UnionBanCal Corporation Reports Third Quarter Net Income of $124 Million

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UnionBanCal Corporation Reports Third Quarter Net Income of $124 Million

Third Quarter Highlights:

  • Net income was $124 million, down from $187 million for the prior quarter, and down from $172 million for the year-ago quarter.
  • Total provision for credit losses was $41 million, compared with a benefit of $15 million for the prior quarter, and a benefit of $13 million for the year-ago quarter. Provision increase from the prior quarter was primarily due to implementation of recently issued regulatory guidance on treatment of certain residential loans and heightened levels of uncertainty in the macroeconomic outlook.
  • Solid underlying credit quality metrics. Excluding FDIC covered assets:
    • Nonperforming assets at quarter-end were $526 million, or 0.60 percent of total assets, including a $35 million reclassification of performing residential mortgage and consumer loans to nonaccrual status, down from $539 million, or 0.62 percent of total assets, at June 30, 2012.
    • Net charge-offs for third quarter were $40 million, or an annualized 0.29 percent of average total loans, including $17 million in residential mortgage and home equity net charge-offs due to implementation of recently issued regulatory guidance, compared with $29 million, or an annualized 0.21 percent of average total loans for prior quarter.
  • Net interest margin was 3.32 percent, up from 3.29 percent for the prior quarter, and up from 3.31 percent for the year-ago quarter.
  • Average total loans, excluding FDIC covered loans, were $54.7 billion, up from $54.1 billion for the prior quarter, and up from $49.0 billion for the year-ago quarter.
  • Core deposits at September 30, 2012, were $55.1 billion, up from $53.4 billion at June 30, 2012, and up from $50.7 billion at September 30, 2011.
  • Capital ratios remained strong during the quarter:
    • Tier 1 common capital ratio, measured using Basel I risk-weighted assets, was 13.76 percent at September 30, 2012, down 2 basis points from 13.78 percent at June 30, 2012.
    • Tangible common equity ratio was 11.46 percent at September 30, 2012, up 42 basis points from 11.04 percent at June 30, 2012.

SAN FRANCISCO--(BUSINESS WIRE)-- UnionBanCal Corporation (the Company), parent company of San Francisco-based Union Bank, N.A., today reported third quarter 2012 results. Net income for third quarter was $124 million, down from $187 million for the prior quarter, and down from $172 million for the year-ago quarter. The primary driver of the decrease in reported net income from second quarter was a provision for credit losses compared to a benefit for the prior quarter, which was largely due to the implementation of recently issued regulatory guidance. The guidance requires that loans discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower be charged off to their collateral value and considered nonaccrual, regardless of their delinquency status. Heightened levels of uncertainty in the macroeconomic outlook also contributed to the provision for credit losses. Additionally, noninterest expense increased primarily due to a prepayment fee paid for early extinguishment of wholesale borrowings, which was partially offset by higher gains on the sale of securities in the current quarter, both resulting from strategic securities portfolio rebalancing activities.


Summary of Third Quarter Results

Third Quarter Total Revenue

For third quarter 2012, total revenue (net interest income plus noninterest income) was $843 million, up $9 million, or 1 percent, compared with second quarter 2012. Net interest income decreased 1 percent, and noninterest income increased 8 percent. The net interest margin was 3.32 percent, up slightly compared with 3.29 percent for the prior quarter.

Net interest income for third quarter 2012 was $654 million, down $5 million, or 1 percent, compared with second quarter 2012. The decrease in net interest income was primarily due to a decline in average earning assets related to securities portfolio rebalancing activities that resulted in a modest increase in net interest margin.

Average total loans, excluding FDIC covered loans, increased $518 million, or 1 percent, compared with second quarter 2012, primarily due to growth in commercial and industrial loans and residential mortgage loans. Average FDIC covered loans decreased $170 million, or 21 percent, due to runoff of the portfolio. Average noninterest bearing deposits increased $897 million, or 4 percent. Average interest bearing deposits decreased $976 million, or 2 percent, primarily due to a decrease in time deposits.

For third quarter 2012, noninterest income was $189 million, up $14 million, or 8 percent, compared with second quarter 2012. Noninterest income increased primarily due to higher net gains on the sale of securities due to portfolio rebalancing activities and higher merchant banking fees from higher syndication activities.

Compared with third quarter 2011, total revenue grew $52 million, with net interest income up 8 percent and noninterest income up 2 percent. Net interest income increased $48 million compared with the year-ago quarter, primarily due to growth in both non-FDIC covered loans and securities, as well as a more favorable mix of total earning assets.

Average total loans, excluding FDIC covered loans, increased $5.6 billion, or 11 percent, compared with third quarter 2011, primarily due to growth in commercial and industrial loans and residential mortgage loans. Average FDIC covered loans decreased $550 million, or 47 percent, due to runoff of the portfolio. Average interest bearing deposits increased $2.2 billion, or 5 percent, and average noninterest bearing deposits increased $2.7 billion, or 14 percent.

Noninterest income increased $4 million, or 2 percent, compared with third quarter 2011, primarily due to higher net gains on the sale of securities related to portfolio rebalancing activities in third quarter 2012. Offsets to the securities gains included the impact of amortization adjustments to the FDIC indemnification asset, lower card processing fees due to lower per-transaction fees charged, and lower trust and investment management fees due to the sale of certain business units in first quarter 2012.

Third Quarter Noninterest Expense

Noninterest expense for third quarter 2012 was $638 million, up $39 million, or 7 percent, compared with second quarter 2012. Salaries and employee benefits expense increased $5 million. Non-staff expense increased $34 million, primarily due to a prepayment fee for early extinguishment of wholesale borrowings, recorded in third quarter.

Noninterest expense for third quarter 2012 was up $35 million, or 6 percent, compared with third quarter 2011, primarily due to a prepayment fee for early extinguishment of wholesale borrowings, recorded in third quarter 2012.

Balance Sheet

At September 30, 2012, the Company had total assets of $88.2 billion, down $1.5 billion, or 2 percent, compared with December 31, 2011. Loan growth, excluding FDIC covered loans, of $2.3 billion during the first nine months of 2012 was offset by decreased interest bearing deposits in banks and decreased securities available for sale. On September 30, 2012, the Company transferred certain of its Collateralized Loan Obligation (CLO) debt securities with a carrying value of $1.1 billion from held to maturity to available for sale, due to a significant increase in risk weights under regulatory capital rules proposed by the U.S. federal banking agencies in June 2012. Accordingly, the Company no longer intends to hold these securities to maturity.

At September 30, 2012, total deposits were $65.1 billion, up $0.7 billion, or 1 percent, compared with December 31, 2011. Core deposits at September 30, 2012, were $55.1 billion, up $2.3 billion, or 4 percent, compared with December 31, 2011.

Credit Quality

Reported credit quality metrics for the quarter were impacted by the implementation in third quarter of regulatory guidance that affected residential mortgage and home equity loans to borrowers whose obligations have been discharged in Chapter 7 bankruptcy where the borrower has not reaffirmed the debt. Implementation of the regulatory guidance affected nonperforming loans and net charge-offs as follows:

  • $35 million reclassification of performing residential mortgage and consumer loans to nonaccrual status
  • $17 million increase in net charge-offs

Nonperforming assets, excluding FDIC covered assets, ended the quarter at $526 million, down from $539 million at June 30, 2102, and down from $690 million at September 30, 2011. The decrease of $13 million, or 2 percent, compared with prior quarter included a $35 million increase in nonaccrual loans resulting from implementation of the regulatory guidance.

Excluding FDIC covered assets, net charge-offs for third quarter 2012 were $40 million, or an annualized 0.29 percent of average total loans for third quarter 2012, up from net charge-offs of $29 million, or an annualized 0.21 percent of average total loans, for second quarter 2012, and down from $43 million, or an annualized 0.36 percent of average total loans for third quarter 2011. The increase of $11 million compared with prior quarter included a $17 million increase in residential mortgage and home equity net charge-offs resulting from implementation of the regulatory guidance.

The total provision for credit losses is comprised of the provision for loan losses and the provision for losses on off-balance sheet commitments, which is classified in noninterest expense. In third quarter 2012, the provision for loan losses was $45 million and the reversal of provision for losses on off-balance sheet commitments was a benefit of $4 million, for a total provision for credit losses of $41 million for third quarter 2012. This compares with a benefit of $15 million for second quarter 2012. The primary drivers of the higher provision were higher charge-offs in the residential mortgage and consumer loan portfolios due to the recently issued regulatory guidance and heightened levels of uncertainty in the macroeconomic outlook.

The allowance for credit losses as a percent of total loans, excluding FDIC covered loans, was 1.43 percent at September 30, 2012, compared with 1.46 percent at June 30, 2012, and 1.77 percent at September 30, 2011. The allowance for credit losses as a percent of nonaccrual loans, excluding FDIC covered loans, was 155 percent at September 30, 2012, compared with 153 percent at June 30, 2012, and 132 percent at September 30, 2011.

Capital

At September 30, 2012, total stockholder's equity was $12.4 billion, up $875 million, or 8 percent, since December 31, 2011, and tangible common equity was $9.8 billion, up $924 million, or 10 percent, since December 31, 2011. The Company's tangible common equity ratio was 11.46 percent at September 30, 2012, up 126 basis points from 10.20 percent at December 31, 2011. The Basel I Tier 1 common and Tier 1 risk-based capital ratios were both 13.76 percent at September 30, 2012. Additionally, the Basel I Total risk-based capital ratio was 15.50 percent at September 30, 2012.

Non-GAAP Financial Measures

This press release contains certain references to financial measures identified as excluding privatization transaction impact, foreclosed asset expense, (reversal of) provision for losses on off-balance sheet commitments, productivity initiative costs and gains, low income housing credit (LIHC) investment amortization expense, expenses of the LIHC consolidated variable interest entities, merger costs related to acquisitions, debt termination fees from balance sheet repositioning, or gains from securities associated with debt termination fees from balance sheet repositioning, which are adjustments from comparable measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (GAAP). These financial measures, as used herein, differ from financial measures reported under GAAP in that they exclude unusual or non-recurring charges, losses or credits. This press release identifies the specific items excluded from the comparable GAAP financial measure in the calculation of each non-GAAP financial measure. Management believes that financial presentations excluding the impact of these items provide useful supplemental information which is important to a proper understanding of the Company's business results. This press release also includes additional capital ratios (the tangible common equity and Basel I Tier 1 common capital ratios) to facilitate the understanding of the Company's capital structure and for use in assessing and comparing the quality and composition of UnionBanCal's capital structure to other financial institutions. These presentations should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures presented by other companies.

Headquartered in San Francisco, UnionBanCal Corporation is a financial holding company with assets of $88.2 billion at September 30, 2012. Its primary subsidiary, Union Bank, N.A., is a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies, and major corporations. The bank operated 402 branches in California, Washington, Oregon, Texas, Illinois, and New York as well as two international offices, on September 30, 2012. UnionBanCal Corporation is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd., which is a subsidiary of Mitsubishi UFJ Financial Group, Inc. Union Bank is a proud member of the Mitsubishi UFJ Financial Group (MUFG, NYSE:MTU), one of the world's largest financial organizations. Visit www.unionbank.com for more information.

 
UnionBanCal Corporation and Subsidiaries
Financial Highlights (Unaudited)

Exhibit 1

 
 As of and for the Three Months EndedPercent Change to
September 30, 2012 from
 
(Dollars in millions)

September 30,
2012

June 30,
2012

March 31,
2012
December 31,
2011
September 30,
2011
June 30,
2012
 September 30,
2011
 
Results of operations: 
Net interest income$654$659$653$640$606(1)%8%
Noninterest income 189 175  202  151 185 82
Total revenue84383485579179117
Noninterest expense 638 599  614  619 603 76
Pre-tax, pre-provision income (1)205235241172188(13)9
(Reversal of) provision for loan losses 45 (14) (1) 7 (13)421446

Income before income taxes and including noncontrolling interests

160249242165201(36)(20)
Income tax expense 42 67  51  40 33 (37)27
Net income including noncontrolling interests118182191125168(35)(30)
Deduct: Net loss from noncontrolling interests 6 5  4  4 4 2050

Net income attributable to UnionBanCal Corporation (UNBC)

$124$187 $195 $129$172 (34)(28)
 
Balance sheet (end of period):
Total assets$88,185$87,939$92,323$89,676$84,013-5
Total securities22,08922,89025,43224,10620,962(3)5
Total loans held for investment55,41054,29154,32253,54050,99829
Core deposits (2)55,14153,37853,12552,84050,72039
Total deposits65,14363,44365,08964,42060,45438
Long-term debt5,5406,4445,5546,6847,064(14)(22)
UNBC stockholder's equity12,43712,07611,82111,56210,900314
 
Balance sheet (period average):
Total assets$87,881$89,479$89,449$87,079$82,197(2)7
Total securities22,49624,22324,26522,72119,145(7)18
Total loans held for investment55,28554,93754,14952,36550,214110
Earning assets79,13780,62580,50378,00773,303(2)8
Total deposits64,42064,49964,42562,84859,580-8
UNBC stockholder's equity12,20911,90511,62111,64610,708314
 
Performance ratios:
Return on average assets (3)0.56%0.84%0.88%0.59%0.83%
Return on average UNBC stockholder's equity (3)4.036.326.754.396.36

Return on average assets excluding the impact of privatization transaction (3) (4)

0.600.900.930.650.90

Return on average stockholder's equity excluding the impact of privatization transaction (3) (4)

5.218.188.765.978.65
Efficiency ratio (5)75.6171.8371.8678.2776.21
Adjusted efficiency ratio (4) (5)68.3766.1868.7669.1266.12
Net interest margin (3) (6)3.323.293.273.293.31
 
Capital ratios:
Tier 1 risk-based capital ratio (7)13.76%13.78%13.73%13.82%13.09%
Total risk-based capital ratio (7)15.5015.5415.7715.9815.41
Leverage ratio (7)12.0311.5811.3511.4410.96
Tier 1 common capital ratio (7) (8)13.7613.7813.7313.8213.09
Tangible common equity ratio (9)11.4611.0410.2010.2010.10
 
Refer to Exhibit 14 for footnote explanations. Read Full Story

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