UMB Financial Corporation — Q2 2014 Form 10-Q
Business context and reporting period. UMB Financial is a diversified financial holding company providing banking, payment solutions, institutional investment management, and asset-servicing businesses. This unaudited filing covers the quarter and six months ended June 30, 2014; balance-sheet comparisons are primarily against December 31, 2013. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $86.2 | $82.3 | $171.6 | $161.8 |
| Noninterest income | $134.0 | $113.6 | $257.0 | $234.6 |
| Net interest income plus noninterest income | $220.2 | $195.9 | $428.6 | $396.4 |
| Provision for loan losses | $5.0 | $5.0 | $9.5 | $7.0 |
| Noninterest expense | $166.5 | $150.3 | $338.8 | $300.7 |
| Net income | $34.7 | $29.9 | $58.1 | $64.9 |
| Diluted EPS | $0.76 | $0.74 | $1.28 | $1.61 |
| Net interest margin, tax-equivalent | 2.53% | 2.56% | 2.45% | 2.53% |
- Quarterly trend: Net income rose 15.9%; reported noninterest income increased 18.0% and net interest income rose 4.7%. Revenue growth outpaced expense growth, but Q2 included a $5.3 million additional contingency charge related to the Prairie Capital Management (PCM) settlement.
- Year-to-date trend: Net income fell 10.5% and diluted EPS declined from $1.61 to $1.28. The $20.3 million PCM-related contingency expense recorded in the first half and higher operating expenses more than offset growth in net interest and noninterest income.
- Trust and securities processing income increased 15.6% in Q2 and 15.2% for the half year. Management attributed the increases chiefly to investment-management fees, fund administration and custody, and Scout Funds advisory fees. Alternative-investment equity earnings were $3.5 million for Q2 and $6.0 million year to date, versus none in the 2013 comparison periods.
- Noninterest expense increased 10.8% in Q2 and 12.7% year to date. Salaries and benefits were the largest recurring increase; the PCM contingency reserve was the major unusual item.
Balance sheet, liquidity, and capital
- At June 30, 2014, total assets were $15.56 billion, loans were $6.92 billion, investment securities were $7.03 billion, deposits were $12.17 billion, and shareholders’ equity was $1.60 billion.
- Compared with December 31, 2013, loans grew $400.2 million, or 6.1%, while deposits declined $1.47 billion, or 10.8%. Management attributed much of the deposit decline to one Asset Servicing client moving approximately $1.5 billion of money-market deposits to another institution in Q1. Interest-bearing balances due from banks also fell substantially as the company deployed cash and adjusted funding.
- Cash and cash equivalents reported in the cash-flow note were $783.5 million at June 30, versus $2.58 billion at year-end. For the first half, operating cash flow was $90.6 million, investing cash use was $436.7 million, and financing cash use was $1.45 billion; cash and due from banks decreased $1.80 billion.
- Federal funds purchased and repurchase agreements were $1.61 billion; long-term debt was $5.7 million and short-term debt was nil at quarter-end. The company reported no outstanding advances on its $25 million revolving credit line.
- Capital ratios at June 30 were 13.81% Tier 1 risk-based, 14.62% total risk-based, and 8.70% leverage. Management said these exceeded regulatory minimums and believed the company would meet the higher Basel III requirements taking effect beginning in 2015.
- The board declared a $0.225-per-share dividend in July, payable October 1, 2014. The quarterly dividend was $0.225 per share, compared with $0.215 a year earlier.
Material changes, outlook, and risks
- Average loans increased 12.0% year over year in Q2, and average earning assets increased 5.4% in Q2 and 8.9% in the first half. Management said volume growth helped lift net interest income despite margin compression and lower asset yields.
- Asset quality remained relatively strong by the company’s reported ratios: nonperforming loans were 0.39% of loans and nonperforming assets were 0.18% of total assets at June 30. Nonperforming loans were $27.2 million, up from $25.5 million at June 30, 2013 but down from $30.7 million at year-end. The allowance for loan losses was $76.8 million, or 1.11% of loans; first-half net charge-offs were $7.4 million versus $6.8 million.
- The PCM seller dispute was settled June 30. The company recorded $20.3 million of contingency expense in the first half, paid $6.0 million, and reported a remaining liability of approximately $14.3 million; final settlement payments were expected in Q3 2015.
- Interest-rate simulation showed projected increases in net interest income over the next 12 months under gradual rising-rate scenarios: $8.8 million at +100 basis points, $16.9 million at +200, and $24.9 million at +300. The filing did not include a falling-rate scenario because rates were already low. These are model estimates, sensitive to assumptions, not earnings guidance.
- No specific earnings or revenue guidance was provided. Management emphasized profitable growth, fee-based businesses, asset quality, low-cost funding, and capital management. It cautioned that actual results may differ due to economic and market conditions, interest rates, credit performance, competition, regulation, technology and operational risks, and the ability to manage liquidity and expenses.
- Approximately $5.0 billion of available-for-sale securities were pledged for deposits and other purposes; $1.4 billion pledged at the Federal Reserve Discount Window was unencumbered at quarter-end. The company reported $5.4 billion of commercial commitments, including credit commitments and letters of credit, many of which may expire undrawn.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It said ordinary-course legal proceedings were not expected to have a material adverse effect; no material risk-factor changes were reported.
Key facts investors should verify
- Whether the PCM settlement liability, payment schedule, and any further fair-value adjustments reconcile to the reported $20.3 million expense and $14.3 million remaining liability.
- Whether the unusually large Q1 deposit outflow from the Asset Servicing client was isolated, and how deposit mix and liquidity develop after quarter-end.
- Whether loan growth continues without deterioration in delinquency, criticized-loan, charge-off, or allowance trends, particularly in commercial and construction lending.
- Whether fee-income growth, including asset-based trust and investment-management fees and alternative-investment earnings, is sustainable and how much reflects market appreciation or other nonrecurring items.
- How expense growth and net interest margin perform as assets reprice, and whether capital ratios remain adequate under Basel III and continued balance-sheet growth.