UMB Financial Corporation — Q3 2011 Form 10-Q
Business context and period. UMB is a multi-bank financial holding company providing banking, trust, asset management, fund services, card and other financial services across multiple states. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons below are with the corresponding 2010 periods unless stated otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $79.1 million | $78.4 million | $237.4 million | $231.8 million |
| Noninterest income | $101.0 million | $90.1 million | $316.6 million | $265.6 million |
| Net interest income plus noninterest income | $180.0 million | $168.5 million | $554.0 million | $497.4 million |
| Provision for loan losses | $4.5 million | $7.7 million | $17.2 million | $24.1 million |
| Noninterest expense | $139.4 million | $130.6 million | $420.5 million | $374.1 million |
| Net income | $26.0 million | $22.8 million | $83.2 million | $72.0 million |
| Diluted earnings per share | $0.64 | $0.57 | $2.06 | $1.78 |
- Q3 net income rose 14.2%; nine-month net income rose 15.6%. Net interest income plus noninterest income increased approximately 6.9% for Q3 and 11.4% year to date.
- Tax-equivalent net interest margin declined to 2.98% in Q3 from 3.23%, and to 2.95% for nine months from 3.24%. Lower deposit funding costs helped sustain net interest income, but yields on loans and securities fell.
- Q3 return on average assets was 0.85% and return on average equity was 8.81%, versus 0.82% and 8.31%. Nine-month figures were 0.90% and 9.89%, versus 0.88% and 9.09%.
- The reported Q3 efficiency ratio was 75.4%, compared with 75.7% a year earlier.
- Trust and securities processing income rose 30.3% in Q3 and 37.9% year to date, with growth attributed to investment advisory, fund administration and custody, and investment management fees. Bankcard and brokerage fees also grew. Securities-sale gains were $2.4 million in Q3 and $15.9 million year to date.
Financial position, cash flow and liquidity
- At September 30, 2011, total assets were $12.14 billion, loans were $4.78 billion, investment securities were $5.94 billion, deposits were $9.40 billion, and shareholders’ equity was $1.17 billion. Versus December 31, 2010, loans rose 4.2%, deposits rose 4.1%, and total assets declined 2.1%.
- Noninterest-bearing deposits increased $728.3 million from year-end, while total borrowed funds fell to $1.38 billion from $2.13 billion, mainly reflecting seasonal public-fund balances and related repurchase agreements.
- For the first nine months, operating cash flow was $132.9 million, investing cash flow was negative $173.4 million, and financing cash flow was negative $421.9 million. Cash and due from banks decreased $462.4 million to $571.2 million; this cash-flow measure differs from the broader balance-sheet cash and short-term investments figures.
- At quarter-end, the allowance for loan losses was $72.9 million, or 1.53% of loans. Nine-month net charge-offs were $18.3 million, up from $15.5 million.
- Nonperforming loans were $20.1 million, or 0.42% of loans, down from $25.0 million at December 2010; nonperforming assets were $25.4 million. Loans past due at least 90 days totaled $6.4 million.
- Tier 1 risk-based capital was 11.32%, total risk-based capital was 12.37%, and the leverage ratio was 6.76%. Management said these exceeded regulatory minimums; the reported ratios were lower than the comparable 2010 ratios.
- Available-for-sale securities totaled $5.76 billion, of which $3.8 billion was pledged as collateral. The company reported $4.5 billion of off-balance-sheet commitments, including credit commitments and letters of credit; many may expire undrawn.
Material changes, outlook and risks
- Management’s stated priorities were growing fee-based businesses, growing loans and deposits, improving efficiency, and managing capital. No specific earnings or revenue guidance was provided; management cautioned that interim results may not indicate full-year results.
- Noninterest expense increased 6.7% in Q3 and 12.4% year to date. Salaries and benefits were a leading contributor, including costs associated with acquisitions and business growth. Amortization of intangibles also rose.
- A $7.8 million escrow settlement expense for overdraft-fee class-action litigation was recognized in Q2 2011. The court gave final approval to the Allen settlement on October 31, 2011; the Johnson suit was dismissed without prejudice. The filing reports a separate similar Downing suit and says other ordinary-course litigation was not expected to materially affect the company.
- Management identified sensitivity to economic conditions, interest rates, securities markets and fund flows, borrower repayment, loan demand, regulation, competition, employee costs, technology and acquisition integration. Trust and securities processing fees are asset-based and exposed to market movements.
- In a modeled rate scenario, management projected higher net interest income under rising rates: approximately $31.7 million under a 300-basis-point increase over the next 12 months. It did not provide a 100-basis-point falling-rate scenario, citing the already-low rate environment.
- The company repurchased 136,998 shares in Q3 at an average $36.89 per share. A $0.205-per-share dividend was declared October 25, payable January 3, 2012.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states there were no material changes to the previously disclosed risk factors.
Investor verification priorities
- Assess whether continued fee-income growth, including acquisition-related contributions and market-sensitive asset-based fees, can offset margin pressure and expense growth.
- Review credit trends alongside higher year-to-date net charge-offs, the declining allowance-to-loan ratio, nonperforming loans and restructured loans.
- Confirm capital adequacy and liquidity under stress, including securities pledged as collateral and the potential drawdown of $4.5 billion in commitments.
- Check the final implementation and any remaining obligations from the overdraft-fee settlement, as well as the status of the Downing litigation.
- Evaluate the assumptions underlying management’s rising-rate simulation and the absence of a disclosed falling-rate scenario.