UnionBanCal Corporation Reports Fourth Quarter Net Income of $123 Million, Full Year Net Income of $

UnionBanCal Corporation Reports Fourth Quarter Net Income of $123 Million, Full Year Net Income of $629 Million

Fourth Quarter Highlights:

• Completed the acquisition of Pacific Capital Bancorp (PCBC) on December 1, 2012.

• Completed the acquisition of Smartstreet on October 26, 2012.

• Net income was $123 million, down slightly from $124 million for the prior quarter, and down from $129 million for the year-ago quarter.

• Total provision for credit losses was a benefit of $15 million, compared with a provision of $41 million for the prior quarter, and a provision of $9 million for the year-ago quarter.

• Solid underlying credit quality metrics, including the acquisition of PCBC. Excluding purchased credit-impaired (PCI) loans and FDIC covered other real estate owned (OREO):

  • Nonperforming assets at quarter-end were $520 million, or 0.54 percent of total assets, down from $526 million, or 0.60 percent of total assets, at September 30, 2012.

  • Net charge-offs were less than $1 million for the fourth quarter, compared with $40 million, or an annualized 0.29 percent of average total loans, for the prior quarter. The prior quarter included $17 million in residential mortgage and home equity net charge-offs due to implementation of new regulatory guidance.

• Net interest margin was 3.23 percent, down from 3.32 percent for the prior quarter, and down from 3.29 percent for the year-ago quarter.

• Average total loans, excluding PCI loans, were $56.5 billion, up from $54.7 billion for the prior quarter, and up from $51.3 billion for the year-ago quarter.

• Core deposits at December 31, 2012, were $63.8 billion, up from $55.1 billion at September 30, 2012, and up from $52.8 billion at December 31, 2011.

• Capital ratios remained strong during the quarter. Including the December 1, 2012, acquisition of PCBC:

  • Tier 1 common capital ratio, measured using Basel I risk-weighted assets, was 12.35 percent at December 31, 2012, down 142 basis points from 13.77 percent at September 30, 2012.

  • Tangible common equity ratio was 9.92 percent at December 31, 2012, down 154 basis points from 11.46 percent at September 30, 2012.

• Full Year Highlights:

  • Net income was $629 million, down from $778 million for the prior year.

  • Total provision for credit losses was $8 million, compared with a benefit of $231 million for the prior year.

  • Excluding PCI loans, net charge-offs were $123 million, or 0.23 percent of average total loans, down from $235 million, or 0.48 percent of average total loans, for the prior year.

SAN FRANCISCO--(BUSINESS WIRE)-- UnionBanCal Corporation (the Company), parent company of San Francisco-based Union Bank, N.A., today reported fourth quarter 2012 results. Net income for the fourth quarter was $123 million, down slightly from $124 million for the prior quarter, and down from $129 million for the year-ago quarter. Higher total revenue and a benefit from the provision for credit losses were offset by higher noninterest expense, which increased primarily due to merger costs related to the acquisition of PCBC.

On December 1, 2012, the Company completed the $1.5 billion purchase of PCBC, a bank holding company headquartered in Santa Barbara, California. As part of the transaction, Santa Barbara Bank & Trust, N.A., was merged with and into the Company's primary subsidiary, Union Bank, N.A. (Union Bank), on December 3, 2012, with Union Bank continuing as the surviving entity. In the transaction, Union Bank acquired $3.8 billion in loans held for investment and $4.7 billion in deposits, as of December 1, 2012.

On October 26, 2012, the Company completed the acquisition of Smartstreet, formerly a division of PNC Bank, N.A., which provides banking services nationwide to homeowners associations (HOA) and community association management companies. In the transaction, Union Bank acquired approximately $1 billion in deposits.

Summary of Fourth Quarter Results

Fourth Quarter Total Revenue

For fourth quarter 2012, total revenue (net interest income plus noninterest income) was $889 million, up $46 million, or 5 percent, compared with third quarter 2012. Net interest income increased 2 percent, and noninterest income increased 17 percent. The net interest margin was 3.23 percent, down 9 basis points compared with 3.32 percent for the prior quarter.

Net interest income for fourth quarter 2012 was $668 million, up $14 million, or 2 percent, compared with third quarter 2012. The increase in net interest income was primarily due to an increase in loans held for investment, which included organic growth and the PCBC acquisition. The net interest margin declined primarily due to a higher level of interest bearing deposits in banks and a lower yield on securities.

Average total loans, excluding PCI loans, increased $1.9 billion, or 3 percent, compared with third quarter 2012, primarily due to organic growth in commercial and industrial loans and residential mortgage loans, and the PCBC acquisition. Deposit balances grew significantly during the quarter, primarily due to the PCBC and Smartstreet acquisitions. Average interest bearing deposits increased $2.9 billion, or 7 percent, and average noninterest bearing deposits increased $2.3 billion, or 11 percent.

For fourth quarter 2012, noninterest income was $221 million, up $32 million, or 17 percent, compared with third quarter 2012. Higher other noninterest income, which increased primarily due to a gain on the sale of Visa, Inc., Class B common shares and higher gains on the sale of private equity investments, was partially offset by lower gains on the sale of securities.

Compared to fourth quarter 2011, total revenue grew $98 million, with net interest income up 4 percent and noninterest income up 46 percent. Net interest income increased $28 million compared with the year-ago quarter, primarily due to loan growth. The net interest margin declined 6 basis points, primarily due to a higher level of interest bearing deposits in banks and a lower yield on securities.

Average total loans, excluding PCI loans, increased $5.2 billion, or 10 percent, compared with fourth quarter 2011, primarily due to organic growth in commercial and industrial loans and residential mortgage loans, as well as the PCBC acquisition. Average interest bearing deposits increased $3.0 billion, or 7 percent, and average noninterest bearing deposits increased $3.7 billion, or 19 percent.

Noninterest income increased $70 million, or 46 percent, compared with fourth quarter 2011, primarily due to higher other noninterest income and higher net gains on the sale of securities related to portfolio rebalancing activities. Other noninterest income increased primarily due to the fourth quarter 2012 gain on the sale of Visa, Inc., Class B common shares and higher gains on private equity investments.

Fourth Quarter Noninterest Expense

Noninterest expense for fourth quarter 2012 was $715 million, up $77 million, or 12 percent, compared with third quarter 2012. One-time merger costs and ongoing operating expenses related to acquisitions, primarily the PCBC acquisition, accounted for $56 million of the increase. The remaining $21 million of the increase was primarily due to higher professional and outside services expense, most of which increased due to various regulatory and compliance projects.

Noninterest expense for fourth quarter 2012 was up $96 million, or 16 percent, compared with fourth quarter 2011, primarily due to the same reasons as the sequential quarter increase.

Full Year 2012 Results

For full year 2012, net income was $629 million, compared with net income of $778 million for full year 2011. The $149 million decrease in net income was primarily due to the after-tax effect of a $239 million increase in total provision for credit losses.

Total revenue for full year 2012 was $3.4 billion, an increase of $127 million, or 4 percent, compared with 2011. Net interest income increased $156 million, or 6 percent, primarily due to higher average earning assets and higher interest income on PCI loans. Noninterest income decreased $29 million, or 4 percent. Noninterest expense increased $151 million, or 6 percent, primarily due to a $94 million increase in salaries and employee benefits expense, which increased primarily due to higher pension expense and merger costs related to acquisitions. The effective tax rate for full year 2012 was 26.5 percent, compared with an effective tax rate of 29.4 percent for 2011. The decrease in the effective tax rate was primarily due to the impact of tax-exempt income and tax credits on lower pretax income in 2012.

Balance Sheet

At December 31, 2012, the Company had total assets of $97.0 billion, up $7.3 billion, or 8 percent, compared with December 31, 2011. Loan growth accounted for most of the increase in assets during the year. At December 31, 2012, total deposits were $74.3 billion, up $9.8 billion, or 15 percent, compared with December 31, 2011. Core deposits at December 31, 2012, were $63.8 billion, up $10.9 billion, or 21 percent, compared with December 31, 2011.

Credit Quality

Excluding PCI loans and FDIC covered OREO, nonperforming assets ended the quarter at $520 million, or 0.54 percent of total assets; down from $526 million, or 0.60 percent of total assets, at September 30, 2012; and down from $618 million, or 0.70 percent of total assets, at December 31, 2011.

Excluding PCI loans, net charge-offs were less than $1 million for fourth quarter 2012. This was down from net charge-offs of $40 million, or an annualized 0.29 percent of average total loans, for third quarter 2012, and down from net charge-offs of $29 million, or an annualized 0.21 percent of average total loans, for fourth quarter 2011. Third quarter 2012 included $17 million in residential mortgage and home equity net charge-offs resulting from the implementation of new 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 fourth quarter 2012, the provision for loan losses was a benefit of $5 million and the reversal of provision for losses on off-balance sheet commitments was a benefit of $10 million, for a total benefit of $15 million for fourth quarter 2012. This compares with a total provision for credit losses of $41 million for third quarter 2012. The primary drivers of the lower provision were lower charge-offs in the consumer loan portfolio, higher net recoveries in the commercial loan portfolio, and improved credit quality across the entire portfolio.

The allowance for credit losses as a percent of total loans, excluding PCI loans, was 1.31 percent at December 31, 2012, compared with 1.43 percent at September 30, 2012, and 1.67 percent at December 31, 2011. The allowance for credit losses as a percent of nonaccrual loans, excluding PCI loans, was 162 percent at December 31, 2012, compared with 155 percent at September 30, 2012, and 149 percent at December 31, 2011.

Capital

At December 31, 2012, the Company's stockholder's equity was $12.5 billion, up $929 million, or 8 percent, since December 31, 2011, and tangible common equity was $9.3 billion, up $430 million, or 5 percent, since December 31, 2011. The Company's tangible common equity ratio was 9.92 percent at December 31, 2012, down 28 basis points from 10.20 percent at December 31, 2011, primarily due to the PCBC acquisition. The Basel I Tier 1 common and Tier 1 risk-based capital ratios were 12.35 percent and 12.44 percent, respectively, at December 31, 2012. Additionally, the Basel I Total risk-based capital ratio was 13.93 percent at December 31, 2012.

Non-GAAP Financial Measures

This press release contains certain references to financial measures identified as excluding privatization transaction impact, foreclosed asset expense and other credit costs, (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 $97.0 billion at December 31, 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 447 branches in California, Washington, Oregon, Texas, Illinois, and New York as well as two international offices, on December 31, 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.