 

(3,000

)

Other

 

50,680

 

51,605

 

Total noninterest expense

 

392,952

 

414,544

 

Income from continuing operations before income taxes

 

260,454

 

275,459

 

Income tax expense

 

80,703

 

94,004

 

Income from Continuing Operations

 

179,751

 

181,455

 

Income (loss) from discontinued operations before income taxes

 

3,639

 

(13,603

)

Income tax expense (benefit)

 

1,413

 

(5,093

)

Income (Loss) from Discontinued Operations

 

2,226

 

(8,510

)

Net Income

 

$

181,977

 

$

172,945

 

Income from continuing operations per common share—basic

 

$

1.22

 

$

1.26

 

Net Income per common share—basic

 

$

1.24

 

$

1.20

 

Income from continuing operations per common share—diluted

 

$

1.20

 

$

1.24

 

Net income per common share—diluted

 

$

1.21

 

$

1.18

 

Weighted average common shares outstanding—basic

 

146,998

 

143,878

 

Weighted average common shares outstanding—diluted

 

149,916

 

146,026

 


(1)In September 2005, Union Bank of Changes in Stockholders' Equity.... 6 Condensed Consolidated StatementsCalifornia, N.A. committed to a plan for disposal of Cash Flows......................... 7 Notesits international correspondent banking business. All periods presented have been restated to Condensed Consolidated Financial Statements.................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Introduction............................................................ 27 Executive Overview...................................................... 27 Discontinued Operations................................................. 28 Critical Accounting Policies............................................ 29 Financial Performance................................................... 30 Net Interest Income..................................................... 34 Noninterest Income...................................................... 37 Noninterest Expense..................................................... 37 Income Tax Expense...................................................... 38 Loans................................................................... 38 Cross-Border Outstandings............................................... 40 Reversal of Allowance for Credit Losses................................. 40 Allowance for Credit Losses............................................. 40 Nonperforming Assets.................................................... 44 Loans 90 Days or More Past Due and Still Accruing....................... 45 Quantitative and Qualitative Disclosures About Market Risk.............. 45 Liquidity Risk.......................................................... 48 Regulatory Capital...................................................... 48 Business Segments....................................................... 49 Regulatory Matters...................................................... 57 Factors That May Affect Future Results.................................. 58 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 64 Item 4. Controls and Procedures........................................... 64 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................. 65 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 65 Item 6. Exhibits.......................................................... 65 Signatures................................................................ 66
PART I. FINANCIAL INFORMATION UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED) AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2005 CHANGE - --------------------------------------------- ------------- ------------- ------ RESULTS OF OPERATIONS: Net interest income(1).......................................................... $407,590 $465,193 14.13% Reversal of allowance for loan losses........................................... (10,939) (15,000) 37.12 Noninterest income.............................................................. 197,120 212,188 7.64 Noninterest expense(2).......................................................... 359,576 396,696 10.32 ----------- ----------- Income before income taxes(1)................................................... 256,073 295,685 15.47 Taxable-equivalent adjustment................................................... 1,012 1,051 3.85 Income tax expense.............................................................. 98,121 93,388 (4.82) ----------- ----------- Income from continuing operations............................................... 156,940 201,246 28.23 Income (loss) from discontinued operations, net of taxes........................ 6,498 (15,961) nm ----------- ----------- Net income...................................................................... $163,438 $185,285 13.37% =========== =========== PER COMMON SHARE: Basic earnings: From continuing operations.................................................... $1.06 $1.39 31.13% Net income.................................................................... 1.11 1.28 15.32 Diluted earnings: From continuing operations.................................................... 1.04 1.36 30.77 Net income.................................................................... 1.09 1.26 15.60 Dividends(3).................................................................... 0.36 0.41 13.89 Book value (end of period)...................................................... 28.04 30.07 7.24 Common shares outstanding (end of period)(4).................................... 147,163,392 144,584,972 (1.75) Weighted average common shares outstanding--basic(4)............................ 147,554,853 144,459,465 (2.10) Weighted average common shares outstanding--diluted(4).......................... 150,379,127 147,613,377 (1.84) BALANCE SHEET (END OF PERIOD): Total assets(8)................................................................. $46,990,605 $51,298,842 9.17% Total loans..................................................................... 26,902,191 32,004,747 18.97 Nonaccrual loans................................................................ 178,840 34,980 (80.44) Nonperforming assets............................................................ 189,447 37,507 (80.20) Total deposits.................................................................. 37,203,790 41,648,355 11.95 Medium and long-term debt....................................................... 820,460 806,353 (1.72) Junior subordinated debt........................................................ 15,904 15,451 (2.85) Stockholders' equity............................................................ 4,126,159 4,346,956 5.35 BALANCE SHEET (PERIOD AVERAGE): Total assets.................................................................... $43,472,704 $48,212,029 10.90% Total loans..................................................................... 26,301,914 32,177,816 22.34 Earning assets.................................................................. 39,402,003 43,371,177 10.07 Total deposits.................................................................. 35,937,713 40,293,528 12.12 Stockholders' equity............................................................ 4,067,953 4,275,122 5.09 FINANCIAL RATIOS: Return on average assets:(5) From continuing operations.................................................... 1.44% 1.66% Net income.................................................................... 1.50 1.52 Return on average stockholders' equity:(5) From continuing operations.................................................... 15.35 18.68 Net income.................................................................... 15.98 17.19 Efficiency ratio(6)............................................................. 59.46 59.07 Net interest margin(1).......................................................... 4.13 4.27 Dividend payout ratio........................................................... 33.96 29.50 Tangible equity ratio........................................................... 8.03 7.57 Tier 1 risk-based capital ratio(8).............................................. 9.99 8.88 Total risk-based capital ratio(8)............................................... 12.52 10.86 Leverage ratio(8)............................................................... 8.27 7.96 Allowance for credit losses to total loans(7)................................... 1.79 1.39 Allowance for credit losses to nonaccrual loans(7).............................. 269.31 1,272.29 Net loans charged off (recovered) to average total loans(5)..................... 0.11 0.20 Nonperforming assets to total loans and foreclosed assets....................... 0.70 0.12 Nonperforming assets to total assets(8)......................................... 0.40 0.07 - --------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) At September 30, 2004 and 2005, there were no expenses related to the allowance for losses on off-balance sheet commitments. (3) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (4) Common shares outstanding reflect common shares issued less treasury shares. (5) Annualized. (6) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the provision for losses on off-balance sheet commitments, as a percentage of net interest income (taxable-equivalent basis) and noninterest income. (7) The allowance for credit losses ratios include the allowance for losses on off-balance sheet commitments. (8) End of period total assets used in calculating these ratios include those of discontinued operations.
2
PART I. FINANCIAL INFORMATION UNIONBANCAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (UNAUDITED) AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, PERCENT (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2005 CHANGE - --------------------------------------------- ------------- ------------- ------ RESULTS OF OPERATIONS: Net interest income(1).......................................................... $1,198,862 $1,361,638 13.58% Reversal of allowance for loan losses........................................... (29,038) (40,683) 40.10 Noninterest income.............................................................. 700,434 621,367 (11.29) Noninterest expense(2).......................................................... 1,084,751 1,178,048 8.60 ----------- ----------- Income before income taxes(1)................................................... 843,583 845,640 0.24 Taxable-equivalent adjustment................................................... 2,617 3,124 19.37 Income tax expense.............................................................. 308,989 274,041 (11.31) ----------- ----------- Income from continuing operations............................................... 531,977 568,475 6.86 Income (loss) from discontinued operations, net of taxes........................ 20,045 (14,031) nm ----------- ----------- Net income...................................................................... $552,022 $554,444 0.44% =========== =========== PER COMMON SHARE: Basic earnings: From continuing operations.................................................... $3.61 $3.91 8.31% Net income.................................................................... 3.74 3.82 2.14 Diluted earnings: From continuing operations.................................................... 3.55 3.84 8.17 Net income.................................................................... 3.68 3.74 1.63 Dividends(3).................................................................... 1.03 1.18 14.56 Book value (end of period)...................................................... 28.04 30.07 7.24 Common shares outstanding (end of period)(4).................................... 147,163,392 144,584,972 (1.75) Weighted average common shares outstanding--basic(4)............................ 147,547,527 145,325,640 (1.51) Weighted average common shares outstanding--diluted(4).......................... 150,026,647 148,062,139 (1.31) BALANCE SHEET (END OF PERIOD): Total assets(8)................................................................. $46,990,605 $51,298,842 9.17% Total loans..................................................................... 26,902,191 32,004,747 18.97 Nonaccrual loans................................................................ 178,840 34,980 (80.44) Nonperforming assets............................................................ 189,447 37,507 (80.20) Total deposits.................................................................. 37,203,790 41,648,355 11.95 Medium and long-term debt....................................................... 820,460 806,353 (1.72) Junior subordinated debt........................................................ 15,904 15,451 (2.85) Stockholders' equity............................................................ 4,126,159 4,346,956 5.35 BALANCE SHEET (PERIOD AVERAGE): Total assets.................................................................... $42,325,380 $47,342,684 11.85% Total loans..................................................................... 25,328,476 30,843,202 21.77 Earning assets.................................................................. 38,352,522 42,575,954 11.01 Total deposits.................................................................. 35,395,054 39,304,760 11.05 Stockholders' equity............................................................ 3,984,194 4,209,884 5.66 FINANCIAL RATIOS: Return on average assets:(5) From continuing operations.................................................... 1.68% 1.61% Net income.................................................................... 1.74 1.57 Return on average stockholders' equity:(5) From continuing operations.................................................... 17.84 18.05 Net income.................................................................... 18.51 17.61 Efficiency ratio(6)............................................................. 57.09 59.74 Net interest margin(1).......................................................... 4.17 4.27 Dividend payout ratio........................................................... 28.53 30.18 Tangible equity ratio........................................................... 8.03 7.57 Tier 1 risk-based capital ratio(8).............................................. 9.99 8.88 Total risk-based capital ratio(8)............................................... 12.52 10.86 Leverage ratio(8)............................................................... 8.27 7.96 Allowance for credit losses to total loans(7)................................... 1.79 1.39 Allowance for credit losses to nonaccrual loans(7).............................. 269.31 1,272.29 Net loans charged off (recovered) to average total loans(5)..................... 0.15 (0.02) Nonperforming assets to total loans and foreclosed assets....................... 0.70 0.12 Nonperforming assets to total assets(8)......................................... 0.40 0.07 - --------------- (1) Amounts are on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Included in noninterest expense at September 30, 2005 was a $1 million reversal of the allowance for losses on off-balance sheet commitments. (3) Dividends per share reflect dividends declared on UnionBanCal Corporation's common stock outstanding as of the declaration date. (4) Common shares outstanding reflects common shares issued less treasury shares. (5) Annualized. (6) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the provision for losses on off-balance sheet commitments, as a percentage of net interest income (taxable-equivalent basis) and noninterest income. (7) The allowance for credit losses ratios include the allowance for losses on off-balance sheet commitments. (8) End of period total assets used in calculating these ratios include those of discontinued operations.
3 ITEM 1. FINANCIAL STATEMENTS
UnionBanCal Corporation and Subsidiaries Condensed Consolidated Statements of Income(1)(Unaudited) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2005 2004 2005 - --------------------------------------------- ---- ---- ---- ---- INTEREST INCOME Loans....................................................................... $341,532 $461,381 $991,081 $1,304,324 Securities.................................................................. 106,172 97,569 320,077 300,868 Interest bearing deposits in banks.......................................... 1,656 303 1,946 1,432 Federal funds sold and securities purchased under resale agreements......... 1,616 6,777 6,503 14,406 Trading account assets...................................................... 1,140 1,062 2,558 2,902 -------- -------- --------- ---------- Total interest income..................................................... 452,116 567,092 1,322,165 1,623,932 -------- -------- --------- ---------- INTEREST EXPENSE Domestic deposits........................................................... 34,725 78,983 100,193 197,801 Foreign deposits............................................................ 370 3,813 951 8,247 Federal funds purchased and securities sold under repurchase agreements..... 3,013 294 3,540 9,330 Commercial paper............................................................ 1,697 9,394 3,883 21,761 Medium and long-term debt................................................... 4,369 8,520 11,201 22,511 Trust notes................................................................. 242 239 2,553 715 Other borrowed funds........................................................ 1,122 1,707 3,599 5,053 -------- -------- --------- ---------- Total interest expense.................................................... 45,538 102,950 125,920 265,418 -------- -------- --------- ---------- NET INTEREST INCOME........................................................... 406,578 464,142 1,196,245 1,358,514 Reversal of allowance for loan losses(2).................................... (10,939) (15,000) (29,038) (40,683) -------- -------- --------- ---------- Net interest income after reversal of allowance for loan losses........... 417,517 479,142 1,225,283 1,399,197 -------- -------- --------- ---------- NONINTEREST INCOME Service charges on deposit accounts......................................... 85,667 84,822 252,974 243,835 Trust and investment management fees........................................ 39,089 43,500 111,699 127,053 Insurance commissions....................................................... 17,463 17,819 57,850 59,176 Merchant banking fees....................................................... 11,682 11,257 26,863 35,637 Foreign exchange gains, net................................................. 8,268 8,849 24,209 25,570 Brokerage commissions and fees.............................................. 8,527 5,290 24,847 22,867 Card processing fees, net................................................... 4,653 6,597 28,901 18,668 Securities gains (losses), net.............................................. (6) (320) 1,612 (13,289) Other....................................................................... 21,777 34,374 171,479 101,850 -------- -------- --------- ---------- Total noninterest income.................................................. 197,120 212,188 700,434 621,367 -------- -------- --------- ---------- NONINTEREST EXPENSE Salaries and employee benefits.............................................. 209,554 236,124 632,463 701,858 Net occupancy............................................................... 32,029 34,336 93,517 100,251 Outside services............................................................ 19,572 28,533 52,130 76,248 Equipment................................................................... 15,949 15,832 49,370 50,176 Software.................................................................... 12,790 14,374 37,309 43,072 Professional services....................................................... 11,976 11,240 33,410 36,131 Communications.............................................................. 10,234 10,808 31,728 30,950 Foreclosed asset expense (income)........................................... (10) (3,435) 526 (5,606) Reversal of allowance for losses on off-balance sheet commitments(2)........ -- -- -- (1,000) Other....................................................................... 47,482 48,884 154,298 145,968 -------- -------- --------- ---------- Total noninterest expense................................................. 359,576 396,696 1,084,751 1,178,048 -------- -------- --------- ---------- Income from continuing operations before income taxes....................... 255,061 294,634 840,966 842,516 Income tax expense.......................................................... 98,121 93,388 308,989 274,041 -------- -------- --------- ---------- INCOME FROM CONTINUING OPERATIONS............................................. 156,940 201,246 531,977 568,475 -------- -------- --------- ---------- Income (loss) from discontinued operations before income taxes.............. 10,592 (25,612) 32,673 (22,385) Income tax expense (benefit)................................................ 4,094 (9,651) 12,628 (8,354) -------- -------- --------- ---------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS.................................... 6,498 (15,961) 20,045 (14,031) -------- -------- --------- ---------- NET INCOME.................................................................... $163,438 $185,285 $552,022 $554,444 ======== ======== ========= ========== INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE--BASIC..................... $1.06 $1.39 $3.61 $3.91 NET INCOME PER COMMON SHARE--BASIC............................................ $1.11 $1.28 $3.74 $3.82 ======== ======== ========= ========== INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE--DILUTED................... $1.04 $1.36 $3.55 $3.84 NET INCOME PER COMMON SHARE--DILUTED.......................................... $1.09 $1.26 $3.68 $3.74 ======== ======== ========= ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--BASIC............................. 147,555 144,459 147,548 145,326 ======== ======== ========= ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--DILUTED........................... 150,379 147,613 150,027 148,062 ======== ======== ========= ========== - --------------- (1) In September 2005, Union Bank of California, N.A. committed to a plan for disposal of its international correspondent banking business. All periods presented have been restated to reflect the discontinued operations. (2) Beginning in the quarter ended March 31, 2005, the net change in the allowance for losses on off-balance sheet commitments was recognized separately from the change in the allowance for loan losses. Prior periods have not been restated.
reflect the discontinued operations.

See accompanying notes to condensed consolidated financial statements. 4
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2004 2004 2005 - ---------------------- ---- ---- ---- ASSETS Cash and due from banks........................................................... $ 2,036,226 $ 1,977,033 $ 2,163,149 Interest bearing deposits in banks................................................ 348,471 277,482 471,340 Federal funds sold and securities purchased under resale agreements............... 1,045,275 944,950 1,454,193 ----------- ----------- ----------- Total cash and cash equivalents............................................... 3,429,972 3,199,465 4,088,682 Trading account assets............................................................ 288,601 235,840 371,551 Securities available for sale: Securities pledged as collateral................................................ 124,896 144,240 158,878 Held in portfolio............................................................... 11,863,216 10,994,981 9,647,093 Loans (net of allowance for loan losses: September 30, 2004, $481,642; December 31, 2004, $399,156; September 30, 2005, $363,671)(1)................................ 26,420,549 28,710,259 31,641,076 Due from customers on acceptances................................................. 16,295 23,841 47,167 Premises and equipment, net....................................................... 497,899 526,543 509,922 Intangible assets................................................................. 60,977 61,737 46,781 Goodwill.......................................................................... 320,835 450,961 452,617 Other assets...................................................................... 1,768,710 1,731,354 2,318,507 Assets of discontinued operations to be disposed or sold(2)....................... 2,198,655 2,018,800 2,016,568 ----------- ----------- ----------- Total assets.................................................................. $46,990,605 $48,098,021 $51,298,842 =========== =========== =========== LIABILITIES Domestic deposits: Noninterest bearing............................................................. $18,903,588 $19,100,128 $20,541,706 Interest bearing................................................................ 17,838,599 19,402,379 20,475,166 Foreign deposits: Interest bearing................................................................ 461,603 216,999 631,483 ----------- ----------- ----------- Total deposits................................................................ 37,203,790 38,719,506 41,648,355 Federal funds purchased and securities sold under repurchase agreements........... 648,864 587,249 357,725 Commercial paper.................................................................. 615,816 824,887 859,515 Other borrowed funds.............................................................. 150,503 172,549 114,324 Acceptances outstanding........................................................... 16,295 23,841 47,167 Other liabilities(1).............................................................. 1,173,988 1,112,743 1,616,174 Medium and long-term debt......................................................... 820,460 816,113 806,353 Junior subordinated debt payable to subsidiary grantor trust...................... 15,904 15,790 15,451 Liabilities of discontinued operations to be extinguished or assumed(2)........... 2,218,826 1,533,099 1,486,822 ----------- ----------- ----------- Total liabilities............................................................. 42,864,446 43,805,777 46,951,886 ----------- ----------- ----------- Commitments and contingencies--See Note 10 STOCKHOLDERS' EQUITY Preferred stock: Authorized 5,000,000 shares, no shares issued or outstanding as of September 30, 2004, December 31, 2004, and September 30, 2005............................... -- -- -- Common stock, par value $1 per share at September 30, 2004, December 31, 2004 and September 30, 2005: Authorized 300,000,000 shares, issued 149,529,292 shares as of September 30, 2004, 152,191,818 shares as of December 31, 2004, and 153,960,915 shares as of September 30, 2005 149,529 152,192 153,961 Additional paid-in capital........................................................ 728,791 881,928 967,242 Treasury stock--2,365,900 shares as of September 30, 2004, 3,831,900 shares as of December 31, 2004 and 9,375,943 shares as of September 30, 2005................. (131,464) (223,361) (552,786) Retained earnings................................................................. 3,400,117 3,526,312 3,901,625 Accumulated other comprehensive loss.............................................. (20,814) (44,827) (123,086) ----------- ----------- ----------- Total stockholders' equity.................................................... 4,126,159 4,292,244 4,346,956 ----------- ----------- ----------- Total liabilities and stockholders' equity.................................... $46,990,605 $48,098,021 $51,298,842 =========== =========== =========== - --------------- (1) On December 31, 2004, UnionBanCal Corporation transferred the allowance related to losses on off-balance sheet commitments of $83 million from the allowance for loan losses to other liabilities. At September 30, 2005, the allowance related to losses on off-balance sheet commitments was $82 million. Periods prior to December 31, 2004 have not been restated. (2) In September 2005, Union Bank of California, N.A. committed to a plan for disposal of its international correspondent banking business. All prior periods presented have been restated to reflect the discontinued operations.

6




UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(1)

 

 

(Unaudited)

 

 

 

(Unaudited)

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2005

 

2005

 

2006

 

Assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,870,367

 

 

$

2,402,212

 

 

$

2,035,544

 

Interest bearing deposits in banks

 

73,667

 

 

771,164

 

 

170,187

 

Federal funds sold and securities purchased under resale agreements

 

1,695,835

 

 

796,500

 

 

513,777

 

Total cash and cash equivalents

 

3,639,869

 

 

3,969,876

 

 

2,719,508

 

Trading account assets

 

234,791

 

 

312,655

 

 

329,703

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Securities pledged as collateral

 

251,657

 

 

96,994

 

 

88,152

 

Held in portfolio

 

10,975,242

 

 

8,072,286

 

 

8,394,318

 

Loans (net of allowance for loan losses: March 31, 2005, $401,275; December 31, 2005, $351,532; March 31, 2006, $339,443)

 

29,377,186

 

 

32,744,063

 

 

33,189,425

 

Due from customers on acceptances

 

21,158

 

 

19,252

 

 

20,541

 

Premises and equipment, net

 

520,286

 

 

536,074

 

 

511,095

 

Intangible assets

 

56,751

 

 

42,616

 

 

39,186

 

Goodwill

 

450,125

 

 

454,015

 

 

453,489

 

Other assets

 

1,929,837

 

 

2,113,577

 

 

2,814,603

 

Assets of discontinued operations to be disposed or sold(1)

 

1,975,969

 

 

1,054,594

 

 

240,925

 

Total assets

 

$

49,432,871

 

 

$

49,416,002

 

 

$

48,800,945

 

Liabilities

 

 

 

 

 

 

 

 

 

Noninterest bearing

 

$

20,421,830

 

 

$

19,489,377

 

 

$

18,118,506

 

Interest bearing

 

19,993,149

 

 

20,592,862

 

 

21,037,398

 

Total deposits

 

40,414,979

 

 

40,082,239

 

 

39,155,904

 

Federal funds purchased and securities sold under repurchase agreements

 

400,570

 

 

651,529

 

 

292,758

 

Commercial paper

 

1,042,795

 

 

680,027

 

 

1,420,276

 

Other borrowed funds

 

126,662

 

 

134,485

 

 

66,472

 

Acceptances outstanding

 

21,158

 

 

19,252

 

 

20,541

 

Other liabilities

 

1,128,383

 

 

1,466,478

 

 

2,259,464

 

Medium and long-term debt

 

803,233

 

 

801,095

 

 

788,763

 

Junior subordinated debt payable to subsidiary grantor trust

 

15,677

 

 

15,338

 

 

15,225

 

Liabilities of discontinued operations to be extinguished or assumed(1)

 

1,372,191

 

 

1,005,859

 

 

201,664

 

Total liabilities

 

45,325,648

 

 

44,856,302

 

 

44,221,067

 

Commitments and contingencies—See Note 9

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Preferred stock:

 

 

 

 

 

 

 

 

 

Authorized 5,000,000 shares; no shares issued or outstanding as of March 31, 2005, December 31, 2005, and March 31, 2006

 

 

 

 

 

 

Common stock, par value $1 per share at March 31, 2005, December 31, 2005 and March 31, 2006:

 

 

 

 

 

 

 

 

 

Authorized 300,000,000 shares; issued 152,530,458 shares as of March 31, 2005, 154,469,215 shares as of December 31, 2005, and 154,832,175 shares as of March 31, 2006

 

152,530

 

 

154,469

 

 

154,832

 

Additional paid-in capital

 

896,855

 

 

994,956

 

 

1,018,943

 

Treasury stock—7,954,843 shares as of March 31, 2005, 10,262,143
shares as of December 31, 2005 and 11,429,843 shares as of March 31, 2006

 

(463,527

)

 

(612,732

)

 

(692,783

)

Retained earnings

 

3,656,187

 

 

4,141,400

 

 

4,258,533

 

Accumulated other comprehensive loss

 

(134,822

)

 

(118,393

)

 

(159,647

)

Total stockholders’ equity

 

4,107,223

 

 

4,559,700

 

 

4,579,878

 

Total liabilities and stockholders’ equity

 

$

49,432,871

 

 

$

49,416,002

 

 

$

48,800,945

 


(1)In September 2005, Union Bank of California, N.A. committed to a plan for disposal of its international correspondent banking business. All prior periods presented have been restated to reflect the discontinued operations.

See accompanying notes to condensed consolidated financial statements. 5
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) ACCUMULATED ADDITIONAL OTHER TOTAL NUMBER COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS' (IN THOUSANDS, EXCEPT SHARES) OF SHARES STOCK CAPITAL STOCK EARNINGS INCOME (LOSS) EQUITY - ----------------------------- --------- ----- ------- ----- -------- ------------- ------ BALANCE DECEMBER 31, 2003................. 146,000,156 $146,000 $555,156 $ (12,846) $2,999,884 $ 52,242 $3,740,436 -------- -------- --------- ---------- --------- ---------- Comprehensive income Net income--For the nine months ended September 30, 2004.................... 552,022 552,022 Other comprehensive income, net of tax: Net change in unrealized gains on cash flow hedges......................... (30,285) (30,285) Net change in unrealized losses on securities available for sale....... (43,404) (43,404) Foreign currency translation adjustment 633 633 ---------- Total comprehensive income................ 478,966 Dividend reinvestment plan................ 308 17 17 Deferred compensation--restricted stock awards.................................. 185 185 Stock options exercised................... 1,520,109 1,520 61,223 62,743 Stock issued in acquisitions.............. 2,008,719 2,009 112,569 114,578 Common stock repurchased(1)............... (174) (118,618) (118,792) Dividends declared on common stock, $1.03 per share(2)............................ (151,974) (151,974) -------- -------- --------- ---------- --------- ---------- Net change................................ 3,529 173,635 (118,618) 400,233 (73,056) 385,723 ----------- -------- -------- --------- ---------- --------- ---------- BALANCE SEPTEMBER 30, 2004................ 149,529,292 $149,529 $728,791 $(131,464) $3,400,117 $ (20,814) $4,126,159 =========== ======== ======== ========= ========== ========= ========== BALANCE DECEMBER 31, 2004................. 152,191,818 $152,192 $881,928 $(223,361) $3,526,312 $ (44,827) $4,292,244 -------- -------- --------- ---------- --------- ---------- Comprehensive income Net income--For the nine months ended September 30, 2005.................... 554,444 554,444 Other comprehensive income, net of tax: Net change in unrealized losses on cash flow hedges.................... (29,476) (29,476) Net change in unrealized losses on securities available for sale....... (48,846) (48,846) Foreign currency translation adjustment 79 79 Minimum pension liability adjustment.. (16) (16) ---------- Total comprehensive income................ 476,185 Dividend reinvestment plan................ -- Deferred compensation--restricted stock awards.................................. 215,363 215 12,956 (8,461) 4,710 Stock options exercised................... 1,553,734 1,554 72,358 73,912 Common stock repurchased(1)............... (329,425) (329,425) Dividends declared on common stock, $1.18 per share(2)............................ (170,670) (170,670) -------- -------- --------- ---------- --------- ---------- Net change................................ 1,769 85,314 (329,425) 375,313 (78,259) 54,712 ----------- -------- -------- --------- ---------- --------- ---------- BALANCE SEPTEMBER 30, 2005................ 153,960,915 $153,961 $967,242 $(552,786) $3,901,625 $(123,086) $4,346,956 =========== ======== ======== ========= ========== ========= ========== - --------------- (1) Common stock repurchased includes commission costs. (2) Dividends are based on UnionBanCal Corporation's shares outstanding as of the declaration date.

7




UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 

 

Additional

 

 

 

 

 

other

 

stock-

 

 

 

Number

 

Common

 

paid-in

 

Treasury

 

Retained

 

comprehensive

 

holders’

 

(In thousands, except shares)

 

of shares

 

stock

 

capital

 

stock

 

earnings

 

income (loss)

 

equity

 

BALANCE DECEMBER 31, 2004

 

152,191,818

 

$

152,192

 

$

881,928

 

$

(223,361

)

$

3,526,312

 

 

$

(44,827

)

 

$

4,292,244

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income—For the three months ended March 31, 2005

 

 

 

 

 

 

 

 

 

181,977

 

 

 

 

 

181,977

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses on cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

(23,894

)

 

(23,894

)

Net change in unrealized losses on securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

(66,382

)

 

(66,382

)

Foreign currency translation
adjustment

 

 

 

 

 

 

 

 

 

 

 

 

297

 

 

297

 

Minimum pension liability adjustment

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

(16

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91,982

 

Deferred compensation—restricted stock awards

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

100

 

Stock options exercised

 

338,640

 

338

 

14,927

 

 

 

 

 

 

 

 

 

15,265

 

Common stock repurchased(1)

 

 

 

 

 

 

 

(240,166

)

 

 

 

 

 

 

(240,166

)

Dividends declared on common stock, $0.36 per share(2)

 

 

 

 

 

 

 

 

 

(52,202

)

 

 

 

 

(52,202

)

Net change

 

 

 

338

 

14,927

 

(240,166

)

129,875

 

 

(89,995

)

 

(185,021

)

BALANCE MARCH 31, 2005

 

152,530,458

 

$

152,530

 

$

896,855

 

$

(463,527

)

$

3,656,187

 

 

$

(134,822

)

 

$

4,107,223

 

BALANCE DECEMBER 31, 2005

 

154,469,215

 

$

154,469

 

$

994,956

 

$

(612,732

)

$

4,141,400

 

 

$

(118,393

)

 

$

4,559,700

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income—For the three months ended March 31, 2006

 

 

 

 

 

 

 

 

 

172,945

 

 

 

 

 

172,945

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized losses on cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

(11,907

)

 

(11,907

)

Net change in unrealized losses on securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

(29,331

)

 

(29,331

)

Foreign currency translation
 adjustment

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

(16

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

131,691

 

Deferred compensation—restricted stock awards

 

2,925

 

3

 

204

 

 

 

3,105

 

 

 

 

 

3,312

 

Compensation expense—stock options

 

 

 

 

 

6,214

 

 

 

 

 

 

 

 

 

6,214

 

Stock options exercised

 

360,035

 

360

 

17,569

 

 

 

 

 

 

 

 

 

17,929

 

Common stock repurchased(1)

 

 

 

 

 

 

 

(80,051

)

 

 

 

 

 

 

(80,051

)

Dividends declared on common stock, $0.41 per share(2)

 

 

 

 

 

 

 

 

 

(58,917

)

 

 

 

 

(58,917

)

Net change

 

 

 

363

 

23,987

 

(80,051

)

117,133

 

 

(41,254

)

 

20,178

 

BALANCE MARCH 31, 2006

 

154,832,175

 

$

154,832

 

$

1,018,943

 

$

(692,783

)

$

4,258,533

 

 

$

(159,647

)

 

$

4,579,878

 


(1)Common stock repurchased includes commission costs.

(2)Dividends are based on UnionBanCal Corporation’s shares outstanding as of the declaration date.

See accompanying notes to condensed consolidated financial statements. 6
UNIONBANCAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2004 2005 - ---------------------- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................................ $ 552,022 $ 554,444 Income (loss) from discontinued operations, net of taxes........................................ 20,045 (14,031) ---------- ---------- Income from continuing operations, net of taxes................................................. 531,977 568,475 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Reversal of allowance for loan losses........................................................... (29,038) (40,683) Reversal of allowance for losses on off-balance sheet commitments............................... -- (1,000) Depreciation, amortization and accretion........................................................ 99,361 97,815 Provision for deferred income taxes............................................................. 29,411 71,328 Losses (gains) on securities available for sale................................................. (1,612) 13,289 Net increase in prepaid expenses................................................................ (96,002) (191,791) Net (increase) decrease in fees and other charges receivable.................................... 4,069 (130,382) Net increase (decrease) in accrued expenses..................................................... 22,905 4,709 Net increase (decrease) in unearned and deferred income......................................... (2,557) 134,111 Net increase (decrease) in other liabilities.................................................... 204,546 289,340 Net (increase) decrease in other assets, net of acquisitions.................................... 182,905 (276,735) Net (increase) decrease in trading account assets............................................... (36,580) (135,711) Loans originated for resale..................................................................... (661,342) (90,238) Net proceeds from sale of loans originated for resale........................................... 518,739 200,637 Other, net...................................................................................... 15,281 (16,484) Discontinued operations, net.................................................................... (62,352) 1,349 ---------- ---------- Total adjustments............................................................................... 187,734 (70,446) ---------- ---------- Net cash provided by (used in) operating activities............................................... 719,711 498,029 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale.............................................. 13,479 506,070 Proceeds from matured and called securities available for sale.................................... 3,170,560 1,753,484 Purchases of securities available for sale, net of acquisitions................................... (4,380,888) (1,036,810) Net (increase) decrease in loans, net of acquisitions............................................. (1,996,067) (2,984,426) Net cash provided by (paid in) acquisitions....................................................... 28,086 -- Other, net........................................................................................ (55,962) (47,776) Discontinued operations, net...................................................................... (155,348) 9,794 ---------- ---------- Net cash provided by (used in) investing activities............................................. (3,376,140) (1,799,664) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits, net of acquisitions.......................................... 2,512,609 2,928,849 Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements 367,896 (229,524) Net increase (decrease) in commercial paper and other borrowed funds.............................. 11,961 (23,597) Repayment of junior subordinated debt............................................................. (360,825) -- Common stock repurchased.......................................................................... (118,792) (329,425) Payments of cash dividends........................................................................ (144,146) (164,946) Other, net........................................................................................ 63,578 78,701 Discontinued operations, net...................................................................... 553,962 (69,219) ---------- ---------- Net cash provided by (used in) financing activities............................................. 2,886,243 2,190,839 ---------- ---------- Net increase (decrease) in cash and cash equivalents from continuing operations..................... 229,814 889,204 Cash and cash equivalents of continuing operations at beginning of period........................... 3,200,158 3,199,465 Effect of exchange rate changes on cash and cash equivalents........................................ -- 13 ---------- ---------- Cash and cash equivalents at end of period.......................................................... $3,429,972 $4,088,682 ========== ========== CASH PAID DURING THE PERIOD FOR: Interest.......................................................................................... $ 122,236 $ 226,584 Income taxes...................................................................................... 230,094 158,089 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisitions: Fair value of assets acquired................................................................... $ 991,887 $ -- Purchase price: Cash.......................................................................................... (33,772) -- Stock issued.................................................................................. (114,578) -- ---------- ---------- Liabilities assumed............................................................................. $ 843,537 $ -- ========== ========== Loans transferred to foreclosed assets (OREO)..................................................... $ 6,723 $ --

8




UnionBanCal Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

 

For the Three Months 
Ended March 31,

 

(Dollars in thousands)

 

2005

 

2006

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

181,977

 

$

172,945

 

Income (loss) from discontinued operations, net of taxes

 

2,226

 

(8,510

)

Income from continuing operations, net of taxes

 

179,751

 

181,455

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Reversal of allowance for loan losses

 

(12,119

)

(7,000

)

(Reversal of) provision for losses on off-balance sheet commitments

 

3,000

 

(3,000

)

Depreciation, amortization and accretion

 

40,885

 

35,336

 

Stock-based compensation—stock options

 

 

6,214

 

Stock-based compensation—restricted stock

 

100

 

3,312

 

Provision for deferred income taxes

 

37,605

 

50,398

 

(Gains) losses on sales of securities available for sale, net

 

(344

)

214

 

Net decrease in accrued expenses

 

(41,164

)

(58,878

)

Net increase (decrease) in unearned and deferred income

 

20,714

 

(2,100

)

Net (increase) decrease in trading account assets

 

1,049

 

(17,047

)

Net increase in prepaid expenses

 

(135,518

)

(87,878

)

Net (increase) decrease in fees and other charges receivable

 

73,848

 

(9,318

)

Net increase in other liabilities

 

14,107

 

816,916

 

Net increase in other assets

 

(155,264

)

(622,930

)

Loans originated for resale

 

(35,640

)

(58,529

)

Net proceeds from loans originated for resale

 

114,823

 

96,558

 

Excess tax benefit—stock options exercised

 

 

(3,900

)

Other, net

 

(10,694

)

1,708

 

Discontinued operations, net

 

32,315

 

126,736

 

Total adjustments

 

(52,297

)

266,812

 

Net cash provided by operating activities

 

127,454

 

448,267

 

Cash Flows from Investing Activities:

 

 

 

 

 

Proceeds from sales of securities available for sale

 

24,958

 

4,041

 

Proceeds from matured and called securities available for sale

 

347,619

 

389,888

 

Purchases of securities available for sale

 

(575,295

)

(758,213

)

Net (purchases) sales of premises and equipment

 

(15,472

)

2,923

 

Net increase in loans

 

(723,287

)

(478,230

)

Other, net

 

(42

)

708

 

Discontinued operations, net

 

11,487

 

622,138

 

Net cash used in investing activities

 

(930,032

)

(216,745

)

Cash Flows from Financing Activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

1,695,473

 

(926,336

)

Net decrease in federal funds purchased and securities sold under repurchase agreements

 

(186,679

)

(358,771

)

Net increase in commercial paper and other borrowed funds

 

172,021

 

672,236

 

Common stock repurchased

 

(240,166

)

(80,051

)

Payments of cash dividends

 

(53,548

)

(59,103

)

Stock options exercised

 

15,265

 

17,929

 

Other, net

 

297

 

(16

)

Discontinued operations, net

 

(160,043

)

(747,910

)

Net cash provided by (used in) financing activities

 

1,242,620

 

(1,482,022

)

Net increase (decrease) in cash and cash equivalents

 

440,042

 

(1,250,500

)

Cash and cash equivalents at beginning of period

 

3,199,854

 

3,969,876

 

Effect of exchange rate changes on cash and cash equivalents

 

(27

)

132

 

Cash and cash equivalents at end of period

 

$

3,639,869

 

$

2,719,508

 

Cash Paid During the Period For:

 

 

 

 

 

Interest

 

$

54,715

 

$

143,090

 

Income taxes

 

41,325

 

111,783

 

See accompanying notes to condensed consolidated financial statements. 7 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS

9




UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1—Basis of Presentation and Nature of Operations

The unaudited condensed consolidated financial statements of UnionBanCal Corporation and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission (SEC). However, they do not include all of the disclosures necessary for annual financial statements in conformity with US GAAP. The results of operations for the period ended September 30, 2005March 31, 2006 are not necessarily indicative of the operating results anticipated for the full year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2004.2005. The preparation of financial statements in conformity with US GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

UnionBanCal Corporation is a commercial bank holding company and has, as its major subsidiary, a banking subsidiary, Union Bank of California, N.A. (the Bank). The Company provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations, primarily in California, Oregon, and Washington, but also nationally. Upon completion of the exit from the international correspondent banking business (see Note 3 "Discontinued Operations"“Discontinued Operations” of this quarterly reportQuarterly Report on Form 10-Q), the Bank will continue to provide trade finance and other international financial services (but not international correspondent banking) to customers.

Under a previously announced stock repurchase plans,plan that provided for repurchases up to $200 million, the Company was authorized to repurchase $162$22 million of the Company'sCompany’s common stock as of September 30, 2005.March 31, 2006. The Company repurchased $210 million, $40 million and $89$80 million of common stock in 2004, the first quarter of 2005 and the second quarter of 2005, respectively, as part of these repurchase plans (excluding commission costs). There were no repurchases of common stock2006, compared to $40 million in the thirdfirst quarter of 2005. Under a separate stock repurchase agreement, the Company repurchased $200 million of its common stock in Februarythe first quarter 2005, from its majority owner, The Bank of Tokyo-Mitsubishi,Tokyo-Mitsubishi UFJ, Ltd. (BTM)(BTMU), with no comparable repurchases in the first quarter 2006. BTMU, which is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc. At September 30, 2005, BTM, owned approximately 6163 percent of the Company'sCompany’s outstanding common stock. stock at March 31, 2006.

Certain amounts for prior periods have been reclassified to conform to current financial statement presentation. STOCK-BASED COMPENSATION As allowed under

Stock-Based Compensation

On January 1, 2006, the provisions ofCompany adopted Statement of Financial Accounting StandardsStandard (SFAS) No. 123R, “Share-Based Payment,” a revision of SFAS No. 123, "Accounting“Accounting for Stock-Based Compensation,"” and elected to use the modified prospective application method to transition to the new accounting standard. SFAS No. 123R requires that compensation costs related to share-based payment transactions be recognized in the financial statements. Measurement of the cost of employee service is based on the grant-date fair value of the equity or liability instrument issued. SFAS 123R also prescribes that estimated forfeitures of shares are to be included in the calculation of compensation expense.

10




UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 1—Basis of Presentation and Nature of Operations (Continued)

Under the modified prospective transition method, compensation cost is recognized as amended,of January 1, 2006 for the portion of outstanding stock option awards for which the requisite service has not yet been rendered. The cost will be recognized over the period during which the employees are required to provide service. The after-tax impact of the adoption of SFAS 123R on income from continuing operations was a reduction of $3.8 million. The corresponding impact to both basic and diluted earnings per share was a reduction of $0.03 per share. Cash flows from operating activities increased as a result of this non-cash adjustment to net income in the amount of $6.2 million.

For the period ended March 31, 2005, as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has chosen to continue to recognizerecognized compensation expense using the intrinsic value-based method of valuing stock options prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting“Accounting for Stock Issued to Employees"Employees” and related Interpretations. Under the intrinsic value-based method, compensation cost iswas measured as the amount by which the quoted market price of the Company'sCompany’s stock at the date of grant exceeds the stock option exercise price. 8 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS (CONTINUED) For the quarter ended March 31, 2005, options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of the grant and, therefore, were not included in compensation expense.

At September 30, 2005,March 31, 2006, the Company had two stock-based employee compensation plans. For further discussion concerning the Company'sCompany’s stock-based employee compensation plans see Note 15 of the Notes11 to these Condensed Consolidated Financial Statements included inand Note 16 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The value of the restricted stock awards issued under the plans has been reflected in compensation expense.2005. Options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grantgrant. The value of the restricted stock awards issued under the plans and therefore, werethe value of that portion of outstanding option awards for which the requisite service has not included inyet been rendered is being amortized over the remaining service period as compensation expense as allowed by current US GAAP. expense.

The following table illustrates the effect on net income, which includes discontinued operations, and corresponding earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.compensation for the three months ended March 31, 2005. For the purpose of this disclosure, the Company has recognized compensation expense for graded vesting on a straight-line basis and without regarddid not include an estimate for forfeitures.
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2004 2005 2004 2005 - ---------------------- ---- ---- ---- ---- AS REPORTED NET INCOME........................................................... $163,438 $185,285 $552,022 $554,444 Add: stock-based employee compensation expense included in reported net income, net of income taxes............................................................ 34 1,274 114 2,908 Deduct: total stock-based employee compensation expense, net of income taxes..... 6,744 6,086 20,039 18,445 -------- -------- -------- -------- Pro forma net income, after stock-based employee compensation expense............ $156,728 $180,473 $532,097 $538,907 ======== ======== ======== ======== NET INCOME PER COMMON SHARE--BASIC As reported.................................................................. $1.11 $1.28 $3.74 $3.82 Pro forma.................................................................... $1.06 $1.25 $3.61 $3.71 NET INCOME PER COMMON SHARE--DILUTED As reported.................................................................. $1.09 $1.26 $3.68 $3.74 Pro forma.................................................................... $1.04 $1.23 $3.55 $3.66
Compensation cost associated with the Company's unvested restricted stock issued under the management stock plan is measured based on the market price of the stock at the grant date

 

 

For the Three 
Months Ended

 

(Dollars in thousands)

 

March 31, 2005

 

As reported net income

 

 

$

181,977

 

 

Add: stock-based employee compensation expense included in reported net income, net of income taxes

 

 

62

 

 

Deduct: total stock-based employee compensation expense, net of income taxes

 

 

5,606

 

 

Pro forma net income, after stock-based employee compensation expense

 

 

$

176,433

 

 

Net income per common share—basic

 

 

 

 

 

As reported

 

 

$

1.24

 

 

Pro forma

 

 

$

1.20

 

 

Net income per common share—diluted

 

 

 

 

 

As reported

 

 

$

1.21

 

 

Pro forma

 

 

$

1.18

 

 

11




UnionBanCal Corporation and is expensed over the vesting period. Compensation costSubsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 2—Recently Issued and Proposed Accounting Pronouncements

Accounting for unvested stock option awards is based upon the fair value method. NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS Share-Based Payments

In December 2003, 2004, the Financial Accounting Standards Board (FASB), issued SFAS No. 132R, a revision of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106." The Statement expands the disclosure requirements of SFAS No. 132 to include information describing types of plan assets, investment strategy, measurement date(s)123 (revised 2004), plan obligations, cash flows, and components of net periodic benefit costs of defined pension plans 9 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) and other defined benefit postretirement plans. The Statement was effective for financial statements with fiscal years ending after December 15, 2003, with additional disclosure of expected benefits to be paid in each of the next five years and in the aggregate for the five years thereafter required for fiscal years ending after June 15, 2004. The disclosures required under SFAS No. 132R are contained in Note 11 of these condensed consolidated financial statements. ACCOUNTING FOR SHARE-BASED PAYMENTS In December 2004, the FASB issued SFAS No. 123R, "Share--Based Payment", a revision of SFAS No. 123.“Share-Based Payment.” This Statement requires that compensation costs related to share-based payment transactions be recognized in the financial statements. Measurement of the cost of employee service will be based on the grant-date fair value of the equity or liability instruments issued. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. Additionally, liability awards will be remeasured each reporting period. Statement 123R replaces SFAS No. 123, "Accounting“Accounting for Stock-Based Compensation"Compensation” and supersedessupercedes APB Opinion No. 25, "Accounting“Accounting for Stock Issued to Employees." This Statement is effective for annual periods beginning after June 15, 2005 and requires adoption using a modified prospective application or a modified retrospective application. The Statement is effective for interim periods beginning after June 15, 2005. However, on April 14, 2005, the SEC issued rule 2005-57, which allowsallowed companies to delay implementation of the Statement to the beginning of the next fiscal year. The Company has not yet concludedadopted Statement 123R on January 1, 2006 under the modified prospective method, which resulted in an increase in noninterest expense of adoption allowed byapproximately $6.2 million in the Statement and is currently evaluating the impact of this accounting guidance on its financial condition and results of operations.quarter ended March 31, 2006. Disclosure required under SFAS No. 123123R is shown in Note 1 and Note 11 of these condensed consolidated financial statements. EXCHANGES OF NONMONETARY ASSETS

Exchanges of Nonmonetary Assets

In December 2004, the FASB issued SFAS No. 153, "Exchanges“Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29." This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of the Statement are effective for nonmonetary asset exchanges occurring in fiscal periodperiods beginning after June 15, 2005. TheAt adoption, of this Statement did not have a materialthere was no impact on the Company'sCompany’s financial position or results of operations. ACCOUNTING CHANGES AND ERROR CORRECTIONS

Accounting Changes and Error Corrections

In May 2005, the FASB issued SFAS No. 154, "Accounting“Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." The Statement requires that a voluntary change in accounting principle be applied retrospectively to all prior periodperiods financial statements presented, unless impracticable to do so. It also provides that a change in method of depreciation or amortization for long-lived nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle, with the change applied prospectively and that correction of errors in previously issued financial statements should be termed a "restatement."“restatement.” The Statement is effective January 1, 2006. At adoption, there was no impact on the Company’s financial position or results of operations.

Accounting for Certain Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” The Statement allows financial instruments that have embedded derivatives to be accounted for as a whole, (eliminating the need to bifurcate the derivative from its host) if the holder elects to irrevocably account for the whole instrument

12




UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 2—Recently Issued and Proposed Accounting Pronouncements (Continued)

on a fair value basis. The Statement is effective for fiscal years 10 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) beginningall financial instruments acquired or issued after December 15, 2005.31, 2006. Management believes that adopting this Statement will not have a material impact on the Company'sCompany’s financial position or results of operations. CONSOLIDATION OF VARIABLE INTEREST ENTITIES

Accounting for Servicing of Financial Assets

In January 2003,March 2006, the FASB issued InterpretationSFAS No. 46 (FIN 46), "Consolidation156, “Accounting for Servicing of Variable Interest Entities." FIN 46 provides guidance on how to identify a variable interest entity (VIE),Financial Assets—an amendment of FASB Statement No. 140.” The Statement requires that all separately recognized servicing assets and when the assets,servicing liabilities noncontrolling interests and results of operations of a VIE need to be included in a company's consolidated financial statements. A VIE exists when either the total equity investmentinitially measured at risk is not sufficient to permit thefair value, if practicable. It allows an entity to finance its activities by itself,choose one of two subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: the amortization method or the equity investors lack a controlling financial interestfair value method. Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or they have voting rights thatservicing loss. Under the fair value method, servicing assets and liabilities are not proportionate to their economic interest. A company that holds variable interestsrecorded at fair value each reporting period with any changes reported in an entity will need to consolidate that entity if the company's interest in the VIEcurrent period earnings. The Statement is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the VIE's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. In December 2003, the FASB issued FIN 46R, a revision of FIN 46. FIN 46R clarifies that only the holder of a variable interest can ever be a VIE's primary beneficiary. FIN 46R delays the effective date of FIN 46 for all entities created subsequent to January 31, 2003 and non-SPEs (special-purpose entities) created prior to February 1, 2003 to reporting periods ending after March 15, 2004. Entities created prior to February 1, 2004 and defined as SPEs must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46R by the first reporting period ending after December 15, 2003. The adoption of FIN 46Rservicing assets on January 1, 2004 did2007. Management believes that adopting this Statement will not have a material impact on the Company'sCompany’s financial position or results of operations. ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN

Accounting for Conditional Asset Retirement Obligations

In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” FIN 47 generally applies to long-lived assets and requires a liability to be recognized for a conditional asset retirement obligation if the fair value of that liability can be reasonably estimated. A TRANSFER In December 2003, under clearanceconditional asset retirement obligation is defined as a legal obligation to perform an activity associated with an asset retirement in which the timing and/or method of settlement are conditional on a future event that may or may not occur or be within the control of the FASB,company. A liability should be recognized when incurred (based on its fair value at that date), which generally would be upon the Accounting Standards Executive Committee (AcSEC)acquisition or construction of the AICPA issued Statementrelated asset. Upon recognition, the offset to the liability would be capitalized as part of Position (SOP) 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." This SOP establishes accounting standards for discounts on purchased loans when the discountcost of the asset and depreciated over the estimated useful life of that asset. The Interpretation is attributable to credit quality.effective no later than December 31, 2005. The SOP requires that the loan discount, rather than contractual amounts, establishes the investor's estimate of undiscounted expected future principal and interest cash flows as a benchmark for yield and impairment measurements. The SOP prohibits the carryover or creation of a valuation allowanceCompany adopted FIN 47 in the initial accounting for these loans. This SOP is effective for loans acquired in years beginning after December 15, 2004. At adoption, there was no impactfourth quarter 2005 without material effect on the Company'sits financial position or results of operations. DETERMINING WHETHER A GENERAL PARTNER CONTROLS A LIMITED PARTNERSHIP

Determining Whether a General Partner Controls a Limited Partnership

In June 2005, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 04-5, "Determining“Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights." The EITF reached a consensus that the general partners in a limited partnership are presumed to control that limited partnership regardless of the extent of the general partners'partners’ ownership interest in the limited partnership. The presumption of control by the general partner can be overcome if the limited partners have either (a) the substantive ability to dissolve the limited partnership or remove the general partners without cause or (b) substantive participating 11 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) rights. The guidance is effective for all limited partnerships created or modified after June 29, 2005 and for all existing limited partnerships beginning January 1, 2006. Management believes that adopting this guidance will not have a materialAt adoption, there was no impact on the Company'sCompany’s financial position or results of operations. NOTE 3--DISCONTINUED OPERATIONS

13




UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 2—Recently Issued and Proposed Accounting Pronouncements (Continued)

Accounting for Defined Benefit Pension and Other Postretirement Plans—Exposure Draft

In March 2006, the FASB issued an Exposure Draft, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This proposed Statement would require a company that sponsors a defined benefit pension plan or other postretirement benefit plan to fully recognize, as an asset or liability, the amount by which the defined-benefit-postretirement obligation is over- or under-funded. The amount would be measured as the difference between the fair value of plan assets and the projected benefit obligation. The proposed Statement would result in the immediate recognition of unrecognized prior service costs and credits and unrecognized net actuarial gains or losses as components of other comprehensive income with any unrecognized transition obligation or asset recorded as an adjustment to beginning retained earnings. The final statement is expected to be issued during the third quarter 2006, to be effective as of December 31, 2006. Based on guidance in the current exposure draft, the Company’s stockholders’ equity at December 31, 2005 would have been reduced by approximately six percent, if adopted.

Note 3—Discontinued Operations

During the third quarter 2005, the Bank signed a definitive agreement to sell its international correspondent banking operations (previously reported as the International Banking Group for segment reporting) to Wachovia Bank, N.A. effective October 6, 2005. Effective third quarter 2005, the

The Company is accountinghas accounted for this transaction as a discontinued operation and has restated all of its prior period financial statements. The principal legal closingassets of the discontinued operations were reclassified as “held for sale” and accounted for at the lower of cost or fair value less the costs to sell. In determining the timing for recognizing the transaction took place on October 6, 2005, withas a discontinued operation, the Bank receiving $245 million inconcluded that the operations and cash from Wachovia Bank, N.A. The Bank may also earn a contingent payment not to exceed $45 million, based on the results of conversionflows of the international correspondent banking customer base to Wachovia Bank, N.A. Any such contingent payment woulddisposal group will be earned and receivedeliminated at the end of the transition period in the second quarter of 2006. At the principal closing, no loans or other assets were acquired by Wachovia Bank, N.A., and no liabilities were assumed. The Bank continues to operate this international business, and will continue to do so over a transition period of several months, during which it is expected that a majority of the Bank's international correspondent banking customers will transfer to Wachovia Bank, N.A. In conjunction with the customer conversion process during the fourth quarter of 20052006 and the first quarter of 2006, it is expected that certain loans and other assets of the businessBank will be acquired by Wachovia Bank, N.A. and certain related liabilities may be assumed. Wachovia Bank, N.A. will paynot have any significant continuing involvement in cash to the Bank an amount equal to the net book value of assets acquired less any liabilities assumed. The Bank expects to complete its exit from the international correspondent banking business by the second quarter 2006. As customers are transferredbusiness.

Interest expense was allocated to Wachovia Bank, N.A.discontinued operations based on average net assets. The amount of interest expense allocated to discontinued operations during the comingthree months the Bank's international correspondent banking revenue will decline. International correspondent banking expenses will also decline, but not necessarilyended March 31, 2005 and 2006 was $2.5 million and $0.6 million, respectively.

The severance reserve balances at the same rate as revenue. 12 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3--DISCONTINUED OPERATIONS (CONTINUED) December 31, 2005 and March 31, 2006 were $21.7 million and $16.2 million, respectively. The decrease of $5.5 million from December 31, 2005 primarily related to cash payments to employees.

14




UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 3—Discontinued Operations (Continued)

At September 30,March 31, 2005 the Bank recordedand 2006, all assets related to the discontinued operations were recorded at the lower of cost or fair value.value, less costs of disposal. The assets and liabilities identified as discontinued operations were comprised of the following:
(DOLLARS IN THOUSANDS) DECEMBER 31, 2004 SEPTEMBER 30, 2005 - ---------------------- ----------------- ------------------- ASSETS Cash and due from banks................................................................ $ 134,152 $ 77,738 Interest bearing deposits in banks..................................................... 214,423 245,371 Loans.................................................................................. 1,599,542 1,589,905 Due from customers on acceptances...................................................... 32,074 48,038 Premises and equipment................................................................. 3,888 3,030 Other assets........................................................................... 34,721 52,486 ---------- ---------- Assets of discontinued operations to be disposed or sold............................... $2,018,800 $2,016,568 ========== ========== LIABILITIES Noninterest bearing deposits........................................................... $ 541,467 $ 508,705 Interest bearing deposits.............................................................. 914,863 878,406 Other liabilities...................................................................... 76,769 99,711 ---------- ---------- Liabilities of discontinued operations to be extinguished or assumed................... $1,533,099 $1,486,822 ========== ==========

(Dollars in thousands)

 

March 31,
2005

 

March 31,
2006

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

92,136

 

$

108,284

 

Interest bearing deposits in banks

 

224,029

 

18,489

 

Loans

 

1,584,124

 

101,134

 

Due from customers on acceptances

 

34,714

 

3,542

 

Premises and equipment

 

3,634

 

3

 

Other assets

 

37,332

 

9,473

 

Assets of discontinued operations to be disposed or sold

 

$

1,975,969

 

$

240,925

 

Liabilities

 

 

 

 

 

Noninterest bearing deposits

 

$

530,237

 

$

124,321

 

Interest bearing deposits

 

766,049

 

36,440

 

Other liabilities

 

75,905

 

40,904

 

Liabilities of discontinued operations to be extinguished or assumed

 

$

1,372,191

 

$

201,664

 

The components of income from discontinued operations for the three and nine months ended September 30, 2004March 31, 2005 and 2005,2006, respectively are:
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- ------------------- (DOLLARS IN THOUSANDS) 2004 2005 2004 2005 - ---------------------- ---- ---- ---- ---- Net interest income............................................................ $ 5,512 $ 5,400 $16,124 $15,683 Provision for loan losses...................................................... 938 -- 4,038 6,683 Noninterest income............................................................. 18,833 21,233 57,733 56,165 Noninterest expense............................................................ 12,815 52,245 37,146 87,550 ------- -------- ------- ------- Income (loss) from discontinued operations before income taxes................. 10,592 (25,612) 32,673 (22,385) Income tax expense (benefit)................................................... 4,094 (9,651) 12,628 (8,354) ------- -------- ------- -------- Income (loss) from discontinued operations..................................... $ 6,498 $(15,961) $20,045 $(14,031) ======= ======== ======= ========

 

 

For the three months
ended March 31,

 

(Dollars in thousands)

 

2005

 

2006

 

Net interest income

 

$

5,137

 

$

1,725

 

Provision for loan losses

 

4,119

 

 

Noninterest income

 

17,136

 

5,811

 

Noninterest expense

 

14,515

 

21,139

 

Income (loss) from discontinued operations before income taxes

 

3,639

 

(13,603

)

Income tax expense (benefit)

 

1,413

 

(5,093

)

Income (loss) from discontinued operations

 

$

2,226

 

$

(8,510

)

Included in noninterest expense for the three and nine months ended September 30,March 31, 2005 was approximately $25 million of severance expense and an impairment of approximately $1 million was recorded relating to the write-off of software in development. In addition,2006 were compliance related expenses the majority of which relates to outside consultants, were approximately $14$2.6 million and $25$4.8 million, for the three and nine months ended September 30, 2005, respectively. For the three and nine months ended September 30, 2004, these compliance related expenses were $0.5 million and $0.5 million, respectively. 13 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4--EARNINGS PER SHARE

Note 4—Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock equivalents outstanding on an average basis during the period. Stock options are a common stock

15




UnionBanCal Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 4—Earnings Per Share (Continued)

equivalent. The following table presents a reconciliation of basic and diluted EPS for the three and nine months ended September 30, 2004March 31, 2005 and 2005.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2004 2005 2004 2005 ---- ---- ---- ---- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED - --------------------------------------------- ----- ------- ----- ------- ----- ------- ----- ------- Income from continuing operations............ $156,940 $156,940 $201,246 $201,246 $531,977 $531,977 $568,475 $568,475 Income (loss) from discontinued operations... 6,498 6,498 (15,961) (15,961) 20,045 20,045 (14,031) (14,031) -------- -------- -------- -------- -------- -------- -------- -------- Net income................................... $163,438 $163,438 $185,285 $185,285 $552,022 $552,022 $554,444 $554,444 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding... 147,555 147,555 144,459 144,459 147,548 147,548 145,326 145,326 Additional shares due to: Assumed conversion of dilutive stock options -- 2,824 -- 3,154 -- 2,479 -- 2,736 -------- -------- -------- -------- -------- -------- -------- -------- Adjusted weighted average common shares outstanding................................ 147,555 150,379 144,459 147,613 147,548 150,027 145,326 148,062 ======== ======== ======== ======== ======== ======== ======== ======== Income from continuing operations per share.. $1.06 $1.04 $1.39 $1.36 $3.61 $3.55 $3.91 $3.84 Income (loss) from discontinued operations per share...................................... 0.05 0.05 (0.11) (0.10) 0.13 0.13 (0.09) (0.10) -------- -------- -------- -------- -------- -------- -------- -------- Net income per share......................... $1.11 $1.09 $1.28 $1.26 $3.74 $3.68 $3.82 $3.74 ======== ======== ======== ======== ======== ======== ======== ========
14 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 2006.

 

 

Three Months Ended March 31,

 

 

 

2005

 

2006

 

(Amounts in thousands, except per share data)

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Income from continuing operations

 

$

179,751

 

$

179,751

 

$

181,455

 

$

181,455

 

Income (loss) from discontinued operations

 

2,226

 

2,226

 

(8,510

)

(8,510

)

Net Income

 

$

181,977

 

$

181,977

 

$

172,945

 

$

172,945

 

Weighted average common shares outstanding

 

146,998

 

146,998

 

143,878

 

143,878

 

Additional shares due to:

 

 

 

 

 

 

 

 

 

Assumed conversion of dilutive stock options

 

 

2,918

 

 

2,148

 

Adjusted weighted average common shares outstanding

 

146,998

 

149,916

 

143,878

 

146,026

 

Income from continuing operations per share

 

$

1.22

 

$

1.20

 

$

1.26

 

$

1.24

 

Income (loss) from discontinued operations per share

 

0.02

 

0.01

 

(0.06

)

(0.06

)

Net income per share

 

$

1.24

 

$

1.21

 

$

1.20

 

$

1.18

 

16




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 5—Accumulated Other Comprehensive Income (Loss)

The following table presents the change in each of the components of other comprehensive income (loss) and the related tax effect of the change allocated to each component.
BEFORE TAX TAX NET OF (DOLLARS IN THOUSANDS) AMOUNT EFFECT TAX - ---------------------- ------ ------ --- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004: Cash flow hedge activities: Unrealized net gains on hedges arising during the period................................ $ 12,680 $(4,850) $ 7,830 Reclassification adjustment for net gains on hedges included in net income.............. (61,725) 23,610 (38,115) --------- ------- -------- Net change in unrealized gains on hedges.................................................. (49,045) 18,760 (30,285) --------- ------- -------- Securities available for sale: Unrealized holding losses arising during the period on securities available for sale.... (68,679) 26,270 (42,409) Reclassification adjustment for net gains on securities available for sale included in net income............................................................................ (1,612) 617 (995) --------- ------- -------- Net change in unrealized losses on securities available for sale.......................... (70,291) 26,887 (43,404) --------- ------- -------- Foreign currency translation adjustment................................................... 1,025 (392) 633 --------- ------- -------- Net change in accumulated other comprehensive income (loss)............................... $(118,311) $45,255 $(73,056) ========= ======= ======== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005: Cash flow hedge activities: Unrealized net losses on hedges arising during the period............................... $ (31,082) $11,889 $(19,193) Reclassification adjustment for net gains on hedges included in net income.............. (16,652) 6,369 (10,283) --------- ------- -------- Net change in unrealized losses on hedges................................................. (47,734) 18,258 (29,476) --------- ------- -------- Securities available for sale: Unrealized holding losses arising during the period on securities available for sale.... (92,392) 35,340 (57,052) Reclassification adjustment for net losses on securities available for sale included in net income............................................................................ 13,289 (5,083) 8,206 --------- ------- -------- Net change in unrealized losses on securities available for sale.......................... (79,103) 30,257 (48,846) --------- ------- -------- Foreign currency translation adjustment................................................... 128 (49) 79 --------- ------- -------- Minimum pension liability adjustment...................................................... (26) 10 (16) --------- ------- -------- Net change in accumulated other comprehensive income (loss)............................... $(126,735) $48,476 $(78,259) ========= ======= ========
15 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5--ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED)

 

 

Before

 

 

 

 

 

 

 

Tax

 

Tax

 

Net of

 

(Dollars in thousands)

 

Amount

 

Effect

 

Tax

 

For the Three Months Ended March 31, 2005:

 

 

 

 

 

 

 

Cash flow hedge activities:

 

 

 

 

 

 

 

Unrealized net losses on hedges arising during the period

 

$

(32,277

)

$

12,346

 

$

(19,931

)

Reclassification adjustment for net gains on hedges included in net income

 

(6,418

)

2,455

 

(3,963

)

Net change in unrealized losses on hedges

 

(38,695

)

14,801

 

(23,894

)

Securities available for sale:

 

 

 

 

 

 

 

Unrealized holding losses arising during the period on securities available for sale

 

(107,158

)

40,988

 

(66,170

)

Reclassification adjustment for net gains on securities available for sale included in net income

 

(344

)

132

 

(212

)

Net change in unrealized losses on securities available for sale

 

(107,502

)

41,120

 

(66,382

)

Foreign currency translation adjustment

 

481

 

(184

)

297

 

Minimum pension liability adjustment

 

(26

)

10

 

(16

)

Net change in accumulated other comprehensive income (loss)

 

$

(145,742

)

$

55,747

 

$

(89,995

)

For the Three Months Ended March 31, 2006:

 

 

 

 

 

 

 

Cash flow hedge activities:

 

 

 

 

 

 

 

Unrealized net losses on hedges arising during the period

 

$

(25,004

)

$

9,564

 

$

(15,440

)

Reclassification adjustment for net losses on hedges included in net income

 

5,722

 

(2,189

)

3,533

 

Net change in unrealized losses on hedges

 

(19,282

)

7,375

 

(11,907

)

Securities available for sale:

 

 

 

 

 

 

 

Unrealized holding losses arising during the period on securities available for sale

 

(47,713

)

18,250

 

(29,463

)

Reclassification adjustment for net losses on securities available for sale included in net income

 

214

 

(82

)

132

 

Net change in unrealized losses on securities available for sale

 

(47,499

)

18,168

 

(29,331

)

Foreign currency translation adjustment

 

(26

)

10

 

(16

)

Net change in accumulated other comprehensive income (loss)

 

$

(66,807

)

$

25,553

 

$

(41,254

)

17




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 5—Accumulated Other Comprehensive Income (Loss) (Continued)

The following table presents accumulated other comprehensive income (loss) balances.
NET NET UNREALIZED UNREALIZED GAINS GAINS (LOSSES) (LOSSES) FOREIGN MINIMUM ACCUMULATED ON CASH ON SECURITES CURRENCY PENSION OTHER FLOW AVAILABLE TRANSLATION LIABILITY COMPREHENSIVE (DOLLARS IN THOUSANDS) HEDGES FOR SALE ADJUSTMENT ADJUSTMENT INCOME (LOSS) - ---------------------- ------ -------- ---------- ---------- ------------- BALANCE, DECEMBER 31, 2003............................ $ 43,786 $ 22,535 $(10,293) $(3,786) $ 52,242 Change during the period.............................. (30,285) (43,404) 633 -- (73,056) -------- -------- -------- ------- --------- BALANCE, SEPTEMBER 30, 2004........................... $ 13,501 $(20,869) $ (9,660) $(3,786) $ (20,814) ======== ======== ======== ======= ========= BALANCE, DECEMBER 31, 2004............................ $1,429 $(31,696) $ (7,870) $(6,690) $ (44,827) Change during the period.............................. (29,476) (48,846) 79 (16) (78,259) -------- -------- -------- ------- --------- BALANCE, SEPTEMBER 30, 2005........................... $(28,047) $(80,542) $ (7,791) $(6,706) $(123,086) ======== ======== ======== ======= =========
NOTE 6--BUSINESS COMBINATIONS The following describes the Company's most recent acquisitions: On January 16, 2004, the Company completed its acquisition of Business Bank of California, a commercial bank headquartered in San Bernardino, California, with $704 million in assets

 

 

Net

 

Net

 

 

 

 

��

 

 

 

 

Unrealized

 

Unrealized

 

 

 

 

 

 

 

 

 

Gains (Losses)

 

Gains (Losses)

 

Foreign

 

Minimum

 

Accumulated

 

 

 

on Cash

 

on Securites

 

Currency

 

Pension

 

Other

 

 

 

Flow

 

Available

 

Translation

 

Liability

 

Comprehensive

 

(Dollars in thousands)

 

Hedges

 

For Sale

 

Adjustment

 

Adjustment

 

Income (Loss)

 

Balance, December 31, 2004

 

 

$

1,429

 

 

 

$

(31,696

)

 

 

$

(7,870

)

 

$

(6,690

)

 

$

(44,827

)

 

Change during the period

 

 

(23,894

)

 

 

(66,382

)

 

 

297

 

 

(16

)

 

(89,995

)

 

Balance, March 31, 2005

 

 

$

(22,465

)

 

 

$

(98,078

)

 

 

$

(7,573

)

 

$

(6,706

)

 

$

(134,822

)

 

Balance, December 31, 2005

 

 

$

(34,308

)

 

 

$

(74,099

)

 

 

$

264

 

 

$

(10,250

)

 

$

(118,393

)

 

Change during the period

 

 

(11,907

)

 

 

(29,331

)

 

 

(16

)

 

 

 

(41,254

)

 

Balance, March 31, 2006

 

 

$

(46,215

)

 

 

$

(103,430

)

 

 

$

248

 

 

$

(10,250

)

 

$

(159,647

)

 

Note 6—Goodwill and fifteen full-service branches in the Southern California Inland Empire and the San Francisco Bay Area. The core deposit intangibles are being amortized on an accelerated basis over an estimated life of 6 years. On August 1, 2004, the Company completed its acquisition of the business portfolio of CNA Trust Company (CNAT). The Company acquired total assets and assumed total liabilities of $173 million, each. CNAT, based in Costa Mesa, California, was a subsidiary of Chicago-based CNA Financial Corporation. The identifiable intangibles are being amortized on an accelerated basis over an estimated life of 7 years. On October 28, 2004, the Company completed its acquisition of Jackson Federal Bank, a savings bank headquartered in Brea, California. The Company acquired approximately $1.4 billion in total assets and fourteen branches. The core deposit intangibles are being amortized on an accelerated basis over an estimated life of 7 years. NOTE 7--GOODWILL AND INTANGIBLE ASSETS Intangible Assets

The table below reflects the Company'sCompany’s identifiable intangible assets and accumulated amortization at September 30, 2004March 31, 2005 and 2005.
SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 ------------------ ------------------ GROSS GROSS CARRYING ACCUMULATED NET CARRYING CARRYING ACCUMULATED NET CARRYING DOLLARS IN THOUSANDS AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT - -------------------- ------ ------------ ------ ------ ------------ ------ Core Deposit Intangibles.................... $62,888 $(25,680) $37,208 $ 67,237 $(41,198) $26,039 Rights-to-Expiration........................ 35,808 (12,039) 23,769 35,808 (16,530) 19,278 Other....................................... -- -- -- 2,100 (636) 1,464 ------- -------- ------- -------- -------- ------- Total..................................... $98,696 $(37,719) $60,977 $105,145 $(58,364) $46,781 ======= ======== ======= ======== ======== =======
16 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7--GOODWILL AND INTANGIBLE ASSETS (CONTINUED) 2006.

 

 

March 31, 2005

 

March 31, 2006

 

Dollars in thousands

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Core Deposit Intangibles

 

$

67,237

 

 

$

(33,651

)

 

$

33,586

 

$

67,237

 

 

$

(47,368

)

 

$

19,869

 

Rights-to-Expiration

 

35,808

 

 

(14,360

)

 

21,448

 

36,608

 

 

(18,532

)

 

18,076

 

Other

 

2,100

 

 

(383

)

 

1,717

 

2,100

 

 

(859

)

 

1,241

 

Total

 

$

105,145

 

 

$

(48,394

)

 

$

56,751

 

$

105,945

 

 

$

(66,759

)

 

$

39,186

 

Total amortization expense for the three-monthsthree months ended September 30, 2004March 31, 2005 and 2005 were $5.12006 was $5.0 million and $5.0$3.4 million, respectively. For the nine-months ended September 30, 2004

 

 

Core Deposit
Intangibles

 

Rights-to-
Expiration

 

Other

 

Total Identifiable
Intangible Assets

 

Estimated amortization expense for the years ending:

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining 2006

 

 

$

7,176

 

 

$

2,788

 

$

291

 

 

$

10,255

 

 

2007

 

 

5,471

 

 

3,166

 

299

 

 

8,936

 

 

2008

 

 

3,245

 

 

2,675

 

231

 

 

6,151

 

 

2009

 

 

1,764

 

 

2,242

 

178

 

 

4,184

 

 

2010

 

 

807

 

 

1,859

 

137

 

 

2,803

 

 

2011

 

 

443

 

 

1,519

 

105

 

 

2,067

 

 

thereafter

 

 

963

 

 

3,827

 

 

 

4,790

 

 

Total amortization expense after March 31, 2006

 

 

$

19,869

 

 

$

18,076

 

$

1,241

 

 

$

39,186

 

 

18




UnionBanCal Corporation and 2005, the expense was $13.8 millionSubsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6—Goodwill and $15.0 million, respectively.
TOTAL IDENTIFIABLE CORE DEPOSIT RIGHTS-TO- INTANGIBLE INTANGIBLES EXPIRATION OTHER ASSETS ----------- ---------- ----- ------ Estimated amortization expense for the years ending: Remaining 2005.............................................................. $ 3,775 $ 1,056 $ 124 $ 4,955 2006........................................................................ 9,571 3,672 389 13,632 2007........................................................................ 5,471 3,113 299 8,883 2008........................................................................ 3,245 2,622 231 6,098 2009........................................................................ 1,764 2,188 178 4,130 2010........................................................................ 807 1,805 138 2,749 thereafter.................................................................. 1,406 4,822 105 6,334 ------- ------- ------ ------- Total amortization expense after September 30, 2005......................... $26,039 $19,278 $1,464 $46,781 ======= ======= ====== =======
Intangible Assets
(Continued)

The changes in the carrying amount of goodwill during the ninethree months ended September 30, 2004March 31, 2005 and 20052006 are shown below. An error in the recognition of deferred taxes related to one of the bank acquisitions is included in the table. This error had no impact on net income.
(DOLLARS IN THOUSANDS) 2004 2005 - ---------------------- ---- ---- Balance, January 1,.................................................................................. $226,556 $450,961 Acquired during the nine months ended September 30,.................................................. 94,279 -- Contingent period adjustments...................................................................... -- (415) Correction of an error............................................................................. -- 2,071 -------- -------- Balance, September 30,............................................................................... $320,835 $452,617 ======== ========
NOTE 8--BUSINESS SEGMENTS

(Dollars in thousands)

 

2005

 

2006

 

Balance, January 1,

 

$

450,961

 

$

454,015

 

Acquired during the three months ended March 31,

 

 

 

Contingent period adjustments

 

(1,274

)

 

Adjustment for contingent consideration

 

438

 

(526

)

Balance, March 31,

 

$

450,125

 

$

453,489

 

Note 7—Business Segments

In April 2005, the Company announced several organizational changes that affected its business segments. The Global Markets Group has beenwas eliminated and the activities of this group have beenwere transferred. Corporate Treasury, which is responsible for Asset- LiabilityAsset-Liability Management (ALM) wholesale funding and the investment portfolioALM securities and derivatives hedging portfolios of the Company, is now included in "Other."“Other.” The trading of securities and foreign exchange contracts, as well as the responsibilities for customer accommodated derivative contracts, are now included in the "Global“Global Markets Division"Division” of the Community Banking and Investment Services Group. In addition, the discontinued operations resulting from the saledisposal of most of the Company'sCompany’s International Banking Group are also reflected in "Other."“Other.” The Company is now organized around the target markets it serves and operates in two principal areas: o

·       The Community Banking and Investment Services Group offers a range of banking services, primarily to individuals and small businesses, delivered generally through a tri-state (California, Washington and Oregon) network of branches and ATMs. These services include mortgages, home equity lines of credit, consumer and commercial loans, deposit services and cash management as 17 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8--BUSINESS SEGMENTS (CONTINUED) well as fiduciary, private banking, investment and asset management services for individuals and institutions, and risk management and insurance products for businesses and individuals. At September 30, 2004March 31, 2005 and 2005,2006, this Group had $307.0$312.0 million and $314.8$315.7 million, respectively, of goodwill assigned to its businesses. o

·       The Commercial Financial Services Group provides credit, depository and cash management services to large corporate and middle- marketmiddle-market companies and numerous specialty niches. Services include commercial and project loans, real estate financing, asset-based financing, trade finance and letters of credit, lease financing, customized cash management services and selected capital markets products. At September 30, 2004,March 31, 2005 and 2006, this Group had $13.8$138.1 million and $137.8 million, respectively, of goodwill assigned to its businesses compared to $137.8 million of goodwill assigned to its businesses at September 30, 2005. businesses.

The information, set forth in the tablestable on the following page, reflects selected income statement and balance sheet items by business segment. The information presented does not necessarily represent the business units'units’ financial condition and results of operations were they independent entities. Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies. Included in the tablestable within total assets are the amounts of goodwill for each business segment as of September 30, 2004March 31, 2005 and 2005. 2006.

19




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 7—Business Segments (Continued)

The information in these tablesthe table is derived from the internal management reporting system used by management to measure the performance of the business segments and the Company overall. The management reporting system assigns balance sheet and income statement items to each business segment based on internal management accounting policies. Net interest income is determined by the Company'sCompany’s internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and expense directly attributable to a business segment are assigned to that business.business segment. Certain indirect costs, such as operations and technology expense, are allocated to the segments based on studies of billable unit costs for product or data processing. Other indirect costs, such as corporate overhead, are allocated to the business segments based on a predetermined percentage of usage. Under the Company'sCompany’s risk-adjusted return on capital (RAROC) methodology, credit expense is charged to business segments based upon expected losses arising from credit risk. In addition, the attribution of economic capital is related to unexpected losses arising from credit, market and operational risks. "Other"

“Other” is comprised of our discontinued operations, certain parent company non-bank subsidiaries, the elimination of the fully taxable-equivalent basis amount, the transfer pricing center, the amount of the provision for loan losses over/(under) the RAROC expected loss for the period, the earnings associated with the unallocated equity capital and allowanceallowances for credit losses, and the residual costs of support groups. In addition, "Other"“Other” includes the Pacific Rim Corporate Group, which offers financial products to Japanese-owned subsidiaries located in the U.S. and, Corporate Treasury, which manages the Company'sis responsible for ALM, wholesale funding, needs, securities portfolio, interest rate and liquidity risk.the ALM Investment and derivatives hedging portfolios, and the results of our discontinued operations. Except as discussed above, none of the items in "Other"“Other” are significant to the Company'sCompany’s business. 18 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8--BUSINESS SEGMENTS (CONTINUED)

In the first quarter 2006, the Company changed its reporting to reflect a “market view” perspective in measuring the business segments. The market view is a measurement of customer markets aggregated to show all revenues generated and expenses incurred from all products and services sold to those customers regardless of where product areas organizationally report. Therefore, revenues and expenses are included in both the business segment that provides the service and the business segment that manages the customer relationship. The duplicative results from this internal management accounting view are reflected in “Reconciling Items.”

20




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 7—Business Segments (Continued)

The business units'unit results for the prior periods have been restatedadjusted to reflect changes in the transfer pricing methodology, the organizational changes that have occurred, discontinued operations and our discontinued operations.
COMMUNITY BANKING AND INVESTMENT SERVICES COMMERCIAL FINANCIAL GROUP SERVICES GROUP ----------------------- -------------------- AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 2004 2005 2004 2005 ---- ---- ---- ---- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income....................................................... $197,024 $235,907 $176,381 $227,476 Noninterest income (expense).............................................. 127,907 138,885 63,020 67,994 -------- -------- -------- -------- Total revenue............................................................. 324,931 374,792 239,401 295,470 Noninterest expense....................................................... 242,406 246,936 104,361 122,404 Credit expense (income)................................................... 8,450 8,783 24,738 20,458 -------- -------- -------- -------- Income from continuing operations before income taxes..................... 74,075 119,073 110,302 152,608 Income tax expense........................................................ 28,334 45,545 35,233 51,493 -------- -------- -------- -------- Income from continuing operations......................................... 45,741 73,528 75,069 101,115 Income (loss) from discontinued operations, net of income taxes........... -- -- -- -- -------- -------- -------- -------- Net income................................................................ $ 45,741 $ 73,528 $ 75,069 $101,115 ======== ======== ======== ======== TOTAL ASSETS, END OF PERIOD (DOLLARS IN MILLIONS):........................ $ 14,867 $ 17,611 $ 15,751 $ 19,728 ======== ======== ======== ======== UNIONBANCAL OTHER CORPORATION ----------------------- -------------------- AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------- 2004 2005 2004 2005 ---- ---- ---- ---- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income......................................................... $33,173 $ 759 $406,578 $464,142 Noninterest income (expense)................................................ 6,193 5,309 197,120 212,188 ------- ------- -------- -------- Total revenue............................................................... 39,366 6,068 603,698 676,330 Noninterest expense......................................................... 12,809 27,356 359,576 396,696 Credit expense (income)..................................................... (44,127) (44,241) (10,939) (15,000) ------- ------- -------- -------- Income from continuing operations before income taxes....................... 70,684 22,953 255,061 294,634 Income tax expense.......................................................... 34,554 (3,650) 98,121 93,388 ------- ------- -------- -------- Income from continuing operations........................................... 36,130 26,603 156,940 201,246 Income (loss) from discontinued operations, net of income taxes............. 6,498 (15,961) 6,498 (15,961) ------- ------- -------- -------- Net income.................................................................. $42,628 $10,642 $163,438 $185,285 ======= ======= ======== ======== TOTAL ASSETS, END OF PERIOD (DOLLARS IN MILLIONS):.......................... $16,373 $13,960 $ 46,991 $ 51,299 ======= ======= ======== ========
19 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8--BUSINESS SEGMENTS (CONTINUED)
COMMUNITY BANKING AND INVESTMENT SERVICES COMMERCIAL FINANCIAL GROUP SERVICES GROUP ----------------------- -------------------- AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- 2004 2005 2004 2005 ---- ---- ---- ---- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income..................................................... $553,095 $ 692,546 $495,870 $646,283 Noninterest income (expense)............................................ 379,818 410,391 202,629 206,445 -------- ---------- -------- -------- Total revenue........................................................... 932,913 1,102,937 698,499 852,728 Noninterest expense..................................................... 695,739 763,189 311,470 346,525 Credit expense (income)................................................. 24,134 25,423 82,443 65,500 -------- ---------- -------- -------- Income from continuing operations before income taxes................... 213,040 314,325 304,586 440,703 Income tax expense...................................................... 81,488 120,229 97,187 147,343 -------- ---------- -------- -------- Income from continuing operations....................................... 131,552 194,096 207,399 293,360 Income (loss) from discontinued operations, net of income taxes......... -- -- -- -- -------- ---------- -------- -------- Net income.............................................................. $131,552 $ 194,096 $207,399 $293,360 ======== ========== ======== ======== TOTAL ASSETS, END OF PERIOD (DOLLARS IN MILLIONS):...................... $ 14,867 $ 17,611 $ 15,751 $ 19,728 ======== ========== ======== ======== UNIONBANCAL OTHER CORPORATION ----------------------- -------------------- AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------- 2004 2005 2004 2005 ---- ---- ---- ---- RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS): Net interest income....................................................... $147,280 $ 19,685 $1,196,245 $1,358,514 Noninterest income (expense).............................................. 117,987 4,531 700,434 621,367 -------- -------- ---------- ---------- Total revenue............................................................. 265,267 24,216 1,896,679 1,979,881 Noninterest expense....................................................... 77,542 68,334 1,084,751 1,178,048 Credit expense (income)................................................... (135,615) (131,606) (29,038) (40,683) -------- -------- ---------- ---------- Income from continuing operations before income taxes..................... 323,340 87,488 840,966 842,516 Income tax expense........................................................ 130,314 6,469 308,989 274,041 -------- -------- ---------- ---------- Income from continuing operations......................................... 193,026 81,019 531,977 568,475 Income (loss) from discontinued operations, net of income taxes........... 20,045 (14,031) 20,045 (14,031) -------- -------- ---------- ---------- Net income................................................................ $213,071 $ 66,988 $ 552,022 $ 554,444 ======== ======== ========== ========== TOTAL ASSETS, END OF PERIOD (DOLLARS IN MILLIONS):........................ $ 16,373 $ 13,960 $ 46,991 $ 51,299 ======== ======== ========== ==========
NOTE 9--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING the market view contribution.

 

 

Community Banking
and Investment
Services Group

 

Commercial Financial
Services Group

 

 

 

As of and for the

 

As of and for the

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

 

2005

 

2006

 

2005

 

2006

 

Results of operations—Market View (dollars in thousands):

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

222,860

 

$

242,829

 

$

203,576

 

$

224,687

 

Noninterest income (expense)

 

149,747

 

162,311

 

65,110

 

65,936

 

Total revenue

 

372,607

 

405,140

 

268,686

 

290,623

 

Noninterest expense (income)

 

269,271

 

279,312

 

108,203

 

122,513

 

Credit expense (income)

 

8,933

 

8,931

 

23,511

 

22,563

 

Income from continuing operations before income taxes

 

94,403

 

116,897

 

136,972

 

145,547

 

Income tax expense

 

35,415

 

43,949

 

45,594

 

47,899

 

Income from continuing operations

 

58,988

 

72,948

 

91,378

 

97,648

 

Income (loss) from discontinued operations, net of income taxes

 

 

 

 

 

Net income

 

$

58,988

 

$

72,948

 

$

91,378

 

$

97,648

 

Total assets, end of period—Market View (dollars in millions):

 

$

16,398

 

$

18,694

 

$

18,041

 

$

20,836

 

 

 

Other

 

Reconciling Items

 

UnionBanCal
Corporation

 

 

 

As of and for the

 

As of and for the

 

As of and for the

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

Three months Ended
March 31,

 

 

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

Results of operations—Market View (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

9,816

 

$

(1,916

)

$

(590

)

$

(507

)

$

435,662

 

$

465,093

 

Noninterest income (expense)

 

6,498

 

7,508

 

(15,730

)

(17,845

)

205,625

 

217,910

 

Total revenue

 

16,314

 

5,592

 

(16,320

)

(18,352

)

641,287

 

683,003

 

Noninterest expense (income)

 

21,225

 

20,232

 

(5,747

)

(7,513

)

392,952

 

414,544

 

Credit expense (income)

 

(44,414

)

(38,451

)

(149

)

(43

)

(12,119

)

(7,000

)

Income from continuing operations before income taxes

 

39,503

 

23,811

 

(10,424

)

(10,796

)

260,454

 

275,459

 

Income tax expense

 

3,681

 

6,285

 

(3,987

)

(4,129

)

80,703

 

94,004

 

Income from continuing operations

 

35,822

 

17,526

 

(6,437

)

(6,667

)

179,751

 

181,455

 

Income (loss) from discontinued operations, net of income taxes

 

2,226

 

(8,510

)

 

 

2,226

 

(8,510

)

Net income

 

$

38,048

 

$

9,016

 

$

(6,437

)

$

(6,667

)

$

181,977

 

$

172,945

 

Total assets, end of period—Market View (dollars in millions):

 

$

15,057

 

$

9,323

 

$

(63

)

$

(52

)

$

49,433

 

$

48,801

 

21




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Derivative Instruments and Other Financial Instruments Used For Hedging

Derivative positions are integral components of the Company'sCompany’s designated ALM activities. The Company uses interest rate derivatives to manage the sensitivity of the Company'sCompany’s net interest income to changes in interest rates. These instruments are used to manage interest rate risk relating to specified 20 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (CONTINUED) groups of assets and liabilities, primarily LIBOR-based commercial loans, certificates of deposit, medium-term notes and subordinated debt. CASH FLOW HEDGES HEDGING STRATEGIES FOR VARIABLE RATE LOANS AND CERTIFICATES OF DEPOSIT The following describes the significant hedging strategies of the Company.

Cash Flow Hedges

Hedging Strategies for Variable Rate Loans and Certificates of Deposit

The Company engages in several types of cash flow hedging strategies for which the hedged transactions are forecasted future loan and deposit interest receipt and payments, and the hedged risk is the variability in those receipts/payments due to changes in the designated benchmark rate, e.g.,i.e. U.S. dollar LIBOR. In these strategies, the hedging instruments are matched with groups of variable rate loans or deposits such that the tenor of the variable rate loans/depositsloans and that of the hedging instrument are aligned.identical. Cash flow hedging strategies include the utilization of purchased floor, cap and corridor options and interest rate swaps. At September 30, 2005,March 31, 2006, the weighted average remaining life of the currently active (excluding any forward positions) cash flow hedges was approximately 1.51.6 years.

The Company uses purchased interest rate floors to hedge the variable cash flows associated with 1-month to 6-monthLIBOR or 3-month LIBOR indexed loans. Payments received under the floor contract offset the decline in loan interest income caused by the relevant LIBOR index falling below the floor'sfloor’s strike rate.

The Company uses interest rate floor corridors to hedge the variable cash flows associated with 1-month to 6-monthLIBOR or 3-month LIBOR indexed loans. Net payments to be received under the floor corridor contracts offset the decline in loan interest income caused by the relevant LIBOR index falling below the corridor'scorridor’s upper strike rate, but only to the extent the index falls to the lower strike rate. The corridor will not provide protection from declines in the relevant LIBOR index to the extent it falls below the corridor'scorridor’s lower strike rate.

The Company uses interest rate collars to hedge the variable cash flows associated with 1-month to 6-monthLIBOR or 3-month LIBOR indexed loans. Net payments to be received under the collar contract offset the decline in loan interest income caused by the relevant LIBOR index falling below the collar'scollar’s floor strike rate while net payments to be paid will reduce the increase in loan interest income caused by the LIBOR index rising above the collar'scollar’s cap strike rate.

The Company uses interest rate swaps to hedge the variable cash flows associated with 1-month to 6-monthLIBOR or 3-month LIBOR indexed loans. Payments to be received (or paid) under the swap contract will offset the fluctuations in loan interest income caused by changes in the relevant LIBOR index. As such, these instruments hedge all fluctuations in the loans'loans’ interest income caused by changes in the relevant LIBOR index.

The Company uses purchased interest rate caps to hedge the variable interest cash flows associated with the forecasted issuance and rollover of short-term, fixed rate certificates of deposit (CDs)time deposits (TDs). In these hedging relationships, the Company hedges the LIBOR component of the CDTD rates, which is 1-month to 6-month3-month LIBOR, based on the CDs'TDs’ original term to maturity, which reflects their repricing frequency. Net payments to be received

22




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

under the cap contract offset the increase in interest expense caused by the relevant LIBOR index rising above the cap'scap’s strike rate.

The Company uses interest rate cap corridors to hedge the variable cash flows associated with the forecasted issuance and rollover of short-term, fixed rate, CDs.TDs. In these hedging relationships, the 21 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (CONTINUED) Company hedges the LIBOR component of the CDTD rates, either 1-month LIBOR, 3-month LIBOR, or 6-month LIBOR, based on the original term to maturity of the CDs,TDs, which reflects their repricing frequency. Net payments to be received under the cap corridor contract offset the increase in deposit interest expense caused by the relevant LIBOR index rising above the corridor'scorridor’s lower strike rate, but only to the extent the index rises to the upper strike rate. The corridor will not provide protection from increases in the relevant LIBOR index to the extent it rises above the corridor'scorridor’s upper strike rate.

Hedging transactions are structured at inception so that the notional amounts of the hedge are matched with an equal principal amount of loans or CDs,TDs, the index and repricing frequencies of the hedge matches those of the loans or CDs,TDs, and the period in which the designated hedged cash flows occurs is equal to the term of the hedge. As such, most of the ineffectiveness in the hedging relationship results from the mismatch between the timing of reset dates on the hedge versus those of the loans or CDs.TDs. In the thirdfirst quarter of 2005,2006, the Company recognized a net loss of less than $0.1 million due to ineffectiveness, which is recognized in other noninterest expense, compared to a net gainloss of $0.1 million in the thirdfirst quarter of 2004. FAIR VALUE HEDGES HEDGING STRATEGY FOR "MARKETPATH" CERTIFICATES OF DEPOSIT The Company engages in a hedging strategy in which interest bearing CDs issued to customers, which are tied to the changes in the Standard and Poor's 500 index, are exchanged2005.

Fair Value Hedges

Hedging Strategy for a fixed rate of interest. The Company accounts for the embedded derivative in the CDs at fair value. A total return swap that encompasses the value of a series of options that had individually hedged each CD is valued at fair value and any ineffectiveness resulting from the hedge and the hedged item are recognized in noninterest expense. HEDGING STRATEGY FOR UNIONBANCAL CORPORATION--JUNIOR SUBORDINATED DEBT PAYABLE TO SUBSIDIARY GRANTOR TRUST (TRUST NOTES) On February 19, 2004, the Company terminated its fair value hedge and called its Trust Notes. Prior to this date, the Company engaged in an interest rate hedging strategy in which an interest rate swap was associated with a specific interest bearing liability, UnionBanCal Corporation's TrustMedium-Term Notes in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigated the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, U.S. dollar LIBOR. At the termination date, the Company recognized a net gain of $1.6 million related to hedge ineffectiveness. HEDGING STRATEGY FOR MEDIUM-TERM NOTES

The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specified interest bearing liability, UnionBanCal Corporation'sCorporation’s five-year, medium-term debt issuance, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, U.S. dollar LIBOR. 22 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9--DERIVATIVE INSTRUMENTS AND OTHER FINANCIAL INSTRUMENTS USED FOR HEDGING (CONTINUED)

The fair value hedging transaction for the medium-term notes was structured at inception to mirror all of the provisions of the medium-term notes, which allows the Company to assume that no ineffectiveness exists. HEDGING STRATEGY FOR SUBORDINATED DEBT

Hedging Strategy for Subordinated Debt

The Company engages in an interest rate hedging strategy in which an interest rate swap is associated with a specified interest bearing liability, UnionBanCal Corporation'sCorporation’s ten-year, subordinated debt issuance, in order to convert the liability from a fixed rate to a floating rate instrument. This strategy mitigates the changes in fair value of the hedged liability caused by changes in the designated benchmark interest rate, U.S. dollar LIBOR.

The fair value hedging transaction for the subordinated debt was structured at inception to mirror all of the provisions of the subordinated debt, which allows the Company to assume that no ineffectiveness exists. OTHER

23




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 8—Derivative Instruments and Other Financial Instruments Used For Hedging (Continued)

Other

The Company uses To-Be-Announced (TBA) contracts to fix the price and yield of anticipated purchases or sales of mortgage-backed securities that will be delivered at an agreed upon date. This strategy hedges the risk of variability in the cash flows to be paid or received upon settlement of the TBA contract. NOTE 10--GUARANTEES

Economic Hedging Strategy for “MarketPath” Certificates of Deposit

The Company engages in an economic hedging strategy in which interest bearing CDs issued to customers, which are tied to the changes in the Standard and Poor’s 500 index, are exchanged for a fixed rate of interest. The Company accounts for the embedded derivative in the CDs at fair value. A total return swap that encompasses the value of a series of options that had individually hedged each CD is valued at fair value. The changes in the fair value of the embedded derivative and the hedge instrument are recognized as interest expense.

Note 9—Commitments and Contingencies

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate foreign or domestic trade transactions. The majority of these types of commitments have terms of one year or less. Collateral may be obtained based on management's credit assessment of the customer. As of September 30, 2005,March 31, 2006, the Company'sCompany’s maximum exposure to loss for standby and commercial letters of credit was $3.4$3.6 billion and $115.8$93.1 million, respectively. At September 30, 2005,March 31, 2006, the carrying value of the Company'sCompany’s standby and commercial letters of credit totaled $8.0$7.7 million. Exposure to loss related to these commitments is covered by the allowance for off-balance sheet commitments. Both of these amounts are included in other liabilities on the condensed consolidated balance sheet. In addition, the Company's maximum exposure to loss for standby and commercial letters of credit related to discontinued operations was $48.4$30.1 million and $85.0$4.7 million, respectively. The corresponding carrying value of these standby and commercial letters of credit totaled $0.2$0.1 million.

The credit risk involved in issuing loan commitments and standby and commercial letters of credit is essentially the same as that involved in extending loans to customers and is represented by the contractual amount of these instruments. Collateral may be obtained based on management’s credit assessment of the customer.

Principal investments include direct investments in private and public companies and indirect investments in private equity funds. The Company issues commitments to provide equity and mezzanine capital financing to private and public companies through either direct investments in specific companies or through investment funds and partnerships. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately-held companies are funded by private equity investors and ultimately sold, merged, or taken 23 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10--GUARANTEES (CONTINUED) public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate. At September 30, 2005,March 31, 2006, the Company had commitments to fund principal investments of $119.6$116.1 million.

24




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9—Commitments and Contingencies (Continued)

The Company has contingent consideration agreements that guarantee additional payments to acquired insurance agencies'agencies’ stockholders based on the agencies'agencies’ future performance in excess of established revenue and/or earnings before interest, taxes, depreciation and amortization (EBITDA) thresholds. If the insurance agencies'agencies’ future performance exceeds these thresholds during a three-year period, the Company will be liable to make payments to those former stockholders. As of September 30, 2005,March 31, 2006, the Company had a maximum exposure of $5.4$4.4 million for these agreements, the last of which expire in December 2006.

The Company is fund manager for limited liability corporations issuing low-income housing credit (LIHC) investments. LIHC investments provide tax benefits to investors in the form of tax deductions from operating losses and tax credits. To facilitate the sale of these LIHC investments, the Company guarantees the timely completion of projects and delivery of tax benefits throughout the investment term. Guarantees may include a minimum rate of return, the availability of tax credits, and operating deficit thresholds over a ten-yearan eleven-year weighted average period. Additionally, the Company receives project completion and tax credit guarantees from the limited liability corporations issuing the LIHC investments that reduce the Company'sCompany’s ultimate exposure to loss. As of September 30, 2005,March 31, 2006, the Company'sCompany’s maximum exposure to loss under these guarantees wasis limited to a return of investor capital and minimum investment yield, or $158.5$158.6 million. The Company maintains a reserve of $6.5$6.1 million for these guarantees.

The Company has guarantees that obligate it to perform if its affiliates are unable to discharge their obligations. These obligations include guaranteeguarantees of commercial paper obligations and leveraged lease transactions. GuaranteesThe guarantee issued by the Bank for an affiliate'saffiliate’s commercial paper program areis done in order to facilitate their sale. As of September 30, 2005,March 31, 2006, the Bank had a maximum exposure to loss under the commercial paper guarantees, which haveprogram guarantee of $1.5 billion. The Bank’s guarantee has an average term of less than one year, of $884.1million. The Bank's guaranteenine months and is fully collateralized by a pledged deposit. UnionBanCal CorporationThe Company guarantees its subsidiaries'subsidiaries’ leveraged lease transactions which havewith terms ranging from 15fifteen to 30thirty years. Following the original funding of thethese leveraged lease transactions, UnionBanCal Corporationthe Company has no material obligation to be satisfied. As of September 30, 2005, UnionBanCal CorporationMarch 31, 2006, the Company had no material exposure to loss underfor these guarantees. agreements.

The Company conducts securities lending transactions for institutional customers as a fully disclosed agent. At times, securities lending indemnifications are issued to guarantee that a security lending customer will be made whole in the event the borrower does not return the security subject to the lending agreement and collateral held is insufficient to cover the market value of the security. All lending transactions are collateralized, primarily by cash. The amount of securities lent with indemnifications was $2.0$2.4 billion at September 30, 2005.March 31, 2006. The market value of the associated collateral was $2.0$2.4 billion at September 30, 2005. March 31, 2006.

The Company occasionally enters into financial guarantee contracts where a premium is received from another financial institution counterparty to guarantee a portion of the credit risk on interest rate swap contracts entered into between the financial institution and its customer. The Company becomes liable to pay the financial institution only if the financial institution is unable to collect amounts owed to 24 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10--GUARANTEES (CONTINUED) them by their customer. As of September 30, 2005,March 31, 2006, the maximum exposure to loss under these contracts totaled $11.9$0.7 million. TheAt March 31, 2006, the Company maintainsmaintained a reserve of $0.1 million for losses related to these guarantees. NOTE 11--PENSION AND OTHER POSTRETIREMENT BENEFITS

25




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 9—Commitments and Contingencies (Continued)

For further discussion of the Company's commitments, contingencies and guarantees, see Note 24 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Note 10—Pension and Other Postretirement Benefits

The following tables summarize the components of net periodic benefit cost for the three and nine months ended September 30, 2004March 31, 2005 and 2005.
PENSION BENEFITS OTHER BENEFITS ---------------- -------------- FOR THE THREE MONTHS FOR THE THREE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- (DOLLARS IN THOUSANDS) 2004 2005 2004 2005 - ---------------------- ---- ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost...................................................................... $ 9,415 $11,383 $ 849 $1,551 Interest cost..................................................................... 13,059 14,587 1,399 2,115 Expected return on plan assets.................................................... (20,782) (23,966) (2,292) (2,626) Amortization of prior service cost................................................ 266 267 (24) (24) Amortization of transition amount................................................. -- -- 637 508 Recognized net actuarial loss..................................................... 3,609 6,656 (539) 699 ------- ------- ------ ------ Total net periodic benefit cost................................................. $ 5,567 $ 8,927 $ 30 $2,223 ======= ======= ====== ====== PENSION BENEFITS OTHER BENEFITS ---------------- -------------- FOR THE NINE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- (DOLLARS IN THOUSANDS) 2004 2005 2004 2005 - ---------------------- ---- ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost........................................................................ $28,244 $34,148 $4,232 $4,653 Interest cost....................................................................... 39,179 43,763 7,079 6,345 Expected return on plan assets...................................................... (62,347) (71,899) (6,759) (7,801) Amortization of prior service cost.................................................. 800 800 (72) (72) Amortization of transition amount................................................... -- -- 1,912 1,526 Recognized net actuarial loss....................................................... 10,826 19,968 2,997 2,096 ------- ------- ------ ------ Total net periodic benefit cost................................................... $16,702 $26,780 $9,389 $6,747 ======= ======= ====== ======
In 2004, the2006.

 

 

Pension Benefits

 

Other Benefits

 

 

 

For the Three Months
Ended March 31,

 

For the Three Months
Ended March 31,

 

(Dollars in thousands)

 

2005

 

2006

 

2005

 

2006

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

 

Service cost

 

$

11,392

 

$

13,625

 

$

1,549

 

$

1,785

 

Interest cost

 

14,320

 

16,049

 

2,228

 

2,240

 

Expected return on plan assets

 

(23,905

)

(28,356

)

(2,599

)

(2,843

)

Amortization of prior service cost

 

267

 

267

 

(24

)

508

 

Amortization of transition amount

 

 

 

509

 

(23

)

Recognized net actuarial loss

 

6,101

 

7,563

 

968

 

1,065

 

Total net periodic benefit cost

 

$

8,175

 

$

9,148

 

$

2,631

 

$

2,732

 

The Company recorded a $6.1 million reduction in employee benefit expense associated with the remeasurement of postretirement benefits as a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"). The reduction is attributable to a federal subsidy provided by the Act to employers that sponsor retiree health care plans with drug benefits that are equivalent to those offered under Medicare Part D. The effect of the subsidy on the measurement of net periodic postretirement benefit cost has been recognized since the effective date of the Act, July 1, 2004. As a result, the Company recorded a reduction in the accumulated postretirement benefit obligation of $30.8 million relating to benefits attributable to past service in the third quarter of 2004. 25 UNIONBANCAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 11--PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) At December 31, 2004, the Company expected to makemade cash contributions of $125$100 million to the Pension Plan and $17in the first quarter of 2006. During 2006, the Company plans to make $19 million in contributions to the Health Plan for pension and postretirement benefits, respectively, in 2005. benefits.

Note 11—Management Stock Plans

The Company madehas two management stock plans. The Year 2000 UnionBanCal Corporation Management Stock Plan, as amended (the 2000 Stock Plan), and the $125UnionBanCal Corporation Management Stock Plan, restated effective June 1, 1997 (the 1997 Stock Plan), have 20.0 million pension contribution in January 2005 and continues6.6 million shares, respectively, of the Company’s common stock authorized to make the postretirement benefit contributions on a monthly basis. In July 2005,be awarded to key employees, outside directors and consultants of the Company made an additional $57 million pension contribution. NOTE 12--SUBSEQUENT EVENTS On October 6, 2005, the Bank received $245 million in cash from Wachovia Bank, N.A. at the principal legal closingdiscretion of the saleExecutive Compensation and Benefits Committee of the Bank's international correspondent banking business. A gainBoard of approximately $147 million, netDirectors (the Committee). Employees on rotational assignment from BTMU are not eligible for stock awards.

The Committee determines the term of direct expenses and income tax expense willeach stock option grant, up to a maximum of ten years from the date of grant. The exercise price of the options issued under the Stock Plans may not be recognizedless than the fair market value on the date the option is granted. Starting in the fourth quarter 2005. The Bank may earn a contingent payment not to exceed $45 million of cash during the secondfirst quarter of 2006, the value of options is amortized to compensation expense over the vesting period during which the employees are required to provide service. Unvested restricted stock issued under the Stock Plans is shown as a reduction to retained earnings at the time of the grant. The value of the restricted shares at the date of grant is amortized to compensation expense over its vesting period with a corresponding credit adjustment to retained earnings. All cancelled or forfeited options and restricted stock become available for future grants.

Under the 2000 Stock Plan, the Company granted options to various key employees, including policy-making officers, and to non-employee directors for selected years. Under both Stock Plans, options granted

26




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11—Management Stock Plans (Continued)

to employees vest pro-rata on each anniversary of the grant date and become fully exercisable three years from the grant date, provided that the employee has completed the specified continuous service requirement. The options vest earlier if the employee dies, is permanently disabled, or retires under certain grant, age, and service conditions or terminates employment under certain conditions. Options granted to non-employee directors are fully vested on the grant date and exercisable 331¤3 percent on each anniversary under the 1997 Stock Plan, and are fully vested and exercisable on the grant date under the 2000 Stock Plan.

Stock Options

The following is a summary of stock option transactions under the Stock Plans for the quarter ended March 31, 2006.

 

 

For the Three Months Ended
March 31, 2006

 

 

 

Number of

 

Weighted-Average

 

 

 

Shares

 

Exercise Price

 

Options outstanding, beginning of the period

 

8,696,589

 

 

$

45.26

 

 

 

Granted

 

4,500

 

 

69.18

 

 

 

Exercised

 

(360,035

)

 

38.97

 

 

 

Forfeited

 

(5,319

)

 

56.15

 

 

 

Options outstanding, end of the period

 

8,335,735

 

 

$

45.54

 

 

 

Options exercisable, end of the period

 

5,041,077

 

 

$

40.51

 

 

 

The following table summarizes information about stock options outstanding and stock options exercisable.

 

 

As of March 31, 2006

 

 

 

Number of
Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual Term

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

(in thousands)

 

Options outstanding

 

8,335,735

 

 

$

45.54

 

 

 

6.16

 

 

 

$

193,437

 

 

Options exercisable

 

5,041,077

 

 

40.51

 

 

 

5.57

 

 

 

142,139

 

 

27




UnionBanCal Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11—Management Stock Plans (Continued)

The following is a summary of the Company’s unvested stock options under the Stock Plans.

 

 

For the Three Months Ended
March 31, 2006

 

 

 

Number of
Shares

 

Weighted-Average Grant
Date Fair Value

 

Unvested awards, beginning of the period

 

3,346,716

 

 

$

14.69

 

 

Granted

 

4,500

 

 

11.85

 

 

Vested

 

(51,289

)

 

14.69

 

 

Forfeited

 

(5,269

)

 

14.90

 

 

Unvested awards, end of the period

 

3,294,658

 

 

$

14.68

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Because the Black-Scholes option pricing model uses tranches based on customer conversion results.expected terms that resulted in ranges of input assumptions, such ranges are disclosed below. Expected volatilities are based on historical data and implied volatilities from traded options on the Company’s stock, and other factors. The Bank continuesCompany uses historical data to operateestimate option exercise and employee terminations within the international correspondent banking business,valuation model. The expected term of an option granted is derived from the output of the option valuation model, which is based on historical data and will continue to do so over a transitionrepresents the period of several months, duringtime that the option granted is expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant based on the expected term.

 

 

For the Three Months Ended
March 31,

 

 

 

2005

 

2006

 

Weighted-average fair value—per share

 

$

13.38

 

$

11.85

 

Risk-free interest rates (a range for 1 to 7 year tenors)

 

3.41 - 4.33

%

4.27 - 4.32

%

Expected volatility

 

27.00

%

16.57 - 22.88

%

Expected term (in years)

 

4.4

 

3.4 - 5.4

 

Expected dividend yield

 

2.72

%

2.72

%

As of March 31, 2006, the total unrecognized compensation cost related to unvested stock option awards was $19.7 million and the weighted-average period over which period it is expected to be recognized is 0.8 year.

For the three months ended March 31, 2006, the amount of cash received on exercise of options was $14.0 million and the corresponding tax benefit realized was $3.9 million.

Restricted Stock

In general, restricted shares are granted under the 2000 Stock Plan to key employees, and in 2005, to non-employee directors. The awards of restricted stock vest pro-rata on each anniversary of the grant date and become fully vested four years from the grant date, provided that the majorityemployee has completed the specified continuous service requirement. They vest earlier if the employee dies, is permanently and totally disabled, retires under certain grant, age, and service conditions or terminates employment under certain conditions. The awards of customersrestricted stock granted to existing non-employee directors in 2005 will transfervest in

28




UnionBanCal Corporation and Subsidiaries
Notes to Wachovia Bank, N.A. Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 11—Management Stock Plans (Continued)

full in July 2006. The award granted to a newly elected director in 2005 will vest as to two-thirds of the shares in November 2006 and the remaining portion will vest in two equal installments in November 2007 and 2008, respectively. Restricted stockholders have the right to vote their restricted shares and receive dividends.

The Company did not grant any restricted stock during the first quarter of 2005. During the first quarter of 2006, the Company granted 4,100 shares of restricted stock with weighted average grant date fair values of $69.18. There were no restricted stock forfeitures in the first quarter of 2005 and 1,175 restricted stock forfeitures in the first quarter of 2006.

As of March 31, 2006, the total unrecognized compensation cost related to unvested restricted stock awards was $15.1 million and the weighted-average period over which it is expected to be recognized is 1.2 years.

At March 31, 2005 and March 31, 2006, a total of 2,945,680 shares and 5,443,873 shares, respectively, were available for future grants as either stock options or restricted stock under the 2000 Stock Plan. The remaining shares under the 1997 Stock Plan are not available for future grants.

Note 12—Subsequent Events

On OctoberApril 26, 2005,2006, the Company'sCompany’s Board of Directors declared a quarterly cash dividend of $0.41$0.47 per share of common stock. The dividend will be paid on January 6,July 7, 2006 to stockholders of record as of June 2, 2006.

On April 26, 2006, the Company’s Board of Directors authorized the repurchase of an additional $500 million of the Company’s common stock. When combined with the $21 million remaining on its previous repurchase authorizations, the Company had $521 million available to repurchase at that date.

29




Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report includes forward-looking statements, which include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly from our forecasts and expectations. Please refer to Part II Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q and Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 9, 2005. 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS, WHICH INCLUDE FORECASTS OF OUR FINANCIAL RESULTS AND CONDITION, EXPECTATIONS FOR OUR OPERATIONS AND BUSINESS, AND OUR ASSUMPTIONS FOR THOSE FORECASTS AND EXPECTATIONS. DO NOT RELY UNDULY ON FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS MIGHT DIFFER SIGNIFICANTLY FROM OUR FORECASTS AND EXPECTATIONS. PLEASE REFER TO "FACTORS THAT MAY AFFECT FUTURE RESULTS" FOR A DISCUSSION OF SOME FACTORS THAT MAY CAUSE RESULTS TO DIFFER. 31, 2005 for a discussion of some factors that may cause results to differ.

You should read the following discussion and analysis of our condensed consolidated financial condition and results of our operations for the period ended September 30, 2005March 31, 2006 in this quarterly reportQuarterly Report on Form 10-Q together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Annual Report).2005. Averages, as presented in the following tables, are substantially all based upon daily average balances. INTRODUCTION

Introduction

We are a California-based, commercial bank holding company withand have as our major subsidiary, a banking subsidiary, Union Bank of California, N.A. (the Bank). We had consolidated assets of $51.3$48.8 billion at September 30, 2005.March 31, 2006. At September 30, 2005,March 31, 2006, The Bank of Tokyo-Mitsubishi UFJ, Ltd., our majority owner, owned approximately 6163 percent of our outstanding common stock. EXECUTIVE OVERVIEW

Executive Overview

We are providing you with an overview of what we believe are the most significant factors and developments that impacted our thirdfirst quarter 20052006 results and that could impact our future results. We ask that you carefully read the rest of this document for more detailed information that will complete your understanding of trends, events and uncertainties that impact us.

Our average loans grew by 15 percent in first quarter 2006 compared to the first quarter 2005 and by 2 percent over the fourth quarter 2005. This growth has been concentrated in our commercial and residential mortgage lending areas, although we expect that the growth rate in residential mortgage loans will slow if interest rates continue to rise.

Although our deposit base continues to be strong, our average noninterest bearing deposits did decline in first quarter 2006 compared to the first quarter of 2005. At 45 percent of average total deposits, our average noninterest bearing deposits continue to provide us with an advantage in our primary markets.

Overall credit quality remained strong during the first quarter 2006. Our nonperforming assets totaled $42 million at March 31, 2006 compared to $62 million at December 31, 2005 and $101 million at March 31, 2005. While such low levels of nonperforming assets are not sustainable, we believe that our responsible lending and monitoring practices will help us maintain high credit quality in our loan portfolios.

During the first quarter 2006, we reversed $10 million of our provision for credit losses ($7 million reversal related to loans and a $3 million reversal of allowance for losses on off-balance sheet commitments) compared with a reversal of $9 million in the first quarter 2005. We expect that we will need to provide for credit losses during 2006 as a result of our anticipated loan growth.

In the thirdfirst quarter 2006, our net interest income was $466 million compared to $437 million in the first quarter 2005, as we signedbenefited from strong loan growth and higher interest rates.

Noninterest income grew 6 percent in the first quarter 2006 compared with the first quarter 2005 primarily from higher service charges on deposit accounts and trust and investment management fees.

30




In the first quarter 2006, our noninterest expense grew to $415 million compared to $393 million in the first quarter 2005. Most of this increase was related to salaries and employee benefits, of which $10 million related to our adoption of the new share-based compensation accounting rules and higher costs for restricted stock awards.

Our effective tax rate increased to 34 percent in the first quarter 2006 from 31 percent during the first quarter 2005. This increase was due to a definitive agreementreduction in reserves in the first quarter 2005 of $10 million for estimated amounts owed to sellthe Internal Revenue Service (IRS) with respect to certain leveraged lease transactions.

In the first quarter 2006, we returned a significant amount of capital to our stockholders in the form of dividends and common stock repurchases. In addition, on April 26, 2006, we announced an increase of 15 percent in our quarterly dividend effective with our next dividend payment on July 7, 2006 and a $500 million increase to the buyback program.

As previously disclosed, we sold our international correspondent banking business to Wachovia Bank, N.A. The principal legal closing of the transaction occurred onin October 6, 2005 and we received $245 million. In the fourth quarter 2005 we will record a gain of approximately $147 million after recognizing direct expenses and income taxes related to the transaction.2005. We will continue to serve our customers impacted byoperate this transaction over thebusiness during a transition period, which is not expected towe expect will continue beyondwell into the second quarter 2006. TheWe expect no material impact on our future earnings per share as a result of this sale. This transaction has been accounted for as a discontinued operation. The following discusses highlights fromoperation; therefore, all subsequent discussion of our results is focused on continuing operations that have been restated to reflect the impact of our discontinued operations. Overall credit quality in the commercial lending area is stable. Our nonaccrual portfolio declined to $38 million at September 30, 2005 compared to $150 million at December 31, 2004 and $189 million at September 30, 2004. Loan payoffs and chargeoffs, loan sales, the resumption to accrual status and the absence of new inflows contributed to the decline in nonaccrual loans. We reversed $15 million of our allowance for loan losses in the third quarter 2005 compared with a reversal of $10.9 million in the third quarter 2004. A significant portion of the reversal in the third quarter 2005 ($10 million) was the result of the impact to our non-specific allowance for loan losses from our decision to exit the international correspondent banking business. Net interest income grew from $407 million for the three months ended September 30, 2004 to $464 million for the three months ended September 30, 2005. Our 14 percent growth in net interest income reflects the impact of higher interest rates and increased average earning assets and noninterest bearing deposits, offset by lower income from our derivative hedges. We believe that as interest rates gradually rise and our commercial loan portfolio continues its growth, our net interest margin will be positively impacted through the remainder of 2005. 27 Noninterest income grew 7.6 percent in the third quarter 2005 compared with the third quarter 2004 primarily from higher trust and investment management fees, investment income and card processing fees. Noninterest expense grew 10.3 percent in the third quarter 2005 compared with the third quarter 2004, primarily from the investments we made in bank acquisitions, de novo branches and technology in 2004. We believe that these investments will continue to bring opportunities for growth in our business by increasing our customer base and expanding the services we provide. DISCONTINUED OPERATIONS unless otherwise stated.

Discontinued Operations

During the third quarter 2005, we committed to a plan to exit our international correspondent banking business and entered into a definitive agreement to sell this business to Wachovia Bank, N.A. This business consistsconsisted of international payment and trade processing along with the related lending activities. The principal legal closing of the transaction occurred on October 6, 2005 and we received $245 million. We will continue to operate this business over a transition period that may extend towhich we expect will continue well into second quarter 2006.

This transaction has been accounted for as a discontinued operation and all prior periods, except where specifically mentioned, have been restated to reflect this accounting treatment. All of the assets and liabilities of the discontinued operations have been separately identified on our condensed consolidated balance sheet and the assets are shown at the lower of cost or fair value less costs to dispose. The average net assets or liabilities of our discontinued operations are reflected in our analysis of net interest margin. For the detailed components of our assets and liabilities from discontinued operations, see Note 3 "Discontinued Operations" in“Discontinued Operations” to the Condensed Consolidated Financial Statements of this quarterly reportQuarterly Report on Form 10-Q.

Included in our net income are the net results of our discontinued operations. For the three and nine months ended September 30, 2004March 31, 2005 and 2005,2006, income from discontinued operations included the following:
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- --------------- (DOLLARS IN THOUSANDS) 2004 2005 2004 2005 - ---------------------- ---- ---- ---- ---- Net interest income............................................................... $5,512 $ 5,400 $16,124 $ 15,683 Provision for loan losses......................................................... 938 -- 4,038 6,683 Noninterest income................................................................ 18,833 21,233 57,733 56,165 Noninterest expense............................................................... 12,815 52,245 37,146 87,550 ------ -------- ------- -------- Income (loss) from discontinued operations before income taxes.................... 10,592 (25,612) 32,673 (22,385) Income tax expense (benefit)...................................................... 4,094 (9,651) 12,628 (8,354) ------ -------- ------- -------- Income (loss) from discontinued operations........................................ $6,498 $(15,961) $20,045 $(14,031) ====== ======== ======= ========

 

 

For the three months ended
March 31,

 

(Dollars in thousands)

 

2005

 

2006

 

Net interest income

 

$

5,137

 

$

1,725

 

Provision for loan losses

 

4,119

 

 

Noninterest income

 

17,136

 

5,811

 

Noninterest expense

 

14,515

 

21,139

 

Income (loss) from discontinued operations before income taxes

 

3,639

 

(13,603

)

Income tax expense (benefit)

 

1,413

 

(5,093

)

Income (loss) from discontinued operations

 

$

2,226

 

$

(8,510

)

31




For the three months ended September 30,March 31, 2005 and March 31, 2006, net interest income included the allocation of interest expense of approximately $4.9 million from continuing operations comparedof approximately $2.5 million and $0.6 million, respectively. Interest expense allocated to interest income of $0.2 million for the three months ended September 30, 2004. We allocated interest expense from continuingdiscontinued operations to theis calculated based on its average net assets and the corresponding cost of the discontinued operations based uponfunds rate equivalent to the average federal funds purchased rate for the period. NoninterestIncluded in noninterest expense included severance andwere compliance related benefit expenses of approximately $25$2.6 million and approximately $14$4.8 million for compliance-related matters. An impairment charge of $1 million resulted from the write-off of software in development. Expenses related to the termination of lease contracts are not included in these results. Upon ceasing to use the leased premises during the first sixthree months ofended March 31, 2005 and 2006, we expect to record lease premise related expenses. We do not believe the amount of this expense will be material. In the fourth quarter 2005, we will recognize a gain of approximately $147 million, after income taxes and expenses directly related to the transaction. 28 respectively.

The remaining discussion of our financial results is based on results from continuing operations, unless otherwise stated. CRITICAL ACCOUNTING POLICIES

Critical Accounting Policies

UnionBanCal Corporation'sCorporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and the general practices of the banking industry. The financial information contained within our statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In many instances, we use a discount factor to determine the present value of assets and liabilities. A change in the discount factor could increase or decrease the values of those assets and liabilities and such a change would result in either a beneficial or adverse impact to our financial results. We use historical loss factors, adjusted for current conditions, to determine the inherent loss that may be present in our loan and lease portfolio. Actual losses could differ significantly from the loss factors that we use. Other significant estimates that we use are employee turnover factors for pension purposes, residual values in our leasing portfolio, fair value of our derivatives and securities, expected useful lives of our depreciable assets and assumptions regarding our effective income tax rates. We enter into derivative contracts to accommodate our customers and for our own risk management purposes. The derivative contracts are generally foreign exchange, interest rate swapswaps and interest rate option contracts and energy-related derivativesindexed to accommodate our customers in the oil and gas industry.energy commodities, interest rates or foreign currencies, although we could enter into other types of derivative contracts. We value these contracts at fair value, using either readily available, market quoted prices or from information that can be extrapolated to approximate a market price. We have not historically entered into derivative contracts for our customers or for ourselves, which relate to credit, non-energy commodity or weather-related indices. We are subject to US GAAP that may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Our most significant estimates are approved by our Chief Executive Officer (CEO) Forum (CEO Forum), which is comprised of our most senior executives. Atofficers. For each financial reporting period, a review of these estimates are then reviewed byis presented to and discussed with the Audit Committee of our Board of Directors.

Understanding our accounting policies is fundamental to understanding our consolidated financial condition and consolidated results of operations. Accordingly, except for an update toboth our pension obligations accounting policy below,Critical Accounting Policies and our significant accounting policies are discussed in detail in Note 1 in the "Notes to Consolidated Financial Statements" in our 20042005 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). In addition to information provided in our "Critical Accounting Policies" in our 2004 Annual Report, we are providing the following information with respectSEC.

32




Financial Performance

Summary of Financial Performance

 

 

 

 

 

Increase (Decrease)

 

 

 

For the Three Months Ended March 31,

 

 

2006 versus 2005

 

(Dollars in thousands)

 

          2005          

 

          2006          

 

 

Amount

 

Percent

 

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income(1)

 

 

$

435,662

 

 

 

$

465,093

 

 

 

$

29,431

 

 

6.8

%

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

79,267

 

 

 

81,635

 

 

 

2,368

 

 

3.0

 

 

Trust and investment management fees

 

 

41,963

 

 

 

50,115

 

 

 

8,152

 

 

19.4

 

 

Insurance commissions

 

 

22,017

 

 

 

19,518

 

 

 

(2,499

)

 

(11.4

)

 

Merchant banking fees

 

 

6,266

 

 

 

8,229

 

 

 

1,963

 

 

31.3

 

 

Gain on private capital investments, net

 

 

7,935

 

 

 

2,827

 

 

 

(5,108

)

 

(64.4

)

 

Other noninterest income

 

 

48,177

 

 

 

55,586

 

 

 

7,409

 

 

15.4

 

 

Total noninterest income

 

 

205,625

 

 

 

217,910

 

 

 

12,285

 

 

6.0

 

 

Total revenue

 

 

641,287

 

 

 

683,003

 

 

 

41,716

 

 

6.5

 

 

Reversal of provision for loan losses

 

 

(12,119

)

 

 

(7,000

)

 

 

5,119

 

 

(42.2

)

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

231,758

 

 

 

252,495

 

 

 

20,737

 

 

8.9

 

 

Outside services

 

 

21,247

 

 

 

28,609

 

 

 

7,362

 

 

34.6

 

 

Professional services

 

 

11,741

 

 

 

14,547

 

 

 

2,806

 

 

23.9

 

 

Advertising and public relations

 

 

7,640

 

 

 

10,231

 

 

 

2,591

 

 

33.9

 

 

Foreclosed asset expense (income)

 

 

406

 

 

 

(7,367

)

 

 

(7,773

)

 

nm

 

 

(Reversal of) provision for losses on off-balance sheet commitments

 

 

3,000

 

 

 

(3,000

)

 

 

(6,000

)

 

nm

 

 

Other noninterest expense

 

 

117,160

 

 

 

119,029

 

 

 

1,869

 

 

1.6

 

 

Total noninterest expense

 

 

392,952

 

 

 

414,544

 

 

 

21,592

 

 

5.5

 

 

Income from continuing operations before income taxes

 

 

260,454

 

 

 

275,459

 

 

 

15,005

 

 

5.8

 

 

Income tax expenses

 

 

80,703

 

 

 

94,004

 

 

 

13,301

 

 

16.5

 

 

Income from Continuing Operations

 

 

179,751

 

 

 

181,455

 

 

 

1,704

 

 

0.9

 

 

Income (loss) from discontinued operations before income taxes

 

 

3,639

 

 

 

(13,603

)

 

 

(17,242

)

 

nm

 

 

Income tax expenses (benefit)

 

 

1,413

 

 

 

(5,093

)

 

 

(6,506

)

 

nm

 

 

Income (Loss) from Discontinued Operations

 

 

2,226

 

 

 

(8,510

)

 

 

(10,736

)

 

nm

 

 

Net Income

 

 

$

181,977

 

 

 

$

172,945

 

 

 

$

(9,032

)

 

(5.0

)%

 


(1)                Net interest income does not include any adjustments for fully taxable equivalence.

nm = not meaningful

The primary contributors to our discount rate for determining our obligations for pension and other postretirement benefits. The discount rate assumed in measuring the plan obligations is determined by selecting high quality investments rated Aa or higher by a recognized rating agency corresponding to each year's future benefit paymentsfinancial performance for the next 30 years. The discount rate is calculated based on the weighted average investment yields asfirst quarter of December 31, 2004 and rounded2006 compared to the nearest 0.25 percent. The reduction in the discount rate from 6.25 percent at December 31, 2003 to 5.75 percent at December 31, 2004, reported in our 2004 Annual Report, reflects the annual evaluationfirst quarter of our discount rate assumptions. 29 FINANCIAL PERFORMANCE
SUMMARY OF FINANCIAL PERFORMANCE FOR THE THREE INCREASE FOR THE NINE INCREASE MONTHS ENDED (DECREASE) MONTHS ENDED (DECREASE) SEPTEMBER 30, 2005 VERSUS 2004 SEPTEMBER 30, 2005 VERSUS 2004 ------------- ---------------- ------------- ---------------- (DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT - ---------------------- ---- ---- ------ ------- ---- ---- ------ ------- RESULTS OF OPERATIONS Net interest income(1)........................ $406,578 $464,142 $57,564 14.2%$1,196,245 $1,358,514 $162,269 13.6% Noninterest income Service charges on deposit accounts......... 85,667 84,822 (845) (1.0) 252,974 243,835 (9,139) (3.6) Trust and investment management fees........ 39,089 43,500 4,411 11.3 111,699 127,053 15,354 13.7 Merchant banking fees....................... 11,682 11,257 (425) (3.6) 26,863 35,637 8,774 32.7 Brokerage commissions and fees.............. 8,527 5,290 (3,237) (38.0) 24,847 22,867 (1,980) (8.0) Card processing fees, net................... 4,653 6,597 1,944 41.8 28,901 18,668 (10,233) (35.4) Securities gains (losses), net.............. (6) (320) (314) nm 1,612 (13,289) (14,901) nm Gain on private capital investments, net.... 467 5,692 5,225 nm 7,798 18,888 11,090 nm Gain on sale of merchant card portfolio....... -- -- -- -- 93,000 -- (93,000) nm Other noninterest income.................... 47,041 55,350 8,309 17.7 152,740 167,708 14,968 9.8 -------- -------- ------- ---------- ---------- -------- Total noninterest income...................... 197,120 212,188 15,068 7.6 700,434 621,367 (79,067) (11.3) -------- -------- ------- ---------- ---------- -------- Total revenue................................. 603,698 676,330 72,632 12.0 1,896,679 1,979,881 83,202 4.4 Reversal of allowance for loan losses(2)...... (10,939) (15,000) 4,061 37.1 (29,038) (40,683) 11,645 40.1 Noninterest expense Salaries and employee benefits.............. 209,554 236,124 26,570 12.7 632,463 701,858 69,395 11.0 Outside services............................ 19,572 28,533 8,961 45.8 52,130 76,248 24,118 46.3 Foreclosed asset expense (income)........... (10) (3,435) (3,425) nm 526 (5,606) (6,132) nm Reversal of allowance for losses on off-balance sheet commitments(2).......... -- -- -- -- -- (1,000) (1,000) nm Other noninterest expense................... 130,460 135,474 5,014 3.8 399,632 406,548 6,916 1.7 -------- -------- ------- ---------- ---------- -------- Total noninterest expense..................... 359,576 396,696 37,120 10.3 1,084,751 1,178,048 93,297 8.6 -------- -------- ------- ---------- ---------- -------- Income from continuing operations before income taxes....................................... 255,061 294,634 39,573 15.5 840,966 842,516 1,550 0.2 Income tax expense............................ 98,121 93,388 (4,733) (4.8) 308,989 274,041 (34,948) (11.3) -------- -------- ------- ---------- ---------- -------- Income from continuing operations............. 156,940 201,246 44,306 28.2 531,977 568,475 36,498 6.9 -------- -------- ------- ---------- ---------- -------- Income (loss) from discontinued operations before income taxes......................... 10,592 (25,612) (36,204) nm 32,673 (22,385) (55,058) nm Income tax expense (benefit).................. 4,094 (9,651) (13,745) nm 12,628 (8,354) (20,982) nm -------- -------- ------- ---------- ---------- -------- Income (loss) from discontinued operations.... 6,498 (15,961) (22,459) nm 20,045 (14,031) (34,076) nm -------- -------- ------- ---------- ---------- -------- Net income.................................... $163,438 $185,285 $21,847 13.4% $552,022 $554,444 $2,422 0.4% ======== ======== ======= ========== ========== ======== - --------------- (1) Net interest income does not include any adjustments for fully taxable equivalence. (2) Beginning in the quarter ended March 31, 2005, the net change in the allowance for losses on off-balance sheet commitments was recognized separately from the change in the allowance for loan losses. Prior periods have not been restated for this change. nm = not meaningful
THE PRIMARY CONTRIBUTORS TO OUR FINANCIAL PERFORMANCE FOR THE THIRD QUARTER OF 2005 COMPARED TO THE THIRD QUARTER OF 2004 ARE PRESENTED BELOW. oare presented below.

·       The reversal of our allowance for loan losses in the thirdfirst quarter of 20052006 is primarily due to improvingfurther improvement in credit quality and the elimination of general reserves held for credit exposures in our discontinued operations.quality. Credit quality continued to improve in our commercial loan portfolio evidenced by reductions in nonperforming assets. However, this trend is balanced by increasing 30 uncertainty in the economic outlook coupled with indications that the improvement in credit quality could be reachingat its peak. (See our discussion under "Allowance“Allowances for Credit Losses.") o

·       Our net interest income was favorably influenced by higher earning asset volumes (including higher volume for commercial loans, residential mortgages commercial loans and commercial mortgages),construction loans) and higher average

33




yields on our earning assets and strong deposit growth.assets. Offsetting these positive influences to our net interest margin were higher rates on interest bearing liabilities, and lower hedge income and lower noninterest bearing deposits (See our discussion under "Net“Net Interest Income.") o

The increase in our noninterest income was due to several factors: o Higher

              Service charges on deposits increased primarily due to higher overdraft fees related to a change in our overdraft and nonsufficient funds fee structure, partly offset by lower account analysis fees stemming from an increase in the earnings credit rates on deposit balances;

              Trust and investment management fees were higher primarily due to continued strong sales and organic growth and a one-time $3.8 million increase in trust fees resulting from a refinement in accrual methodology. Managed assets increased by approximately 4 percent and non-managed assets increased by approximately 5 percent from March 31, 2005 to March 31, 2006. Total assets under administration increased by approximately 5 percent, to $216.8 billion, for the same period;

              Merchant banking fees increased due to a higher volume of syndication transactions than in the prior year quarter; partly offset by

              Lower insurance commissions mainly attributable to lower contingent commission payments due to a revised state fund program and to higher loss ratios experienced by insurance companies;

              Lower net gains on the sales and capital distributions on private capital investments compared to the prior year quarter; o Trustyear; and investment management fees were higher primarily due to continued strong sales, solid organic growth and the acquisition of the business portfolio of CNA Trust Company (renamed TruSource) and the corporate trust business of the BTM Trust Company, New York. Managed assets increased by approximately 11.1 percent and non-managed assets increased by approximately 28 percent from the third quarter 2004 to the third quarter 2005. Total assets under administration increased by approximately 26 percent, to $209.1 billion, for the same period; o Card processing fees increased primarily due to higher Master Money Card (debit card) income; and o

              Higher other income includedincluded:

·       higher gains on the impactsale of a reclassificationassets and higher trading gains of certain brokerage commissions and fees (from brokerage fees to other noninterest income) and $2.5 million in COLI income, which was previously reported as an offset to noninterest expense in the third quarter of 2004; partly offset by o Brokerage commissions and fees declined from the change in classification, effective July 1, 2005, mentioned above; and o Service charges on deposits declined primarily due to lower account analysis fees, stemming from an increase in the earnings credit rate on commercial deposit balances, partly offset by higher overdraft fees related to a change in our overdraft and nonsufficient funds fee structure. o $5.0 million.

Our higher noninterest expense was due to several factors: o

Salaries and employee benefits increased primarily as a result of: o acquisitions and new branch openings, which accounted for approximately 32 percent of the increase in our salaries and other compensation; o

·       higher performance-related incentive expense from goal achievementsthe amortization of stock options in the first quarter of 2006 and the increased amortization of restricted stock in the thirdfirst quarter of 20052006 as a result of thea higher level of issuances in the second quarter of 2005; ogrants;

·       annual merit increases; and o

·       higher employee benefits expense mainly due to the impact of the lower discount rate we used to calculate our future pension and other postretirement liabilities (reduced from 6.25 percent at December 31, 2003 to 5.75 percent at December 31, 2004)2004 to 5.50 percent at December 31, 2005) and higher health insurance expense; o

              Outside services expense increased mainly as a result of higher vendor billings stemming from a higher earnings credit rate in the thirdfirst quarter of 20052006 primarily related to title and escrow deposit balances; and 31 o Other noninterest

              Professional services expense increased mainly due to higher software expensesconsulting costs related to compliance related expenses;

              Higher marketing cost in the purchase and development of software to support key technology initiatives, advertising and higher expenses related to the Jackson Federal Bank acquisition;current quarter; partly offset by o

              Foreclosed asset income in the thirdfirst quarter of 20052006, which was higher due to a gain on the sale of a foreclosed commercial property. THE PRIMARY CONTRIBUTORS TO OUR FINANCIAL PERFORMANCE FOR THE FIRST NINE MONTHS OF 2005 COMPARED TO THE FIRST NINE MONTHS OF 2004 ARE PRESENTED BELOW. o The reversal of our allowanceproperty; and

              Provision for loan losses inon off-balance sheet commitments, which declined by $6.0 million compared to the first nine monthsquarter of 2005 is primarily due to improving credit quality, the elimination of general reserves held for credit exposures in our discontinued operations and year-to-date net recoveries. (See our discussion under "Allowance for Credit Losses.") o Our net interest income was favorably influenced by higher earning asset volumes (including a higher mix of residential mortgages, commercial loans, and commercial mortgages), higher average yields on our earning assets and strong deposit growth. Offsetting these positive influences to our net interest margin were higher rates on interest bearing liabilities and lower hedge income (See our discussion under "Net Interest Income.") o The decrease in our noninterest income was mainly due to several factors: o In the second quarter 2004, we sold our merchant card portfolio to NOVA. In addition, card processing fees, net, decreased in the current year as a result of this sale; o In the first nine months of 2005, service charges on deposits decreased primarily due to lower account analysis fees, stemming from an increaseimprovements in the earnings credit rate on commercial deposit balances; o In the second quarter 2005, we sold $475 millionquality of U.S. government agency securities for a loss of approximately $13.3 million; and o Brokerage commissions and fees declined primarily from a change in classification of certain fees to other noninterest income, effective July 1, 2005; partly offset by o Trust and investment management fees increased from the first nine months 2004 primarily due to continued strong sales, solid organic growth and the acquisition of the business portfolio of CNA Trust Company (renamed TruSource) and the corporate trust business of the BTM Trust Company, New York; o Higher merchant banking fees mainly due to an increased number of completed syndication deals in the current year compared to the prior year; o Higher net gains on the sales and capital distributions on private capital investments compared to the prior year; and o Higher other income included the impact of a reclassification of certain brokerage commissions and fees (from brokerage fees to other noninterest income) discussed above and $5.7 million in COLI income, which was previously reported as an offset to noninterest expense in the third quarter of 2004. o Our higher noninterest expense was mainly due to several factors: o Salaries and employee benefits increased primarily as a result of: o acquisitions and new branch openings, which accounted for approximately 26 percent of the increase in our salaries and other compensation; 32 o higher performance-related incentive expense from goal achievements and the increased amortization of restricted stock in the third quarter of 2005 as discussed previously; o annual merit increases; and o higher employee benefits expense mainly due to the impact of the lower discount rate we used to calculate our future pension and other postretirement liabilities (reduced from 6.25 percent at December 31, 2003 to 5.75 percent at December 31, 2004) and a $4.7 million reclassification of COLI income to other noninterest income (previously reported as employee benefits expense in the prior year); o borrowers.

34




Net occupancy expense increased mainly from acquisitions, new branch openings, the payment of a lease termination fee in the second quarter of 2005 and the impact of lower rental income from non-bank tenants due to bank employee occupancy as we migrate our operations into fewer downtown San Francisco locations; o Outside services expense increased primarily as a result of higher vendor billings stemming from a higher earnings credit rate in the first nine months of 2005 primarily related to title and escrow balances; o Foreclosed asset income in the first nine months of 2005 was primarily due to gains on the sale of two foreclosed commercial properties; and o Other noninterest expense increased primarily as a result of higher software expenses related to the purchase and development of software to support key technology initiatives, higher expenses related to our acquisitions, including amortization of intangibles, and increased charitable contributions, offset by lower reserve expenses for litigation. 33 NET INTEREST INCOME Interest Income

The following table shows the major components of net interest income and net interest margin.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 INCREASE (DECREASE) IN ------------------ ------------------ ---------------------- INTEREST AVERAGE INCOME/ BALANCE EXPENSE (1) INTEREST AVERAGE INTEREST AVERAGE ------- ---------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1)(2) BALANCE EXPENSE(1) RATE(1)(2) AMOUNT PERCENT AMOUNT PERCENT - ---------------------- ------- ---------- ---------- ------- ---------- ---------- ------- ------- ------ ------- ASSETS Loans:(3) Domestic............ $26,158,230 $340,348 5.19% $31,949,929 $459,280 5.72% $5,791,699 22.1% $118,932 34.9% Foreign(4).......... 143,684 1,586 4.39 227,887 2,612 4.55 84,203 58.6 1,026 64.7 Securities--taxable.... 11,907,592 105,256 3.54 9,971,085 96,706 3.88 (1,936,507)(16.3) (8,550) (8.1) Securities--tax-exempt. 68,884 1,416 8.22 65,800 1,350 8.21 (3,084) (4.5) (66) (4.7) Interest bearing deposits in banks... 364,505 1,656 1.81 57,042 303 2.11 (307,463)(84.4) (1,353) (81.7) Federal funds sold and securities purchased under resale agreements.......... 431,138 1,616 1.49 770,116 6,777 3.49 338,978 78.6 5,161 nm Trading account assets 327,970 1,250 1.52 329,318 1,115 1.34 1,348 0.4 (135) (10.8) ----------- -------- ----------- -------- ---------- -------- Total earning assets........ 39,402,003 453,128 4.59 43,371,177 568,143 5.21 3,969,174 10.1 115,015 25.4 -------- -------- -------- Allowance for loan losses(5)........... (499,440) (392,651) 106,789 (21.4) Cash and due from banks 2,154,048 2,232,281 78,233 3.6 Premises and equipment, net...... 500,123 514,156 14,033 2.8 Other assets.......... 1,915,970 2,487,066 571,096 29.8 ----------- ----------- ---------- Total assets.... $43,472,704 $48,212,029 $4,739,325 10.9% =========== =========== ========== LIABILITIES Domestic deposits: Interest bearing.... $11,775,553 18,536 0.63 $13,157,103 44,318 1.34 $1,381,550 11.7% 25,782 nm Savings and consumer time.............. 4,382,668 9,027 0.82 4,642,782 15,668 1.34 260,114 5.9 6,641 73.6 Large time.......... 1,932,610 7,162 1.47 2,588,559 18,997 2.91 655,949 33.9 11,835 nm Foreign deposits(4)... 218,131 370 0.67 517,298 3,813 2.92 299,167 nm 3,443 nm ----------- -------- ----------- -------- ---------- -------- Total interest bearing deposits...... 18,308,962 35,095 0.76 20,905,742 82,796 1.57 2,596,780 14.2 47,701 nm ----------- -------- ----------- -------- ---------- -------- Federal funds purchased and securities sold under repurchase agreements.......... 867,988 2,861 1.31 630,272 5,158 3.25 (237,716)(27.4) 2,297 80.3 Net funding allocated from (to) discontinued operations(6)....... 46,149 152 1.31 (593,732) (4,864) 3.25 (639,881) nm (5,016) nm Commercial paper...... 639,345 1,697 1.06 1,207,822 9,394 3.09 568,477 88.9 7,697 nm Other borrowed funds.. 161,290 1,122 2.77 173,853 1,707 3.89 12,563 7.8 585 52.1 Medium and long-term debt................ 792,083 4,369 2.19 817,602 8,520 4.13 25,519 3.2 4,151 95.0 Trust notes........... 15,959 242 6.07 15,506 239 6.15 (453) (2.8) (3) (1.2) ----------- -------- ----------- -------- ---------- -------- Total borrowed funds......... 2,522,814 10,443 1.65 2,251,323 20,154 3.55 (271,491)(10.8) 9,711 93.0 ----------- -------- ----------- -------- ---------- -------- Total interest bearing liabilities... 20,831,776 45,538 0.87 23,157,065 102,950 1.76 2,325,289 11.2 57,412 nm -------- -------- -------- Noninterest bearing deposits............ 17,628,751 19,387,786 1,759,035 10.0 Other liabilities(5).. 944,224 1,392,056 447,832 47.4 ----------- ----------- ---------- Total liabilities 39,404,751 43,936,907 4,532,156 11.5 STOCKHOLDERS' EQUITY Common equity......... 4,067,953 4,275,122 207,169 5.1 ----------- ----------- ---------- Total stockholders' equity........ 4,067,953 4,275,122 207,169 5.1 ----------- ----------- ---------- Total liabilities and stockholders' equity........ $43,472,704 $48,212,029 $4,739,325 10.9% =========== =========== ========== NET INTEREST INCOME/MARGIN Net interest income/margin (taxable-equivalent basis).............. 407,590 4.13% 465,193 4.27% 57,603 14.1 Less: taxable-equivalent adjustment.......... 1,012 1,051 39 3.9 -------- -------- -------- Net interest income........ $406,578 $464,142 $57,564 14.2% ======== ======== ======== Average Assets and Liabilities of Discontinued Operations for the three months ended: SEPTEMBER 30, SEPTEMBER 30, 2004 2005 ---- ---- Assets.............. $2,239,965 $1,978,255 Liabilities......... $2,286,114 $1,384,523 Net assets (liabilities)..... $(46,149) $593,732 - --------------- (1)

 

 

For the Three Months Ended

 

Increase (Decrease) in

 

 

 

March 31, 2005

 

March 31, 2006

 

 

 

Interest

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

Average

 

Income/

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Balance

 

Expense (1)

 

(Dollars in thousands)

 

Balance

 

Expense(1)

 

Rate(1)(2)

 

Balance

 

Expense(1)

 

Rate(1)(2)

 

Amount

 

Percent

 

Amount

 

Percent

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:(3)

 

$ 29,714,206

 

$  405,124

 

 

5.51

%

 

$ 34,052,067

 

$ 512,988

 

 

6.09

%

 

$ 4,337,861

 

 

14.6

%

 

$ 107,864

 

 

26.6

%

 

Securities—taxable

 

11,117,365

 

99,939

 

 

3.60

 

 

8,233,854

 

96,053

 

 

4.67

 

 

(2,883,511

)

 

(25.9

)

 

(3,886

)

 

(3.9

)

 

Securities—tax-exempt

 

67,144

 

1,325

 

 

7.89

 

 

65,204

 

1,298

 

 

7.96

 

 

(1,940

)

 

(2.9

)

 

(27

)

 

(2.0

)

 

Interest bearing deposits in
banks

 

160,782

 

733

 

 

1.85

 

 

59,847

 

736

 

 

4.99

 

 

(100,935

)

 

(62.8

)

 

3

 

 

0.4

 

 

Federal funds sold and securities purchased under resale agreements

 

377,291

 

2,373

 

 

2.55

 

 

345,342

 

3,845

 

 

4.52

 

 

(31,949

)

 

(8.5

)

 

1,472

 

 

62.0

 

 

Trading account assets

 

231,043

 

908

 

 

1.59

 

 

328,035

 

1,530

 

 

1.89

 

 

96,992

 

 

42.0

 

 

622

 

 

68.5

 

 

Total earning assets

 

41,667,831

 

510,402

 

 

4.94

 

 

43,084,349

 

616,450

 

 

5.77

 

 

1,416,518

 

 

3.4

 

 

106,048

 

 

20.8

 

 

Allowance for loan losses

 

(403,435

)

 

 

 

 

 

 

(348,626

)

 

 

 

 

 

 

54,809

 

 

(13.6

)

 

 

 

 

 

 

 

Cash and due from banks

 

2,182,658

 

 

 

 

 

 

 

2,119,926

 

 

 

 

 

 

 

(62,732

)

 

(2.9

)

 

 

 

 

 

 

 

Premises and equipment, net

 

524,339

 

 

 

 

 

 

 

527,001

 

 

 

 

 

 

 

2,662

 

 

0.5

 

 

 

 

 

 

 

 

Other assets

 

2,341,660

 

 

 

 

 

 

 

2,633,993

 

 

 

 

 

 

 

292,333

 

 

12.5

 

 

 

 

 

 

 

 

Total assets

 

$ 46,313,053

 

 

 

 

 

 

 

$ 48,016,643

 

 

 

 

 

 

 

$ 1,703,590

 

 

3.7

%

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing

 

$ 12,232,585

 

25,416

 

 

0.84

 

 

$ 13,261,888

 

62,358

 

 

1.91

 

 

$ 1,029,303

 

 

8.4

%

 

$ 36,942

 

 

145.3

 

 

Savings and consumer time

 

4,778,029

 

13,045

 

 

1.11

 

 

4,467,627

 

18,487

 

 

1.68

 

 

(310,402

)

 

(6.5

)

 

5,442

 

 

41.7

 

 

Large time

 

3,021,684

 

17,367

 

 

2.33

 

 

3,608,597

 

34,464

 

 

3.87

 

 

586,913

 

 

19.4

 

 

17,097

 

 

98.4

 

 

Total interest bearing deposits

 

20,032,298

 

55,828

 

 

1.13

 

 

21,338,112

 

115,309

 

 

2.19

 

 

1,305,814

 

 

6.5

 

 

59,481

 

 

106.5

 

 

Federal funds purchased and securities sold under repurchase agreements

 

1,279,862

 

7,455

 

 

2.36

 

 

874,055

 

9,410

 

 

4.37

 

 

(405,807

)

 

(31.7

)

 

1,955

 

 

26.2

 

 

Net funding allocated from (to) discontinued operations(4)

 

(422,117

)

(2,457

)

 

2.36

 

 

(57,088

)

(608

)

 

4.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

865,460

 

4,560

 

 

2.14

 

 

1,242,465

 

12,448

 

 

4.06

 

 

377,005

 

 

43.6

 

 

7,888

 

 

173.0

 

 

Other borrowed funds

 

180,519

 

1,529

 

 

3.44

 

 

268,262

 

2,915

 

 

4.41

 

 

87,743

 

 

48.6

 

 

1,386

 

 

90.6

 

 

Medium and long-term debt

 

808,846

 

6,532

 

 

3.27

 

 

800,014

 

10,397

 

 

5.27

 

 

(8,832

)

 

(1.1

)

 

3,865

 

 

59.2

 

 

Trust notes

 

15,733

 

238

 

 

6.06

 

 

15,280

 

238

 

 

6.24

 

 

(453

)

 

(2.9

)

 

 

 

 

 

Total borrowed funds

 

2,728,303

 

17,857

 

 

2.65

 

 

3,142,988

 

34,800

 

 

4.49

 

 

414,685

 

 

15.2

 

 

16,943

 

 

94.9

 

 

Total interest bearing liabilities

 

22,760,601

 

73,685

 

 

1.31

 

 

24,481,100

 

150,109

 

 

2.49

 

 

1,720,499

 

 

7.6

 

 

76,424

 

 

103.7

 

 

Noninterest bearing deposits

 

18,167,420

 

 

 

 

 

 

 

17,517,921

 

 

 

 

 

 

 

(649,499

)

 

(3.6

)

 

 

 

 

 

 

 

Other liabilities

 

1,176,382

 

 

 

 

 

 

 

1,478,943

 

 

 

 

 

 

 

302,561

 

 

25.7

 

 

 

 

 

 

 

 

Total liabilities

 

42,104,403

 

 

 

 

 

 

 

43,477,964

 

 

 

 

 

 

 

1,373,561

 

 

3.3

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity

 

4,208,650

 

 

 

 

 

 

 

4,538,679

 

 

 

 

 

 

 

330,029

 

 

7.8

 

 

 

 

 

 

 

 

Total stockholders’ equity 

 

4,208,650

 

 

 

 

 

 

 

4,538,679

 

 

 

 

 

 

 

330,029

 

 

7.8

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$ 46,313,053

 

 

 

 

 

 

 

$ 48,016,643

 

 

 

 

 

 

 

$ 1,703,590

 

 

3.7

%

 

 

 

 

 

 

 

Reported Net Interest Income/Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income/margin (taxable-equivalent basis)

 

 

 

436,717

 

 

4.22

%

 

 

 

466,341

 

 

4.36

%

 

 

 

 

 

 

 

29,624

 

 

6.8

 

 

Less: taxable-equivalent adjustment

 

 

 

1,055

 

 

 

 

 

 

 

1,248

 

 

 

 

 

 

 

 

 

 

 

193

 

 

18.3

 

 

Net interest income

 

 

 

$  435,662

 

 

 

 

 

 

 

$ 465,093

 

 

 

 

 

 

 

 

 

 

 

$ 29,431

 

 

6.8

%

 

 

Average Assets and Liabilities of Discontinued Operations for the Three Months Ended:

 

 

 

March 31,
2005

 

 

 

 

 

March 31,
2006

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

$ 1,964,673

 

 

 

 

 

 

 

$ 618,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

$ 1,542,556

 

 

 

 

 

 

 

$ 561,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets

 

 

 

$  422,117

 

 

 

 

 

 

 

$ 57,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Annualized. (3) Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (4) Foreign loans and deposits are those loans and deposits originated in foreign branches. (5) The average allowance related to off-balance sheet commitments was included in other liabilities starting in the quarter ended March 31, 2005. Prior periods have not been restated. (6) In September 2005, Union Bank of California, N.A. committed to a plan for disposal of its international correspondent banking business. All periods presented have been restated to reflect discontinued operations. Net funding allocated from (to) discontinued operations represents the shortage (excess) of assets over liabilities of discontinued operations. The expense (earnings) on funds allocated from (to) discontinued operations are calculated by taking the net balance of discontinued operations for each quarter and applying an earnings rate or a cost of funds equivalent to the corresponding quarter's fed funds purchased rate. nm--not meaningful

34
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 INCREASE (DECREASE) IN ------------------ ------------------ ---------------------- INTEREST AVERAGE INCOME/ BALANCE EXPENSE (1) INTEREST AVERAGE INTEREST AVERAGE ------- ---------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE(1) RATE(1)(2) BALANCE EXPENSE(1) RATE(1)(2) AMOUNT PERCENT AMOUNT PERCENT - ---------------------- ------- ---------- ---------- ------- ---------- ---------- ------- ------- ------ ------- ASSETS Loans:(3) Domestic.............. $25,213,753 $987,987 5.23% $30,633,865 $1,298,240 5.66% $5,420,112 21.5% $310,253 31.4% Foreign(4)............ 114,723 4,053 4.72 209,337 7,567 4.83 94,614 82.5 3,514 86.7 Securities--taxable...... 11,664,022 317,390 3.63 10,678,358 298,317 3.72 (985,664) (8.5) (19,073) (6.0) Securities--tax-exempt... 68,120 4,175 8.17 66,379 4,022 8.08 (1,741) (2.6) (153) (3.7) Interest bearing deposits in banks..... 159,386 1,946 1.63 96,961 1,432 1.97 (62,425)(39.2) (514) (26.4) Federal funds sold and securities purchased under resale agreements............ 786,045 6,503 1.11 615,967 14,406 3.13 (170,078)(21.6) 7,903 nm Trading account assets.. 346,473 2,728 1.05 275,087 3,072 1.49 (71,386)(20.6) 344 12.6 ----------- --------- ---------- ---------- -------- Total earning assets.......... 38,352,522 1,324,782 4.61 42,575,954 1,627,056 5.10 4,223,432 11.0 302,274 22.8 --------- ---------- -------- Allowance for loan losses(5)............. (519,393) (398,404) 120,989 (23.3) Cash and due from banks. 2,144,157 2,240,948 96,791 4.5 Premises and equipment, net................... 508,314 519,915 11,601 2.3 Other assets............ 1,839,780 2,404,271 564,491 30.7 ----------- ----------- ---------- Total assets...... $42,325,380 $47,342,684 $5,017,304 11.9% =========== =========== ========== LIABILITIES Domestic deposits: Interest bearing...... $11,538,769 51,199 0.59 $12,614,932 101,752 1.08 $1,076,163 9.3% 50,553 98.7 Savings and consumer time................ 4,248,057 26,282 0.83 4,707,515 42,841 1.22 459,458 10.8 16,559 63.0 Large time............ 2,185,349 22,712 1.39 2,758,495 53,208 2.58 573,146 26.2 30,496 nm Foreign deposits(4)..... 254,754 951 0.50 431,599 8,247 2.55 176,845 69.4 7,296 nm ----------- --------- ---------- ---------- -------- Total interest bearing deposits 18,226,929 101,144 0.74 20,512,541 206,048 1.34 2,285,612 12.5 104,904 nm ----------- --------- ---------- ---------- -------- Federal funds purchased and securities sold under repurchase agreements............ 537,169 4,094 1.02 1,021,123 20,829 2.73 483,954 90.1 16,735 nm Net funding allocated from (to) discontinued operations(6)......... (124,459) (554) 0.59 (535,998) (11,499) 2.87 (411,539) nm (10,945) nm Commercial paper........ 566,776 3,883 0.92 1,078,558 21,761 2.70 511,782 90.3 17,878 nm Other borrowed funds.... 174,470 3,599 2.76 183,997 5,053 3.67 9,527 5.5 1,454 40.4 Medium and long-term debt.................. 805,863 11,201 1.86 808,686 22,511 3.72 2,823 0.4 11,310 nm Trust notes............. 78,139 2,553 4.36 15,618 715 6.10 (62,521)(80.0) (1,838) (72.0) ----------- --------- ---------- ---------- -------- Total borrowed funds........... 2,037,958 24,776 1.62 2,571,984 59,370 3.09 534,026 26.2 34,594 nm ----------- --------- ---------- ---------- -------- Total interest bearing liabilities..... 20,264,887 125,920 0.83 23,084,525 265,418 1.54 2,819,638 13.9 139,498 nm --------- ---------- -------- Noninterest bearing deposits.............. 17,168,125 18,792,219 1,624,094 9.5 Other liabilities(5).... 908,174 1,256,056 347,882 38.3 ----------- ----------- ---------- Total liabilities. 38,341,186 43,132,800 4,791,614 12.5 STOCKHOLDERS' EQUITY Common equity........... 3,984,194 4,209,884 225,690 5.7 ----------- ----------- ---------- Total stockholders' equity.......... 3,984,194 4,209,884 225,690 5.7 ----------- ----------- ---------- Total liabilities and stockholders' equity.......... $42,325,380 $47,342,684 $5,017,304 11.9% =========== =========== ========== NET INTEREST INCOME/MARGIN Net interest income/margin (taxable-equivalent basis)................ 1,198,862 4.17% 1,361,638 4.27% 162,776 13.6 Less: taxable-equivalent adjustment............ 2,617 3,124 507 19.4 --------- ---------- -------- Net interest income.......... $1,196,245 $1,358,514 $162,269 13.6% ========== ========== ======== Average Assets and Liabilities of Discontinued Operations for the nine months ended: SEPTEMBER 30, SEPTEMBER 30, 2004 2005 ---- ---- Assets................ $2,137,241 $1,974,884 Liabilities........... $2,012,782 $1,438,886 Net assets (liabilities)....... $124,459 $535,998 - --------------- (1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 35 percent. (2) Annualized. (3) Average balances on loans outstanding include all nonperforming loans. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield. (4) Foreign loans and deposits are those loans and deposits originated in foreign branches. (5) The average allowance related to off-balance sheet commitments was included in other liabilities starting in the quarter ended March 31, 2005. Prior periods have not been restated. (6) In September 2005, Union Bank of California, N.A. committed to a plan for disposal of its international correspondent banking business. All periods presented have been restated to reflect discontinued operations. Net funding allocated from (to) discontinued operations represents the shortage (excess) of assets over liabilities of discontinued operations. The expense (earnings) on funds allocated from (to) discontinued operations are calculated by taking the net balance of discontinued operations for each quarter and applying an earnings rate or a cost of funds equivalent to the corresponding quarter's fed funds purchased rate. The year-to-date expense (earnings) amount is the sum of the quarterly amounts. nm--not meaningful
35 percent.

(2)Annualized.

(3)Average balances on loans outstanding include all nonperforming loans and loans held for sale. The amortized portion of net loan origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.

(4)In September 2005, Union Bank of California, N.A. committed to a plan for disposal of its international correspondent banking business. All periods presented have been restated to reflect discontinued operations. Net funding allocated from (to) discontinued operations represents the shortage (excess) of assets over liabilities of discontinued operations. The expense (earning) on funds allocated from (to) discontinued operations is calculated by taking the net balance and applying an earnings rate or a cost of funds equivalent to the corresponding period’s fed funds purchased rate.

35




Net interest income in the thirdfirst quarter 2005,2006, on a taxable-equivalent basis, increased 147 percent, from the thirdfirst quarter 2004.2005. Our results were primarily due to the following: o The growth in average

·       Average earning assets wasincreased $1.4 billion, or 3 percent, primarily due to an increase in average loans.loans, partly offset by a decline in average securities. The increase in average loans was largely due to a $1.9$2.0 billion increase in average commercial loans and a $2.2$1.6 billion increase in average residential mortgages, while average securities declined by $2.9 billion as a result of sales of approximately $1.5 billion and a $1.3maturities offset by purchases of $1.0 billion increase in average commercial mortgages; o Deposit growth contributed favorably to net interest margin in the third quarter 2005. Average noninterest bearing deposits were higher in the third quarterbetween December 2005 compared to the third quarter 2004, mainly due to higher average business demand deposits, including an increase in demand deposits from our title and escrow clients and higher consumer demand deposit growth; o February 2006;

·Yields on our earning assets were favorably impacted by the increasing interest rate environment resulting in a higher average yield of 62 basis points on average earning assets of 83 basis points, despite being negatively impacted by lower hedge income, which decreased by $16.0$13.9 million;

·Average noninterest bearing deposits decreased $649 million, or 4 percent, including a decrease of $381 million, or 14 percent, in average title and o escrow deposits due to lower residential real estate activity. Average business demand deposits, excluding title and escrow, declined $305 million, or 3 percent, primarily due to disintermediation resulting from rising short-term interest rates. Consumer deposits increased $37 million, or 1 percent. Average noninterest bearing deposits represented 45 percent of average total deposits in first quarter 2006.

·In the thirdfirst quarter 2005, our2006, the annualized average all-in cost of funds, on interest bearing liabilities was negatively impacted by the increasing rate environment, resulting in a higher average cost of interest-bearing liabilities of 89 basis points, which included lower hedge income which decreased by $1.5 million. of $2.5 million, was 1.45 percent, reflecting our average deposit-to-loan ratio of 114 percent and the proportion of noninterest bearing deposits to total deposits.

As a result of these changes, our net interest margin increased by 14 basis points.

We use derivatives to hedge expected changes in the yields on our variable rate loans and term certificates of deposit (CDs), and to convert our long-term, fixed-rate borrowings to floating rate. Throughout 2005,For 2006, these derivative positions have providedare expected to provide less net interest income than in 2004,2005, as positions maturedmature and, to a lesser extent, as interest rates rose.rise. However, as we expected, the declines in hedge income have been offset by increased yields on the underlying variable rate loans. For the quarters ended September 30, 2004March 31, 2005 and 2005,2006, we had hedge income of $20.4$9.5 million and $2.9hedge expense of $6.9 million, respectively. Net interest income

Noninterest Income

 

 

For the Three Months Ended

 

 

 

March 31,

 

March 31,

 

Increase (Decrease)

 

(Dollars in thousands)

 

2005

 

2006

 

Amount

 

Percent

 

Service charges on deposit accounts

 

$ 79,267

 

$ 81,635

 

$ 2,368

 

 

3.0

%

 

Trust and investment management fees

 

41,963

 

50,115

 

8,152

 

 

19.4

 

 

Insurance commissions

 

22,017

 

19,518

 

(2,499

)

 

(11.4

)

 

Merchant banking fees

 

6,266

 

8,229

 

1,963

 

 

31.3

 

 

Foreign exchange gains, net

 

8,170

 

7,818

 

(352

)

 

(4.3

)

 

Brokerage commissions and fees

 

8,972

 

7,795

 

(1,177

)

 

(13.1

)

 

Card processing fees, net

 

5,607

 

6,697

 

1,090

 

 

19.4

 

 

Securities gains (losses), net

 

344

 

(214

)

(558

)

 

nm

 

 

Gain on private capital investments, net

 

7,935

 

2,827

 

(5,108

)

 

(64.4

)

 

Other

 

25,084

 

33,490

 

8,406

 

 

33.5

 

 

Total noninterest income

 

$ 205,625

 

$ 217,910

 

$ 12,285

 

 

6.0

%

 


nm = not meaningful

36




Noninterest Expense

 

 

For the Three Months Ended

 

 

 

March 31,

 

March 31,

 

Increase (Decrease)

 

(Dollars in thousands)

 

2005

 

2006

 

Amount

 

Percent

 

Salaries and other compensation

 

$

178,957

 

$

194,259

 

$

15,302

 

 

8.6

%

 

Employee benefits

 

52,801

 

58,236

 

5,435

 

 

10.3

 

 

Salaries and employee benefits

 

231,758

 

252,495

 

20,737

 

 

8.9

 

 

Net occupancy

 

32,362

 

32,837

 

475

 

 

1.5

 

 

Outside services

 

21,247

 

28,609

 

7,362

 

 

34.6

 

 

Equipment

 

17,403

 

17,922

 

519

 

 

3.0

 

 

Software

 

13,975

 

16,344

 

2,369

 

 

17.0

 

 

Professional services

 

11,741

 

14,547

 

2,806

 

 

23.9

 

 

Communications

 

10,380

 

10,552

 

172

 

 

1.7

 

 

Advertising and public relations

 

7,640

 

10,231

 

2,591

 

 

33.9

 

 

Data processing

 

8,870

 

7,398

 

(1,472

)

 

(16.6

)

 

Intangible asset amortization

 

4,985

 

3,430

 

(1,555

)

 

(31.2

)

 

Foreclosed asset expense (income)

 

406

 

(7,367

)

(7,773

)

 

nm

 

 

(Reversal of) provision for losses on off-balance sheet commitments

 

3,000

 

(3,000

)

(6,000

)

 

nm

 

 

Other

 

29,185

 

30,546

 

1,361

 

 

4.7

 

 

Total noninterest expense

 

$

392,952

 

$

414,544

 

$

21,592

 

 

5.5

%

 


nm = not meaningful

Income Tax Expense

Income tax expense on continuing operations in the first nine months 2005, on a taxable-equivalent basis, increased 14 percent, from the first nine months 2004. Our results were primarily due to the following: o The growth in average earning assets was primarily due to an increase in average loans. The increase in average loans was largely due to a $2.4 billion increase in average residential mortgages, a $1.6 billion increase in average commercial loans and a $1.2 billion increase in average commercial mortgages; o Deposit growth contributed favorably to net interest margin in the first nine months 2005. Average noninterest bearing deposits were higher in the first nine months 2005, compared to the first nine months 2004, mainly due to higher average business demand deposits, including demand deposits from our title and escrow clients and higher consumer demand deposit growth; o Yields on our earning assets were favorably impacted by the increasing interest rate environment and higher cash basis recoveries, resulting in a higher average yield of 49 basis points on average earning assets, despite being negatively impacted by lower hedge income, which decreased by $53.3 million; and o In the first nine months 2005, our cost of funds on interest bearing liabilities was negatively impacted by the increasing rate environment, resulting in a higher average cost of interest-bearing liabilities of 71 basis points, including lower hedge income, which decreased by $6.3 million. As a result of these changes, our net interest margin increased by 10 basis points. We use derivatives to hedge expected changes in the yields on our variable rate loans and term certificates of deposit (CDs), and to convert our long-term, fixed-rate borrowings to floating rate. Throughout 2005, these derivative positions have provided less net interest income than in 2004, as positions matured and, to a lesser extent, as interest rates rose. However, as we expected, the declines in 36 hedge income have been offset by increased yields on the underlying variable rate loans. For the nine months ended September 30, 2004 and 2005, we had hedge income of $79.4 million and $19.8 million, respectively.
NONINTEREST INCOME FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- INCREASE (DECREASE) INCREASE (DECREASE) ------------------ ------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT - ---------------------- ---- ---- ------ ------- ---- ---- ------ ------- Service charges on deposit accounts.................. $ 85,667 $ 84,822 $ (845) (1.0)% $252,974 $243,835 $ (9,139) (3.6)% Trust and investment management fees........... 39,089 43,500 4,411 11.3 111,699 127,053 15,354 13.7 Insurance commissions....... 17,463 17,819 356 2.0 57,850 59,176 1,326 2.3 Merchant banking fees....... 11,682 11,257 (425) (3.6) 26,863 35,637 8,774 32.7 Foreign exchange gains, net....................... 8,268 8,849 581 nm 24,209 25,570 1,361 5.6 Brokerage commissions and fees...................... 8,527 5,290 (3,237) (38.0) 24,847 22,867 (1,980) (8.0) Card processing fees, net... 4,653 6,597 1,944 41.8 28,901 18,668 (10,233) (35.4) Securities gains (losses), net....................... (6) (320) (314) nm 1,612 (13,289) (14,901) nm Gain on private capital investments, net.......... 467 5,692 5,225 nm 7,798 18,888 11,090 142.2 Gain on sale of merchant card portfolio............ -- -- -- nm 93,000 -- (93,000) nm Other....................... 21,310 28,682 7,372 34.6 70,681 82,962 12,281 17.4 -------- -------- ------- -------- -------- -------- Total noninterest income $197,120 $212,188 $15,068 7.6% $700,434 $621,367 $(79,067) (11.3)% ======== ======== ======= ======== ======== ======== - --------------- nm--not meaningful
NONINTEREST EXPENSE FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- INCREASE (DECREASE) INCREASE (DECREASE) ------------------ ------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT - ---------------------- ------------- ------------- ------ ------- ------------- ------------- ------ ------- Salaries and other compensation..... $175,619 $190,293 $14,674 8.4% $ 509,646 $ 556,249 $46,603 9.1% Employee benefits................... 33,935 45,831 11,896 35.1 122,817 145,609 22,792 18.6 -------- -------- ------- ---------- ---------- ------- Salaries and employee benefits.... 209,554 236,124 26,570 12.7 632,463 701,858 69,395 11.0 Net occupancy....................... 32,029 34,336 2,307 7.2 93,517 100,251 6,734 7.2 Outside services.................... 19,572 28,533 8,961 45.8 52,130 76,248 24,118 46.3 Equipment........................... 15,949 15,832 (117) (0.7) 49,370 50,176 806 1.6 Software............................ 12,790 14,374 1,584 12.4 37,309 43,072 5,763 15.4 Professional services............... 11,976 11,240 (736) (6.1) 33,410 36,131 2,721 8.1 Communications...................... 10,234 10,808 574 5.6 31,728 30,950 (778) (2.5) Advertising and public relations.... 7,843 9,114 1,271 16.2 27,154 25,657 (1,497) (5.5) Data processing..................... 8,146 7,406 (740) (9.1) 24,416 24,703 287 1.2 Intangible asset amortization....... 5,077 4,985 (92) (1.8) 13,783 14,956 1,173 8.5 Foreclosed asset expense (income)... (10) (3,435) (3,425) nm 526 (5,606) (6,132) nm Reversal of allowance for losses on off-balance sheet commitments(1).. -- -- -- -- -- (1,000) (1,000) nm Other............................... 26,416 27,379 963 3.6 88,945 80,652 (8,293) (9.3) -------- -------- ------- ---------- ---------- ------- Total noninterest expense....... $359,576 $396,696 $37,120 10.3% $1,084,751 $1,178,048 $93,297 8.6% ======== ======== ======= ========== ========== ======= - --------------- (1) Beginning in the quarter ended March 31, 2005, the net change in the allowance for losses on off-balance sheet commitments was recognized separately from the change in the allowance for loan losses. Prior periods have not been restated. nm--not meaningful
37 INCOME TAX EXPENSE The following discussion of our income tax expense is based upon net income and therefore includes our discontinued operations. Income tax expense in the third quarter of 20052006 resulted in a 3134 percent effective income tax rate compared with an effective tax rate of 38 percent for the third quarter of 2004. In the third quarter of 2005, we recognized reductions to income tax expense of approximately $9.0 million primarily related to the decrease in our California effective tax rate for 2005, the adjustment of 2004 California tax expense to reflect the tax as reported on the tax return filed on the worldwide unitary basis, and to California Enterprise Zone credits, primarily from prior years, for which we qualified during the third quarter. In the third quarter of 2004, we recognized an increase to income tax expense of approximately $7.8 million primarily related to the adjustment of 2003 California tax expense as reported on 2003 worldwide unitary tax return. Income tax expense in the first nine months of 2005 resulted in a 32 percent effective tax rate compared with an effective tax rate of 3731 percent for the first nine months of 2004. The decrease inquarter 2005. In the year-to-date tax rate was due primarily tofirst quarter 2005 we recognized a reduction in reserves of $10.0 million in the first quarter of 2005 for estimated amounts owed to the Internal Revenue Service with respect to certain leveraged leasing transactions, and the third quarter tax adjustments described above. transactions.

For further information regarding income tax expense, see "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations--IncomeOperations—Income Tax Expense"Expense” in our Annual Report on Form 10-K for the year ended December 31, 2004. LOANS
The following table shows loans outstanding by loan type. INCREASE (DECREASE) SEPTEMBER 30, 2005 FROM: ------------------------ SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2004 2004 2005 2004 2004 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT - ---------------------- ------ ------- ------ ------- Domestic: Commercial, financial and industrial... $ 9,545,482 $ 9,760,756 $10,791,643 $1,246,161 13.1% $1,030,887 10.6% Construction........................... 1,103,970 1,130,070 1,366,413 262,443 23.8 236,343 20.9 Mortgage: Residential.......................... 8,821,566 9,538,150 10,976,681 2,155,115 24.4 1,438,531 15.1 Commercial........................... 4,356,052 5,409,029 5,590,774 1,234,722 28.3 181,745 3.4 ----------- ----------- ----------- ---------- ---------- Total mortgage..................... 13,177,618 14,947,179 16,567,455 3,389,837 25.7 1,620,276 10.8 Consumer: Installment.......................... 779,857 767,767 834,653 54,796 7.0 66,886 8.7 Revolving lines of credit............ 1,496,581 1,581,863 1,653,275 156,694 10.5 71,412 4.5 ----------- ----------- ----------- ---------- ---------- Total consumer..................... 2,276,438 2,349,630 2,487,928 211,490 9.3 138,298 5.9 Lease financing........................ 612,054 609,090 574,798 (37,256) (6.1) (34,292) (5.6) ----------- ----------- ----------- ---------- ---------- Total loans in domestic offices.... 26,715,562 28,796,725 31,788,237 5,072,675 19.0 2,991,512 10.4 Loans originated in foreign branches..... 184,335 194,790 205,375 21,040 11.4 10,585 5.4 ----------- ----------- ----------- ---------- ---------- Total loans held to maturity....... 26,899,897 28,991,515 31,993,612 5,093,715 18.9 3,002,097 10.4 Total loans held for sale.......... 2,294 117,900 11,135 8,841 385.4 (106,765) (90.6) ----------- ----------- ----------- ---------- ---------- Total loans...................... $26,902,191 $29,109,415 $32,004,747 $5,102,556 19.0% $2,895,332 9.9% =========== =========== =========== ========== ==========
COMMERCIAL, FINANCIAL AND INDUSTRIAL LOANS 2005.

37




Loans

The following table shows loans outstanding by loan type.

 

 

 

 

 

 

 

 

Increase (Decrease)

 

 

 

 

 

 

 

 

 

March 31, 2006 From:

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31, 2005

 

December 31, 2005

 

(Dollars in thousands)

 

2005

 

2005

 

2006

 

Amount

 

Percent

 

Amount

 

Percent

 

Domestic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial and industrial

 

$

9,998,843

 

 

$

11,450,955

 

 

$

11,666,818

 

$

1,667,975

 

 

16.7

%

 

$

215,863

 

 

1.9

%

 

Construction

 

1,189,273

 

 

1,447,292

 

 

1,598,162

 

408,889

 

 

34.4

 

 

150,870

 

 

10.4

 

 

Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

10,121,033

 

 

11,380,728

 

 

11,570,355

 

1,449,322

 

 

14.3

 

 

189,627

 

 

1.7

 

 

Commercial

 

5,448,741

 

 

5,682,624

 

 

5,647,089

 

198,348

 

 

3.6

 

 

(35,535

)

 

(0.6

)

 

Total mortgage

 

15,569,774

 

 

17,063,352

 

 

17,217,444

 

1,647,670

 

 

10.6

 

 

154,092

 

 

0.9

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment

 

777,986

 

 

891,062

 

 

947,881

 

169,895

 

 

21.8

 

 

56,819

 

 

6.4

 

 

Revolving lines of credit

 

1,612,037

 

 

1,610,680

 

 

1,532,671

 

(79,366

)

 

(4.9

)

 

(78,009

)

 

(4.8

)

 

Total consumer

 

2,390,023

 

 

2,501,742

 

 

2,480,552

 

90,529

 

 

3.8

 

 

(21,190

)

 

(0.8

)

 

Lease financing

 

596,331

 

 

579,593

 

 

563,491

 

(32,840

)

 

(5.5

)

 

(16,102

)

 

(2.8

)

 

Total loans held to maturity

 

29,744,244

 

 

33,042,934

 

 

33,526,467

 

3,782,223

 

 

12.7

 

 

483,533

 

 

1.5

 

 

Total loans held for sale

 

34,217

 

 

52,661

 

 

2,401

 

(31,816

)

 

(93.0

)

 

(50,260

)

 

(95.4

)

 

Total loans

 

$

29,778,461

 

 

$

33,095,595

 

 

$

33,528,868

 

$

3,750,407

 

 

12.6

%

 

$

433,273

 

 

1.3

%

 

Commercial, Financial and Industrial Loans

Commercial, financial and industrial loans represent one of the largest categories in the loan portfolio. These loans are extended principally to corporations, middle-market businesses, and small businesses, with no industry concentration exceeding 10 percent of total loans. In addition, we believeAlthough many of our 38 customers are located in California, the portfolio has a high degree of geographic diversification based upon our customers'customers’ revenue bases, which we believe lowers our vulnerability to changes in the regional and nationaleconomic outlook forof any particular region of the U.S. economy.

Our commercial market lending originates primarily through our commercial banking offices. These offices, which rely extensively on relationship-oriented banking, provide a variety of services including depository and cash management services, lines of credit, accounts receivable and inventory financing. Separately, we originate or participate in a wide variety of financial services to major corporations. These services include traditional commercial banking and specialized financing tailored to the needs of each customer'scustomer’s specific industry. Presently, we are active in, among other sectors, the oil and gas, communications, entertainment, retailing, power and utilities and financial services industries.

The commercial, financial and industrial loan portfolio increaseincreased in the thirdfirst quarter of 20052006 from the thirdfirst quarter of 2004 was2005 mainly due to increased loan demand primarily in the California middle-marketmiddle market and specialty segments, which reflected the improving economy in those markets. CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS

Construction and Commercial Mortgage Loans

We engage in non-residential real estate lending that includes commercial mortgage loans and construction loans secured by deeds of trust. Construction loans are made primarily to commercial property developers and to residential builders.

The construction loan portfolio increase in the thirdfirst quarter of 20052006 from the thirdfirst quarter of 20042005 was mainly due to increased demand for new single-family homes, as well as apartment, condominium, retail buildingshopping center and REITReal Estate Investment Trust financing. ThisAdditionally, improvement in commercial income property markets also accounted for some related growth occurred despite continued high office vacancy rates in our markets, which was a factor that impacted the level of development and construction projects we financed. loans.

The commercial mortgage loan portfolio consists of loans on commercial and industrial projectsincome properties primarily in California. The increase in commercial mortgages inbetween the thirdfirst quarter of 2006 and the first quarter

38




of 2005 from the third quarter of 2004 was mainly due to our acquisition of Jackson Federal Bankgeneral improvements in the fourth quarter of 2004, offset by substantial commercial mortgage refinancings with other lenders. RESIDENTIAL MORTGAGE LOANS income property markets, which resulted in increased financings and refinancings.

Residential Mortgage Loans

We originate residential mortgage loans, secured by one-to-four family residential properties, through our multiple channel network (including branches, mortgage brokers, and loan-by-phone) throughout California, Oregon and Washington, and we periodically purchase loans in our market area. At September 30, 2005, 55March 31, 2006, 60 percent of our residential mortgage loans were interest only, of which none are negative amortizing. At origination, these interest only loans had high credit scores with anand had weighted average of 65 percent loan-to-value (LTV) ratio.ratios of approximately 65 percent. The remainder of the portfolio consists of balloon or regular amortizing loans. The increase in residential mortgages in the third quarter of 2005 compared to third quarter of 2004 was primarily driven by adjustable rate mortgages (ARMs). Contributing to this increase were very attractive mortgage rates in the latter half of 2004 and higher home prices.

We hold most of the loans we originate, selling only our 30-year, fixed rate loans, except for Community Reinvestment Act (CRA) loans. CONSUMER LOANS

Consumer Loans

We originate consumer loans, such as auto loans and home equity loans and lines, through our branch network. The primary driver of the increase in consumer loans was our "Flex“Flex Equity Line/Loan"Loan” product. The "Flex“Flex Equity Line/Loan"Loan” allows our customers the flexibility to manage a line of credit andwith as many as four fixed rate loans under a single product. 39 LEASE FINANCING We offer a “Flex Equity High LTV” product, which allows our customers to draw up to 100 percent of the value of their real estate or $100 thousand, whichever is less.

Lease Financing

We primarily offer two types of leases to our customers: direct financing leases, where the assets leased are acquired without additional financing from other sources; and leveraged leases, where a substantial portion of the financing is provided by debt with no recourse to us. The lease financing decrease from September 30, 2004 was attributable to the run-off of our discontinued auto leasing activity. At September 30, 2005, our auto lease portfolio had declined to $4.6 million and will fully mature by mid-year 2006. Included in our lease portfolio are leveraged leases of $561$549 million, which are net of non-recourse debt of approximately $1.2$1.1 billion. We utilize a number of special purpose entities for our leveraged leases. These entities serve legal and tax purposes and do not function as vehicles to shift liabilities to other parties or to deconsolidate affiliates for financial reporting purposes. As allowed by US GAAP and by law, the gross lease receivable is offset by the qualifying non-recourse debt. In leveraged lease transactions, the third-party lender may only look to the collateral value of the leased assets for repayment. CROSS-BORDER OUTSTANDINGS

Cross-Border Outstandings

Our cross-border outstandings, including those that are part of our discontinued operations, reflect certain additional economic and political risks that are not reflected in domestic outstandings. These risks include those arising from exchange rate fluctuations and restrictions on the transfer of funds. The following table sets forth our cross-border outstandings as of September 30, 2004, DecemberMarch 31, 2004 and September 30, 2005, for any country where such outstandings exceeded 1 percent of total assets. For the periods ending December 31, 2005 and March 31, 2006 we did not meet the 1 percent threshold for disclosure. The cross- bordercross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. For any country shown in the table below, any significant local currency outstandings are either hedged or funded by local currency borrowings.
PUBLIC CORPORATIONS FINANCIAL SECTOR AND OTHER TOTAL (DOLLARS IN MILLIONS) INSTITUTIONS ENTITIES BORROWERS OUTSTANDINGS - --------------------- ------------ -------- --------- ------------ September 30, 2004 Korea...................................................................... $623 $-- $4 $627 December 31, 2004 Korea...................................................................... $615 $-- $3 $618 September 30, 2005 Korea...................................................................... $656 $-- $10 $666
REVERSAL OF ALLOWANCE FOR CREDIT LOSSES

 

 

 

 

Public

 

Corporations

 

 

 

 

 

Financial

 

Sector

 

and Other

 

Total

 

(Dollars in millions)

 

Institutions

 

Entities

 

Borrowers

 

Outstandings

 

March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Korea

 

 

$

679

 

 

 

$

 

 

 

$

6

 

 

 

$

685

 

 

39




Provision for Loan Losses

We recorded a reversal of the allowance for loan losses of $15$7 million in the thirdfirst quarter of 2005,2006, compared with a reversal of the allowance for creditloan losses of $11$12 million in the thirdfirst quarter of 2004.2005. Provisions for loan losses are charged to income to bring our allowance for loan losses to a level deemed appropriate by management based on the factors discussed under "Allowance“Allowances for Credit Losses"Losses” below. Beginning with first quarter 2005, changes in the allowance for losses related to off-balance sheet commitments are recognized in noninterest expense. There was no provision ora recovery for losses related to the change in the allowance for losses on off-balance sheet commitments in the thirdfirst quarter 2005. ALLOWANCE FOR CREDIT LOSSES ALLOWANCE POLICY AND METHODOLOGY 2006 of $3 million compared to a provision for losses on off-balance sheet commitments in the first quarter 2005 of $3 million.

Allowances for Credit Losses

Allowance Policy and Methodology

We maintain an allowanceallowances for credit losses (defined as both the allowance for loan and the allowance for off-balance sheet commitment losses) to absorb losses inherent in the loan portfolio as well as for leases and off-balance sheet commitments. Understanding our policies on the allowanceallowances for credit losses is fundamental to understanding our consolidated financial condition and consolidated results of operations. 40 Accordingly, our significant policies and methodology on the allowanceallowances for credit losses are discussed in detail in Note 1 in the "Notes“Notes to Consolidated Financial Statements"Statements” and in the section "Allowance“Allowances for Credit Losses"Losses” included in our "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” in our 20042005 Annual Report on Form 10-K, which was filed with the SEC. COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR CREDIT LOSSES FROM DECEMBER

Comparison of the Total Allowances and Related Provision for Credit Losses from December 31, 2004 2005

At September 30, 2005,March 31, 2006, our total allowanceallowances for credit losses was $445$423 million, which consisted of $363$340 million related to loans and $82$83 million related to off-balance sheet commitments. The allowanceallowances for credit losses consisted of $375$360 million and $70$63 million of allocated and unallocated allowance, respectively. At September 30, 2005,March 31, 2006, our allowanceallowances for credit loss coverage ratios were 1.391.26 percent of total loans and 1,2721,003 percent of total nonaccrual loans. At December 31, 2004,2005, our total allowanceallowances for credit losses was at $482$438 million, or 1.651.32 percent of the total loan portfolio and 338744 percent of total nonaccrual loans.

In addition, the allowanceallowances incorporates the results of measuring impaired loans as provided in SFAS No. 114, "Accounting“Accounting by Creditors for Impairment of a Loan"Loan” as amended by SFAS No. 118, "Accounting“Accounting by Creditors for Impairment of a Loan--IncomeLoan—Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. At September 30, 2005,March 31, 2006, total impaired loans were $35$27 million, and the associated impairment allowance was $8$9 million, compared with $88$59 million and $24$13 million, respectively, at December 31, 2004. 2005.

At September 30, 2005March 31, 2006 and December 31, 2004,2005, the allowancesallowance for losses related to off-balance sheet commitments included within our total allowanceallowances for credit losses, were $82was $83 million and $83$86 million, respectively. In determining the adequacy of our allowanceallowances for credit losses, we consider both the allowance for loan losses and for losses on off-balance sheet commitments. commitment losses.

We recorded a reversal of our allowance for loan losses of $7 million in the first quarter 2006, as a result of management’s assessment of factors, including improvements in the quality of our loan portfolio, growth in the U.S. economy and improving conditions in domestic markets in which we operate, offset by the growth in the loan portfolio.

40




During the thirdfirst quarter of 2005,2006, there were no material changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the formula and specific allowanceallowances for credit losses. We recorded a total reversal of our allowance for credit losses of $15 million

Changes in the third quarter 2005. Approximately $10 million of this reversal reflects the impact on the general allowance from the decision to exit the international correspondent banking businessAllocated (Formula and approximately $5 million of this reversal was the result of management's assessment of factors, including improvements in the quality of our loan portfolio, the continued improvement in the U.S. economy and improving conditions in domestic markets in which we operate, offset by the growth in the loan portfolio and the adverse impact of increasing fuel costs across the whole economy. CHANGES IN THE ALLOCATED (FORMULA AND SPECIFIC) ALLOWANCE Specific) Allowance

At September 30, 2005,March 31, 2006, the formula allowance increaseddecreased to $365$348 million, compared to $361$356 million at December 31, 2004.2005. The increasenet decrease was due primarily to the impact of a decrease in criticized loans offset by growth in our pass-graded and homogeneous pooled loans. the commercial loan portfolio.

At September 30, 2005,March 31, 2006, the specific allowance decreased to $10$12 million, compared to $38$17 million at December 31, 2004.2005. This decrease is primarily reflective of lower nonaccrual loans and leases. CHANGES IN THE UNALLOCATED ALLOWANCE

Changes in the Unallocated Allowance

At September 30, 2005,March 31, 2006, the unallocated allowance decreased modestly to $70$63 million from $83$65 million at December 31, 2004,2005, reflecting management’s belief that maintaining the declineunallocated allowance near our December 31, 2005 assessment is appropriate based on continuing uncertainty associated with our principal portfolio segments as we approach a turning point in exposures in our leasing portfolio as a result of the charge-off of certain aircraft leases, and improvements in both the commercial real estate and power company portfolios.credit quality trends. Additionally, the reasons for which we believe an unallocated allowance is warranted are detailed below.

In our assessment as of September 30, 2005,March 31, 2006, management focused, in particular, on the factors and conditions set out below. There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the ranges set forth. 41

Although in certain instances the downgrading of a loan resulting from the effects of the conditions described below has been reflected in the formula allowance, management believes that the impact of these events on the collectibility of the applicable loans may not have been reflected in the level of nonperforming loans or in the internal risk grading process with respect to such loans. In addition, our formula allowance does not take into consideration sector-specific changes in the severity of losses that are expected to arise from current economic conditions compared with our historical losses. Accordingly, our evaluation of the probable losses related to the impact of these factors was reflected in the unallocated allowance. The evaluations of the inherent losses with respect to these factors are subject to higher degrees of uncertainty because they are not identified with specific problem credits.

The following describes the specific conditions we considered. o

·       With respect to fuel prices, we considered the ability of borrowers to absorb higher oil prices without anticipated negative effects, the prospects of high and increasing pricescosts of oil and petroleum products and the impact across virtually all sectors of the economy, which could be in thea range of $10$6 million to $39$29 million. o

·       With respect to commercial real estate, we considered slightly improved vacancy rates and rent growth being experienced nationally,an improvement in the commercial real estate sector, partly offset by weakness in the residential construction market, which reduced our attribution to acould be in the range of $8 million to $18 million. o With respect to leasing, we considered an improvement for some electric service providers, the realization of losses in the aircraft lease portfolio and the remaining aircraft lease exposures, which reduced our attribution to a range of $3 million to $6 million. o

·       With respect to concentrated sales, which include suppliers of "big box'“big box” stores like Costco, Wal-Mart, Home Depot, Lowe'sLowe’s and other companies that generate 15 percent or more of their revenues from one customer, we considered the potential negative impact competitive market pricing would have on their profit margins, which could be in the range of $5 million to $9 million.

·       With respect to contractors, we considered the decline in new home sales and the impact of higher commodity prices on contractor margins, which could be in the range of $4 million to $6 million.

·       With respect to leasing, we considered the uncertain state of the airline industry, as well as improving positions in our utilities portfolio, which could be in the range of $3 million to $6 million.

41




Accordingly, our evaluation of the probable losses related to the impact of these factors was reflected in the unallocated allowance. 42 CHANGE IN THE TOTAL ALLOWANCE FOR CREDIT LOSSES

Change in the Total Allowances for Credit Losses

The following table sets forth a reconciliation of changes in our allowanceallowances for credit losses:
FOR THE THREE MONTHS FOR THE NINE MONTHS -------------------- ------------------- ENDED SEPTEMBER 30, INCREASE (DECREASE) ENDED SEPTEMBER 30, INCREASE (DECREASE) ------------------- ------------------- ------------------- ------------------- (DOLLARS IN THOUSANDS) 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT - ---------------------- ---- ---- ------ ------- ---- ---- ------ ------- Balance, beginning of period... $499,580 $394,972 $(104,608) (20.9)% $532,910 $399,156 $(133,754) (25.1)% Loans charged off: Commercial, financial and industrial................. 13,700 8,629 (5,071) (37.0) 52,888 15,992 (36,896) (69.8) Construction................. 200 -- (200) (100.0) 200 118 (82) (41.0) Commercial mortgage.......... -- 8 8 nm 43 1,315 1,272 nm Consumer..................... 1,520 1,136 (384) (25.3) 4,795 3,238 (1,557) (32.5) Lease financing.............. 183 19,656 19,473 nm 2,207 19,857 17,650 799.7 -------- -------- --------- -------- -------- --------- Total loans charged off.... 15,603 29,429 13,826 88.6 60,133 40,520 (19,613) (32.6) Recoveries of loans previously charged off: Commercial, financial and industrial................. 8,216 12,632 4,416 53.7 29,127 44,073 14,946 51.3 Construction................. -- -- -- -- -- 34 34 nm Commercial mortgage.......... -- -- -- -- 1,571 48 (1,523) (96.9) Consumer..................... 350 361 11 3.1 1,241 1,362 121 9.8 Lease financing.............. 40 12 (28) (70.0) 191 149 (42) (22.0) -------- -------- --------- -------- -------- --------- Total recoveries of loans previously charged off... 8,606 13,005 4,399 51.1 32,130 45,666 13,536 42.1 -------- -------- --------- -------- -------- --------- Net loans charged off (recovered)............ 6,997 16,424 9,427 134.7 28,003 (5,146) (33,149) (118.4) Reversal of allowance for loan losses....................... (10,939) (15,000) (4,061) 37.1 (29,038) (40,683) (11,645) 40.1 Foreign translation adjustment and other net additions (deductions)(1).............. (2) 123 125 nm 5,773 52 (5,721) (99.1) -------- -------- --------- -------- -------- --------- Ending balance of allowance for loan losses(2)............... $481,642 $363,671 $(117,971) (24.5)% $481,642 $363,671 $(117,971) (24.5)% Allowance for losses on off-balance sheet commitments(2)............... -- 81,375 81,375 nm -- 81,375 81,375 nm -------- -------- --------- -------- -------- --------- Allowance for credit losses.... $481,642 $445,046 $ (36,596) (7.6)% $481,642 $445,046 $ (36,596) (7.6)% ======== ======== ========= ======== ======== ========= Allowance for credit losses to total loans.................. 1.79% 1.39% 1.79% 1.39% Reversal of allowance for loan losses to net loans charged off (recovered).............. nm nm nm 790.58 Net loans charged off (recovered) to average loans outstanding for the period(3) 0.11 0.20 0.15 (0.02) - --------------- (1) Includes $5.7 million related to the Business Bank of California acquisition in the first quarter of 2004. (2) On December 31, 2004, UnionBanCal Corporation transferred the allowance for losses on off-balance sheet commitments of $83 million from allowance for loan losses to other liabilities. At September 30, 2005, the allowance for losses on off-balance commitments was $82 million. Periods prior to December 31, 2004 have not been restated. (3) Annualized. nm--not meaningful

 

 

For the Three Months

 

 

 

 

 

 

 

Ended March 31,

 

Increase (Decrease)

 

(Dollars in thousands)

 

2005

 

2006

 

Amount

 

Percent

 

Balance, beginning of period

 

$

399,156

 

$

351,532

 

$

(47,624

)

(11.9

)%

Loans charged off:

 

 

 

 

 

 

 

 

 

Commercial, financial and industrial

 

3,337

 

10,744

 

7,407

 

nm

 

Construction

 

118

 

 

(118

)

(100.0

)

Mortgage

 

1,296

 

 

(1,296

)

(100.0

)

Consumer

 

1,083

 

918

 

(165

)

(15.2

)

Lease financing

 

131

 

19

 

(112

)

(85.5

)

Total loans charged off

 

5,965

 

11,681

 

5,716

 

95.8

 

Recoveries of loans previously charged off:

 

 

 

 

 

 

 

 

 

Commercial, financial and industrial

 

19,600

 

1,909

 

(17,691

)

(90.3

)

Mortgage

 

23

 

2

 

(21

)

(91.3

)

Consumer

 

590

 

440

 

(150

)

(25.4

)

Lease financing

 

17

 

4,228

 

4,211

 

nm

 

Total recoveries of loans previously charged off

 

20,230

 

6,579

 

(13,651

)

(67.5

)

Net loans charged off (recovered)

 

(14,265

)

5,102

 

19,367

 

nm

 

Reversal of allowance for loan losses

 

(12,119

)

(7,000

)

5,119

 

(42.2

)

Foreign translation adjustment and other net additions (deductions)

 

(27

)

13

 

40

 

 

nm

 

Ending balance of allowance for loan losses

 

$

401,275

 

$

339,443

 

$

(61,832

)

(15.4

)

Allowance for losses on off-balance sheet commitments

 

85,374

 

83,374

 

(2,000

)

(2.3

)

Allowances for credit losses

 

$

486,649

 

$

422,817

 

$

(63,832

)

(13.1

)%

Allowances for credit losses to total loans

 

1.63

%

1.26

%

 

 

 

 

Reversal of allowance for loan losses to net loans charged off (recovered)

 

nm

 

nm

 

 

 

 

 

 

Net loans charged off (recovered) to average loans outstanding for the period(1)

 

(0.19

)

0.06

 

 

 

 

 

 


(1)                Annualized.

nm = not meaningful

Total loans charged off in the thirdfirst quarter 20052006 increased from the thirdfirst quarter 2004, 2005, primarily attributabledue to the charge-off of certain aircraft leases. Totalfour commercial loans, charged offeach in the nine months ended September 2005 decreased from the nine months ended September 30, 2004, primarily attributable to the improvements in the credit qualityexcess of our portfolio, partly offset by the charge-off of certain aircraft leases. $1 million. Charge-offs reflect the realization of losses in the portfolio that were recognized previously through provision for credit losses. In both the three and nine months ended September 30, 2005,addition, first quarter 2006 recoveries of loans previously charged off increaseddecreased from the samefirst quarter of 2005 primarily a result of the higher levels of loans charged-off in periods in 2004, primarily attributableprior to higher 43 recoveries of commercial loans. FluctuationsMarch 31, 2005. Such fluctuations in loan recoveries from year-to-year are due to variability in timing of recoveries and tend to trail the periods in which charge-offs are recorded. NONPERFORMING ASSETS

42




Nonperforming Assets

Nonperforming assets consist of nonaccrual loans and foreclosed assets. Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest. For a more detailed discussion of the accounting for nonaccrual loans, see Note 1 to our Consolidated Financial Statements included in our 2004 Annual Report on Form 10-K. 10-K for the year ended December 31, 2005.

Foreclosed assets include property where we acquired title through foreclosure or "deed“deed in lieu"lieu” of foreclosure.

The following table sets forth an analysis of nonperforming assets.
INCREASE (DECREASE) SEPTEMBER 30, 2005 FROM: ------------------------ SEPTEMBER 30, DECEMBER 31, 2004 2004 ---- ---- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2004 2004 2005 AMOUNT PERCENT AMOUNT PERCENT - ---------------------- ---- ---- ---- ------ ------- ------ ------- Commercial, financial and industrial $ 90,506 $ 58,538 $ 24,654 $ (65,852) (72.8)% $ (33,884) (57.9)% Construction....................... 6,180 2,622 -- (6,180) (100.0) (2,622) (100.0) Commercial mortgage................ 28,396 26,519 10,326 (18,070) (63.6) (16,193) (61.1) Lease financing.................... 53,758 54,894 -- (53,758) (100.0) (54,894) (100.0) -------- -------- -------- --------- --------- Total nonaccrual loans......... 178,840 142,573 34,980 (143,860) (80.4) (107,593) (75.5) Foreclosed assets.................. 10,607 7,282 2,527 (8,080) (76.2) (4,755) (65.3) -------- -------- -------- --------- --------- Total nonperforming assets..... $189,447 $149,855 $ 37,507 $(151,940) (80.2) $(112,348) (75.0) ======== ======== ======== ========= ========= Allowances for credit losses(1).... $481,642 $481,531 $445,046 $ (36,596) (7.6)% $ (36,485) (7.6)% ======== ======== ======== ========= ========= Nonaccrual loans to total loans.... 0.66% 0.49% 0.11% Allowances for credit losses to nonaccrual loans................. 269.31 337.74 1,272.29 Nonperforming assets to total loans and foreclosed assets............ 0.70 0.51 0.12 Nonperforming assets to total assets........................... 0.40 0.31 0.07 - --------------- (1) Includes allowance for losses on off-balance sheet commitments.

 

 

 

 

 

 

 

 

Increase (Decrease)

 

 

 

 

 

 

 

 

 

 

March 31, 2006 From:

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31, 2005

 

December 31, 2005

 

 

(Dollars in thousands)

 

2005

 

2005

 

2006

 

Amount

 

Percent

 

Amount

 

Percent

 

 

Commercial, financial and industrial

 

 

$

30,089

 

 

 

$

50,073

 

 

$

18,691

 

$

(11,398

)

 

(37.9

)%

 

$

(31,382

)

 

(62.7

)%

 

Construction

 

 

1,425

 

 

 

 

 

 

(1,425

)

 

(100.0

)

 

 

 

nm

 

 

Commercial mortgage

 

 

9,587

 

 

 

8,819

 

 

8,257

 

(1,330

)

 

(13.9

)

 

(562

)

 

(6.4

)

 

Lease financing

 

 

54,893

 

 

 

 

 

15,187

 

(39,706

)

 

(72.3

)

 

15,187

 

 

nm

 

 

Total nonaccrual loans

 

 

95,994

 

 

 

58,892

 

 

42,135

 

(53,859

)

 

(56.1

)

 

(16,757

)

 

(28.5

)

 

Foreclosed assets

 

 

5,232

 

 

 

2,753

 

 

257

 

(4,975

)

 

(95.1

)

 

(2,496

)

 

(90.7

)

 

Total nonperforming
assets

 

 

$

101,226

 

 

 

$

61,645

 

 

$

42,392

 

$

(58,834

)

 

(58.1

)

 

$

(19,253

)

 

(31.2

)

 

Allowances for credit losses(1)

 

 

$

486,649

 

 

 

$

437,907

 

 

$

422,817

 

$

(63,832

)

 

(13.1

)%

 

$

(15,090

)

 

(3.4

)%

 

Nonaccrual loans to total loans

 

 

0.32

%

 

 

0.18

%

 

0.13

%

 

 

 

 

 

 

 

 

 

 

 

 

Allowances for credit losses to nonaccrual loans

 

 

506.96

 

 

 

743.58

 

 

1,003.48

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets to total loans and foreclosed assets

 

 

0.34

 

 

 

0.19

 

 

0.13

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets to total assets

 

 

0.20

 

 

 

0.12

 

 

0.09

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)Includes allowance for losses related to off-balance sheet commitments.

nm = not meaningful

At September 30, 2005,March 31, 2006, our nonperforming assets included approximately $9.5$5 million in acquired syndicated loans. The decreasesdecrease in nonaccrual commercial, financial, and industrial financings were primarily due to pay-downs, note sales, and charge-offs. The increase in nonaccrual lease financings was primarily due to leases in the charge-off of certain aircraft leases.utilities sector. During the thirdfirst quarter 2005,2006, we sold $4.0approximately $18 million of nonperforming loans compared to none$35 million in the thirdfirst quarter 2004.2005. Losses and gains, torecoveries that result when the extent previously charged-off, from these salessale decision is made are reflected in our net charge-offs. 44
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING INCREASE (DECREASE) SEPTEMBER 30, 2005 FROM: ------------------------ SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2004 2004 2005 2004 2004 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT - ---------------------- ------ ------- ------ ------- Commercial, financial and industrial....... $1,892 $1,315 $ 778 $(1,114) (58.9)% $(537) (40.8)% Construction............................... 2,137 -- -- (2,137) (100.0) -- nm Residential mortgage....................... 3,353 1,385 3,042 (311) (9.3) 1,657 119.6 Consumer and other......................... 1,249 1,157 883 (366) (29.3) (274) (23.7) ------ ------ ------ ------- ----- Total loans 90 days or more past due and still accruing........................... $8,631 $3,857 $4,703 $(3,928) (45.5)% $ 846 21.9% ====== ====== ====== ======= ===== - --------------- nm = not meaningful
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

43




Loans 90 Days or More Past Due and Still Accruing

 

 

 

 

 

 

 

 

Increase (Decrease)

 

 

 

 

 

 

 

 

 

March 31, 2006 From:

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31, 2005

 

December 31, 2005

 

(Dollars in thousands)

 

2005

 

2005

 

2006

 

Amount

 

Percent

 

Amount

 

Percent

 

Commercial, financial and industrial

 

 

$

271

 

 

 

$

187

 

 

 

$

412

 

 

 

$

141

 

 

 

52.0

%

 

 

$

225

 

 

 

120.3

%

 

Construction

 

 

629

 

 

 

677

 

 

 

 

 

 

(629

)

 

 

(100.0

)

 

 

(677

)

 

 

(100.0

)

 

Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1,580

 

 

 

2,784

 

 

 

2,968

 

 

 

1,388

 

 

 

87.8

 

 

 

184

 

 

 

6.6

 

 

Commercial

 

 

878

 

 

 

499

 

 

 

1,007

 

 

 

129

 

 

 

14.7

 

 

 

508

 

 

 

101.8

 

 

Total mortgage

 

 

2,458

 

 

 

3,283

 

 

 

3,975

 

 

 

1,517

 

 

 

61.7

 

 

 

692

 

 

 

21.1

 

 

Consumer and other

 

 

616

 

 

 

819

 

 

 

812

 

 

 

196

 

 

 

31.8

 

 

 

(7

)

 

 

(0.9

)

 

Total loans 90 days or more past due and still accruing

 

 

$

3,974

 

 

 

$

4,966

 

 

 

$

5,199

 

 

 

$

1,225

 

 

 

30.8

%

 

 

$

233

 

 

 

4.7

%

 

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk exists primarily in interest rate risk in our non-trading balance sheet and, to a much lesser degree, in price risk in our trading portfolio for our customer-focused trading and sales activities. The objective of market risk management is to mitigate an undue adverse impact on earnings and capital arising from changes in interest rates and other market variables. This risk management objective supports our broad objective of preservingenhancing shareholder value, which encompasses stable earnings growth over time and capital stability.

The Board of Directors, through its Finance and Capital Committee, approves our Asset-Liability Management (ALM)ALM Policy, which governs the management of market risk and liquidity. In the administration of market risk management, the Chief Executive Officer (CEO)CEO Forum provides broad and strategic guidance and, as appropriate, specific direction to the Asset & Liability Management Committee (ALCO) whose voting members are comprised of senior executives. ALCO is responsible for ongoing management of interest rate and price risks as well as liquidity risk, including formulation of risk management strategies, in accordance with the CEO Forum'sForum’s directives. The Treasurer is primarily responsible for the implementation of risk management strategies approved by the CEO Forum or ALCO and for operating management of market risk through the funding, investment, and derivatives hedging activities of Corporate Treasury. The Manager of the Global Markets Division is responsible for operating management of price risk through the trading activities conducted in that division.

The Market Risk Monitoring (MRM) unit is responsible for the monitoring and reporting of market risk, including ensuring that ALCO, our senior management and the Board are kept fully informed as to our market risk profile and compliance with applicable limits, guidelines and policies. MRMrisk. Market Risk Monitoring functions independently of all operating and management units.

We have separate and distinct methods for managing the market risk associated with our ALMasset and liability management activities and our trading activities. INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) activities, as described below.

Interest Rate Risk Management (Other Than Trading)

During the thirdfirst quarter 2005,of 2006, our asset sensitivity decreased as a result of several factors. Firstly, we added new floor hedges to reduce our downside asset-sensitivity was reduced, reversing the upward trend(see our discussion of the first six months of 2005. The reduction“ALM Derivatives” below). Additionally, changes in asset-sensitivity during the third quarter 2005 reflected the combination of a shift in ALM strategy that took place in the third quarter 2005 and changes underway in the coreour balance sheet (for additional information see "ALM Activities" section below). In particular wascomposition and refinements we made to our deposit-pricing model to reflect the interest rate risk impact of changes in deposit market pricing conditions. We observed an increasing 45 responsiveness of non-maturity deposit rates to changes in short-term market rates in recent months especially during the current quarter. This has occurred as a result of the delayed response of deposit rateshave also contributed to the increases in market rates since 2004. Our modeling of this change in the deposit-pricing environment resulted in a reduction in the reportedour asset sensitivity.

At March 31, 2006, Economic NII showed modest asset-sensitivity of our earnings during the third quarter 2005. In the table below, ato parallel rate shifts. A +200 basis pointspoint parallel rate shift at September 30, 2005 would have produced an estimated 1.04 percent increase in Economic NII (net interest income), while a -200 basis points shift would have loweredraise 12-month Economic NII by an estimated 2.221.01 percent, while a similar downward shift would reduce it by 1.21 percent. This compares with an estimated 0.811.93 percent and negative 1.702.58 percent, respectively, at September 30, 2004.March 31, 2005. We caution however, that ongoing enhancements to our interest rate risk modeling changes implemented over this period may make year-over-yearprior-year comparisons no longerof Economic NII less meaningful.

44




Economic NII adjusts our reported NII for the effect of certain non-interest, DDA-related, fee and expense items. Those adjustment items are innately liability-sensitive, meaning that reported NII is more asset-sensitive than is Economic NII. ECONOMIC

Economic NII
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, (DOLLARS IN MILLIONS) 2004 2005 2005 - --------------------- ---- ---- ---- +200 basis points..................................................................... $13.1 $51.3 $20.4 as a percentage of base case NII...................................................... 0.81% 2.68% 1.04% - -200 basis points..................................................................... $(27.6) $(66.5) $(43.3) as a percentage of base case NII...................................................... 1.70% 3.48% 2.22%

(Dollars in millions)

 

March 31,
2005

 

December 31,
2005

 

March 31,
2006

 

+200 basis points

 

 

$

36.4

 

 

 

$

18.9

 

 

 

$

20.4

 

 

as a percentage of basc case NII

 

 

1.93

%

 

 

0.93

%

 

 

1.01

%

 

-200 basis points

 

 

$

(48.6

)

 

 

$

(40.2

)

 

 

$

(24.5

)

 

as a percentage of basc case NII

 

 

2.58

%

 

 

1.97

%

 

 

1.21

%

 

The figures in the above table are reported on a continuing operations basis, with all assets and liabilities associated with the disposal of the international correspondent banking business eliminated. We believe that this approach provides the best representation of our risk profiles. In the case of non-parallel yield curve changes, we remainour Economic NII is relatively neutral to short rates changes (with long rates held constant) and modestly asset-sensitive both to changes in long-term rates (with short-term rates held constant) and to the converse. The table above presents the impact on economic NII on a consolidated basis, which represents the true economic interest rate risk, reflecting the assets and liabilities of the international correspondent banking business as they are expected to run off in coming months under the terms of the recently announced sale of that unit (see discussion under "Discontinued Operations"). On a continuing operations basis, our asset-sensitivity at September 30, 2005, was affected only marginally. Economic NII would have risen by 1.09 percent under a +200 basis points parallel shift and would have fallen by 2.27 percent had rates moved down by 200 basis points.

ALM ACTIVITIES Activities

In general, our unhedged, core balance sheet is asset-sensitive,relatively asset sensitive, meaning that our loans generally re-price more quickly than our core deposits. In managing the interest sensitivity of our balance sheet, we use the ALM investment securities portfolio and derivatives positions as the primary tools to adjust our primary tools.risk profile. During the thirdfirst quarter 2005,of 2006, we continuedcompleted our ALM portfolio rebalancing strategy as described below while continuing to allow runoff in our relatively short durationmaturing ALM securities runoff to help support loan growth. However, newNew derivative hedges were also added during the third quarter 2005 as described below, to help reduce our overall asset-sensitivity. asset sensitivity.

ALM INVESTMENTS Investments

At September 30,March 31, 2005 and 2006, our securities available for sale portfolio included $8.3$10.0 billion and $6.6 billion, respectively, of securities for ALM purposes, compared with $11.2 billion at September 30, 2004.purposes. During the thirdfirst quarter of 2006, we purchased approximately $646 million of AAA-rated Non-Agency mortgage-backed securities to complete our portfolio rebalancing strategy, initiated in the fourth quarter of 2005, to diversify our Agency concentration risk. The composition of the portfolio is expected to remain relatively stable for the remainder of 2006. Also, approximately $700$380 million of ALM securities matured or were called divided evenly between direct Agency obligations and mortgage-backed securities.during the quarter. The estimated ALM portfolio effective duration was 2.02.3 at September 30, 2005,March 31, 2006, compared to 2.42.2 at September 30, 2004. 46 March 31, 2005.

Effective duration is a measure of price sensitivity of a bond portfolio to immediate parallel shifts in interest rates. An effective duration of 2.02.3 suggests an expected price change of approximately minus 2.02.3 percent for an immediate one percent riseincrease in interest rates.

ALM DERIVATIVES Derivatives

During the thirdfirst quarter 2005,2006, we purchased $1 billion notional amount in new derivative hedgesof LIBOR floors in order to reducemoderate the downside asset-sensitivity of our overall balance sheet. Together withrisk position while retaining the $300 millionupside sensitivity should rates rise further. During the first quarter of 2006, we also allowed $1.8 billion of caps and cap corridors, which hedged our CD portfolios to mature. The net effect of the purchases and maturities was a reduction in maturing positions, our ALM derivatives portfolio increased by $700 million between June 30 and September 30, 2005. During the nine months ended September 30, 2005, the ALM derivatives portfolio has declined by a net $1.73 billion notional, as $2.73 billion notional of contracts have matured, offset by the $1 billion notional of interest rate swaps added in the most recent quarter.approximately $750 million. The fair value of the ALM derivative contracts have declined throughout the year as several "in-the-money"“in-the-money” contracts have matured and as the value of our remaining receive fixed and floor positions have declined with rising interest rates.

45




For additional discussion of derivative instruments and our hedging strategies, see Note 8 to our Condensed Consolidated Financial Statements included in this report and Note 1819 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004. 2005.

The following table provides the notional value and the fair value of our ALM derivatives portfolio as of March 31, 2005, December 31, 2004, June 302005, and September 30, 2005March 31, 2006 and the change in fair value between June 30December 31, 2005 and September 30, 2005.
INCREASE / (DECREASE) FROM JUNE 30, 2005 DECEMBER 31, JUNE 30, SEPTEMBER 30, TO SEPTEMBER 30, (DOLLARS IN THOUSANDS) 2004 2005 2005 2005 - ---------------------- ---- ---- ---- ---- Total gross notional amount of positions held for purposes other than trading:......................................... $9,880,000 $7,450,000 $8,150,000 $700,000 Of which, interest rate swaps pay fixed rates of interest:.. $ -- $ -- $ -- $-- ---------- ---------- ---------- -------- Fair value of positions held for purposes other than trading: Gross positive fair value................................... $45,434 $ 36,596 $ 15,690 $(20,906) Gross negative fair value................................... $ (15,461) $ (23,259) $ (48,118) $(24,859) ---------- ---------- ---------- -------- Fair value of position.................................... $ 29,973 $ 13,337 $ (32,428) $(45,765) ========== ========== ========== ========
TRADING ACTIVITIES March 31, 2006.

 

 

 

 

 

 

 

 

Increase / (Decrease)

 

 

 

March 31,

 

December 31,

 

March 31,

 

From December 31, 2005

 

(Dollars in thousands)

 

2005

 

2005

 

2006

 

to March 31, 2006

 

Total gross notional amount of positions held for purposes other than trading:

 

$

8,680,000

 

$

7,550,000

 

$

6,800,000

 

 

$

(750,000

)

 

Of which, interest rate swaps pay fixed rates of interest:

 

 

 

 

 

 

 

Fair value of positions held for purposes other than trading:

 

 

 

 

 

 

 

 

 

 

 

Gross positive fair value

 

20,040

 

5,721

 

13,370

 

 

7,649

 

 

Gross negative fair value

 

43,305

 

55,943

 

69,746

 

 

13,803

 

 

Fair value of position

 

$

(23,265

)

$

(50,222

)

$

(56,376

)

 

$

(6,154

)

 

Trading Activities

Effective January 1, 2005, the Securities Trading and Institutional Sales department, which serves the fixed-income needs of our institutional clients, was combined with the retail brokerage operations of our broker/dealer subsidiary, UnionBanc Investment Services LLC. The great majority of our securities trading income comes from customer-related transactions. UnionBanc Investment Services LLC'sLLC’s trading risk is monitored and controlled using the existing Value-at-Risk methodology.

We began marketing energy derivatives contracts to existing energy industry customers, primarily oil and gas producers, in late 2004, in order to meet their hedging needs. Volume increased from $42 million$1.1 billion in notional amount of contracts outstanding as of December 31, 20042005 to $832 million$1.5 billion as of September 30, 2005.March 31, 2006. Consistent with our customer interest rate derivatives business, all transactions are fully matched to remove our exposure to market risk, with income produced from the credit spread earned.

For information about the market risk in our trading activities, please see "Quantitative“Quantitative and Qualitative Disclosures about Market Risk"Risk” in "Management's“Management’s Discussion and Analysis of Financial 47 Condition and Results of Operations"Operations” in our Annual Report on Form 10-K for the year ended December 31, 2004. LIQUIDITY RISK 2005.

Liquidity Risk

Liquidity risk representsis the potential for loss as aundue risk to the Bank’s earnings and capital, which would result of limitations on our ability to adjust our future cash flowsfrom the Bank’s inability to meet its obligations as they come due without incurring unacceptable costs. Liquidity risk management is governed by the needs of depositors and borrowers and to fund operations on a timely and cost-effective basis. The ALM Policy, which is approved by the Finance and Capital Committee of the Board requires regular reviews of our liquidity by ALCO.Board. ALCO conducts monthly ongoing reviews of our liquidity situation as well asand provides regular updates to our CEO Forum who approve our liquidity contingency plan.Liquidity Contingency Plan. Liquidity is managed through this ALCO coordination process on an entity-wide basis, encompassing all major business units. The operatingOur liquidity management of liquidity is implemented through the funding and investment functions. Our liquidity management drawsour three primary sources of liquidity: core deposits, drawing upon the strengths of our extensive retail and commercial core deposit franchise, coupled with the ability to obtainfranchise; asset liquidation, including selling securities under repurchase agreements; and wholesale funding, which includes funds for various terms in a variety ofraised from interbank and other sources, both domestic and international money markets. Our securities portfolio represents a significant source of additional liquidity. offshore.

46




Core deposits provide us with a sizable source of relatively stable and low-cost funds. Our average core deposits, which include demand deposits, money market demand accounts, and savings and consumer time deposits, (of $100 thousand or less), combined with average common stockholders'stockholders’ equity, funded over 7683 percent of average total assets of approximately $48 billion in the thirdfirst quarter of 2005.2006. Most of the remaining funding was provided by short-term borrowings in the form of negotiable certificates of deposit, large time deposits, foreign deposits, federal funds purchased, securities sold under repurchase agreements, commercial paper, and other borrowings. The

Our securities portfolio provides additionaladditional enhancement to our liquidity position, which may be created through either securities sales or repurchase agreements. At September 30, 2005,March 31, 2006, we could have sold or transferred under repurchase agreements almost $6approximately $4 billion of our available for sale securities. Liquidity may also be provided by the sale or maturity of other assets such as interest-bearing deposits in banks, federal funds sold, and trading account securities. For the quarter ended September 30, 2005, theThe aggregate balance of these assets averaged $1 billion.$733 million in the first quarter of 2006. Additional liquidity may be provided through loan maturities and sales. REGULATORY CAPITAL

Regulatory Capital

The following tables summarize our risk-based capital, risk-weighted assets, and risk-based capital ratios. The tables include assets of discontinued operations.
UNIONBANCAL CORPORATION MINIMUM SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY (DOLLARS IN THOUSANDS) 2004 2004 2005 REQUIREMENT - ---------------------- ----------- ----------- ----------- ----------- CAPITAL COMPONENTS Tier 1 capital.............$ 3,760,291 $ 3,817,698 $ 3,963,712 Tier 2 capital............. 949,091 968,294 883,832 ----------- ----------- ----------- Total risk-based capital...$ 4,709,382 $ 4,785,992 $ 4,847,544 =========== =========== =========== Risk-weighted assets.......$37,622,266 $39,324,859 $44,630,199 =========== =========== =========== Quarterly average assets $45,444,623 $47,168,683 $49,819,315 =========== =========== =========== CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - -------------- ------ ----- ------ ----- ------ ----- ------ ----- Total capital (to risk-weighted assets).......... $4,709,382 12.52% $4,785,992 12.17% $4,847,544 10.86% > $3,570,416 8.0% - Tier 1 capital (to risk-weighted assets).......... 3,760,291 9.99 3,817,698 9.71 3,963,712 8.88 > 1,785,208 4.0 - Leverage(1)........ 3,760,291 8.27 3,817,698 8.09 3,963,712 7.96 > 1,992,773 4.0 - --------------- - (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).
48
UNION BANK OF CALIFORNIA, N.A. MINIMUM "WELL-CAPITALIZED" SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, REGULATORY REGULATORY (DOLLARS IN THOUSANDS) 2004 2004 2005 REQUIREMENT REQUIREMENT - ---------------------- ------------- ------------ ------------- ----------- ------------------ CAPITAL COMPONENTS Tier 1 capital.......... $ 3,791,489 $ 3,597,738 $ 4,068,332 Tier 2 capital.......... 487,480 493,756 441,350 ----------- ----------- ----------- Total risk-based capital.............. $ 4,278,969 $ 4,091,494 $ 4,509,682 =========== =========== =========== Risk-weighted assets.... $36,919,037 $38,711,682 $43,966,515 =========== =========== Quarterly average assets $44,943,543 $46,588,762 $49,138,592 =========== =========== =========== CAPITAL RATIOS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - -------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total capital (to risk-weighted assets)........ $4,278,969 11.59% $4,091,494 10.57% $4,509,682 10.26% > $3,517,321 8.0% > $4,396,652 10.0% - - Tier 1 capital (to risk-weighted assets)........ 3,791,489 10.27 3,597,738 9.29 4,068,332 9.25 > 1,758,661 4.0 > 2,637,991 6.0 - - Leverage(1)...... 3,791,489 8.44 3,597,738 7.72 4,068,332 8.28 > 1,965,544 4.0 > 2,456,930 5.0 - --------------- - - (1) Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).

UnionBanCal Corporation

 

 

 

 

 

 

 

 

Minimum

 

 

 

March 31,

 

December 31,

 

March 31,

 

Regulatory

 

(Dollars in thousands)

 

2005

 

2005

 

2006

 

Requirement

 

Capital Components

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

 

$

3,728,822

 

 

 

$

4,178,160

 

 

 

$

4,243,053

 

 

 

 

Tier 2 capital

 

 

968,292

 

 

 

876,713

 

 

 

862,051

 

 

 

 

Total risk-based capital

 

 

$

4,697,114

 

 

 

$

5,054,873

 

 

 

$

5,105,104

 

 

 

 

Risk-weighted assets

 

 

$

41,167,052

 

 

 

$

45,540,448

 

 

 

$

46,657,433

 

 

 

 

Quarterly average assets

 

 

$

47,892,405

 

 

 

$

49,789,877

 

 

 

$

48,200,458

 

 

 

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

4,697,114

 

11.41

%

$

5,054,873

 

11.10

%

$

5,105,104

 

10.94

%     ³

$

3,732,595

 

 

8.0

%

 

Tier 1 capital (to risk-weighted assets)

 

3,728,822

 

9.06

 

4,178,160

 

9.17

 

4,243,053

 

9.09

³ 

1,866,297

 

 

4.0

 

 

Leverage(1)

 

3,728,822

 

7.79

 

4,178,160

 

8.39

 

4,243,053

 

8.80

³ 

1,928,018

 

 

4.0

 

 


(1)Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).

47




Union Bank of California, N.A.

 

 

 

 

 

 

 

 

Minimum

 

“Well-Capitalized”

 

 

March 31,

 

December 31

 

March 31,

 

Regulatory

 

Regulatory

 

(Dollars in thousands)

 

2005

 

2005

 

2006

 

Requirement

 

Requirement

 

Capital Components

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital

 

 

$

3,719,837

 

 

 

$

4,315,471

 

 

 

$

4,377,832

 

 

 

 

 

 

Tier 2 capital

 

 

492,259

 

 

 

433,353

 

 

 

426,955

 

 

 

 

 

 

Total risk-based capital 

 

 

$

4,212,096

 

 

 

$

4,748,824

 

 

 

$

4,804,787

 

 

 

 

 

 

Risk-weighted assets

 

 

$

40,563,339

 

 

 

$

44,851,154

 

 

 

$

45,943,246

 

 

 

 

 

 

Quarterly average
assets

 

 

$

47,267,803

 

 

 

$

49,127,241

 

 

 

$

47,563,560

 

 

 

 

 

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

4,212,096

 

10.38

%

$

4,748,824

 

10.59

%

$

4,804,787

 

10.46

%

³$ 3,675,460

 

 

8.0

%      

 

³$ 4,594,325

 

 

10.0

%

 

Tier 1 capital (to risk-weighted assets)

 

3,719,837

 

9.17

 

4,315,471

 

9.62

 

4,377,832

 

9.53

 

³  1,837,730

 

 

4.0

 

 

³  2,756,595

 

 

6.0

 

 

Leverage(1)

 

3,719,837

 

7.87

 

4,315,471

 

8.78

 

4,377,832

 

9.20

 

³  1,902,542

 

 

4.0

 

 

³  2,378,178

 

 

5.0

 

 


(1)Tier 1 capital divided by quarterly average assets (excluding certain intangible assets).

We and Union Bank of California, N.A. are subject to various regulations of the federal banking agencies, including minimum capital requirements. We both are required to maintain minimum ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets (the Leverage ratio).

The decrease in ourthe Total capital ratiosratio for UnionBanCal Corporation from September 30, 2004, was attributable to higher risk-weighted assets and also stock repurchase. Our Leverage ratio decreaseMarch 31, 2005 was primarily due to a $4 billion, or 10 percent,an increase in quarterly averagerisk-weighted assets, which was substantially the result of increases in both our residential mortgageloan and commercial loan portfolios. lease financing receivables and unused off-balance sheet commitments. The increase in our leverage ratios from March 31, 2005 was due to the increase in our Tier 1 capital.

As of September 30, 2005,March 31, 2006, management believes the capital ratios of Union Bank of California, N.A. met all regulatory requirements of "well-capitalized"“well-capitalized” institutions, which are 10 percent for the Total risk-based capital ratio, 6 percent for the Tier 1 risk-based capital ratio and 5 percent for the Leverage ratio. BUSINESS SEGMENTS

Business Segments

In April 2005, we announced several organizational changes that affected our business segments. The Global Markets Group has been eliminated and the activities of this group have been transferred. Corporate Treasury, which is responsible for ALM and the investment portfolio, is now included in "Other."“Other.”  The trading of securities and foreign exchange contracts, as well as the responsibilities for customer accommodated derivative contracts, are now included in the "Global“Global Markets Division"Division” of the Community Banking and Investment Services Group. In addition, the discontinued operations resulting from the sale of most of our International Banking Group is also reflected in "Other."“Other.”  We are now organized around the target markets we serve and operate in two principal areas, as shown in the table that follows. The results show the financial performance of our major business units.

The risk-adjusted return on capital (RAROC) methodology used seeks to attribute economic capital to business units consistent with the level of risk they assume. These risks are primarily credit, market and operational. Credit risk is the potential loss in economic value due to the likelihood that the obligor will not perform as agreed. Market risk is the potential loss in fair value due to changes in interest rates, currency rates and equity prices. Operational risk is the potential loss due to all other factors, such as failures in internal control, system failures, or external events. RAROC is one of several measures that is used to measure business unit compensation.

48




The following tables reflect the condensed income statements, selected average balance sheet items, and selected financial ratios, including changes from the prior year, for each of our primary business units. The information presented does not necessarily represent the business units'units’ financial condition and results of operations as if they were independent entities. Also,In the table has been expandedfirst quarter of 2006, we changed our reporting to include 49 performance center earnings. A performance centerreflect a “market view” perspective in measuring our business segments. The market view is a special unit whose income generating activities, unlike typical profit centers, are based on other business segment units'measurement of our customer base. Themarkets aggregated to show all revenues generated and expenses incurred forfrom all products and services sold to those transactions entered into to accommodate our customers regardless of where product areas organizationally report. Therefore,  revenues and expenses are allocated to otherincluded in both the business segments wheresegment that provides the service and the business segment that manages the customer relationships reside. A performance center's purpose is to fosterrelationship. The duplicative results from this internal management accounting view are reflected in “Reconciling Items.” The market view approach fosters cross-selling with a total profitability view of the products and services it manages.being managed. For example, the Securities Trading and Sales unit within the Global Markets Division, is a performance centerbusiness unit that manages the fixed income securities activities. activities for all retail and corporate customers throughout the Bank.

Unlike financial accounting, there is no authoritative body of guidance for management accounting equivalent to US GAAP. Consequently, reported results are not necessarily comparable with those presented by other companies.

The RAROC measurement methodology recognizes credit expense for expected losses arising from credit risk and attributes economic capital related to unexpected losses arising from credit, market and operational risks. As a result of the methodology used by the RAROC model to calculate expected losses, differences between the provision for credit losses and credit expense in any one period could be significant. However, over an economic cycle, the cumulative provision for credit losses and credit expense for expected losses should be substantially the same. Business unit results are based on an internal management reporting system used by management to measure the performance of the units and UnionBanCal Corporation as a whole. Our management reporting system identifies balance sheet and income statement items for each business unit based on internal management accounting policies. Net interest income is determined using our internal funds transfer pricing system, which assigns a cost of funds to assets or a credit for funds to liabilities and capital, based on their type, maturity or repricing characteristics. Noninterest income and expense directly or indirectly attributable to a business unit are assigned to that business. The business units are assigned the costs of products and services directly attributable to their business activity through standard unit cost accounting based on volume of usage. All other corporate expenses (overhead) are allocated to the business units based on a predetermined percentage of usage. 50

The business units'unit results for the prior periods have been restatedadjusted to reflect changes in the transfer pricing methodology, the organizational changes that have occurred, and our discontinued operations.
COMMUNITY BANKING COMMERCIAL AND INVESTMENT FINANCIAL SERVICES GROUP SERVICES GROUP -------------- -------------- AS OF THE THREE AS OF THE THREE MONTHS 2005 VS. 2004 MONTHS 2005 VS. 2004 ENDED SEPTEMBER 30, INCREASE/(DECREASE) ENDED SEPTEMBER 30, INCREASE/(DECREASE) ------------------- ------------------- ------------------- ------------------- 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT ---- ---- ------ ------- ---- ---- ------ ------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income......................... $197,024 $235,907 $38,883 20% $176,381 $227,476 $51,095 29% Noninterest income (expense)................ 127,907 138,885 10,978 9 63,020 67,994 4,974 8 -------- -------- ------- -------- -------- ------- Total revenue............................... 324,931 374,792 49,861 15 239,401 295,470 56,069 23 Noninterest expense......................... 242,406 246,936 4,530 2 104,361 122,404 18,043 17 Credit expense.............................. 8,450 8,783 333 4 24,738 20,458 (4,280) (17) -------- -------- ------- -------- -------- ------- Income from continuing operations before income taxes.............................. 74,075 119,073 44,998 61 110,302 152,608 42,306 38 Income tax expense.......................... 28,334 45,545 17,211 61 35,233 51,493 16,260 46 -------- -------- ------- -------- -------- ------- Income from continuing operations........... $ 45,741 $ 73,528 $27,787 61 $ 75,069 $101,115 $26,046 35 Income (loss) from discontinued operations, net of income taxes....................... -- -- -- na -- -- -- na -------- -------- ------- -------- -------- ------- Net income.................................. $ 45,741 $ 73,528 $27,787 61 $ 75,069 $101,115 $26,046 35 ======== ======== ======= ======== ======== ======= PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income......................... $ 73 $ (50) $ (123) (168)%$ (47) $ (20) $ 27 57% Noninterest income.......................... (13,762) (15,323) (1,561) (11) 10,447 11,858 1,411 14 Noninterest expense......................... (4,669) (5,722) (1,053) (23) 4,063 4,919 856 21 Income (loss) from continuing operations.... (9,110) (9,811) (701) (8) 6,433 6,994 561 9 Total loans (dollars in millions)........... 21 17 (4) (19) (42) (42) -- nm AVERAGE BALANCES OF CONTINUING OPERATIONS (DOLLARS IN MILLIONS): Total loans(1).............................. $ 13,105 $ 15,539 $ 2,434 19% $ 12,712 $ 16,391 $ 3,679 29% Total assets................................ 14,508 17,062 2,554 18 15,383 19,995 4,612 30 Total deposits(1)........................... 19,406 20,319 913 5 14,345 16,861 2,516 18 FINANCIAL RATIOS (ON A CONTINUING OPERATIONS): Risk adjusted return on capital(2)............ 25% 28% 20% 23% Return on average assets(2)................... 1.25 1.71 1.94 2.01 Efficiency ratio(3)........................... 74.60 65.89 43.59 41.43
UNIONBANCAL OTHER CORPORATION ----- ----------- AS OF THE THREE AS OF THE THREE MONTHS 2005 VS. 2004 MONTHS 2005 VS. 2004 ENDED SEPTEMBER 30, INCREASE/(DECREASE) ENDED SEPTEMBER 30, INCREASE/(DECREASE) ------------------- ------------------- ------------------- ------------------- 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT ---- ---- ------ ------- ---- ---- ------ ------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income....................... $33,173 $ 759 $(32,414) (98)% $406,578 $464,142 $57,564 14% Noninterest income (expense).............. 6,193 5,309 (884) (14) 197,120 212,188 15,068 8 ------- ------- -------- -------- -------- ------- Total revenue............................. 39,366 6,068 (33,298) (85) 603,698 676,330 72,632 12 Noninterest expense....................... 12,809 27,356 14,547 114 359,576 396,696 37,120 10 Credit expense............................ (44,127) (44,241) (114) nm (10,939) (15,000) (4,061) (37) ------- ------- -------- -------- -------- ------- Income from continuing operations before income taxes............................ 70,684 22,953 (47,731) (68) 255,061 294,634 39,573 16 Income tax expense........................ 34,554 (3,650) (38,204) (111) 98,121 93,388 (4,733) (5) ------- ------- -------- -------- -------- ------- Income from continuing operations......... $36,130 $26,603 $ (9,527) (26) $156,940 $201,246 $44,306 28 Income (loss) from discontinued operations, net of income taxes..................... 6,498 (15,961) (22,459) (346) 6,498 (15,961) (22,459) (346) ------- ------- -------- -------- -------- ------- Net income................................ $42,628 $10,642 $(31,986) (75) $163,438 $185,285 $21,847 13 ======= ======= ======== ======== ======== ======= PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income....................... $ (26) $ 70 $ 96 369% $ -- $ -- $ -- na Noninterest income........................ 3,315 3,465 150 5 -- -- -- na Noninterest expense....................... 606 803 197 33 -- -- -- na Income (loss) from continuing operations.. 2,677 2,817 140 5 -- -- -- na Total loans (dollars in millions)......... 21 25 4 19 -- -- -- na AVERAGE BALANCES OF CONTINUING OPERATIONS (DOLLARS IN MILLIONS): Total loans(1)............................ $ 485 $ 248 $ (237) (49)% $ 26,302 $ 32,178 $ 5,876 22% Total assets.............................. 13,582 11,155 (2,427) (18) 43,473 48,212 4,739 11 Total deposits(1)......................... 2,187 3,114 927 42 35,938 40,294 4,356 12 FINANCIAL RATIOS (ON A CONTINUING OPERATIONS): Risk adjusted return on capital(2).......... na na na na Return on average assets(2)............... na na 1.44% 1.66% Efficiency ratio(3)....................... na na 59.46 59.07 - --------------- (1) Represents loans and deposits for each business segment after allocation between the segments of loans and deposits originated in one segment but managed by another segment. (2) Annualized. (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and provision for losses on off-balance sheet commitments, as a percentage of net interest income and noninterest income. nm = not meaningful na = not applicable
51
COMMUNITY BANKING COMMERCIAL AND INVESTMENT FINANCIAL SERVICES GROUP SERVICES GROUP -------------- -------------- AS OF THE NINE AS OF THE NINE MONTHS 2005 VS. 2004 MONTHS 2005 VS. 2004 ENDED SEPTEMBER 30, INCREASE/(DECREASE) ENDED SEPTEMBER 30, INCREASE/(DECREASE) ------------------- ------------------- ------------------- ------------------- 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT ---- ---- ------ ------- ---- ---- ------ ------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income...................... $553,095 $ 692,546 $139,451 25% $495,870 $646,283 $150,413 30% Noninterest income (expense)............. 379,818 410,391 30,573 8 202,629 206,445 3,816 2 -------- --------- -------- -------- -------- -------- Total revenue............................ 932,913 1,102,937 170,024 18 698,499 852,728 154,229 22 Noninterest expense...................... 695,739 763,189 67,450 10 311,470 346,525 35,055 11 Credit expense........................... 24,134 25,423 1,289 5 82,443 65,500 (16,943) (21) -------- --------- -------- -------- -------- -------- Income from continuing operations before income taxes........................... 213,040 314,325 101,285 48 304,586 440,703 136,117 45 Income tax expense....................... 81,488 120,229 38,741 48 97,187 147,343 50,156 52 -------- --------- -------- -------- -------- -------- Income from continuing operations........ $131,552 $ 194,096 $ 62,544 48 $207,399 $293,360 $ 85,961 41 Income (loss) from discontinued operations, net of income taxes........ -- -- -- na -- -- -- na -------- --------- -------- -------- -------- -------- Net income............................... $131,552 $ 194,096 $ 62,544 48 $207,399 $293,360 $ 85,961 41 ======== ========= ======== ======== ======== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income...................... $ 399 $ 102 $ (297) (74) $ (286) $ (266) $ 20 7 Noninterest income....................... (53,242) (44,157) 9,085 17 42,337 34,095 (8,242) (19) Noninterest expense...................... (24,764) (16,413) 8,351 34 21,654 13,893 (7,761) (36) Income (loss) from continuing operations. (28,384) (28,207) 177 1 20,611 20,303 (308) (1) Total loans (dollars in millions)........ 25 22 (3) (12) (44) (49) (5) (11) AVERAGE BALANCES OF CONTINUING OPERATIONS (DOLLARS IN MILLIONS): Total loans(1)........................... $ 12,486 $ 15,037 $ 2,551 20 $ 12,314 $ 15,530 $ 3,216 26 Total assets............................. 13,846 16,499 2,653 19 14,685 18,928 4,243 29 Total deposits(1)........................ 19,150 20,342 1,192 6 14,022 15,761 1,739 12 FINANCIAL RATIOS (ON A CONTINUING OPERATIONS): Risk adjusted return on capital(2)....... 24% 30% 19% 24% Return on average assets(2).............. 1.27 1.57 1.89 2.07 Efficiency ratio(3)...................... 74.58 69.20 44.59 40.64
UNIONBANCAL OTHER CORPORATION ----- ----------- AS OF THE NINE AS OF THE NINE MONTHS 2005 VS. 2004 MONTHS 2005 VS. 2004 ENDED SEPTEMBER 30, INCREASE/(DECREASE) ENDED SEPTEMBER 30, INCREASE/(DECREASE) ------------------- ------------------- ------------------- ------------------- 2004 2005 AMOUNT PERCENT 2004 2005 AMOUNT PERCENT ---- ---- ------ ------- ---- ---- ------ ------- RESULTS OF OPERATIONS AFTER PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income..................... $147,280 $ 19,685 $(127,595) (87)% $1,196,245 $1,358,514 $162,269 14% Noninterest income (expense)............ 117,987 4,531 (113,456) (96) 700,434 621,367 (79,067) (11) -------- -------- --------- ---------- ---------- -------- Total revenue........................... 265,267 24,216 (241,051) (91) 1,896,679 1,979,881 83,202 4 Noninterest expense..................... 77,542 68,334 (9,208) (12) 1,084,751 1,178,048 93,297 9 Credit expense.......................... (135,615) (131,606) 4,009 3 (29,038) (40,683) (11,645) (40) -------- -------- --------- ---------- ---------- -------- Income from continuing operations before income taxes.......................... 323,340 87,488 (235,852) (73) 840,966 842,516 1,550 nm Income tax expense...................... 130,314 6,469 (123,845) (95) 308,989 274,041 (34,948) (11) -------- -------- --------- ---------- ---------- -------- Income from continuing operations....... $193,026 $ 81,019 $(112,007) (58) $ 531,977 $ 568,475 $ 36,498 7 Income (loss) from discontinued operations, net of income taxes....... 20,045 (14,031) (34,076) (170) 20,045 (14,031) (34,076) (170) -------- -------- --------- ---------- ---------- -------- Net income............................ $213,071 $ 66,988 $(146,083) (69) $ 552,022 $ 554,444 $ 2,422 nm ======== ======== ========= ========== ========== ======== PERFORMANCE CENTER EARNINGS (DOLLARS IN THOUSANDS): Net interest income..................... $ (113) $ 164 $ 277 245 $ -- $ -- $ -- na Noninterest income...................... 10,905 10,062 (843) (8) -- -- -- na Noninterest expense..................... 3,110 2,520 (590) (19) -- -- -- na Income (loss) from continuing operations 7,773 7,904 131 2 -- -- -- na Total loans (dollars in millions)....... 19 27 8 42 -- -- -- na AVERAGE BALANCES OF CONTINUING OPERATIONS (DOLLARS IN MILLIONS): Total loans(1).......................... $ 528 $ 276 $ (252) (48) $ 25,328 $ 30,843 $ 5,515 22 Total assets............................ 13,794 11,916 (1,878) (14) 42,325 47,343 5,018 12 Total deposits(1)....................... 2,223 3,202 979 44 35,395 39,305 3,910 11 FINANCIAL RATIOS (ON A CONTINUING OPERATIONS): Risk adjusted return on capital(2)...... na na na na Return on average assets(2)............. na na 1.68% 1.61% Efficiency ratio(3)..................... na na 57.09 59.74 - --------------- (1) Represents loans and deposits for each business segment after allocation between the segments of loans and deposits originated in one segment but managed by another segment. (2) Annualized. (3) The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the provision for losses on off-balance sheet commitments, as a percentage of net interest income and noninterest income. nm = not meaningful na = not applicable
52 COMMUNITY BANKING AND INVESTMENT SERVICES GROUP operations and the market view contribution.

49




 

 

Community Banking
and Investment
Services Group

 

 

 

 

 

Commercial Financial
Services Group

 

 

 

 

 

 

 

As of and for the
Three Months
Ended March 31,

 

Increase/(decrease)

 

As of and for the
Three Months
Ended March 31,

 

Increase/(decrease)

 

 

 

2005

 

2006

 

Amount

 

Percent

 

2005

 

2006

 

Amount

 

Percent

 

Results of operations—Market View
(dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$ 222,860

 

$ 242,829

 

$ 19,969

 

 

9

%

 

$ 203,576

 

$ 224,687

 

$ 21,111

 

 

10

%

 

 

Noninterest income (expense)

 

149,747

 

162,311

 

12,564

 

 

8

 

 

65,110

 

65,936

 

826

 

 

1

 

 

 

Total revenue

 

372,607

 

405,140

 

32,533

 

 

9

 

 

268,686

 

290,623

 

21,937

 

 

8

 

 

 

Noninterest expense (income)

 

269,271

 

279,312

 

10,041

 

 

4

 

 

108,203

 

122,513

 

14,310

 

 

13

 

 

 

Credit expense

 

8,933

 

8,931

 

(2

)

 

0

 

 

23,511

 

22,563

 

(948

)

 

(4

)

 

 

Income from continuing operations before income taxes

 

94,403

 

116,897

 

22,494

 

 

24

 

 

136,972

 

145,547

 

8,575

 

 

6

 

 

 

Income tax expense (income)

 

35,415

 

43,949

 

8,534

 

 

24

 

 

45,594

 

47,899

 

2,305

 

 

5

 

 

 

Income from continuing operations

 

58,988

 

72,948

 

13,960

 

 

24

 

 

91,378

 

97,648

 

6,270

 

 

7

 

 

 

Income (loss) from discontinued operations, net of income taxes

 

 

 

 

 

na

 

 

 

 

 

 

na

 

 

 

Net income (loss)

 

$  58,988

 

$  72,948

 

$ 13,960

 

 

24

 

 

$  91,378

 

$  97,648

 

$  6,270

 

 

7

 

 

 

Average balances—Market View (dollars in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$  14,550

 

$  16,348

 

$  1,798

 

 

12

 

 

$  14,909

 

$  17,540

 

$  2,631

 

 

18

 

 

 

Total assets

 

16,053

 

17,993

 

1,940

 

 

12

 

 

18,075

 

21,438

 

3,363

 

 

19

 

 

 

Total deposits

 

20,362

 

19,615

 

(747

)

 

(4

)

 

14,874

 

15,660

 

786

 

 

5

 

 

 

Financial ratios—Market View

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk adjusted return on capital(1)

 

29

%

33

%

 

 

 

 

 

 

23

%

21

%

 

 

 

 

 

 

 

Return on average assets(1)

 

1.49

 

1.64

 

 

 

 

 

 

 

2.05

 

1.85

 

 

 

 

 

 

 

 

Efficiency ratio(2)

 

72.27

 

68.94

 

 

 

 

 

 

 

40.16

 

44.69

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

Reconciling Items

 

UnionBanCal Corporation

 

 

 

 

 

As of and for the
Three Months
Ended March 31,

 

Increase/(decrease)

 

As of and for the
Three Months
Ended March 31,

 

As of and for the
Three Months 
Ended March 31,

 

Increase/(decrease)

 

 

 

2005

 

2006

 

Amount

 

Percent

 

2005

 

2006

 

    2005    

 

    2006    

 

Amount

 

Percent

 

Results of operations—Market View (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income
(expense)

 

$  9,816

 

$ (1,916

)

$ (11,732

)

 

(120

)%

 

$    (590

)

$    (507

)

 

$ 435,662

 

 

 

$ 465,093

 

 

$ 29,431

 

 

7

%

 

Noninterest income
(expense)

 

6,498

 

7,508

 

1,010

 

 

16

 

 

(15,730

)

(17,845

)

 

205,625

 

 

 

217,910

 

 

12,285

 

 

6

 

 

Total revenue

 

16,314

 

5,592

 

(10,722

)

 

(66

)

 

(16,320

)

(18,352

)

 

641,287

 

 

 

683,003

 

 

41,716

 

 

7

 

 

Noninterest expense
(income)

 

21,225

 

20,232

 

(993

)

 

(5

)

 

(5,747

)

(7,513

)

 

392,952

 

 

 

414,544

 

 

21,592

 

 

5

 

 

Credit expense

 

(44,414

)

(38,451

)

5,963

 

 

13

 

 

(149

)

(43

)

 

(12,119

)

 

 

(7,000

)

 

5,119

 

 

42

 

 

Income from
continuing
operations before
income taxes

 

39,503

 

23,811

 

(15,692

)

 

(40

)

 

(10,424

)

(10,796

)

 

260,454

 

 

 

275,459

 

 

15,005

 

 

6

 

 

Income tax expense
(income)

 

3,681

 

6,285

 

2,604

 

 

71

 

 

(3,987

)

(4,129

)

 

80,703

 

 

 

94,004

 

 

13,301

 

 

16

 

 

Income from
continuing
operations

 

35,822

 

17,526

 

(18,296

)

 

(51

)

 

(6,437

)

(6,667

)

 

179,751

 

 

 

181,455

 

 

1,704

 

 

1

 

 

Income (loss) from discontinued operations, net of income taxes

 

2,226

 

(8,510

)

(10,736

)

 

(482

)

 

 

 

 

2,226

 

 

 

(8,510

)

 

(10,736

)

 

(482

)

 

Net income (loss)

 

$ 38,048

 

$  9,016

 

$ (29,032

)

 

(76

)

 

$ (6,437

)

$ (6,667

)

 

$ 181,977

 

 

 

$ 172,945

 

 

$ (9,032

)

 

(5

)

 

Average balances—Market View (dollars in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$     317

 

$     208

 

$    (109

)

 

(34

)

 

$     (62

)

$     (44

)

 

$ 29,714

 

 

 

$ 34,052

 

 

$  4,338

 

 

15

 

 

Total assets

 

12,254

 

8,638

 

(3,616

)

 

(30

)

 

(69

)

(52

)

 

46,313

 

 

 

48,017

 

 

1,704

 

 

4

 

 

Total deposits

 

2,981

 

3,599

 

618

 

 

21

 

 

(17

)

(18

)

 

38,200

 

 

 

38,856

 

 

656

 

 

2

 

 

Financial ratios—Market View

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk adjusted return on capital(1)

 

na

 

na

 

 

 

 

 

 

 

na

 

na

 

 

na

 

 

 

na

 

 

 

 

 

 

 

 

Return on average
assets
(1)

 

na

 

na

 

 

 

 

 

 

 

na

 

na

 

 

1.57

%

 

 

1.53

%

 

 

 

 

 

 

 

Efficiency ratio(2)

 

na

 

na

 

 

 

 

 

 

 

na

 

na

 

 

60.64

 

 

 

62.10

 

 

 

 

 

 

 

 


(1)Annualized.

(2)The efficiency ratio is noninterest expense, excluding foreclosed asset expense (income) and the provision for losses on off-balance sheet commitments, as a percentage of net interest income (taxable-equivalent basis) and noninterest income and is calculated for continuing operations only.

na = not applicable

50




Community Banking and Investment Services Group

The Community Banking and Investment Services Group provides financial products including a set of credit, deposit, trust, investment management, risk management, and insurance products delivered through our branches, relationship managers, private bankers, trust administrators, and insurance agents to individuals, small businesses and small businesses. institutional clients.

During the thirdfirst quarter 2005,of 2006, net income of the group increased by 6124 percent over the same period in 2004,2005, reflecting the group'sgroup’s continued focus on growing the consumer asset portfolio and attracting retail and small business deposits. Net interest income increased by 9 percent due to a higher margin on deposits.

The group'sgroup’s strategy is to grow assets through an expanded small business sales force, increased emphasis on real estate securedestate-secured and Small Business Administration (SBA) guaranteed loans to small business, and a stronger network of residential real estate brokers. Increasing demand forThe focus on home equity loans and more effective cross-selling tacticsefforts have led to an overall growth in consumer loans, despite run-off of discontinued auto dealer and auto lease lines of business. In addition, the group expects a larger branch network, created from new branches and acquired branches, to improve growth prospects when combined with more robust efforts in the telephone and internet channels. Total

Despite the decrease of 4 percent in core deposit growth demonstratesdeposits from the group's continued success inprior year, primarily reflecting increased competition for interest bearing deposits, the group continues to focus on attracting mass retail, affluent consumersconsumer and small business deposits through marketing activities, relationship management, increased and improved sales resources, new locations, and new products. These activities, in the aggregate, have resulted in a year-over-year increase of approximately 5 percent in core deposits. Among the more successful marketing activities has been the "Power Bank"“Power Bank” network, in Fresno, California and in the Central Coast region of California. These branches offer an expanded set of service options, extended hours and have been remodeled to improve the customer experience with facility enhancements. We do not, however, intend to expand

Of the "Power Bank" to additional markets in 2005 until we better understand the return on our investment in facilities and improved service. The focus on enterprise-wide cross-sell has been particularly effective in our affluent market where a key strategy of The Private Bank is to expand its business by leveraging existing Bank client relationships. The largest portion of the 98 percent increase in the group’s noninterest income, wastrust fees contributed 5 percent of the growth, primarily due to ancontinued strong sales and organic growth, as well as a one-time $3.8 million increase resulting from a refinement in accrual methodology. In addition, deposit fees and trust fees fromcontributed 3 percent to the recently acquired portfolios from CNA Trust (renamed TruSource) and the BTM Trust Company, New York.increase. Overall, total revenues for the thirdfirst quarter 20052006 increased by over 159 percent compared to the thirdfirst quarter 2004. 2005.

The Community Banking and Investment Services Group is comprised of five major divisions: Community Banking, Wealth Management, Institutional Services and Asset Management, Consumer Asset Management and Global Markets. COMMUNITY BANKING

Community Banking   serves its customers through 315317 full-service branches in California, 4 full-service branches in Oregon and Washington, and a network of 596603 proprietary ATMs. Customers may also access our services 24 hours a day by telephone or through our WEBSITEwebsite at WWW.UBOC.COM.www.uboc.com. In addition, the division offers automated teller and point-of-sale merchant services.

This division is organized by service delivery method, by markets and by geography. We serve our customers in the following ways: o

·       through community banking branches, which serve consumers and businesses with checking and deposit services, as well as various types of consumer financing; o

·       through access to our internet banking services, which augment our physical delivery channels by providing an array of customer transaction, bill payment and loan payment services; o

·       through branches and business banking centers, which serve small businesses with annual sales up to $5 million; and o

·       through in-store branches, which also serve consumers and small businesses. 53 WEALTH MANAGEMENT

51




Wealth Management   provides comprehensive private banking services to our affluent clientele. o

·       The Private Bank focuses primarily on delivering financial services to high net worth individuals with sophisticated financial needs as well as to professional service firms. Specific products and services include trust and estate services, investment account management services, and deposit and credit products. A key strategy of The Private Bank is to expand its business by leveraging existing Bank client relationships. Through 14 existing locations, The Private Bank relationship managers offer all of our available products and services. INSTITUTIONAL SERVICES AND ASSET MANAGEMENT

Institutional Services and Asset Management   provides investment management and administration services for a broad range of individuals and institutions. o

·       HighMark Capital Management, Inc., a registered investment advisor, provides investment management and advisory services to institutional clients as well as investment advisory, administration and support services to our proprietary mutual funds, the affiliated HighMark Funds. It also provides advisoryinvestment management services to most Union Bank of California, N.A. with respect to most of its trust and agency clients, including corporations, pension funds and individuals. HighMark Capital Management, Inc.'s’s strategy is to increase assets under management by broadeningbroaden its client base and helpingin turn to expandincrease the distributionassets of shares of its mutual fund clients. othe HighMark Funds.

·       Institutional Services provides custody, corporate trust, and retirement plan services. Custody Services provides both domestic and international safekeeping/settlement services in addition to securities lending. Corporate Trust acts as trustee for corporate and municipal debt issues, and provides escrow services.services and trustee services for project finance. Retirement Services provides a full range of defined benefit and defined contribution administrative services, including trustee services, administration, investment management, and 401(k) valuation services. The client base of Institutional Services includes financial institutions, corporations, government agencies, unions, insurance companies, mutual funds, investment managers, and non-profit organizations. Institutional Services'Services’ strategy is to continue to leverage and expand its position in our target markets. The acquisition of CNA Trust Company (renamed TruSource) expanded our retirement processing capability by providing outsourcing services for direct distributors of retirement products, and strengthened capacity to support smaller plans. The acquisition of the corporate trust portfolio of the BTM Trust Company, New York enhanced our capability in the areas of municipal and project finance trustee and agent services. CONSUMER ASSET MANAGEMENT

Consumer Asset Management   provides the centralized origination, underwriting, processing, servicing, collection and administration for consumer assets including residential mortgages. GLOBAL MARKETS

Global Marketsserves our customers with their insurance, foreign exchange and interest rate risk management and investment needs. Since the fourth quarter 2004, the Global Markets Division has been offering energy derivative contracts, on a limited basis, to serve our energy sector client base. The division takes market risk when buying and selling securities and foreign exchange contracts for its own account, but takes no market risk when providing insurance or derivative contracts, since the market risk for these products is offset with third parties.

Insurance Servicesproducts are sold through UBOC Insurance, Inc. (through its insurance agency subsidiaries) and securities are sold through UnionBanc Investment Services LLC, both of which are subsidiaries of Union Bank of California, N.A. Effective January 1, 2006, our insurance agency subsidiaries were combined into UnionBanc Insurance Services, Inc.

Through alliances with other financial institutions, the Community Banking and Investment Services Group offers additional products and services, such as credit cards, merchant bank cards, leasing, and asset-based and leveraged financing.

The group competes with larger banks by attempting to provide service quality superior to that of its major competitors. The group'sgroup’s primary means of competing with community banks include its branch network and its technology to deliver banking services. The group also offers convenient banking hours to 54 consumers through our drive-through banking locations and selected branches that are open seven days a week.

52




The group competes with a number of commercial banks, internet banks, savings associations and credit unions, as well as more specialized financial service providers such as investment brokerage companies, consumer finance companies, and residential real estate lenders. COMMERCIAL FINANCIAL SERVICES GROUP

Commercial Financial Services Group

The Commercial Financial Services Group offers financing, depository and cash management services to middle market and large corporate businesses primarily headquartered in the western United States. The group has continued to focus on specific geographic markets and industry segments such as energy, entertainment, and real estate. Relationship managers provide credit services, including commercial loans, accounts receivable and inventory financing, project financing, lease financing, trade financing, and real estate financing. In addition to credit services, the group offers cash management services delivered through deposit managers with significant industry expertise and experience in cash management solutions for businesses, U.S. correspondent banks and government entities.

In the thirdfirst quarter 2005,of 2006, the 7 percent increase in net income was due to significant growth in both loans and deposits. Net interest income increased by 2910 percent due to higher demand depositsdeposit balances and a higher margin on deposits, resulting in a $51 million improvement over the prior year.deposits. Deposit growth came primarily from sales successes in middle market, corporate and real estate industries.industries and government markets. In addition to new sales, pricing strategies to retain volume helped to offset the disintermediation associated with a rising interest rate environment. Third

First quarter 20052006 average loans increased by 2918 percent over the same period last year. This was primarily due to the acquisition of Jackson Federal and continued improvement in our approach to the commercial real estate market. The increase in noninterest income was mainly due to gains on our private capital portfolio, primarily offset by lower deposit fees due to an increasemarket and increased loan demand in the earnings credit available to our wholesale customers.California middle-market and specialty segments.

Noninterest income did not change significantly, increasing 1 percent from the first quarter of 2005. The increase in noninterest expense during the thirdfirst quarter 2005,2006, compared to the thirdfirst quarter 2004,2005, was mainly due to outside services expense from vendor bills paid primarily forhigher costs of services related to title and escrow customers. balances, stemming from a higher earnings credit rate, as well as higher performance-related incentive expense.

The group'sgroup’s initiatives during 2005 will continue to include expanding wholesale deposit activities and increasing domestic trade financing. Loan strategies include originating, underwriting and syndicating loans in core competency markets, such as the California middle-market, corporate banking, commercial real estate, energy, entertainment, equipment leasing and commercial finance. The group is particularly strong in processing services, including services such as Automated Clearing House (ACH), check processing, and cash vault services.

The Commercial Financial Services Group is comprised of the following business units: o

·       the Commercial Banking Division, which serves California middle-market and large corporate companies with commercial lending, trade financing, and asset-based loans; o

·       the Commercial Deposit and Treasury Management Division, which provides deposit and cash management expertise to middle-market and large corporate clients, government agencies and specialized industries. This division also manages the Bank'sUnion Bank of California’s web strategies for retail, small business, wealth management and commercial clients, as well as product development and management for the Bank as a whole. oour entire banking franchise;

·       the Real Estate Industries Division, which provides real estate lending products such as construction loans, commercial mortgages and bridge financing; 55 o

·       the Energy Capital Services Division, which provides corporate financing and project financing to oil and gas companies, as well as power and utility companies, nationwide; and o

53




·       the Corporate Capital Markets Division, which provides financing to middle-market and large corporate clients in their defined industries and geographic markets, together with limited merchant and investment banking related products and services.

The group'sgroup’s main strategy is to target industries and companies for which the group can reasonably expect to be one of a customer'scustomer’s primary banks. Consistent with its strategy, the group attempts to serve a large part of its targeted customers'customers’ credit and depository needs. The group competes with other banks primarily on the basis of the quality of its relationship managers, the level of industry expertise, the delivery of quality customer service, and its reputation as a "business“business bank." The group also competes with a variety of other financial services companies as well as non-bank companies. Competitors include other major California banks, as well as regional, national and international banks. In addition, the group competes with investment banks, commercial finance companies, leasing companies, and insurance companies. OTHER "Other"

Other

“Other” includes the following items: o

·       corporate activities that are not directly attributable to one of the two major business units. Included in this category are certain other nonrecurring items such as the results of operations of certain parent company non-bank subsidiaries and the elimination of the fully taxable-equivalent basis amount; o

·       the funds transfer pricing results for the entire company, which allocates to the other business segments their cost of funds on all asset categories and credit for funds on all liability categories; o

·       the adjustment between the credit expense under RAROC and the provision for credit losses under US GAAP and earnings associated with unallocated equity capital; o

·       the adjustment between the tax expense calculated under RAROC using a tax rate of 38.25 percent and our effective tax rates; o

·       the Pacific Rim Corporate Group, with assets of $250$254 million at September 30, 2005,March 31, 2006, which offers a range of credit, deposit, and investment management products and services to companies in the U.S., which are affiliated with companies headquartered in Japan; o

·       Corporate Treasury, which is responsible for our ALM, wholesale funding, and the investmentALM Investment and derivatives hedging portfolios. These treasury management activities are carried out to counter-balance the residual risk positions of our core balance sheet and to manage those risks within conservative guidelines. (For additional discussion regarding these risk management activities, see "Quantitative“Quantitative and Qualitative Disclosures About Market Risk.") o;

·       the discontinued operations resulting from the sale of most of our International Banking Group;international correspondent banking business; and o

·       the residual costs of support groups.

The thirdfirst quarter 20052006 financial results were impacted by the following factors: o

·       credit expense (income) of ($44.2)38.5) million was due to the difference between the $15.0$7.0 million reversal of provision for loan losses calculated under our US GAAP methodology and the $29.2$31.5 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; o

·       net interest income included the result of differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal 56 Corporation, a credit for deposits in the Pacific Rim Corporate Group and transfer pricing results. Net interest income declined $32.4 million compared to the three months ended September 30, 2004 primarily as a result of a decrease in income from ALM derivatives hedges and from the net impact of changes in transfer pricing rates over prior period as market rates increased; o noninterest income of $5.3 million; o noninterest expense of $27.4 million, included increased corporate benefits and performance related incentives; o loss from discontinued operations of $16.0 million. The third quarter 2004 financial results were impacted by the following factors: o credit expense (income) of ($44.1) million was due to the difference between the $10.9 million reversal in provision for loan losses calculated under our US GAAP methodology and the $33.2 million in expected losses for the reportable business segments, which utilizes the RAROC methodology; o net interest income is the result of differences between the credit for equity for the reportable segments under RAROC and the net interest income earned by UnionBanCal Corporation, a credit for deposits in the Pacific Rim Corporate Group and net transfer pricing results reported by Corporate Treasury; o noninterestresults. Net interest income of $6.2 million; o noninterest expense of $12.8 million; and o income from discontinued operations of $6.5 million. The following discussesdeclined $11.7 million compared to the significant changes in "Other" between the ninethree months ended September 30, 2004 and 2005. o the decline in net interest incomeMarch 31, 2005 primarily as a result

54




of a decrease in income from ALM derivatives hedges and from the decrease of hedge income and thenet impact of changes in transfer pricing rates oover the recognitionprior period as market rates increased;

·       noninterest income of $7.5 million;

·       noninterest expense of $20.2 million;

·       loss from discontinued operations of $8.5 million.

The first quarter 2005 financial results were impacted by the following factors:

·       credit expense (income) of ($44.4) million was due to the difference between the $12.1 million reversal of provision for loan losses calculated under our US GAAP methodology and the $32.3 million in expected losses for the reportable business segments, which utilizes the RAROC methodology;

·       net interest income is the result of differences between the credit for equity for the reportable segments under RAROC, the net transfer pricing results, the net interest income earned by UnionBanCal Corporation, and a $93credit for deposits in the Pacific Rim Corporate Group;

·       noninterest income $6.5 million;

·       noninterest expense of $21.2 million; and

·       income tax expense included a credit adjustment of $10.0 million gain fromto reflect a reduction in reserves to the saleInternal Revenue Service with respect to the tax treatment of our merchant card portfolio which occurred in 2004. REGULATORY MATTERS Oncertain leasing transactions.

Regulatory Matters

In October 18, 2004, Union Bank of California International entered into a written agreement with the Federal Reserve Bank of New York requiringrelating to Union Bank of California International to strenghten itsInternational’s Bank Secrecy Act and anti-money laundering controls and processes. Union Bank of California International, is wholly-owned bya wholly owned subsidiary of Union Bank of California, N.A., which is wholly-owned by UnionBanCal Corporation. Union Bank of California International is headquartered in New York City and as an Edge Act subsidiary, is limited to engaging in international banking activities, most of which have been sold.were sold in October 2005. We expect to dissolve this subsidiary in the second quarter 2006. Although the principal business activities of Union Bank of California International werethis subsidiary have been sold, to Wachovia Bank, N.A. on October 6, 2005, we remain legally responsible and committed tofor resolving the issues raised by the regulators and continue to take action aimed at resolving these matters. OnFederal Reserve Bank of New York.

In March 23, 2005, Union Bank of California, N.A. entered into a memorandum of understanding with the Office of the Comptroller of the Currency, its principal regulator, which requires Union Bank of California, N.A. to strengthen its Bank Secrecy Act and anti-money laundering controls and processes. TheseDuring 2005, we began the process of strengthening those controls and processes, which will continue in 2006.

Management is committed to resolving the issues raised by the regulators and continues to take actions it believes to be appropriate to achieve this objective.

Until resolved, these pending regulatory matters, or any future regulatory actions concerning anti-money laundering controls and processes, may adversely affect UnionBanCal Corporation'sCorporation’s and Union Bank of California, N.A.'s’s ability to obtain regulatory approvals for future initiatives requiring regulatory approval, 57 including acquisitions. Also, any future regulatory actions relating to this subject could result in the imposition of fines or penalties as has occurred with a number of other banks in recent years. However, neither this effect,Union Bank of California, N.A.’s memorandum of understanding with the regulatory agreements,Office of the Comptroller of the Currency, Union Bank of California International’s agreement with the Federal Reserve Bank of New York, nor the financial impact of enhanced Bank Secrecy Act and anti-money laundering controls and processes, are expected to have a material adverse impact on the financial condition or results of operations of Union Bank of California, N.A. or UnionBanCal Corporation. FACTORS THAT MAY AFFECT FUTURE RESULTS This document includes forward-looking information, which is subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended,

55




Item 3.   Quantitative and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles, conference calls with analysts and stockholders and when we are speaking on behalf of UnionBanCal Corporation. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "estimate," "potential," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward- looking statements are made. In this document, for example, we make forward-looking statements, which discuss our expectations about: o Pending legal and regulatory actions o Credit quality and provision for credit losses o Net interest income including income from derivative hedges o The impact of increases in interest rates and growth in our commercial loan portfolio on our net interest margin o The impact of strategic investments on our business o The unallocated portion of our allowance for credit losses o Our sensitivity to changes in interest rates o The asset sensitivity of our balance sheet o Increased regulatory controls and processes regarding Bank Secrecy Act and anti-money laundering matters o Future legislative and regulatory developments o The costs and effects of litigation, investigations, or similar matters, or adverse facts and developments related thereto o Decisions to downsize, sell or close units or otherwise change the business mix of any of the company o Potential dividend restrictions o Integration of acquired companies o Impact of the sale of our international correspondent banking business There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to 58 control or predict and could have a material adverse effect on our stock price, financial condition, and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed below in "Industry Factors" and "Company Factors." Readers of this document should not rely solely on forward-looking information and should consider all uncertainties and risks disclosed throughout this document and in our other reports to the SEC, including, but not limited to, those discussed below. Any factor described in this report could by itself, or together with one or more other factors, adversely affect our business, future prospects, results of operations or financial condition. There are also other factors that we have not described in this report and our other reports that could cause our results to differ from our expectations. INDUSTRY FACTORS FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, decreases in interest rates could result in an acceleration of loan prepayments. An increase in market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge-offs, which could adversely affect our business. FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR MARGIN SPREAD Changes in market interest rates, including changes in the relationship between short-term and long-term market interest rates or between different interest rate indices, can impact our margin spread, 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. The impact could result in a decrease in our interest income relative to interest expense. THE CONTINUING WAR ON TERRORISM COULD ADVERSELY AFFECT U.S. AND GLOBAL ECONOMIC CONDITIONS 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 may result in a disruption of U.S. and global economic and financial conditions and could adversely affect business and economic and financial conditions in the U.S. and globally generally and in our principal markets. SUBSTANTIAL COMPETITION COULD ADVERSELY AFFECT US Banking is a highly competitive business. We compete actively for loan, deposit, and other financial services business in California, Oregon and Washington, as well as nationally and internationally. Our competitors include a large number of state and national banks, thrift institutions, credit unions 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. Some of our competitors are community or regional banks that have strong local market positions. Other competitors include large financial institutions that have substantial capital, technology and marketing resources that are well in excess of ours. Such large financial institutions may have greater access to capital at a lower cost than us, which may adversely affect our ability to compete effectively. 59 Adverse effects of, or changes in, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us We are subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of our customers and not for the benefit of investors. In the past, our business has been materially affected by these regulations. This will likely continue in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us and our subsidiaries may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, our business may be adversely affected by future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement. International laws, regulations and policies affecting us, our subsidiaries and the business we conduct may change at any time and affect our business opportunities and competitiveness in these jurisdictions. Due to The Bank of Tokyo-Mitsubishi, Ltd.'s controlling ownership of us, laws, regulations and policies adopted or enforced by the Government of Japan and the Federal Reserve Board may adversely affect our activities and investments and those of our subsidiaries in the future. Additionally, 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 Board, which regulates the supply of money and credit in the U.S. Under long-standing policy of the Federal Reserve Board, a bank holding company is expected to act as a source of financial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the Federal Reserve Board are (a) conducting open market operations in U.S. government securities, (b) changing the discount rates on borrowings by depository institutions, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the Federal Reserve Board may have a material effect on our business, prospects, results of operations and financial condition. Refer to "Supervision and Regulation" in our Annual Report on Form 10-K for the year ended December 31, 2004, and above in "Regulatory Matters" for discussion of other laws and regulations, including the Bank Secrecy Act and other anti-money laundering laws and regulations that may have a material effect on our business, prospects, results of operations and financial condition. CHANGES IN ACCOUNTING STANDARDS COULD MATERIALLY IMPACT OUR FINANCIAL STATEMENTS From time to time the Financial Accounting Standards Board, the SEC and bank regulators change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be very difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. THERE ARE AN INCREASING NUMBER OF NON-BANK COMPETITORS PROVIDING FINANCIAL SERVICES Technology and other changes increasingly allow parties to complete financial transactions electronically, and in many cases, without banks. For example, consumers can pay bills and transfer funds over the internet and by telephone without banks. Many non-bank financial service providers have lower overhead costs and are subject to fewer regulatory constraints. If consumers do not use banks to complete their financial transactions, we could potentially lose fee income, deposits and income generated from those deposits. 60 COMPANY FACTORS ADVERSE CALIFORNIA ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS A substantial majority of our assets, deposits and fee income are generated in California. As a result, poor economic conditions in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Economic conditions in California are subject to various uncertainties at this time, including the pace and scope of the recovery in the technology sector, and the California state government's continuing budgetary and fiscal difficulties. If economic conditions in California decline, we expect that our level of problem assets could increase and our prospects for growth could be impaired. The State of California continues to face fiscal challenges, the long-term impact of which on the State's economy cannot be predicted with any certainty. ADVERSE ECONOMIC FACTORS AFFECTING CERTAIN INDUSTRIES WE SERVE COULD ADVERSELY AFFECT OUR BUSINESS We are subject to certain industry-specific economic factors. For example, a significant and increasing portion of our total loan portfolio is related to residential real estate, especially in California. Accordingly, a downturn in the real estate and housing industries in California could have an adverse effect on our operations and the quality of our real estate loan portfolio. Increases in residential mortgage loan interest rates could also have an adverse effect on our operations by depressing new mortgage loan originations. We provide financing to businesses in a number of other industries that may be particularly vulnerable to industry- specific economic factors, including the commercial real estate industry, the communications/media industry, the retail industry, the power industry and the technology industry. Recent increases in fuel prices and energy costs have adversely affected businesses in several of these industries. Industry-specific risks are beyond our control and could adversely affect our portfolio of loans, potentially resulting in an increase in nonperforming loans or charge-offs and a slowing of growth or reduction in our loan portfolio. WE ARE NOT ABLE TO OFFER ALL OF THE FINANCIAL SERVICES AND PRODUCTS OF A FINANCIAL HOLDING COMPANY Banks, securities firms, and insurance companies can now combine as a "financial holding company." Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our competitors have elected to become financial holding companies. Recently, a number of foreign banks have acquired financial holding companies in the U.S., further increasing competition in the U.S. market. Under current regulatory interpretations, Mitsubishi UFJ Financial Group, Inc. would be required to make a financial holding company election in order for us to have the benefits of their status. We do not expect that Mitsubishi UFJ Financial Group, Inc. will make such an election in the near future. OUR STOCKHOLDER VOTES ARE CONTROLLED BY THE BANK OF TOKYO-MITSUBISHI, LTD.; OUR INTERESTS AND THOSE OF OUR MINORITY STOCKHOLDERS MAY NOT BE THE SAME AS THOSE OF THE BANK OF TOKYO-MITSUBISHI, LTD. The Bank of Tokyo-Mitsubishi, Ltd., a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc., owns a majority of the outstanding shares of our common stock. As a result, The Bank of Tokyo-Mitsubishi, Ltd. can elect all of our directors and can control the vote on all matters, including: approval of mergers or other business combinations; a sale of all or substantially all of our assets; issuance of any additional common stock or other equity securities; incurrence of debt other than in the ordinary course of business; the selection and tenure of our Chief Executive Officer; payment of dividends with respect to our common stock or other equity securities; and other matters that might be favorable to The Bank of Tokyo-Mitsubishi, Ltd. A majority of our directors are independent of The Bank of Tokyo-Mitsubishi, Ltd. and are not officers or employees of UnionBanCal Corporation or any of our affiliates, including The Bank of Tokyo-Mitsubishi, Ltd. However, because of The Bank of Tokyo-Mitsubishi, Ltd.'s control over the election of our directors, we could designate ourselves as a "controlled company" under the New York Stock Exchange Rules and could change the composition of our Board of Directors so that 61 the Board would not have a majority of independent directors. The Bank of Tokyo-Mitsubishi, Ltd.'s ability to prevent an unsolicited bid for us or any other change in control could also have an adverse effect on the market price for our common stock. POSSIBLE FUTURE SALES OF OUR SHARES BY THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT THE MARKET FOR OUR STOCK The Bank of Tokyo-Mitsubishi, Ltd. may sell shares of our common stock in compliance with the federal securities laws. By virtue of The Bank of Tokyo-Mitsubishi, Ltd.'s current control of us, The Bank of Tokyo-Mitsubishi, Ltd. could sell large amounts of shares of our common stock by causing us to file a registration statement that would allow it to sell shares more easily. In addition, The Bank of Tokyo-Mitsubishi, Ltd. could sell shares of our common stock without registration under certain circumstances, such as in a "private placement." Although we can make no prediction as to the effect, if any, that such sales would have on the market price of our common stock, sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect the market price of our common stock. If The Bank of Tokyo-Mitsubishi, Ltd. sells or transfers shares of our common stock as a block, another person or entity could become our controlling stockholder. THE BANK OF TOKYO-MITSUBISHI, LTD.'S AND MITSUBISHI UFJ FINANCIAL GROUP, INC.'S FINANCIAL CONDITION COULD ADVERSELY AFFECT OUR OPERATIONS We fund our operations independently of The Bank of Tokyo-Mitsubishi, Ltd. and Mitsubishi UFJ Financial Group, Inc. and believe our business is not necessarily closely related to the business or outlook of The Bank of Tokyo-Mitsubishi, Ltd. or Mitsubishi UFJ Financial Group, Inc. However, The Bank of Tokyo-Mitsubishi, Ltd.'s and Mitsubishi UFJ Financial Group, Inc.'s credit ratings may affect our credit ratings. The Bank of Tokyo-Mitsubishi, Ltd. and Mitsubishi UFJ Financial Group, Inc. are also subject to regulatory oversight and review by Japanese and U.S. regulatory authorities. Our business operations and expansion plans could be negatively affected by regulatory concerns related to the Japanese financial system, The Bank of Tokyo-Mitsubishi, Ltd. or Mitsubishi UFJ Financial Group, Inc., and other developments concerning The Bank of Tokyo-Mitsubishi, Ltd. or Mitsubishi UFJ Financial Group, Inc., which may result in capital constraints as well as additional Japanese and U.S. regulatory constraints. POTENTIAL CONFLICTS OF INTEREST WITH THE BANK OF TOKYO-MITSUBISHI, LTD. COULD ADVERSELY AFFECT US The Bank of Tokyo-Mitsubishi, Ltd.'s view of possible new businesses, strategies, acquisitions, divestitures or other initiatives may differ from ours. This may delay or hinder us from pursuing such initiatives. Also, as part of The Bank of Tokyo-Mitsubishi, Ltd.'s normal risk management processes, The Bank of Tokyo-Mitsubishi, Ltd. manages global credit and other types of exposures and concentrations on an aggregate basis, including exposures and concentrations at UnionBanCal Corporation. Therefore, at certain levels or in certain circumstances, our ability to approve certain credits or other banking transactions and categories of customers is subject to the concurrence of The Bank of Tokyo-Mitsubishi, Ltd. We may wish to extend credit or furnish other banking services to the same customers as The Bank of Tokyo-Mitsubishi, Ltd. Our ability to do so may be limited for various reasons, including The Bank of Tokyo-Mitsubishi, Ltd.'s aggregate exposure and marketing policies. Certain directors' and officers' ownership interests in The Bank of Tokyo-Mitsubishi, Ltd.'s common stock or service as a director or officer or other employee of both us and The Bank of Tokyo-Mitsubishi, Ltd. could create or appear to create potential conflicts of interest, especially since both of us compete in U.S. banking markets. 62 RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS COULD LIMIT AMOUNTS PAYABLE TO US As a holding company, a substantial portion of our cash flow typically comes from dividends our bank and nonbank subsidiaries pay to us. Various statutory provisions restrict the amount of dividends our subsidiaries can pay to us without regulatory approval. In addition, if any of our subsidiaries 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. OUR ABILITY TO MAKE ACQUISITIONS IS SUBJECT TO REGULATORY CONSTRAINTS AND RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES OR RESTRUCTURINGS MAY ADVERSELY AFFECT US Our ability to obtain regulatory approval of acquisitions is subject to constraints related to the Bank Secrecy Act, as described in "Supervision and Regulation" in our Annual Report on Form 10-K for the year ended December 31, 2004, and above in "Regulatory Matters." Subject to our ability to address successfully these regulatory concerns, we may seek to acquire or invest in financial and non-financial companies that complement our business. There can be no assurance that we will be successful in completing any such acquisition or investment as this will depend on the availability of prospective target opportunities at valuation levels we find attractive and the competition for such opportunities from other parties. In addition, we continue to evaluate the performance of all of our businesses and business lines and may sell a business or business line. Any acquisitions, divestitures or restructurings may result in the issuance of potentially dilutive equity securities, significant write-offs, including those related to goodwill and other intangible assets, and/or the incurrence of debt, any of which could have a material adverse effect on our business, results of operations and financial condition. Acquisitions, divestitures or restructurings could involve numerous additional risks including difficulties in obtaining any required regulatory approvals and in the assimilation or separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, higher than expected deposit attrition (run-off), divestitures required by regulatory authorities, the disruption of our business, and the potential loss of key employees. There can be no assurance that we will be successful in addressing these or any other significant risks encountered in such transactions. PRIVACY RESTRICTIONS COULD ADVERSELY AFFECT OUR BUSINESS Our business model relies, in part, upon cross-marketing the services offered by us and our subsidiaries to our customers. Laws that restrict our ability to share information about customers within our corporate organization could adversely affect our business, results of operations and financial condition. 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. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense. SIGNIFICANT LEGAL ACTIONS COULD SUBJECT US TO SUBSTANTIAL UNINSURED LIABILITIES We are from time to time subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve large monetary claims and significant defense costs. To protect ourselves from the cost of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage may 63 not cover all claims against us or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative Disclosures About Market Risk

A discussion of our market risk exposure is incorporated by reference to Part I, Item 2 of this document under the captions "Quantitative“Quantitative and Qualitative Disclosures About Market Risk," "Liquidity” “Liquidity Risk," and "Factors That May Affect Future Results." ITEMPart II, Item 1A “Risk Factors” and in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 4.   CONTROLS AND PROCEDURES Controls and Procedures

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2005.March 31, 2006. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

During the quarter ended September 30, 2005,March 31, 2006, 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. 64

56




PART II. OTHER INFORMATION ITEM

Item 1.   LEGAL PROCEEDINGS Legal Proceedings

We are subject to various pending and threatened legal actions that arise in the normal course of business. We maintain reserves for losses from legal actions that are both probable and estimable. Grafton Partners LP v. Union Bank of California is pending in Alameda County Superior Court (filed March 12, 2003). That suit concerns a "Ponzi" scheme perpetrated by PinnFund, USA, located in San Diego, California. We have reached an agreement to resolveIn addition, we believe the Grafton matter, which calls for a payment of $22 million, $15.8 million of which will be paid by the Company's insurance carriers. This agreement has been documented, and has received preliminary court approval. The disposition of this claim, on the basis described above, assuming that the settlement becomes final,all claims currently pending will not have a material adverse effect on our financial conditionposition or results of operations. ITEM

Item 1A.   Risk Factors

For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005, which is incorporated by reference herein.

Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS REPURCHASES OF EQUITY SECURITIES We did not repurchase anyUnregistered Sales of Equity Securities and Use of Proceeds

Repurchases of Equity Securities

The following table presents repurchases by us of our equity securities during the thirdfirst quarter 2005. The dollar value2006:

Period

 

Total Number of
Shares Purchased

 

Average Price Paid
per Share

 

Total Number
of Shares Purchased
as Part of Publicly
Announced Programs

 

Approximate
Dollar 
Value of Shares That
May Yet Be
Purchased
Under the Programs

 

January 2006
(January 1-31, 2006)

 

 

 

 

 

$

 

 

 

 

 

 

$

102,334,370

 

 

February 2006
(February 2-28, 2006)

 

 

769,700

 

 

 

$

68.18

 

 

 

769,700

 

 

 

$

49,857,016

 

 

March 2006
(March 1-20, 2006)

 

 

398,000

 

 

 

$

69.19

 

 

 

398,000

 

 

 

$

22,318,422

(1)

 

Total

 

 

1,167,700

 

 

 

$

68.52

 

 

 

1,167,700

 

 

 

 

 

 


(1)      In the first quarter of shares that may yet be purchased2006, UnionBanCal Corporation used $80.0 million from the $200 million repurchase program announced on April 21, 2005.

57




Item 4.   Submission of Matters to a Vote of Security Holders

Set forth below is information concerning each matter submitted to a vote at the Annual Meeting of Stockholders on April 26, 2006 (“Annual Meeting”):

Election of Directors:   Each of the following persons was elected as a director to hold office until the 2007 Annual Meeting of Stockholders or until earlier retirement, resignation or removal.

NOMINEE

 

FOR

 

WITHHELD

 

Aida M. Alvarez

 

137,994,921

 

345,846

 

David R. Andrews

 

138,088,668

 

252,099

 

L. Dale Crandall

 

137,827,185

 

513,582

 

Richard D. Farman

 

136,681,925

 

1,658,841

 

Stanley F. Farrar

 

135,953,253

 

2,387,514

 

Philip B. Flynn

 

136,552,631

 

1,788,136

 

Michael J. Gillfillan

 

137,825,352

 

515,415

 

Ronald L. Havner, Jr.

 

138,081,638

 

259,128

 

Norimichi Kanari

 

136,626,956

 

1,713,811

 

Mary S. Metz

 

136,884,189

 

1,456,578

 

Shigemitsu Miki

 

112,235,456

 

26,105,311

 

Takashi Morimura

 

136,640,280

 

1,703,686

 

J. Fernando Niebla

 

137,781,823

 

558,944

 

Masashi Oka

 

136,527,965

 

1,812,801

 

Tetsuo Shimura

 

136,548,234

 

1,792,533

 

Proposal No. 2:To approve the Amended and Restated 1997 UnionBanCal Corporation Performance Share Plan to enable awards under our repurchase programs is $162,078,928. ITEM 6. EXHIBITS NO. DESCRIPTION --- ----------- 10.1 Purchase and Assumption Agreement by and amongthe Plan to qualify as deductible, performance-based compensation under Section 162(m) of the Internal Revenue Code received the following votes:

FOR

135,941,571

AGAINST

2,076,881

ABSTAIN

322,314

BROKER NON-VOTES

3,200

Proposal No. 3:   To approve the Union Bank of California N.A., Union BankSenior Executive Bonus Plan to enable bonuses paid under the Plan to qualify as deductible, performance-based compensation under Section 162(m) of California International, and Union Bankthe Internal Revenue Code received the following votes:

FOR

134,287,157

AGAINST

3,734,905

ABSTAIN

318,704

BROKER NON-VOTES

3,200

Proposal No. 4:To ratify the selection of California Servicos LTDA. and Wachovia Bank, N.A. dated September 21, 2005(1) 10.2 Written DescriptionDeloitte & Touche LLP as independent registered public accounting firm of Compensation Arrangement for UnionBanCal Corporation Non-Employee Directors(2) 31.1 Certificationfor 2006 received the following votes:

FOR

136,637,650

AGAINST

1,620,754

ABSTAIN

85,562

BROKER NON-VOTES

0

58




Item 5.   Other Information

(a)   Restricted Stock Agreement.

Effective as of January 3, 2006, the Executive Compensation & Benefits Committee of the Chief Executive OfficerBoard of Directors of UnionBanCal Corporation granted 2,000 shares of restricted stock to Linda Betzer pursuant to Section 302a restricted stock agreement, a form of the Sarbanes-Oxley Act of 2002(1) 31.2 which is filed herewith as Exhibit 10.3 and incorporated by reference herein.

Item 6.   Exhibits

No.

Description

10.1

Form of 2006 Nonqualified Stock Option Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)

10.2

Form of Performance Share Agreement under the 1997 UnionBanCal Corporation Performance Share Plan(2)

10.3

Form of Restricted Stock Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)

10.4

Amended and Restated 1997 UnionBanCal Corporation Performance Share Plan(3)

10.5

Union Bank of California, N.A. Senior Executive Bonus Plan(4)

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)


(1)                   Filed herewith.

(2)                   Incorporated by reference to Section 302 of the Sarbanes-Oxley Act of 2002(1) 32.1 Certification of the Chief Executive Officer pursuantExhibit 10.1 to 18 U.S.C. Section 1350, as adopted pursuantUnionBanCal Corporation’s Current Report on Form 8-K dated March 24, 2006 (SEC File No. 001-15081).

(3)                   Incorporated by reference to Section 906 of the Sarbanes-Oxley Act of 2002(1) 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) - --------------- (1) Filed herewith. (2) Filed as Appendix A to the UnionBanCal Corporation'sCorporation Definitive Proxy Statement on Schedule 14A for its 2005 Annual Meeting of Stockholders and incorporatedfiled on March 23, 2006 (SEC File No. 001-15081).

(4)                   Incorporated by reference herein. 65 SIGNATURES to Appendix B to the UnionBanCal Corporation Definitive Proxy Statement on Schedule 14A filed on March 23, 2006 (SEC File No. 001-15081).

59




Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIONBANCAL CORPORATION (Registrant) Date: November 8, 2005 By: /s/ TAKASHI MORIMURA ---------------------------------------- Takashi Morimura PRESIDENT AND CHIEF EXECUTIVE OFFICER (Principal Executive Officer) Date: November 8, 2005 By: /s/ DAVID I. MATSON ---------------------------------------- David I. Matson VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER (Principal Financial Officer) Date: November 8, 2005 By: /s/ DAVID A. ANDERSON ---------------------------------------- David A. Anderson SENIOR VICE PRESIDENT AND CONTROLLER (Chief Accounting Officer) 66

UNIONBANCAL CORPORATION (Registrant)

Date: May 8, 2006

By:

/s/ TAKASHI MORIMURA

Takashi Morimura

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 8, 2006

By:

/s/ DAVID I. MATSON

David I. Matson

Vice Chairman and Chief Financial Officer

(Principal Financial Officer)

Date: May 8, 2006

By:

/s/ DAVID A. ANDERSON

David A. Anderson

Executive Vice President and Controller

(Chief Accounting Officer)

60




EXHIBIT INDEX

No.

Description

10.1

Form of 2006 Nonqualified Stock Option Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)

10.2

Form of Performance Share Agreement under the 1997 UnionBanCal Corporation Performance Share Plan(2)

10.3

Form of Restricted Stock Agreement under the Year 2000 UnionBanCal Corporation Management Stock Plan(1)

10.4

Amended and Restated 1997 UnionBanCal Corporation Performance Share Plan(3)

10.5

Union Bank of California, N.A. Senior Executive Bonus Plan(4)

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)


(1)                   Filed herewith.

(2)                   Incorporated by reference to Exhibit 10.1 to UnionBanCal Corporation’s Current Report on Form 8-K dated March 24, 2006 (SEC File No. 001-15081).

(3)                   Incorporated by reference to Appendix A to the UnionBanCal Corporation Definitive Proxy Statement on Schedule 14A filed on March 23, 2006 (SEC File No. 001-15081).

(4)                   Incorporated by reference to Appendix B to the UnionBanCal Corporation Definitive Proxy Statement on Schedule 14A filed on March 23, 2006 (SEC File No. 001-15081).