DBRS Comments on UnionBanCal Corporation’s 2Q12 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 2Q12 earnings of UnionBanCal Corporation (UB or the Company). DBRS rates UB’s Issuer & Senior Debt at “A” with a Stable trend. The Company reported net income attributable to UB of $187 million, down from $195 million in the first quarter, and from $242 million in 2Q11. The sequential quarter decline in net income was driven by a higher effective tax rate and no net gain on the sale of certain business units that contributed $23 million of revenue in 1Q12.

Highlights of the quarter include loan growth (excluding covered loans), modest deposit growth, margin expansion, and continued improvements in both asset quality and capital metrics.

Total revenues declined by $21 million, or 2%, to $834 million with net interest income growing a modest 1% to $659 million, while noninterest income decreased 13% to $175 million. The improvement in net interest income reflected a favorable mix of earning assets (average loan balances increased, while lower yielding security balances decreased) and better than expected performance related to covered loans, offset by lower yields in the securities portfolio. Overall, the net interest margin increased two basis points to 3.29% during the quarter.

Partially offsetting the decline in other income related to the net gain on the sale of certain business units in 1Q12, the Company sold some securities generating a net gain of $28 million compared to a net gain of $19 million in 1Q12. Nonetheless, most fee income categories declined during the quarter.

As a result of portfolio rebalancing activities, the available-for-sale portfolio declined by $2.8 billion to $20.5 billion. DBRS notes that the portfolio remains in an unrealized gain position of $305 million with only private label MBS in an unrealized loss position.

Noninterest expenses were down 2% to $599 million reflecting the higher seasonal expenses recorded in 1Q12, as non-staff expenses were relatively flat.

Average total loans, excluding FDIC covered loans, increased $0.9 billion, or 2%, to $54.1 billion reflecting primarily higher commercial and industrial loans and residential mortgage loans. Meanwhile, core deposits increased a modest $0.3 billion to $53.4 billion, but the mix improved with noninterest bearing deposits increasing, while time deposits declined.

Asset quality remains quite sound and continues to improve. Specifically, nonperforming assets, excluding covered loans, declined 3% to $539 million, or just 1.01% of total loans held for investment and OREO, from $558 million, or 1.04%, in 1Q12. Continuing asset quality improvement appears sustainable with criticized commercial loans declining a sizeable 15% during the quarter to $1.3 billion. Meanwhile, net charge-offs, excluding covered loans, were $29 million, or 0.21% of annualized average total loans, compared to $54 million, or 0.41%, in 1Q12. The total provision for credit losses was a benefit of $15 million compared to a benefit of $3 million in 1Q12. Despite continued provision for credit loss reversals, the allowance for credit losses remains sufficient at 1.46% of total loans (excluding covered loans).

Earnings retention and a declining balance sheet helped bolster capital metrics in 2Q12. Indeed, the Company’s tangible common equity ratio increased 84 basis points to a robust 11.04%. Already with one announced bank acquisition that is expected to close in 4Q12, UB remains interested in additional acquisitions that make sense strategically and financially.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this commentary include company documents and data from SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 7 July 2005
Most Recent Rating Update: 12 March 2012

For additional information on this rating, please refer to the linking document under Related Research.