UMB Financial Corporation — Q1 2015 Form 10-Q
Business context and reporting period
UMB Financial Corporation is a diversified financial holding company with banking, payment solutions, institutional investment management and asset servicing businesses. This unaudited filing covers the three months ended March 31, 2015; income and cash-flow comparisons are against Q1 2014, while balance-sheet comparisons are primarily against December 31, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / date |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $215.6 | $208.4 in Q1 2014 |
| Net interest income | $90.4 | $85.4 in Q1 2014 |
| Net interest margin, tax-equivalent | 2.46% | 2.39% in Q1 2014 |
| Noninterest income | $125.2 | $123.0 in Q1 2014 |
| Noninterest expense | $164.4 | $172.2 in Q1 2014 |
| Provision for loan losses | $3.0 | $4.5 in Q1 2014 |
| Net income / diluted EPS | $33.8 / $0.74 | $23.4 / $0.52 in Q1 2014 |
| Operating cash flow | $22.3 provided | $17.9 used in Q1 2014 |
| Total assets | $16,730 | $17,501 at Dec. 31, 2014; $15,946 at Mar. 31, 2014 |
| Gross loans / allowance for loan losses | $7,498 / $77.5 | $7,466 / $76.1 at Dec. 31, 2014 |
| Total deposits | $13,156 | $13,617 at Dec. 31, 2014 |
| Federal funds purchased and repurchase agreements | $1,719 | $2,025 at Dec. 31, 2014 |
| Long-term debt / shareholders’ equity | $7.6 / $1,682 | $8.8 / $1,644 at Dec. 31, 2014 |
| Cash and cash equivalents | $1,035 | $1,787 at beginning of Q1 2015 |
Reported net income rose 44.2% year over year. Return on average assets was 0.81%, versus 0.58%; return on average equity was 8.18%, versus 6.13%. The allowance was 1.03% of loans, and Q1 net charge-offs were $1.7 million, down from $3.7 million a year earlier. Nonperforming loans were $29.2 million, or 0.39% of loans, compared with $27.4 million at year-end. Loans past due 90 days or more totaled $5.2 million.
Regulatory capital ratios at March 31 included a 12.91% Tier 1 risk-based ratio, 12.91% common equity Tier 1 ratio, 13.62% total risk-based ratio and 8.69% leverage ratio. Management stated that capital exceeded regulatory requirements. The quarterly dividend was $0.235 per share; the company repurchased 103,924 shares at an average $51.08 per share.
Material changes versus the prior comparable period
- Net interest income increased 5.7%, supported by average loan growth of 11.8% and higher average earning assets; management cited volume growth and low funding costs, partly offset by unfavorable asset-rate effects.
- Noninterest income rose 1.8%, but performance was mixed: securities-sale gains increased to $7.3 million from $1.5 million, while trust and securities processing fees declined 6.0% and alternative investments recorded an $0.8 million loss versus $2.5 million of earnings a year earlier.
- Noninterest expense fell 4.5%, substantially because Q1 2014 included a $15.0 million contingency reserve relating to a disputed acquisition earn-out and incentive calculation. The dispute was settled in Q2 2014. Salaries and benefits nevertheless increased 10.9% year over year.
- Trust and securities processing weakness reflected lower Scout Funds advisory fees and lower assets under management. Institutional Investment Management AUM was $30.6 billion, down from $32.2 billion a year earlier. Asset Servicing net income fell 46.0%, while Bank and Payment Solutions net income increased.
- Loans increased 10.9% year over year, while total assets rose 4.9%. From year-end, however, assets declined 4.4%, principally as Federal Reserve balances, deposits and repurchase funding decreased. Deposits were 7.3% higher than a year earlier.
Outlook, commentary, risks and unusual items
Management identified priorities of growing fee-based businesses, expanding loans and deposits, improving operating efficiency and managing capital. The filing provides no quantified earnings or revenue guidance. The company was pursuing its merger with Marquette Financial Companies, subject to regulatory approval, and expected closing in mid-2015; the stated consideration was approximately 3.4 million UMB shares, subject to agreement terms and adjustments.
Management’s interest-rate simulation projected higher net interest income under gradual rising-rate scenarios: approximately $6.1 million for +100 basis points, $11.0 million for +200 basis points and $15.9 million for +300 basis points over the next 12 months. It did not model a 100-basis-point decline because rates were already low. Outcomes depend on assumptions, including how deposits are repriced.
Liquidity sources include core deposits, securities, Federal Reserve and federal funds market access, and up to $510 million of available FHLB advances against pledged collateral; no FHLB advances were outstanding at quarter-end. Securities available for sale with a market value of $4.9 billion were pledged, including $1.2 billion at the Federal Reserve Discount Window that was unencumbered. Off-balance-sheet commitments totaled $7.3 billion, principally loan commitments; many may expire unused and the total does not represent expected cash outflows.
Key risks identified include economic and market changes, interest-rate and liquidity risk, credit deterioration, competition and pricing, regulatory changes, acquisition integration, operational and cyber risk, and the ability to control expenses and retain staff. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors. A Q1 2015 commercial real estate TDR payment default of $178,000 was charged off against a previously established allowance. Securities unrealized losses were attributed primarily to interest-rate movements; management said it did not intend, and did not expect to be required, to sell those securities before recovery.
Important facts for investors to verify
- How much of the earnings increase is sustainable: compare recurring operating trends with the prior-year $15.0 million reserve, Q1 2015 securities-sale gains and contingent-consideration valuation changes.
- Whether loan growth and asset quality remain sound, particularly the movement in nonperforming loans, 90-day delinquencies, criticized commercial credits and the allowance relative to portfolio growth.
- Whether fee income recovers, including Scout Funds AUM and advisory fees, and how market levels and fund flows affect trust and securities-processing revenue.
- How deposit balances and funding costs evolve after the quarter-end reduction in deposits and repurchase funding, and whether available liquidity remains adequate as commitments are drawn or deposits change.
- Whether the Marquette transaction receives regulatory approval, closes on expected terms and timing, and delivers expected benefits without material integration costs or dilution.
- Whether rising-rate sensitivity assumptions, especially deposit repricing behavior, prove accurate; the filing gives no modeled falling-rate result.