UnionBanCal Corp. of San Francisco continued to struggle in the first quarter with the contraction of its net interest margin as deposit pricing pressure overshadowed strong loan growth.
Philip B. Flynn, its chief operating officer, said on a conference call Friday that he expects the margin to stabilize this quarter. "We're not losing customers, we're not losing their deposits, and we are, in fact, gaining new customers."
Net income fell 18% from a year earlier, to $149.6 million, the $54.6 billion-asset company, mostly owned by Mitsubishi UFJ Financial Group Inc., said late Thursday.
Earnings per share fell 17 cents, to $1.07, beating the average estimate by 2 cents. The results included a gain of 4 cents on private-equity investments.
Commercial customers moved funds into interest-bearing accounts, causing UnionBanCal's margin to fall 19 basis points from the fourth quarter and 78 points from a year earlier, to 3.61%. Average loans rose 12.9%, to $38.5 billion, but net interest income fell 8%, to $430.6 million.
In a report issued Friday, Heather Wolf, an analyst at Merrill Lynch & Co., wrote that the "low margin level this quarter will likely persist throughout the year, and the company will probably not be able to generate enough loan growth in coming quarters" to offset margin compression.
Noninterest expenses rose 1.8% from a year earlier and fell 4% from the fourth quarter, to $422.1 million.
Mr. Flynn said it is still too soon to show results from an effort UnionBanCal began last summer to build stronger relationships with its most profitable retail customers. "This undertaking is not a short-term strategy but a significant long-term change to our entire consumer and small-business banking culture and operational model."
In an interview last month, he said that the company expects benefits to emerge next year.
"We will invest as needed to support this strategic shift," he said Friday. Retail plans include opening 10 branches this year.
South Financial Group Inc. reported late Thursday that first-quarter operating profits fell about 19% from a year earlier, to $22.6 million, or 30 cents a share, though the company made improvements in expense control.
The operating results excluded about $2.1 million of charges related to securities sales and severance pay. The Greenville, S.C., company said at the end of the fourth quarter that it would cut $20 million of costs this year.
First-quarter noninterest operating expenses, excluding severance costs, fell 4.7% from the fourth quarter, to $81.6 million. Operating revenue fell about 2%, to $128.4 million.
"We're keeping our focus on ongoing expense control," Mack I. Whittle Jr., the $14.2 billion-asset company's president, chairman, and chief executive, said in the earnings report.
On a Friday earnings call, he said that the cuts included travel and entertainment, and that the expense-approval process has been made stricter. Last month South Financial hired James R. Gordon to succeed Timothy K. Schools as its chief financial officer.
Net loan chargeoffs rose about 2%, to $6.9 billion. As a percentage of average loans, the ratio was flat from last quarter and a year earlier, at 0.29%. The margin fell 4 basis points from the fourth quarter and 21 basis points from a year earlier, to 3.08%.
"All in all, it was disappointing but a relatively clean quarter," Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said in an interview. Despite improved cost controls, South is "struggling in a very tough environment."
Mr. Whittle said his company "accomplished much of what we set out to do this quarter, although we recognize we have a ways to go."
