UMB Financial Corporation — Q3 2013 Form 10-Q
Business context and reporting period. UMB Financial Corporation is a financial holding company with banking and financial-services operations across multiple states. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless noted. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $207.2 million, up 11.0% | $186.7 million in Q3 2012 |
| Net income | $34.4 million; diluted EPS $0.83 | $26.1 million; diluted EPS $0.64 in Q3 2012 |
| Net income, nine months | $99.3 million; diluted EPS $2.44 | $101.7 million; diluted EPS $2.51 in 2012 |
| Net interest income | $85.5 million for Q3; $247.4 million year to date | Up 6.4% for Q3 and 3.1% year to date |
| Net interest margin, tax-equivalent | 2.61% for Q3; 2.56% year to date | 2.80% and 2.79%, respectively, in 2012 |
| Noninterest income | $121.6 million for Q3; $356.2 million year to date | Up 14.4% for Q3 and 2.1% year to date |
| Noninterest expense | $153.1 million for Q3; $453.8 million year to date | Up 4.9% in both comparisons |
| Return on average assets / equity | 0.92% / 10.84% for Q3; 0.89% / 10.39% year to date | Q3 2012: 0.79% / 8.12%; nine-month 2012: 1.03% / 10.90% |
| Total assets / loans | $16.18 billion / $6.51 billion | Assets up 8.4% and loans up 14.4% from December 31, 2012 |
| Deposits / borrowed funds | $13.04 billion / $1.53 billion | Deposits up 11.9%; borrowed funds down from year-end |
| Cash and due from banks, cash flows | $1.94 billion at period end; operating cash flow $193.1 million for nine months | Period-end cash was $541.5 million in 2012 |
| Shareholders’ equity and capital | $1.46 billion; Tier 1 risk-based 12.93%, total risk-based 13.74%, leverage 8.34% | Capital ratios were 11.69%, 12.62%, and 7.15% in 2012 |
| Debt | $5.1 million long-term debt and $0.2 million short-term debt | Federal funds purchased and repurchase agreements were $1.53 billion |
Material changes and management commentary
- Q3 net income increased 31.8%, while nine-month net income declined 2.3%. Q3 growth reflected higher net interest and fee income; year-to-date results were affected by lower securities gains and trading and investment-banking income.
- Fee growth was led by trust and securities processing, up 21.6% in Q3 and 16.5% year to date. Management cited Scout Funds advisory fees, investment-management services, and fund administration and custody fees.
- Average loans rose 21.3% year over year in Q3; period-end loans increased $820 million from year-end 2012, led by commercial and commercial real estate lending. Average deposits grew 13.5% year over year, according to management.
- Interest expense fell, supporting net interest income, but lower earning-asset yields compressed margin. Management attributed the increase in net interest income primarily to balance-sheet volume growth and lower deposit costs.
- The allowance for loan losses was $74.9 million, or 1.15% of loans, versus 1.32% a year earlier. Nine-month provision was $13.5 million, unchanged year over year; net charge-offs declined to $10.0 million from $14.1 million.
- Nonperforming loans were $31.3 million, or 0.48% of loans, versus $27.4 million and 0.51% a year earlier. Nonperforming assets were 0.20% of total assets. The allowance equaled 2.40 times nonperforming loans.
- Available-for-sale securities were $6.70 billion. The portfolio had $81.8 million in gross unrealized losses, predominantly attributed by the company to interest-rate movements; management stated it did not intend, and was not likely required, to sell before recovery.
Capital, liquidity, outlook, and risks
- UMB issued 3.9 million shares on September 16, raising $201.2 million net for strategic growth. Underwriters exercised an additional 585,000-share option on October 17, generating another $30.2 million net.
- Management reported capital ratios above regulatory minimums and stated it believed current ratios exceeded requirements under the final Basel III rule. The company paid $0.645 per share in dividends in the first nine months; a $0.225 per-share dividend was declared October 22 for payment January 2, 2014.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It described strategic priorities as credit quality, sustainable growth, diversified fee revenue, and capital management. Trust and securities processing income depends in part on securities-market values.
- A single Asset Servicing client was expected to move its deposits elsewhere; $1.1 billion of that client’s deposits remained on the balance sheet at September 30. This creates a potential funding outflow.
- Interest-rate simulation projected a $10.4 million increase in next-12-month net interest income under a gradual 300-basis-point rise, and $2.2 million under a 100-basis-point rise. No falling-rate case was modeled because rates were already low. Management noted that flat rates could expose the company to continued asset-yield declines while deposit costs remain relatively stable.
- Unused commitments totaled approximately $5.2 billion, with a reported utilization rate of 25.7%. Many commitments may expire undrawn. The company also disclosed ordinary-course legal proceedings, which management did not expect to materially affect its financial position, results, or cash flows.
- Forward-looking risks include economic and market conditions, interest and currency rates, credit quality, funding and liquidity, competition, regulation, operational and cybersecurity risks, and the ability to grow revenue and control expenses. Management cautioned that interim results may not indicate full-year results.
Most important facts for investors to verify
- Whether strong Q3 fee and loan growth continues, and whether it offsets further margin compression and higher operating costs.
- The timing and impact of the expected $1.1 billion Asset Servicing deposit departure, including replacement funding and liquidity costs.
- Credit performance as the loan portfolio expands, particularly criticized loans, nonperforming loans, charge-offs, and allowance adequacy.
- The sensitivity of earnings and securities values to interest-rate changes, prepayments, and market volatility.
- How management deploys the equity proceeds for strategic growth and the effect of the share issuance and subsequent option exercise on per-share results.