UMB Financial Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparative periods ended June 30, 2012. Unless otherwise noted, financial amounts below are in millions of dollars. UMB is a diversified financial holding company operating banking, payment solutions, investment management, and asset servicing businesses.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $82.3 | $80.4 | $161.8 | $159.5 |
| Provision for loan losses | $5.0 | $4.5 | $7.0 | $9.0 |
| Noninterest income | $113.6 | $110.2 | $234.6 | $242.5 |
| Noninterest expense | $150.3 | $144.7 | $300.7 | $286.6 |
| Income before taxes | $40.6 | $41.4 | $88.7 | $106.4 |
| Net income | $29.9 | $29.2 | $64.9 | $75.5 |
| Diluted EPS | $0.74 | $0.72 | $1.61 | $1.87 |
- Q2 net income increased 2.6%; first-half net income declined 14.1%. First-half diluted EPS fell 14.0%.
- Q2 total revenue, defined as net interest income plus noninterest income, was $195.9 million, up about 2.8%; first-half revenue was $396.4 million, down about 1.4%.
- Tax-equivalent net interest margin was 2.56% in Q2 and 2.53% for the first half, down from 2012. The filing’s narrative gives Q2 2012 margin as 2.82%, while its table shows 2.83%.
- Trust and securities processing income rose 13.9% in Q2 and first-half; securities-sale gains fell to $7.4 million for the half from $19.8 million. First-half noninterest income also reflected lower trading/investment banking and other income.
- Noninterest expense rose 3.9% in Q2 and 4.9% for the half. Higher salaries and benefits and processing costs were notable contributors.
Financial position, cash flow, and credit
- At June 30, assets totaled $15.25 billion, up 2.2% from year-end 2012. Loans were $6.34 billion, up 11.5%; investment securities were $7.18 billion.
- Deposits were $11.73 billion, up 0.7% from year-end. Federal funds purchased and repurchase agreements were $2.16 billion, versus $1.79 billion at year-end; short- and long-term debt totaled about $4.6 million.
- Shareholders’ equity was $1.23 billion, down $52.9 million from year-end. Accumulated other comprehensive income moved from positive $85.6 million to negative $22.2 million, primarily reflecting unrealized securities losses. Q2 comprehensive loss was $55.9 million despite net income of $29.9 million.
- First-half operating cash flow was $121.9 million; investing activities used $904.5 million, including a $658.8 million net increase in loans; financing activities provided $415.3 million. Cash and due from banks, as defined in the cash-flow statement, ended at $999.2 million.
- Credit quality improved year over year: nonperforming loans were $25.5 million, or 0.40% of loans, versus $30.6 million and 0.58% a year earlier. Nonperforming assets were $29.1 million, or 0.19% of total assets. First-half net charge-offs were $6.8 million, down from $8.4 million.
- The allowance for loan losses was $71.6 million, or 1.13% of loans, compared with 1.37% a year earlier. Management said the reserve assessment considers portfolio trends, economic conditions, concentrations, and other qualitative factors.
- Regulatory capital ratios were 10.72% Tier 1 risk-based, 11.52% total risk-based, and 6.76% leverage. Management reported the total risk-based ratio exceeded the 10% well-capitalized threshold.
Changes, outlook, and risks
- Average loans increased 18.1% year over year in Q2; period-end loans rose 19.3% from June 2012. Management attributed growth mainly to commercial and commercial real estate lending.
- Management’s stated priorities are credit quality and balance-sheet strength, sustainable growth in fee businesses and earning assets, diversified revenue, and capital management. The filing provides no specific earnings or financial guidance.
- Management noted continued pressure from low interest rates and lower asset yields; loan and securities volume supported net interest income. Its rate simulation projected higher net interest income under rising-rate scenarios, but also identified risk if rates stay flat and asset yields continue to decline.
- Available-for-sale securities had $87.8 million of gross unrealized losses at June 30, versus $4.8 million at year-end 2012. Management attributed the losses principally to interest-rate changes, stated it did not intend to sell the securities and did not expect forced sales before recovery, and did not consider them other-than-temporarily impaired.
- Unused credit commitments and letters of credit totaled about $5.1 billion; the filing says 26.2% of total outstanding commitments were utilized. These commitments may create funding needs, although many expire undrawn. A $25 million revolving credit line had no advances outstanding.
- Other disclosed risks include economic and political conditions, regulatory changes, interest rates, securities-market performance and fund flows, customer repayment capacity, competition, technology, acquisition integration, and employee costs. The company reported no material change to its previously disclosed risk factors.
- The company reported ordinary-course litigation; management did not expect the matters described to materially affect financial position, results, or cash flows. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether rapid loan growth is sustained without deterioration in criticized loans, delinquencies, charge-offs, or reserve adequacy.
- How lower net interest margin and the interest-rate sensitivity of assets and funding affect earnings if rates remain low or change unexpectedly.
- Whether fee growth, particularly trust and investment-management fees, continues to offset weaker securities gains and trading income.
- Whether expense growth—especially compensation and processing costs—remains consistent with revenue growth.
- The effect of securities valuation changes on accumulated other comprehensive income and equity, and the assumptions supporting management’s impairment assessment.
- Funding and liquidity implications of loan growth, repurchase-agreement balances, pledged securities, and potential draws on off-balance-sheet commitments.
- Capital and shareholder-return plans, including dividends and share repurchases; the board declared a $0.215-per-share dividend payable October 1, 2013.