UMB Financial Corporation - Q2 2015 Form 10-Q
Business context and reporting period. UMB Financial Corporation is a financial holding company providing banking and related financial services. This unaudited filing covers the quarter and six months ended June 30, 2015; income comparisons are year over year, while balance-sheet comparisons are principally against December 31, 2014. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $97.4 | $86.2 | $187.7 | $171.6 |
| Noninterest income | $119.6 | $134.0 | $244.8 | $257.0 |
| Total interest and noninterest income | $216.9 | $220.2 | $432.5 | $428.6 |
| Provision for loan losses | $5.0 | $5.0 | $8.0 | $9.5 |
| Noninterest expense | $172.0 | $166.2 | $336.4 | $338.1 |
| Net income | $30.2 | $34.7 | $64.0 | $58.1 |
| Diluted EPS | $0.65 | $0.76 | $1.39 | $1.28 |
- Q2 net income fell 12.9%; six-month net income rose 10.1%. Q2 return on average assets was 0.70% and return on average equity was 6.95%, versus 0.89% and 8.77%, respectively, a year earlier. First-half returns were 0.75% and 7.55%, compared with 0.73% and 7.48%.
- Tax-equivalent net interest margin improved to 2.59% for Q2 from 2.53%, and to 2.53% for the first half from 2.45%. Management attributed higher net interest income mainly to loan growth and larger average earning assets, with a low cost of funds.
- At June 30, total assets were $18.42 billion, loans were $8.92 billion, deposits were $14.50 billion, and shareholders’ equity was $1.86 billion. Loans increased 19.4% and deposits 6.5% from year-end, with Marquette contributing materially to both.
- Cash and cash equivalents ended the first half at $1.01 billion, down $775 million from the start of the year. Six-month operating cash flow was $105.7 million; investing cash outflow was $401.3 million and financing cash outflow was $479.9 million. The filing describes liquidity sources including deposits, securities, federal funds and available FHLB advances.
- Total borrowed funds were $1.86 billion, including $1.77 billion of federal funds purchased and repurchase agreements; long-term debt was $88.3 million. The company reported a 13.77% total risk-based capital ratio, 12.64% common equity tier 1 ratio and 9.56% leverage ratio.
- The allowance for loan losses was $77.7 million, or 0.87% of loans, versus 1.02% at year-end 2014. First-half net charge-offs were $6.4 million, down from $7.4 million. Nonperforming loans rose to $37.6 million from $27.4 million at year-end; the nonperforming-loan ratio was 0.42% versus 0.37%.
Material changes and notable items
- UMB completed its acquisition of Marquette Financial Companies on May 31, 2015, issuing approximately 3.47 million shares valued at $179.7 million. Marquette added $1.32 billion of assets, including $980.3 million of acquired loans, and $1.16 billion of assumed liabilities. Acquired asset and liability valuations remained provisional.
- Q2 noninterest income declined 10.8%, chiefly reflecting lower Scout Funds advisory fees, losses on alternative investments versus gains a year earlier, lower securities-sale gains, and the absence of a prior-year branch-property gain. First-half noninterest income fell 4.8%.
- Q2 noninterest expense increased 3.5%, including higher salaries, equipment and acquisition-related costs. First-half expense decreased 0.5%, largely because 2014 included a $20.3 million contingency reserve related to the PCM dispute settlement.
- Other comprehensive income was negative $29.0 million in Q2, primarily reflecting after-tax unrealized securities losses; this reduced reported comprehensive income despite positive net income.
- Nonperforming loans, past-due loans and restructured loans increased from year-end. At June 30, nonperforming loans were $37.6 million, loans more than 90 days past due were $7.6 million, and restructured loans totaled $27.0 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s stated priorities were expanding fee-based businesses, growing loans and deposits, improving operating efficiency, and managing capital. It identified Marquette integration and efficiency opportunities as ongoing priorities.
- Management’s interest-rate simulation projected higher net interest income under gradual rate increases: approximately $9.8 million under a 100-basis-point rise and $27.3 million under a 300-basis-point rise over the modeled 12-month period. No 100-basis-point falling-rate scenario was provided because rates were already low. Results depend on assumptions, including deposit pricing behavior.
- Key disclosed risks include economic and market conditions, interest rates, credit quality, liquidity and deposit growth, regulation, competition, technology and cybersecurity, operational controls, and the ability to integrate acquisitions. Securities-market changes may affect asset-based fees. Management cautioned that interim results may not indicate full-year results.
- Off-balance-sheet commitments totaled about $7.7 billion, primarily commitments to extend credit; many may expire undrawn. The company reported $526.8 million of potential FHLB Des Moines borrowing capacity and no outstanding advances there at quarter-end.
- Management said ordinary-course legal proceedings were not expected to be material; no material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported loan, deposit and earnings growth is attributable to Marquette, and how integration, final purchase accounting and acquired-loan performance develop.
- Whether fee-income pressure, especially Scout Funds advisory fees and alternative-investment results, persists, and how asset-market movements affect fees.
- Whether elevated nonperforming, past-due and restructured loan balances lead to higher provisions or charge-offs; assess the allowance in light of acquired loans and its lower ratio to loans.
- How expense growth, capital ratios, liquidity and the funding cost of assumed trust-preferred debt evolve.
- The sensitivity of interest income to actual rate changes and deposit repricing, compared with management’s simulation assumptions.