UMB Financial Corporation — Q3 2015 Form 10-Q
Business context and reporting period
UMB Financial is a financial holding company offering banking and financial services across multiple U.S. states. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless stated otherwise. The May 31, 2015 acquisition of Marquette Financial Companies materially affects comparisons: its results are included only from the acquisition date.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $109.9 million | $87.5 million | $297.6 million | $259.1 million |
| Noninterest income | $109.1 million | $126.5 million | $353.9 million | $383.4 million |
| Noninterest expense | $185.3 million | $161.2 million | $521.7 million | $499.3 million |
| Net income | $22.5 million | $35.6 million | $86.4 million | $93.7 million |
| Diluted EPS | $0.46 | $0.78 | $1.84 | $2.06 |
| Tax-equivalent net interest margin | 2.73% | 2.53% | 2.60% | 2.48% |
- Quarterly net income fell 37.0%; nine-month net income fell 7.8%. Quarterly ROA was 0.49% and return on average equity was 4.72%, versus 0.90% and 8.77%, respectively, a year earlier. Nine-month figures were 0.66% and 6.53%, versus 0.79% and 7.92%.
- Higher net interest income reflected loan and earning-asset growth, Marquette, and a higher net interest margin. Average earning assets rose 15.5% in Q3 and 9.1% year to date; average loans rose 27.7% in Q3 year over year.
- Noninterest income declined 13.7% in Q3 and 7.7% year to date. Q3 included a $5.0 million loss on alternative investments, compared with $2.5 million of gains a year earlier. Trust and securities-processing income also declined, including lower Scout Funds advisory fees.
- Noninterest expense increased 15.0% in Q3 and 4.5% year to date. Drivers included compensation, technology and equipment, consulting, and acquisition-related costs. The prior-year comparison included a $20.3 million contingency reserve expense, absent in 2015.
- At September 30, total assets were $18.60 billion, gross loans $9.05 billion, investment securities $7.35 billion, and deposits $15.06 billion. Since year-end 2014, loans grew 21.2% and deposits 10.6%; growth reflects both Marquette and legacy-channel lending.
- Cash and cash equivalents were $1.03 billion at period-end. For the first nine months, operating cash flow was $172.7 million, investing cash flow was negative $572.3 million, financing cash flow was negative $356.9 million, and cash declined $756.4 million.
- Total borrowed funds were approximately $1.43 billion at September 30, including $1.34 billion of federal funds purchased and repurchase agreements; long-term debt was $83.5 million. Deposits remained the primary funding source. The company reported a 13.50% total risk-based capital ratio, 12.39% common equity tier 1 ratio, and 9.27% leverage ratio.
Material changes, outlook, risks, and unusual items
- Marquette consideration was approximately $179.7 million in UMB shares. It added $1.32 billion of assets, including $980.4 million of loans, and $1.16 billion of assumed liabilities at acquisition-date fair value. Purchase accounting remained provisional. Nine-month acquisition expenses were $6.0 million. Management reported that integration limits the availability of separate post-acquisition Marquette results.
- Management identified $32.9 million in annualized savings from planned position eliminations and process improvements, to be implemented over coming quarters; this excludes additional potential Marquette integration savings. The filing provides no formal earnings or revenue guidance.
- Credit quality indicators warrant attention: nonperforming loans rose to $50.0 million from $32.7 million at September 30, 2014, and nonperforming assets rose to $52.5 million from $34.0 million. The allowance was $78.0 million, or 0.86% of loans, versus 1.09% a year earlier; net charge-offs were $8.6 million year to date, down from $11.4 million. Restructured loans totaled $35.3 million, versus $10.2 million a year earlier.
- Off-balance-sheet commitments totaled about $9.1 billion, including $5.84 billion in loan commitments excluding credit cards, $2.91 billion in credit-card commitments, and $378.6 million in standby letters of credit. Many commitments may expire undrawn. Securities available for sale with a market value of $5.3 billion were pledged; $1.7 billion pledged at the Federal Reserve Discount Window was unencumbered.
- Management describes sensitivity to economic and political conditions, interest and currency rates, regulation, competition, credit quality, liquidity and funding, cybersecurity and operational controls, and acquisition integration. The bank reported that it was positioned to benefit from rising rates; it did not model a 100-basis-point falling-rate scenario because rates were already low. Litigation in the ordinary course was not expected by management to be material, and no material risk-factor changes were reported.
- The board declared a quarterly dividend of $0.245 per share on October 27, 2015, payable January 4, 2016. The company repurchased 119,690 shares in the first nine months of 2015. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the announced $32.9 million annualized savings are achieved on schedule, and what restructuring costs or Marquette synergies accompany them.
- Whether Marquette integration, purchase-accounting adjustments, and acquired-loan performance affect future earnings, expenses, and capital.
- Whether alternative-investment losses, Scout asset levels and fee income, and market-driven trust revenue stabilize or continue to weaken.
- Whether nonperforming loans and restructurings continue rising, and whether the allowance remains adequate as the loan portfolio expands.
- How growth is funded, including deposit trends, repurchase-agreement balances, pledged collateral, and the scale and utilization of outstanding commitments.
- How the company’s earnings respond to interest-rate changes and whether the assumptions underlying its rate-sensitivity analysis hold.