UMB Financial Corporation — Q3 2012 Form 10-Q
Business context and reporting period. UMB is a multi-bank financial holding company offering banking, payment solutions, investment management and asset-servicing businesses. This unaudited filing covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless otherwise noted. The company reorganized its reportable segments in Q1 2012 and recast prior-period segment information for comparability.
Financial results and condition
- Quarter earnings: Net income was $26.1 million, up 0.4%; diluted EPS was $0.64, unchanged. Return on average assets was 0.79% and return on average equity was 8.12%.
- Nine-month earnings: Net income was $101.7 million, up 22.2%; diluted EPS was $2.51 versus $2.06. Return on average assets was 1.03% versus 0.90%, and return on average equity was 10.90% versus 9.89%.
- Revenue and margin: Q3 net interest income was $80.4 million, up 1.6%; noninterest income was $106.3 million, up 5.3%. For nine months, those amounts were $239.8 million, up 1.0%, and $348.8 million, up 10.2%. Tax-equivalent net interest margin declined to 2.80% for Q3 from 2.98%, and to 2.79% year to date from 2.95%.
- Expenses and credit costs: Noninterest expense rose 4.7% to $145.9 million in Q3 and 2.9% to $432.5 million year to date. Provision for loan losses was $4.5 million in Q3, unchanged, and $13.5 million year to date, down from $17.2 million. The Q3 efficiency ratio was 74.3%, versus 74.2%.
- Loans and asset quality: Loans were $5.39 billion at September 30, up 8.7% from year-end 2011. Nonperforming loans were $27.4 million, up from $20.1 million a year earlier; nonperforming assets were $33.0 million. The allowance was $71.4 million, or 1.32% of loans, compared with 1.53% a year earlier. Nine-month net charge-offs declined to $14.1 million from $18.3 million.
- Balance sheet and funding: Assets totaled $13.29 billion, down 1.9% from December 31, 2011; deposits were $10.61 billion, up 4.4%. Investment securities totaled $6.65 billion. Federal funds purchased and repurchase agreements were $1.16 billion; long-term debt was $5.6 million and short-term debt was zero. Shareholders’ equity was $1.29 billion.
- Cash flow: For nine months, operating activities provided $177.1 million; investing activities used $701.7 million and financing activities used $393.5 million. Cash and cash equivalents, as presented in the cash-flow statement, decreased $918.2 million to $541.5 million.
- Capital and dividends: The Tier 1 risk-based capital ratio was 11.69%, total risk-based capital was 12.62%, and the leverage ratio was 7.15%; the filing says these exceed regulatory minimums. The Q3 dividend was $0.205 per share; a $0.215 dividend was declared October 23, payable December 28, 2012.
Material changes and management commentary
- Management emphasized growth in fee-based businesses, loan and deposit growth, operating efficiency, and capital management. Average Q3 earning assets rose 8.9%, average loans 10.5%, and average deposits 9.7% year over year.
- Fee income growth reflected trust and securities processing and trading/investment banking. Year-to-date noninterest income also benefited from securities gains and an acquisition contingent-consideration adjustment. Bankcard fees declined in the quarter; management attributed lower consumer card-services income year to date in part to the Durbin amendment.
- Lower deposit costs helped support net interest income, but lower asset yields reduced net interest margin. Management described the company as close to neutral to rate changes and slightly positive in rising-rate scenarios; its simulation projected higher net interest income under rate increases. No specific earnings or full-year financial guidance is provided in the supplied filing text.
- Nonperforming loans increased year over year, although past-due loans over 90 days declined. Management identifies economic conditions, borrower repayment capacity, interest rates, securities-market performance, regulatory changes, competition, technology costs, acquisition integration and employee costs among the risks that could affect results.
Contingencies and unusual items
- Adoption of fair-value guidance changed the company’s valuation methodology and reduced acquisition contingent-consideration liabilities by $6.9 million, increasing other noninterest income by $4.7 million net of tax. The filing also attributes part of the year-to-date increase in other noninterest income to an $8.7 million contingent-consideration adjustment.
- The $7.8 million consumer deposit-account class-action settlement was recorded in 2011; no settlement expense was recorded in the 2012 periods shown. Management said lawsuits in the ordinary course of business were not expected to materially affect financial position, results or cash flows.
- Off-balance-sheet commitments included $2.40 billion of loan commitments excluding credit cards, $2.15 billion of credit-card commitments and $321.1 million of standby letters of credit. Management cautions that commitments may expire undrawn and do not necessarily represent future cash needs.
- The company reported $4.5 billion of securities pledged to secure deposits and other obligations. Its securities portfolio’s average life increased to 42.6 months from 33.8 months a year earlier, increasing the importance of monitoring interest-rate and prepayment exposure.
Important facts for investors to verify
- Whether the increase in nonperforming loans and criticized commercial exposures is sustained, and whether the $71.4 million allowance remains adequate as the loan portfolio grows.
- How much of nine-month earnings growth came from recurring business activity versus securities gains and contingent-consideration fair-value adjustments.
- Whether fee-income growth and expense trends continue, particularly in Payment Solutions, where nine-month expenses rose 19.2% while net income was essentially flat.
- How lower asset yields, securities portfolio duration and changes in interest rates may affect net interest margin, earnings and liquidity.
- Whether deposit growth and pledged securities provide adequate funding flexibility given $4.9 billion of reported commercial commitments and seasonal movements in public-fund-related borrowings.