UnionBanCal Corporation Reports Second Quarter Net Income of $141 Million

UnionBanCal Corporation Reports Second Quarter Net Income of $141 Million

Second Quarter Highlights:

• On June 24, 2013, Union Bank, N.A. announced that it had completed the acquisition of PB Capital Corporation's $3.5 billion institutional commercial real estate (CRE) lending portfolio (PB Capital acquisition).

• Net income for the second quarter was $141 million, down from $147 million for the prior quarter, and down from $187 million for the year-ago quarter.

• Total loans held for investment, excluding purchased credit-impaired (PCI) loans, at June 30, 2013, were $64.4 billion, up from $59.8 billion at March 31, 2013, and up from $53.6 billion at June 30, 2012.

• Core deposits at June 30, 2013, were $65.5 billion, up from $63.6 billion at March 31, 2013, and up from $53.4 billion at June 30, 2012.

• Total provision for credit losses was a benefit of $5 million, compared with a provision of $12 million for the prior quarter, and a benefit of $15 million for the year-ago quarter.

• Key asset quality metrics continued to be strong. Excluding PCI loans and Federal Deposit Insurance Corporation (FDIC) covered other real estate owned (OREO):

  • Nonperforming assets at quarter-end were $521 million, or 0.52 percent of total assets, compared with $520 million, or 0.54 percent of total assets, at March 31, 2013.

  • Net charge-offs were $10 million for the quarter, or an annualized 0.06 percent of average total loans held for investment, compared with $12 million for the prior quarter and $29 million a year ago.

• Net interest margin was 3.00 percent, similar to 3.01 percent for the prior quarter, and down from 3.23 percent for the year-ago quarter.

• Capital ratios remained strong:

  • Tier 1 common capital ratio, measured using Basel I risk-weighted assets, was 11.47 percent at June 30, 2013, down 98 basis points from 12.45 percent at March 31, 2013.

  • Tangible common equity ratio was 9.11 percent at June 30, 2013, down 94 basis points from 10.05 percent at March 31, 2013.

SAN FRANCISCO--(BUSINESS WIRE)-- UnionBanCal Corporation (the Company), parent company of San Francisco-based Union Bank, N.A., today reported second quarter 2013 results. Net income for the quarter was $141 million, down from $147 million for the prior quarter, and down from $187 million for the year-ago quarter. Net income declined compared to the prior quarter primarily due to lower gains of the sale of securities, which were largely offset by higher net interest income on higher loan balances and a lower total provision for credit losses.

Summary of Second Quarter Results

Second Quarter Total Revenue

For second quarter 2013, total revenue (net interest income plus noninterest income) was $871 million, down $32 million compared with first quarter 2013. Net interest income increased 3 percent, and noninterest income decreased 20 percent. The net interest margin was 3.00 percent, down 1 basis point from 3.01 percent for the prior quarter.

Net interest income for second quarter 2013 was $666 million, up $18 million, or 3 percent, compared with first quarter 2013. The increase in net interest income was primarily due to higher commercial mortgage loan balances, mostly resulting from the PB Capital acquisition, and higher yields on commercial and industrial loans. The net interest margin was 3.00 percent, similar to 3.01 percent for the prior quarter, as lower yields on total loans and securities were mitigated by declining balances of lower-yielding interest bearing deposits in banks.

Average total loans held for investment, excluding PCI loans, increased $2.9 billion, or 5 percent, compared with first quarter 2013, primarily due to the PB Capital acquisition and organic growth in the residential mortgage and commercial and industrial loan portfolios. Average total deposits increased $1.1 billion, or 1 percent, during the quarter, primarily due to organic retail deposit growth. Average interest bearing deposits increased $0.8 billion, or 2 percent, and average noninterest bearing deposits increased $0.3 billion, or 1 percent.

For second quarter 2013, noninterest income was $205 million, down $50 million, or 20 percent, compared with first quarter 2013, primarily due to lower net gains on the sale of securities.

Compared to second quarter 2012, total revenue grew $37 million, with net interest income up 3 percent and noninterest income up 9 percent. Net interest income increased $20 million compared with the year-ago quarter, primarily due to loan growth, largely offset by a lower net interest margin. The net interest margin declined 23 basis points, primarily due to lower yields on loans and securities.

Average total loans held for investment, excluding PCI loans, increased $8.2 billion, or 15 percent, compared with second quarter 2012, primarily due to the acquisition of Pacific Capital Bancorp (PCBC) that was completed December 1, 2012; the PB Capital acquisition; and organic loan growth. Average total deposits increased $10.9 billion, primarily due to organic growth, with average interest bearing deposits up $6.6 billion, or 15 percent, and average noninterest bearing deposits up $4.3 billion, or 21 percent.

Noninterest income increased $17 million, or 9 percent, compared with second quarter 2012, primarily due to higher trust and investment management fees, which increased primarily due to higher fees on assets under management.

Second Quarter Noninterest Expense

Noninterest expense for second quarter 2013 was $702 million, down $11 million compared with first quarter 2013. Staff expense decreased $8 million, primarily reflecting annual seasonal factors. Non-staff expense decreased $3 million, primarily due to a $2 million reversal of provision for losses on off-balance sheet commitments, compared with a $15 million provision for losses on off-balance sheet commitments in first quarter 2013.

Noninterest expense for second quarter 2013 was up $103 million, or 17 percent, compared with second quarter 2012. Staff expense increased $62 million, primarily due to acquisition-related activity. Non-staff expense increased primarily due to one-time costs associated with the PCBC acquisition. The provision for losses on off-balance sheet commitments was a benefit of $2 million for second quarter 2013, compared with a benefit of $1 million for second quarter 2012.

Taxes

The effective tax rate for second quarter 2013 was 20 percent, compared with an effective tax rate of 26 percent for first quarter 2013. The decrease in the quarterly effective tax rate was primarily due to a change in the 2013 estimated annual effective tax rate, which was caused by the larger impact of low-income housing and alternative energy income tax benefits on lower pre-tax income.

Balance Sheet

At June 30, 2013, the Company had total assets of $102.3 billion, up $5.3 billion compared with March 31, 2013, primarily reflecting the PB Capital acquisition. At June 30, 2013, total deposits were $77.3 billion, up $3.3 billion compared with March 31, 2013, primarily reflecting organic retail deposit growth. Core deposits at June 30, 2013, were $65.5 billion, up $1.9 billion, or 3 percent, compared with March 31, 2013.

Credit Quality

Credit quality continued to be strong during the second quarter of 2013, reflected by lower levels of criticized loans, lower net charge-offs excluding PCI loans, and stable nonperforming assets excluding PCI loans and FDIC covered OREO compared with prior quarter.

Excluding PCI loans and FDIC covered OREO, nonperforming assets ended the quarter at $521 million, or 0.52 percent of total assets; compared with $520 million, or 0.54 percent of total assets, at March 31, 2013; and $539 million, or 0.62 percent of total assets, at June 30, 2012.

Excluding PCI loans, net charge-offs were $10 million for second quarter 2013, or an annualized 0.06 percent of average total loans. This was down from net charge-offs of $12 million, or an annualized 0.08 percent of average total loans, in first quarter 2013; and down from net charge-offs of $29 million, or an annualized 0.21 percent of average total loans, for second quarter 2012.

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 second quarter 2013, the provision for loan losses was a benefit of $3 million and the provision for losses on off-balance sheet commitments was a benefit of $2 million, for a total provision for credit losses benefit of $5 million for second quarter 2013. This compares with a total provision for credit losses of $12 million for first quarter 2013. The primary driver of the lower total provision was improved credit quality in the legacy portfolio.

The allowance for credit losses as a percent of total loans, excluding PCI loans, was 1.18 percent at June 30, 2013, compared with 1.30 percent at March 31, 2013, and 1.46 percent at June 30, 2012. The allowance for credit losses as a percent of nonaccrual loans, excluding PCI loans, was 153 percent at June 30, 2013, compared with 158 percent at March 31, 2013, and 153 percent at June 30, 2012.

Capital

During the second quarter of 2013, Union Bank, N.A., issued $750 million of subordinated debt to the Company's shareholder, The Bank of Tokyo-Mitsubishi UFJ, Ltd. The subordinated debt qualifies as Tier 2 regulatory capital under federal banking agency risk-based capital guidelines.

At June 30, 2013, the Company's stockholder's equity was $12.4 billion, down $195 million, or 2 percent, from March 31, 2013, primarily due to higher unrealized losses on securities available for sale. Tangible common equity was $9.0 billion, down $417 million, or 4 percent, from March 31, 2013. The Company's tangible common equity ratio was 9.11 percent at June 30, 2013, down 94 basis points from 10.05 percent at March 31, 2013, primarily reflecting the PB Capital acquisition. The Basel I Tier 1 common and Tier 1 risk-based capital ratios were 11.47 percent and 11.55 percent, respectively, at June 30, 2013. Additionally, the Basel I Total risk-based capital ratio was 13.63 percent at June 30, 2013.

Non-GAAP Financial Measures

This press release contains certain references to financial measures identified as excluding PCI loans, FDIC covered OREO, 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 intangible asset amortization, 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 $102.3 billion at June 30, 2013. Its primary subsidiary, Union Bank, N.A., provides an array of financial services to individuals, small businesses, middle-market companies, and major corporations. The bank operated 422 branches in California, Washington, Oregon, Texas, Illinois, and New York as well as two international offices, on June 30, 2013. 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.