UMB Financial Corporation — Q1 2010 Form 10-Q
Business context and reporting period
UMB Financial Corporation is a multi-bank financial holding company serving customers across 11 states. This unaudited filing covers the three months ended March 31, 2010; income and cash-flow comparisons are against Q1 2009, while balance-sheet comparisons are principally against December 31, 2009. Results for the quarter may not indicate full-year results.
Financial performance and condition
- Earnings: Net income was $26.2 million, up 15.9% from $22.6 million. Diluted EPS was $0.65 versus $0.55. Return on average assets was 0.96% and return on average equity was 10.25%, compared with 0.89% and 9.23%.
- Income and margins: Net interest income was $75.8 million, up $0.6 million. Noninterest income rose 25.4% to $86.4 million, led by trust and securities processing and $5.4 million of net gains on securities sales. Net interest margin (tax-equivalent) declined 20 basis points to 3.19%. The efficiency ratio was 70.6%.
- Expenses and credit costs: Noninterest expense increased 10.1% to $117.4 million; salary and benefits, processing fees, amortization, and regulatory fees were notable contributors. Provision for loan losses increased to $8.3 million from $6.0 million. Net charge-offs were $5.0 million, versus $4.3 million.
- Loans and asset quality: Loans were $4.30 billion at March 31, broadly flat year over year and versus year-end. The allowance was $67.4 million, or 1.57% of loans, compared with 1.25% a year earlier. Nonperforming loans were $25.4 million (0.59% of loans), up from $14.6 million a year earlier and $23.3 million at year-end. Nonperforming assets totaled $31.2 million.
- Balance sheet and liquidity: Total assets were $10.72 billion, down $939.3 million from year-end, which management attributed primarily to seasonal public-fund deposit and collateral movements. Deposits were $8.22 billion, down 3.7% from year-end but up $543.7 million year over year. Federal funds purchased and repurchase agreements were $1.31 billion, down from $1.93 billion at year-end. Available-for-sale securities were $4.74 billion; $3.41 billion of securities were pledged. Cash and due from banks, including Federal Reserve balances, was $740.3 million at quarter-end.
- Cash flow: Operating activities provided $45.9 million and investing activities provided $414.0 million; financing activities used $949.3 million. Cash and due from banks decreased $489.3 million during the quarter, reflecting, among other items, net reductions in deposits and repurchase funding.
- Capital and shareholder returns: Shareholders’ equity was $1.03 billion. The Tier 1 risk-based capital ratio was 13.51%, total risk-based capital was 14.64%, and leverage was 7.57%. The company repurchased 76,809 shares at an average $38.55 and paid a $0.185 quarterly dividend per share.
Material changes versus comparable periods
- Higher fee income and securities gains supported earnings growth, while the higher loan-loss provision and operating expenses partly offset the increase.
- Trust and securities processing income rose 42.9%, including higher Scout Funds fees, fund administration and custody revenue, and revenue associated with the 2009 J.D. Clark acquisition. Trading and investment banking income rose 44.6%; securities-sale gains were a significant contributor.
- Average earning assets increased 7.1% year over year, but the tax-equivalent yield on earning assets fell to 3.60% from 4.02%. The cost of interest-bearing liabilities also declined, to 0.59% from 0.87%, but net interest margin still contracted.
- Nonperforming loans increased year over year, which management linked partly to the downgrade of a large syndicated credit and broader economic conditions. The allowance-to-loans ratio increased.
- The company reorganized its reportable business segments in Q1 2010 around customer needs; prior-period segment figures were presented using the new methodologies.
Outlook, risks, contingencies, and unusual items
- Management described expectations of a slowly recovering economy, little movement in interest rates, and measured net-income growth for Commercial Financial Services. The filing provides no company-wide numerical earnings guidance.
- Management continues to emphasize fee-based businesses, deposit and loan growth, expense discipline, and capital management. It identified securities-market performance and flows as factors affecting asset-based trust and processing fees.
- Interest-rate simulations indicated that a 200-basis-point increase would raise modeled 12-month net interest income by $5.8 million, while a 200-basis-point decrease would reduce it by $13.1 million. These are scenario estimates, not forecasts, and depend on assumptions.
- Off-balance-sheet commitments included $1.76 billion of loan commitments excluding credit cards, $1.36 billion of credit-card commitments, and $306.9 million of standby letters of credit. Many commitments may expire undrawn.
- Management stated that pending lawsuits were not expected to have a material adverse effect. The filing reported no material change in previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- Q1 included $5.4 million of net gains on available-for-sale securities. Management said securities sales were part of efforts to manage interest-rate sensitivity in anticipation of a rising-rate environment. Accounting-standard adoptions during the quarter had no material impact.
Important facts for investors to verify
- Review whether higher trust, custody, and Scout Funds fees are sustainable and how sensitive they are to market values and fund flows.
- Track loan delinquencies, nonperforming loans, the large syndicated credit, charge-offs, and whether the increased allowance proves adequate.
- Assess the sustainability of net interest income and margin given the declining asset yield, low-rate environment, and modeled downside from falling rates.
- Separate recurring operating performance from securities-sale gains and monitor the expense increases, including processing, compensation, and regulatory costs.
- Reconcile the filing’s differing disclosures of loans past due 90 days or more: the narrative gives $7.7 million, while the loan-quality table reports $6.244 million.
- Monitor seasonal funding movements, pledged securities, deposit trends, and the possible liquidity demands represented by off-balance-sheet commitments.