UMB Financial Corporation — 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; quarterly data includes the three months ended December 31, 2012. UMB is a diversified financial-services company operating through Bank, Payment Solutions, Institutional Investment Management, and Asset Servicing. Its bank served customers across multiple states, with 119 banking centers at year-end. Four subsidiary banks were merged into UMB Bank, n.a. effective December 31, 2012.
Financial performance and condition
Amounts below are in millions unless stated otherwise.
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net interest income | $320.1 | $317.0 | +1.0% |
| Provision for loan losses | $17.5 | $22.2 | -21.2% |
| Noninterest income | $458.1 | $414.3 | +10.6% |
| Noninterest expense | $590.5 | $562.7 | +4.9% |
| Net income | $122.7 | $106.5 | +15.3% |
| Diluted EPS | $3.04 | $2.64 | +15.2% |
| Return on average assets | 0.92% | 0.86% | +6 bps |
| Return on average equity | 9.75% | 9.35% | +40 bps |
- Fourth quarter: net income was $21.1 million, versus $23.3 million in Q4 2011; diluted EPS was $0.52 versus $0.58. Q4 2012 noninterest expense rose to $158.0 million from $142.2 million, while noninterest income was $109.3 million versus $97.8 million.
- Interest margins: net interest margin (tax-equivalent) declined to 2.75% from 2.94%; net interest spread declined to 2.65% from 2.83%. Average earning assets rose 8.4%, and average loans increased 10.4%.
- Balance sheet: year-end assets were $14.93 billion, up from $13.54 billion. Loans before allowance were $5.69 billion, up 14.6%; deposits were $11.65 billion, up 14.6%. Securities totaled $7.13 billion.
- Credit: net charge-offs were $18.1 million, down from $24.1 million; net charge-offs were 0.35% of average loans versus 0.51%. The allowance was $71.4 million, or 1.26% of loans, compared with $72.0 million and 1.45%. Nonperforming loans increased to $28.1 million from $25.6 million; nonperforming assets were 0.21% of total assets versus 0.23%.
- Cash flow: operating activities provided $223.7 million; investing activities used $1.54 billion; financing activities provided $1.22 billion. Cash and due from banks, as presented in the cash flow statement, declined $93.2 million to $1.37 billion.
- Debt and liquidity: year-end repurchase agreements and federal funds purchased were $1.79 billion; long-term debt was $5.9 million, and no balance was outstanding on the $25 million revolving credit line. Available-for-sale securities were $6.94 billion, although about 81.2% were pledged or used as collateral.
- Capital and shareholder returns: shareholders’ equity was $1.28 billion. Company Tier 1, total risk-based, and leverage ratios were 11.05%, 11.92%, and 6.81%, respectively; the bank was reported as well-capitalized. Annual dividends were $0.83 per share. The company repurchased 472,956 shares during 2012 at an average $43.17 per share.
Material changes versus 2011
- Net income growth reflected higher fee income, modest net interest income growth, and lower loan-loss provision; expense growth partially offset those benefits.
- Trust and securities processing income rose 8.0% to $225.1 million. Securities-sale gains increased to $20.2 million from $16.1 million.
- Other noninterest income included a $6.9 million pretax reduction in acquisition contingent-consideration liabilities from adoption of fair-value guidance, plus additional acquisition-related valuation changes. This is a notable nonrecurring/accounting-driven contributor.
- Salary and benefit expense increased 8.5% to $319.9 million. The $7.8 million class-action settlement expense recorded in 2011 did not recur in 2012.
- Institutional Investment Management net income increased 47.8% to $21.3 million; Payment Solutions rose 5.2% to $21.3 million; Asset Servicing rose 27.4% to $5.9 million; Bank net income increased 10.5% to $74.2 million. Segment definitions were revised in 2012 and prior figures reclassified.
- Average noninterest-bearing demand deposits increased to $4.26 billion from $3.41 billion. The loan mix shifted toward commercial loans, which grew 28.6% and represented 50.5% of loans at year-end.
Outlook, commentary, risks, and unusual items
- Management emphasized fee-based growth, loan and deposit growth, operating efficiency, capital management, and customer service. It anticipated operating efficiencies from the single-bank merger, with a related core-systems conversion planned for 2013; no quantified earnings guidance was provided.
- Management noted that persistently low rates could pressure interest income and that results depend on Federal Reserve policy and market movements. Approximately $1.5 billion of securities were expected to repay in 2013 and be reinvested, including about $421 million in Q1.
- Interest-rate sensitivity modeling projected higher net interest income under rising-rate scenarios: +$6.5 million for +100 bps, +$13.6 million for +200 bps, and +$20.5 million for +300 bps over the following 12 months. The filing did not present a -100 bps scenario because rates were already low.
- Key risks include interest-rate and economic sensitivity, loan-credit deterioration, competitive pricing, market-driven asset-management fees, funding and liquidity access, regulation, litigation, technology and cyber threats, operational failures, employee retention, and the reliability of estimates and risk controls.
- Off-balance-sheet commitments totaled about $5.0 billion, principally undrawn loan and credit-card commitments and standby letters of credit. Management did not anticipate material losses, but amounts may not represent actual future funding needs. Management stated that ordinary-course litigation was not expected to materially affect financial position, results, or cash flows.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether loan growth and credit quality remain sound, particularly given higher nonperforming and restructured loan balances and the lower allowance-to-loans ratio.
- How much 2012 earnings growth is repeatable after the acquisition-liability fair-value adjustment and higher securities-sale gains.
- Whether deposit growth, including noninterest-bearing balances, can fund continued lending while preserving margins and liquidity.
- Execution and costs of the bank merger and planned 2013 systems conversion, and whether expected operating efficiencies materialize.
- Interest-rate exposure, securities reinvestment yields, and the effect of pledged collateral and repurchase funding on available liquidity.
- Potential funding needs from the $5.0 billion of off-balance-sheet commitments, and developments in litigation, regulatory matters, cyber and operational risks, and unrecognized tax benefits ($4.3 million at year-end).