UMB Financial Corporation: 2013 Form 10-K
Business context and reporting period
UMB Financial Corporation is a diversified financial holding company headquartered in Kansas City, Missouri. Its businesses comprise Bank, Payment Solutions, Institutional Investment Management and Asset Servicing. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. The consolidated financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income | $333.3 million | $320.1 million |
| Noninterest income | $491.8 million | $458.1 million |
| Noninterest expense | $624.2 million | $590.5 million |
| Provision for loan losses | $17.5 million | $17.5 million |
| Net income | $134.0 million | $122.7 million |
| Diluted EPS | $3.20 | $3.04 |
| Total assets at year-end | $16.9 billion | $14.9 billion |
| Loans at year-end, before allowance | $6.52 billion | $5.69 billion |
| Deposits at year-end | $13.64 billion | $11.65 billion |
| Shareholders’ equity at year-end | $1.51 billion | $1.28 billion |
- Net income increased 9.2%; basic EPS rose 5.9%. Net interest income grew 4.1%, while noninterest income rose 7.4%.
- Net interest margin on a fully tax-equivalent basis fell to 2.55% from 2.75%; net interest spread declined to 2.49% from 2.65%. Average loans increased 18.5%, and average earning assets increased 13.0%.
- Net cash provided by operating activities was $295.2 million; investing activities used $1.02 billion and financing activities provided $1.94 billion. Cash and due from banks at year-end was $2.58 billion, including $2.06 billion due from the Federal Reserve.
- Year-end regulatory capital ratios were 13.61% Tier 1 risk-based, 14.43% total risk-based and 8.41% leverage for the holding company. The Bank was categorized as well capitalized.
- Debt excluding federal funds purchased and repurchase agreements was modest: $5.2 million of short- and long-term debt. Federal funds purchased and repurchase agreements totaled $1.58 billion at year-end.
- Allowance for loan losses was $74.8 million, or 1.15% of loans, versus $71.4 million, or 1.26%, in 2012. Net charge-offs declined to $14.2 million from $18.1 million.
Material changes versus 2012
- Fee income growth was led by trust and securities processing, up $40.9 million, and alternative-investment equity earnings, up $18.6 million, including $17.0 million in unrealized gains on Prairie Capital investments.
- Trading and investment banking income fell $9.7 million, and securities-sale gains declined to $8.5 million from $20.2 million. Noninterest expenses rose 5.7%, notably salaries and benefits, processing fees and equipment costs.
- Loan balances grew $833.8 million, or 14.7%, with growth in commercial, commercial real estate and construction lending. Nonperforming loans increased to $30.7 million from $28.1 million, although nonperforming loans as a share of loans edged down to 0.47% from 0.49%.
- Available-for-sale securities had a $52.3 million net unrealized loss at year-end, compared with a $134.8 million gain in 2012, primarily reflecting higher market interest rates. After-tax accumulated other comprehensive income moved from a gain of $85.6 million to a loss of $32.6 million.
- The company issued 4.485 million shares and raised $231.4 million net for strategic growth. This strengthened capital but increased the weighted-average share count.
- Payment Solutions net income fell 41.7% to $14.2 million, as higher expenses and loan-loss provision outweighed revenue growth. Institutional Investment Management net income increased 33.9% to $28.1 million.
Outlook, risks and unusual items
Management emphasized fee-based growth, loan and deposit growth, operating efficiency and capital management. It did not provide specific earnings or revenue guidance. Management said continued low interest rates could pressure interest income; its rate model showed a modestly positive effect from rising rates, with a projected $11.8 million increase in annual net interest income under a gradual 300-basis-point increase. A 100-basis-point decline scenario was not modeled because rates were already low. Approximately $1.1 billion of available-for-sale securities were expected to repay principal in 2014.
- A single Asset Servicing client was expected to move its deposits elsewhere. Its $1.5 billion balance remained at year-end, creating a significant potential funding outflow.
- Interest-rate movements, loan credit quality, deposit retention, securities valuation, competitive pressures, cybersecurity and operational disruptions, regulatory change and litigation are identified risks. Management said it knew of no trends or uncertainties expected to materially change capital or liquidity in the foreseeable future.
- Management attributed securities losses primarily to interest-rate changes and did not consider the affected securities other-than-temporarily impaired. The company reported $17.0 million of unrealized alternative-investment gains, which contributed to the year’s income.
- The company was assessing the impact of the Volcker Rule, with full conformance required by July 21, 2015. Basel III transition was scheduled to begin in 2015.
- Management stated that ordinary-course legal proceedings were not expected to materially affect financial position, results or cash flows. Off-balance-sheet commitments totaled $5.3 billion; management did not anticipate material losses, and the amounts do not represent expected cash funding needs.
Important facts for investors to verify
- Whether and when the $1.5 billion Asset Servicing client deposit migration occurred, and how replacement funding affected margins and liquidity.
- Whether loan growth continued without deterioration in commercial and real estate credit quality, provision needs or net charge-offs.
- How the securities portfolio’s unrealized losses and expected principal repayments affected earnings, capital and reinvestment yields.
- How much of 2013 earnings growth depended on the $17.0 million unrealized alternative-investment gain and other acquisition-related fair-value adjustments.
- Whether Payment Solutions expense growth was contained and its profitability recovered.
- The effects of share issuance and subsequent repurchases on per-share earnings, capital deployment and shareholder returns.