DBRS Comments on UnionBanCal Corporation’s 2Q13 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $141 million, down from $147 million in 1Q13, and from $187 million a year ago. Excluding securities gains, DBRS notes that net income would have improved sequentially.

Highlights of the quarter include the completion of UB’s acquisition of PB Capital Corporation’s $3.5 billion institutional commercial real estate portfolio, loan and deposit growth, and the maintenance of strong asset quality. Excluding securities gains and other non-core items, DBRS notes that UB delivered positive operating leverage sequentially.

Benefiting from the acquisition, as well as organic loan growth, total loans held for investment, excluding purchased credit-impaired (PCI) loans, increased $4.6 billion to $64.4 billion during the quarter. As a result of this growth and a relatively stable net interest margin, UB’s net interest income increased 3% to $666 million. Meanwhile, noninterest income benefitted from higher trading account activities, merchant banking fees, and trust and investment fees. Indeed, excluding securities gains and other non-core items, noninterest income increased $10 million, or 6.2%.

Noninterest expenses totaled $702 million, an $11 million improvement from 1Q13. However, excluding the impact of the provision for losses on off-balance sheet commitments, expenses would have increased $6 million to $704 million even with higher seasonal expenses in 1Q13. Overall, the Company’s adjusted efficiency ratio remained elevated at 69.60%.

Positively, core deposit balances increased for the first time since year-end, increasing $1.9 billion to $65.5 billion.

Credit quality remains strong with relatively stable nonperforming assets (NPAs), lower levels of criticized loans, and lower net charge-offs (NCOs). Specifically, NPAs, excluding PCI loans and covered other real estate loans, inched up $1 million to $520 million. Increases within the commercial portfolios were offset by improvements within the consumer portfolios. As a result of loan growth, NPAs as percentage of total loans held for investment and OREO excluding PCI and covered OREO improved 6 basis points (bps) to only 0.81%. Meanwhile, NCOs, excluding PCI loans, totaled just $10 million, or an annualized 0.06% of average total loans held for investment. The total provision for credit losses was a benefit of $5 million compared to a provision of $12 million in 1Q13. Given the low loss rates, the allowance for credit losses remains sufficient at 1.18% of total loans, excluding PCI loans.

Despite the acquisition and lower stockholder’s equity primarily related to higher unrealized losses on securities available for sale, the Company’s tangible common equity ratio declined 94 bps to a still strong 9.11%. DBRS notes that Union Bank, N.A. issued $750 million of subordinated debt to the Company’s shareholder, which helped bolster Tier 2 capital.

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

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