UMB Financial Corporation — Q2 2010 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2010, compared with the same 2009 periods. UMB is a multi-bank financial holding company operating across several U.S. states, with commercial, institutional, and personal financial services businesses. Balance-sheet comparisons are to December 31, 2009 unless otherwise stated. Dollars below are in millions except per-share data and ratios.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net interest income | $77.7 | $74.2 | $153.4 | $149.4 |
| Provision for loan losses | $8.1 | $6.3 | $16.4 | $12.3 |
| Noninterest income | $89.1 | $77.3 | $175.5 | $146.2 |
| Noninterest expense | $126.1 | $118.9 | $243.5 | $225.5 |
| Net income | $23.0 | $19.0 | $49.2 | $41.6 |
| Diluted EPS | $0.57 | $0.47 | $1.22 | $1.02 |
| Net interest margin, tax-equivalent | 3.29% | 3.42% | 3.24% | 3.41% |
- Q2 net income rose 20.9%; first-half net income rose 18.2%. Q2 return on average assets was 0.85% and return on average equity was 8.77% (0.76% and 7.66% in Q2 2009).
- Q2 noninterest income increased 15.2%, led by trust and securities processing fees, up $10.0 million, and bankcard fees, up $2.8 million. First-half noninterest income rose 20.0%.
- Q2 noninterest expense increased 6.1%; first-half expense increased 8.0%. Higher salaries, processing fees, and intangible amortization were partly offset by lower regulatory fees.
- At June 30, total assets were $11.06 billion, loans $4.45 billion, investment securities $5.05 billion, deposits $8.42 billion, and shareholders’ equity $1.07 billion. Loans grew 3.1% from year-end; assets declined $601 million.
- First-half operating cash flow was $92.8 million, investing cash flow was $112.4 million, and financing cash flow was negative $677.2 million. Cash and due from banks ended at $757.6 million, down $472.0 million from year-end. Financing outflows included reduced repurchase-agreement funding and time deposits.
- At June 30, the allowance for loan losses was $70.1 million, or 1.58% of loans, versus 1.27% a year earlier. First-half net charge-offs were $10.4 million versus $9.5 million.
- Capital ratios were 13.23% Tier 1 risk-based, 14.36% total risk-based, and 7.77% leverage. The company reported these as above regulatory minimums. Q2 efficiency ratio was 73.9%, compared with 76.4%.
- Total borrowed funds were $1.44 billion, including $1.40 billion of federal funds purchased and repurchase agreements. Long-term debt was $9.3 million. The filing describes liquidity as supported by core deposits, asset maturities and sales, and access to federal funds markets; $3.5 billion of securities were pledged as collateral.
Material changes versus comparable periods
- Net interest income increased, mainly because deposit and other funding costs fell more than interest income. However, tax-equivalent net interest margin declined 13 basis points in Q2 and 17 basis points for the first half.
- Fee income growth reflected Scout Funds and fund-administration and custody activity, as well as acquired credit-card portfolios. Securities-sale gains were $6.5 million in the first half of 2010 versus $1.9 million in 2009.
- Credit indicators weakened year over year: nonperforming loans were $23.1 million versus $14.1 million, and loans past due 90 days or more were $14.6 million versus $6.8 million. Nonperforming loans were slightly lower than at year-end.
- Deposits increased $746.4 million year over year but declined $114.1 million from year-end, primarily reflecting seasonal public-fund balances. Repurchase agreements and federal funds purchased declined $526.7 million from year-end.
Outlook, commentary, risks, contingencies, and unusual items
- Management described expectations for a static or slowly recovering economy and little interest-rate movement during the remainder of 2010; it expected Commercial Financial Services income growth to be relatively flat. The filing gives no consolidated earnings guidance.
- Management’s stated priorities include growing fee-based businesses, growing loans and deposits, improving operating efficiency, and disciplined capital deployment. Its interest-rate simulation projected higher net interest income under a 200-basis-point increase; management also described the company as relatively neutral to further rate changes in the prevailing low-rate environment. No 100-basis-point decline scenario was modeled because rates were near floors.
- Risks include economic and borrower weakness, interest-rate and securities-market changes, regulation, competition, technology and operating risks, and acquisition integration. The newly enacted Dodd-Frank Act may increase regulatory, capital, margin, reporting, or business-practice requirements; its financial effect was not quantifiable in the filing.
- Off-balance-sheet commitments included $1.92 billion of loan commitments excluding credit cards, $1.34 billion of credit-card commitments, and $310.4 million of standby letters of credit. Many commitments may expire undrawn. Management said pending lawsuits were not expected to have a material adverse effect.
- Unusual items included a $3.5 million pretax gain on the sale of art, with proceeds contributed to a charitable foundation, and $6.5 million of first-half pretax gains on available-for-sale securities. A $3.5 million FDIC special assessment had affected 2009 regulatory expense.
- After quarter-end, on July 30, 2010, subsidiaries completed the acquisition of substantially all assets of Prairie Capital Management and PCM for $25.9 million cash. The transaction was expected to add $2.2 billion in assets under management and $2.6 billion in servicing assets.
Important facts for investors to verify
- Whether fee growth, particularly asset-based Scout Funds and custody fees, persists if market values or fund flows weaken, and how much of growth is offset by related processing costs.
- Whether higher nonperforming loans and past-due balances lead to further provisions, charge-offs, or deterioration in collateral values.
- Whether the reduced net interest margin can stabilize, given low rates, asset repricing, and the funding mix.
- The sustainability of earnings excluding securities gains and the art-sale gain, and the trajectory of compensation, processing, and acquisition-related expenses.
- How Prairie Capital’s acquisition performs and integrates, and the eventual effect of Dodd-Frank implementation on costs, capital, and operations.