DBRS Comments on UnionBanCal Corporation’s 4Q12 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 4Q12 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 $123 million, down modestly from $124 million in the third quarter, and from $129 million in 4Q11. Highlights of the quarter include the closing of two acquisitions, organic loan growth, and broad-based improvements in asset quality. DBRS notes that expense growth even adjusting for the acquisitions was higher than we anticipated.

On December 1, 2012, UB completed its $1.5 billion acquisition of Pacific Capital Bancorp, which contributed $3.8 billion in loans held for investment and $4.7 billion of deposits. Earlier in the quarter, the Company completed its acquisition of SmartStreet, which provides banking services to nationwide homeowners associations and community association management companies. The acquisition also included approximately $1 billion in deposits.

Positively, total revenues increased 5% during the quarter, despite margin pressure, with net interest income growing 2%, while noninterest income increased 17%, as the Company benefited from the Pacific Capital acquisition. Specifically, net interest income increased $14 million to $668 million, as higher loan balances more than offset net interest margin pressure of nine basis points to 3.23%. Meanwhile, noninterest income increased $32 million to $221 million reflecting gains from the sale of Visa shares, as well as from the sale of private equity investments.

Expenses of $715 million increased $77 million during the quarter with $56 million of the increase attributable to the acquisitions. Non-acquisition related expenses increased $21 million, primarily due to various compliance and regulatory projects reflected in higher professional and outside services expense. On an adjusted basis, core expenses increased 12% to $617 million, but did include the added ongoing expenses from the acquisitions. In total, the Company’s adjusted efficiency ratio was a high 70.29% in 4Q12.

Asset quality remains strong and continues to improve. Indeed, criticized loans, nonperforming assets (NPAs), and net charge-offs (NCOs) all declined during the quarter. Specifically, criticized loans declined by 16% during the quarter to $1.28 billion. Excluding purchased credit-impaired loans and FDIC covered other real estate owned, nonperforming assets declined $6 million to $520 million, or 0.88% of total loans held for investment and OREO. Lastly, NCOs were negligible at less than $1 million, or 0.01% of average loans. As a result of the improvements in asset quality, the total provision for credit losses was a benefit of $15 million compared to a provision of $41 million in 3Q12. Overall, the allowance for credit losses was a sufficient 1.31% of total loans, excluding PCI loans.

Even with the two acquisitions, capital remains strong with a tangible common equity ratio declining 154 basis points to 9.92% during the quarter. DBRS expects the Company to continue to pursue additional acquisitions that make sense strategically and financially.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]