UMB Financial Corporation — Q3 2014 Form 10-Q
Business context and reporting period
UMB Financial Corporation is a diversified financial holding company providing banking, payment solutions, institutional investment management, and asset-servicing services. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are principally with the corresponding 2013 periods. Balance-sheet comparisons are also made with December 31, 2013.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $87.5 million | $85.5 million | $259.1 million | $247.4 million |
| Noninterest income | $126.5 million | $121.6 million | $383.4 million | $356.2 million |
| Net income | $35.6 million | $34.4 million | $93.7 million | $99.3 million |
| Diluted EPS | $0.78 | $0.83 | $2.06 | $2.44 |
| Noninterest expense | $161.5 million | $153.1 million | $500.2 million | $453.8 million |
- Margins and revenue: Tax-equivalent net interest margin was 2.53% for Q3 and 2.48% year to date, down 8 basis points from the respective 2013 periods. Net interest income rose on asset growth despite lower yields. Noninterest income was 59.1% of total revenue at September 30.
- Balance sheet: Total assets were $16.28 billion, down 3.7% from year-end 2013. Loans grew 8.9% to $7.10 billion; deposits fell 6.5% to $12.75 billion. Investment securities totaled $7.10 billion. Shareholders’ equity was $1.62 billion.
- Credit and allowance: The allowance for loan losses was $77.3 million, or 1.09% of loans, versus 1.15% a year earlier. Nine-month net charge-offs were $11.4 million versus $10.0 million. Nonperforming loans were $32.7 million, 0.46% of loans; nonperforming assets were 0.21% of total assets.
- Cash flow and liquidity: Nine-month operating cash flow was $181.6 million; investing and financing activities used $767.0 million and $776.8 million, respectively. Cash and cash equivalents ended at $1.22 billion, compared with $1.94 billion at September 30, 2013. The company reported $6.8 billion of available-for-sale securities, of which $5.1 billion was pledged; $1.4 billion pledged at the Federal Reserve Discount Window was unencumbered.
- Funding and debt: Federal funds purchased and repurchase agreements were $1.71 billion; long-term debt was $7.1 million. The company had no outstanding advances under its $25 million revolving credit line.
- Capital: The filing reports a 13.72% Tier 1 risk-based capital ratio and an 8.90% leverage ratio. The total risk-based capital ratio is reported as 14.51% in the capital table, while the narrative gives 14.37%.
Material changes versus prior periods
- Q3 net income increased 3.5%, although diluted EPS declined to $0.78 from $0.83. Year-to-date net income fell 5.6% and diluted EPS fell to $2.06 from $2.44.
- Noninterest income grew 4.0% in Q3 and 7.6% year to date, led by trust and securities processing, which increased 8.2% and 12.7%, respectively. Q3 bankcard fees rose 12.7%.
- Expenses increased 5.5% in Q3 and 10.2% year to date. Year-to-date results include a $20.3 million contingency reserve related to the Prairie Capital Management (PCM) dispute.
- Loans increased $582.7 million from year-end, while deposits declined $887.3 million. 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.
- Q3 return on average assets was 0.90% and return on average equity 8.77%, versus 0.92% and 10.84% a year earlier. Year-to-date returns were also lower year over year.
Outlook, risks, contingencies, and unusual items
- Management emphasized profitable growth, fee-based businesses, balance-sheet strength, and capital management. It expects to benefit from rising interest rates in its simulations; a gradual 300-basis-point increase projected a $24.1 million increase in net interest income over 12 months. No 100-basis-point falling-rate case was presented because rates were already low. These estimates depend on assumptions, including deposit pricing.
- The PCM dispute settlement resulted in a $20.3 million reserve in 2014; $6.0 million was paid June 30, with final settlement payments expected in Q3 2015. The remaining contingent-consideration liability was $54.3 million, including other acquisition-related amounts and subsequent fair-value adjustments.
- Key stated risks include interest-rate and market movements, credit deterioration, deposit and liquidity management, competition, regulatory changes, operational and cyber risks, and the ability to integrate acquisitions and control expenses. Basel III capital requirements were scheduled to begin taking effect January 1, 2015; management said it expected capital ratios to exceed the new requirements.
- Management said ordinary-course legal proceedings were not expected to be material. No material change to previously disclosed risk factors was reported. Disclosure controls were concluded to be effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the reported total risk-based capital ratios of 14.51% and 14.37%, including the entity and calculation each represents.
- Assess whether the large client deposit outflow is isolated and whether core deposits can support continued loan growth and liquidity needs.
- Review the PCM settlement terms, remaining payment timing, and the assumptions underlying acquisition contingent consideration and fair-value adjustments.
- Monitor expense growth relative to fee revenue, net interest margin trends, and the effect of interest-rate changes on earnings.
- Track criticized commercial loan balances, nonperforming loans, charge-offs, and allowance adequacy as the loan portfolio expands.