UMB Financial Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Dollar amounts are in millions unless otherwise stated. UMB is a multi-bank financial holding company offering banking, trust, investment, fund-services and payment services.
Financial performance and condition
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $79.9 | $77.7 | $158.4 | $153.4 |
| Provision for loan losses | $5.6 | $8.1 | $12.7 | $16.4 |
| Noninterest income | $107.9 | $89.1 | $215.6 | $175.5 |
| Noninterest expense | $145.6 | $126.1 | $281.1 | $243.5 |
| Net income | $26.3 | $23.0 | $57.2 | $49.2 |
| Diluted EPS | $0.65 | $0.57 | $1.42 | $1.22 |
- Q2 net income rose 14.4%; six-month net income rose 16.3%. Q2 return on average assets was 0.85% and return on average equity was 9.59%; six-month figures were 0.92% and 10.47%.
- Tax-equivalent net interest margin declined to 2.98% in Q2 from 3.29%, and to 2.94% for the six months from 3.24%. Lower asset yields were partly offset by lower funding costs and growth in earning assets.
- At June 30, total assets were $12.77 billion, loans were $4.73 billion, investment securities were $5.65 billion, and deposits were $9.91 billion. Compared with December 31, 2010, assets increased 3.0%, loans 3.2%, and deposits 9.8%.
- Shareholders’ equity was $1.13 billion. Tier 1 and total risk-based capital ratios were 11.54% and 12.63%, respectively; the leverage ratio was 6.48%.
- Cash and due from banks at period-end was $1.586 billion, versus $757.6 million at June 30, 2010. For the first half, operating cash flow was $118.7 million, investing cash flow was $157.8 million, and financing cash flow was $275.7 million; reported cash and due from banks increased $552.2 million.
- Borrowed funds totaled $1.54 billion, primarily federal funds purchased and repurchase agreements of $1.51 billion; short-term debt was $23.7 million and long-term debt $7.5 million. Federal funds and repurchase agreements fell from $2.08 billion at year-end, largely reflecting seasonal public-fund balances.
Material changes and management commentary
- Q2 noninterest income increased 21.1%, led by trust and securities processing income, up $15.0 million, and bankcard fees, up $2.6 million. Six-month trust and securities processing income grew 42.0%. Growth reflected acquisitions, asset-management fees, fund servicing and card activity.
- Net securities-sale gains were $6.0 million in Q2 and $13.5 million for the first half, compared with $1.1 million and $6.5 million, respectively, in 2010. Management said sales supported interest-rate positioning ahead of anticipated rate increases.
- Noninterest expense rose 15.4% in Q2 and 15.5% for the first half. Salary and benefits increased, in part due to acquisitions and higher commissions; processing costs and intangible amortization also rose. The Q2 efficiency ratio was 75.8%, versus 73.9% a year earlier.
- Loan balances grew 6.4% year over year, particularly commercial and commercial real estate loans. Nonperforming loans declined to $15.4 million from $23.1 million at June 2010 and $25.1 million at December 2010. However, first-half net charge-offs increased to $14.2 million from $10.4 million a year earlier; the allowance was $72.4 million, or 1.53% of loans.
- Management’s stated priorities are fee-business growth, loan and deposit growth, expense discipline and capital management. It highlighted deposit growth as a source of funding for future customer credit needs. The filing provides no quantified full-year earnings or revenue guidance.
Risks, contingencies and unusual items
- The company recorded a $7.8 million expense for an agreed settlement of overdraft-fee class-action claims. The company and bank subsidiaries admitted no wrongdoing; court approval was pending, with a fairness hearing scheduled for October 31, 2011. Related suits included other actions, and the filing does not state that all were resolved by this agreement.
- Credit exposure remains sensitive to borrowers’ ability to repay, collateral values and economic conditions. Loans more than 90 days past due totaled $7.4 million, up from $5.5 million at year-end, though below $14.6 million a year earlier. Nonperforming assets were $22.1 million; other real estate owned was $6.7 million.
- Interest-rate, securities-market, regulatory, competitive, acquisition-integration, technology, operating and liquidity risks could affect results. Securities with a market value of $4.0 billion were pledged to secure deposits and other obligations. Unused credit commitments and letters of credit totaled approximately $4.3 billion, but may not be fully drawn.
- Management described the company as approximately neutral to rate changes in the current low-rate environment and slightly positive in rapidly rising-rate scenarios. These are model estimates dependent on assumptions, not a performance guarantee.
- The board declared a $0.195-per-share dividend on July 26, payable October 3, 2011. The company repurchased 48,695 shares during Q2 at an average $41.27 per share.
Most important facts for investors to verify
- Whether trust, fund-services and card-fee growth can continue and offset falling net interest margins.
- Whether operating costs—especially compensation, processing and acquisition-related amortization—can be controlled as revenue grows.
- Whether higher first-half net charge-offs signal renewed deterioration in particular loan segments, and whether the allowance remains adequate.
- The final court outcome and any further costs or exposure from the overdraft-fee litigation.
- The composition and durability of deposit growth, liquidity needs, pledged securities and the company’s substantial securities exposure to interest-rate changes.
- Whether capital ratios, dividend payments and share repurchases remain sustainable as business and regulatory conditions evolve.