UMB Financial Corporation — Q1 2011 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2011, with comparisons to Q1 2010 and balance-sheet comparisons primarily to December 31, 2010. UMB is a multi-bank financial holding company operating across 12 states, with commercial, institutional and personal financial services businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior date |
|---|---|---|
| Net interest income | $78.4; up 3.5% | $75.8 in Q1 2010 |
| Noninterest income | $107.8; up 24.7% | $86.4 in Q1 2010 |
| Net income | $30.9; up 17.9% | $26.2 in Q1 2010 |
| EPS | $0.77 basic; $0.76 diluted | $0.65 basic and diluted in Q1 2010 |
| Net interest margin | 2.90% tax-equivalent | 3.19% in Q1 2010 |
| Noninterest expense | $135.5; up 15.5% | $117.4 in Q1 2010 |
| Provision for loan losses | $7.1 | $8.3 in Q1 2010 |
| Operating cash flow | $71.6 | $45.9 in Q1 2010 |
| Total assets | $13,352.3 | $12,404.9 at December 31, 2010; $10,724.1 at March 31, 2010 |
| Total loans | $4,667.9 | $4,583.7 at December 31, 2010 |
| Total deposits | $10,372.8 | $9,028.7 at December 31, 2010 |
| Shareholders’ equity | $1,079.0 | $1,060.9 at December 31, 2010 |
| Capital ratios | Tier 1 risk-based 11.57%; total risk-based 12.68%; leverage 6.23% | 13.51%, 14.64% and 7.57%, respectively, in Q1 2010 |
- Net interest income plus noninterest income, a bank revenue measure, totaled $186.2, compared with $162.2 in Q1 2010.
- Net interest margin contracted 29 basis points year over year as earning-asset yields fell faster than funding costs. Average earning assets grew 14.3%, while their tax-equivalent yield declined to 3.16% from 3.60%.
- Q1 net cash provided by investing activities was $148.9 and by financing activities was $925.8. Cash and cash equivalents ended the quarter at $2,180.0, versus $740.3 a year earlier; the increase included substantial deposit growth.
- Short- and long-term debt totaled $31.6. Federal funds purchased and repurchase agreements were $1,687.4, down from $2,084.3 at year-end 2010.
- Nonperforming loans were $19.2, or 0.41% of loans, versus $25.1 and 0.55% at year-end. Loans at least 90 days past due rose to $7.3 from $5.5. Net charge-offs increased to $8.3 from $5.0 in Q1 2010. The allowance was $72.7, or 1.56% of loans.
Material changes and management commentary
- Noninterest income growth was led by trust and securities processing, up $16.2, and bankcard fees, up $2.4. Trust-related growth included higher Scout advisory, fund administration/custody, and investment management fees; management cited acquisition-related growth, net inflows and market appreciation.
- UMB recorded $7.5 of pretax gains on securities sales, compared with $5.4 in Q1 2010. Management described sales as part of managing interest-rate sensitivity and duration.
- Noninterest expense rose $18.1, led by salaries and benefits (+$10.6), processing fees (+$1.1) and intangible amortization (+$1.9). Management attributed cost increases to 2010 performance-related compensation, acquisitions, business growth and higher service volumes.
- Institutional Financial Services pretax income rose to $18.4 from $11.3. Personal Financial Services pretax income declined to $3.6 from $6.4; Commercial Financial Services was broadly flat at $14.0 versus $14.1.
- Management emphasized growth in fee-based businesses, loans and deposits, operating efficiency, and capital management. The company reported a 12.68% total risk-based capital ratio, above the stated 10% well-capitalized threshold. It repurchased 33,337 shares at an average $41.17 and declared a $0.195-per-share dividend payable July 1, 2011.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or financial guidance. Management said deposits position the company to fund customer credit needs when loan demand returns, and noted that fee income tied to investment assets may vary with securities-market performance.
- Interest-rate risk remains important: management characterized the company as close to neutral, with slight positive sensitivity to rapidly rising rates. Its model projected net interest income changes of +$0.7 for a 200-basis-point rise and +$2.4 for a 300-basis-point rise over 12 months; a 100-basis-point decline scenario was not included because rates were already low. These are model estimates, not forecasts.
- Key stated risks include economic and political conditions, interest rates, regulation, competition, technology and operating changes, acquisition integration, loan repayment capacity, loan demand, securities-market performance and employee costs. High liquidity also carries a cost through lower-yielding liquid assets.
- Off-balance-sheet commitments totaled approximately $4.1 billion, including loan commitments and letters of credit; many may expire undrawn. Securities with market value of $3.8 billion were pledged to secure deposits, repurchase agreements and trust deposits.
- UMB Bank faced customer class-action suits alleging improper overdraft-fee practices; a third similar suit was filed in Q1 2011. Management could not determine the probability or estimate potential loss at this stage. Management said other lawsuits were not expected to materially affect the company.
- Available-for-sale securities had $28.1 of gross unrealized losses, which management attributed to interest rates and did not consider other-than-temporary impairment. Accumulated other comprehensive income fell to $19.8 from $25.5 at year-end, reflecting a quarterly securities-related loss.
Important facts for investors to verify
- Whether growth in trust, securities-processing and other fee income persists, and how sensitive it is to markets, client flows and acquisitions.
- Whether expense growth moderates and whether acquisition integration delivers revenue and efficiency benefits.
- Credit trends: rising past-due loans and net charge-offs despite lower nonperforming loans; assess allowance adequacy against portfolio growth and risk grades.
- Net interest margin and modeled interest-rate sensitivity, including the effect of asset repricing, deposit mix and low market rates.
- Deposit concentration and liquidity needs, including the scale of pledged securities and undrawn commitments.
- Potential financial exposure from overdraft-fee litigation; the filing says the outcome and loss cannot currently be estimated.
- Capital ratios declined versus Q1 2010; verify their trajectory alongside planned dividends, repurchases and growth.