DBRS Comments on UnionBanCal Corporation’s 3Q12 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 3Q12 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 $124 million, down from $187 million in the second quarter, and from $172 million in 3Q11. Highlights of the quarter include loan and deposit growth, modest margin expansion and a higher provision for credit losses primarily related to OCC guidelines surrounding the treatment of consumer loans following a Chapter 7 bankruptcy filing.

Total revenues increased 1% to $843 million during the quarter, but would have declined absent higher securities gains. Net interest income was down modestly to $654 million, as declines in securities and covered loan balances more than offset margin expansion and non-covered loan growth. The securities repositioning did bolster the margin by three basis points to 3.32%. Meanwhile, noninterest income increased 8% to $189 million reflecting higher securities gains, improved syndication fees and better merchant banking results.

Expenses crept up 7% to $638 million, but excluding the prepayment fee for early extinguishment of wholesale borrowings and other non-core items, UB’s expenses were flat.

The total provision for credit losses was $41 million compared to a benefit of $15 million in 2Q12. The jump in provisioning was primarily driven by the recent OCC guidance, and to a lesser extent, the heightened levels of uncertainty surrounding the economy.

Asset quality remains strong even with the OCC guidance, which by itself, caused the reclassification of $35 million of performing residential mortgage and consumer loans to nonaccrual status and $17 million of additional net charge-offs (NCOs). Excluding covered loans, but including the OCC guidance, nonperforming assets (NPAs) still declined $13 million to $526 million, or a very low 0.96% of total loans held for investment and OREO. Meanwhile, non-covered NCO’s totaled $40 million including the impact of the aforementioned OCC guidance compared to $29 million in 2Q12. DBRS notes that even including the effects of the guidance, 3Q12’s NCOs were still a very manageable 0.29% (annualized) of average total loans. The provision for loan losses exceeded charge-offs, but loan growth caused the allowance for loan losses to decline modestly to a still sufficient 1.20% of total loans held for investment.

The Company reported average loan growth with average non-covered loans increasing $518 million to $54.7 billion. The loan growth came from commercial & industrial and residential mortgage loans. Meanwhile, core deposits increased by $1.763 billion to $55.1 billion. DBRS notes that period-end core deposits almost fully funded total loans for investment.

Capital remains strong with the Company’s tangible common equity ratio improving 42 basis points to 11.46% during the quarter. DBRS notes that UB’s announced acquisition of Pacific Capital Bancorp remains on track to close during 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 and Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. All 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: Alan G. Reid
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.