UMB Financial Corporation — Q2 2012 Form 10-Q
Business context and period. UMB is a multi-bank financial holding company offering banking and financial services across multiple U.S. states. This unaudited report covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless noted. Its four reportable segments are Bank, Payment Solutions, Institutional Investment Management, and Asset Servicing.
Financial performance and position
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $80.4 | $79.9 | $159.5 | $158.4 |
| Noninterest income | $110.2 | $107.9 | $242.5 | $215.6 |
| Total revenue (net interest income plus noninterest income) | $190.6 | $187.8 | $402.0 | $374.0 |
| Provision for loan losses | $4.5 | $5.6 | $9.0 | $12.7 |
| Noninterest expense | $144.7 | $145.6 | $286.6 | $281.1 |
| Net income | $29.2 | $26.3 | $75.5 | $57.2 |
| Diluted EPS | $0.72 | $0.65 | $1.87 | $1.42 |
- Q2 net income rose 10.8%; first-half net income rose 32.1%. Reported Q2 return on average assets/equity was 0.89%/9.42%; first-half figures were 1.15%/12.36%.
- Tax-equivalent net interest margin declined to 2.82% in Q2 from 2.98%, and to 2.79% for the first half from 2.94%. Higher earning-asset volume supported net interest income, but lower asset yields pressured margin.
- Noninterest income increased 2.2% in Q2 and 12.5% year to date. Trust and securities processing income rose 4.0% in Q2. First-half results also benefited from higher securities-sale gains and other income, including contingent-consideration fair-value adjustments.
- Noninterest expense was down 0.6% in Q2 but up 2.0% year to date. Salaries and benefits increased 7.0% in Q2 and 8.3% for the first half. The prior-year periods included a $7.8 million class-action settlement charge.
- Operating cash flow was $95.1 million for the first half, versus $118.7 million a year earlier. Investing activities used $493.4 million, while financing activities used $419.9 million; cash and due from banks ended at $641.5 million, down $818.2 million from year-end.
- At June 30, total assets were $13.18 billion, loans $5.32 billion, investment securities $6.50 billion, deposits $10.33 billion, and shareholders’ equity $1.25 billion. Since December 31, loans rose 7.2% and deposits 1.6%, while total assets declined 2.6%, primarily reflecting lower Federal Reserve balances and seasonal repurchase-agreement funding.
- Tier 1 risk-based and total risk-based capital ratios were 11.63% and 12.59%, respectively; the leverage ratio was 6.92%. The company reported total risk-based capital above the 10% well-capitalized threshold.
- Long-term debt was $5.3 million and short-term debt $10.0 million at June 30. Federal funds purchased and repurchase agreements were $1.40 billion, down from $1.95 billion at year-end.
Material changes, outlook, risks, and unusual items
- Credit quality: Loans grew 12.4% year over year, while nonperforming loans rose to $30.6 million from $15.4 million at June 30, 2011. Nonperforming loans were 0.58% of loans, versus 0.33% a year earlier; nonperforming assets were 0.28% of total assets. The allowance was $72.7 million, or 1.37% of loans, versus 1.53% a year earlier. First-half net charge-offs declined to $8.4 million from $14.2 million.
- Accounting and acquisition-related items: Adoption of fair-value guidance changed the valuation methodology for contingent consideration, reducing the liability by about $6.9 million and increasing other noninterest income by about $4.7 million after tax. The filing also reports additional acquisition-related fair-value adjustments. These items contributed to reported income and are not necessarily recurring.
- Interest-rate exposure: The company’s simulation showed projected one-year net interest income increases of $4.6 million, $9.9 million, and $15.6 million under gradual rate increases of 100, 200, and 300 basis points, respectively. No 100-basis-point falling-rate case was included because rates were already low. Management noted that flat rates could leave asset yields declining while deposit costs remain relatively stable.
- Management priorities and outlook: Management emphasized credit quality, profitable growth, fee-based revenue diversification, and capital management. It cited average loan growth of 10.4% year over year in Q2 and increased low-cost funding. No specific earnings or revenue guidance was provided; management cautioned interim results may not indicate full-year results.
- Liquidity and commitments: Management identified core deposits, scheduled asset cash flows, securities, and access to funding markets as liquidity sources. Securities with a market value of $4.4 billion were pledged. Off-balance-sheet commitments totaled approximately $4.7 billion, principally credit commitments and letters of credit; many may expire undrawn.
- Other matters: Management said ordinary-course lawsuits were not expected to materially affect financial position, results, or cash flows. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported first-half income growth depended on securities-sale gains and contingent-consideration fair-value adjustments, and what portion is repeatable.
- Whether margin pressure continues as asset yields reprice, and whether loan and deposit growth can offset lower yields.
- Trends in nonperforming loans, restructured loans, charge-offs, and allowance coverage as the loan portfolio expands.
- The cash and liquidity impact of securities purchases, loan growth, seasonal funding flows, and the $4.7 billion of off-balance-sheet commitments.
- Capital ratios, share repurchases, and dividends; the board declared a $0.205-per-share dividend payable October 1, 2012.