DBRS Comments on UnionBanCal Corporation’s 1Q13 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $147 million, up from $123 million in 4Q12, but down from $195 million a year ago. The improved sequential quarter results reflected net securities gains and a lower effective tax rate, which more than offset a decline in net interest income and a higher total provision for credit losses.

Highlights of the quarter include positive operating leverage and modest loan growth. Specifically, total revenue increased 2% to $903 million, while expenses were down modestly to $713 million. Meanwhile, total loans held for investment increased approximately $800 million, or 1%, to $60.9 billion. Nonetheless, the low interest rate environment remains a headwind with net interest income declining 1% to $648 million reflecting a 16 basis point compression in the net interest margin to 3.01% despite average earning asset growth of 5%. Moreover, excluding net securities gains, total revenues would have declined 7% sequentially and resulted in negative operating leverage.

On April 7, 2013, the Company announced that is has reached an agreement to acquire PB Capital Corporation’s (PB Capital) $3.7 billion institutional CRE lending portfolio. The deal is for all cash and is expected to close in 2Q13. While the purchased portfolio is national in nature, in a more volatile asset class, and comprised of larger loans ($52 million average loan size), DBRS is comfortable with the conservative estimated weighted average loan-to-value of 63%, as well as the fact that 69% of the portfolio has been originated after 2007. The Company noted that the transaction is immediately accretive to earnings and exceeds all internal hurdles.

Noninterest income increased 9% to $255 million during the quarter. However, net securities gains increased an incremental $76 million to $96 million in 1Q13 masking significant declines in trading account activities, other noninterest income, and to a lesser extent, lower merchant banking fees.

Expenses modestly decreased by $2 million to $713 million, as higher seasonal expenses, a full quarter impact of the Pacific Capital Bancorp acquisition, and a $25 million incremental increase in the provision for losses on off-balance sheet commitments were offset by lower professional and outside service expense and lower merger costs related to acquisitions. DBRS notes that core expenses were stable sequentially at $617 million. Overall, the adjusted efficiency ratio remains high at 67.76%.

Credit quality remains strong with stable nonperforming assets and relatively low net charge-offs. Specifically, excluding PCI loans and FDIC covered OREO, nonperforming assets remained stable at $520 million, or just 0.87% of total loans held for investment and OREO. Meanwhile, excluding PCI loans, net charge-offs remained very manageable at $12 million, or an annualized 0.08% of average loans. The allowance for credit losses as a percentage of total loans, excluding PCI loans, was a sufficient 1.30% at quarter-end.

Capital remains strong with a tangible common equity ratio of 10.05% and a Tier 1 common capital ratio of 12.48% at March 31, 2013. UnionBanCal indicated that the PB acquisition would have a minimal impact on overall capital levels.

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

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