DBRS Comments on UnionBanCal Corporation’s 3Q13 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $198 million, up from $142 million in 2Q13, and from $124 million a year ago. Higher sequential quarter earnings were driven by loan growth, higher gains on sale of securities, a higher reversal of provision for credit losses, and expense savings realized from the Pacific Capital Bancorp (PCBC) acquisition.

Highlights of the quarter include solid loan and deposit growth, and continued improvements in already strong asset quality. Indeed, average total loans held for investment, excluding purchased credit-impaired loans, increased $2.9 billion, or 5%, to $66.6 billion driven primarily by commercial and industrial and commercial real estate loan growth. Meanwhile, core deposits increased $2.8 billion, or 4%, to $68.3 billion. Importantly, UB delivered positive operating leverage sequentially on both a reported and adjusted (excluding non-core items) basis.

Total revenue increased $46 million, or 5%, to $919 million reflecting growth in both net interest income and noninterest income. Despite net interest margin pressure of four bps to 2.99%, net interest income increased 2% to $685 million. Meanwhile, noninterest income of $234 million benefited from higher merchant banking fees and higher net gains on securities. After harvesting net securities gains for more than a year including $47 million in 3Q13, DBRS notes that the available-for-sale securities portfolio is now in an unrealized loss position of $319 million at September 30, 2013, so this benefit to earnings is unlikely to continue.

Noninterest expenses declined $13 million in the quarter to $689 million driven by lower salary expense reductions from the PCBC integration, and to a lesser extent, lower annual seasonal factors. Despite the decline in expenses and revenue growth, UB’s efficiency ratio was 75.01%, or a still high 67.21% on an adjusted basis.

Asset quality remains strong with criticized loans, nonperforming assets (NPAs) and net-charge-offs (NCOs) all improving once again during the quarter. Specifically, criticized loans held for investment declined 7% to $1.27 billion, while NPAs, excluding PCI and FDIC covered OREO, declined $8 million to $513 million, or just 0.78% of total loans held for investment and OREO. Lastly, NCOs, excluding PCI and FDIC covered OREO, were just $1 million in 3Q13, or 0.01% of average total loans (annualized). As a result of improving asset quality, UB’s provision for credit losses was a benefit of $15 million. DBRS notes that with an allowance for credit losses at 1.12% of total loans, excluding PCI loans, UnionBanCal is likely limited in future reserve releases, especially if solid loan growth continues.

Despite balance sheet growth, capital metrics remain strong. Indeed, the Company’s tangible common equity ratio was 9.01% at September 30, 2013.

During 3Q13, the Company corrected prior period errors related to the recognition of income and expense associated with market-linked certificates of deposit. These errors resulted in immaterial changes that benefited net interest income at the expense of noninterest income.

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

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