UMB Financial Corporation — 2014 Form 10-K
Business context and reporting period. UMB Financial Corporation is a diversified financial holding company headquartered in Kansas City, Missouri. Its businesses comprise Bank, Payment Solutions, Institutional Investment Management and Asset Servicing. This annual report covers the fiscal year ended December 31, 2014; unaudited fourth-quarter results are also disclosed. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $350.1 million | $333.3 million |
| Noninterest income | $498.7 million | $491.8 million |
| Provision for loan losses | $17.0 million | $17.5 million |
| Noninterest expense | $666.9 million | $624.2 million |
| Net income | $120.7 million | $134.0 million |
| Diluted earnings per share | $2.65 | $3.20 |
| Net interest margin, tax-equivalent | 2.49% | 2.55% |
| Return on average assets | 0.75% | 0.89% |
| Return on average equity | 7.54% | 10.02% |
- Fourth quarter: Net income was $26.9 million, versus $34.7 million in Q4 2013. Diluted EPS was $0.59, versus $0.77. Q4 net interest income was $90.9 million; provision for loan losses was $3.0 million.
- Balance sheet at year-end: Assets were $17.50 billion, loans before allowance were $7.47 billion, investment securities were $7.29 billion, deposits were $13.62 billion, and shareholders’ equity was $1.64 billion. Long-term debt was $8.8 million; federal funds purchased and repurchase agreements totaled $2.03 billion.
- Cash flows: Operating activities provided $243.8 million; investing activities used $1.43 billion; financing activities provided $392.0 million. Cash and cash equivalents ended the year at $1.79 billion, down from $2.58 billion.
- Capital and liquidity: Company Tier 1 risk-based, total risk-based and leverage ratios were 13.29%, 14.04% and 8.72%, respectively. The Bank was categorized as well capitalized. Core deposits represented 94.9% of average deposits. The Company reported no outstanding FHLB advances or borrowings under its $25 million revolving credit line.
- Credit quality: Nonperforming loans were $27.4 million, down from $30.7 million; nonperforming assets were $27.8 million, down from $32.0 million. The allowance was $76.1 million, or 1.02% of loans, compared with $74.8 million, or 1.15%, in 2013. Net charge-offs were $15.6 million, versus $14.2 million.
Material changes versus the prior comparable period
- Net income fell 9.9% and diluted EPS fell from $3.20 to $2.65. Noninterest expense rose 6.8%, including a $20.3 million contingency reserve tied to a settlement over the Prairie Capital Management (PCM) acquisition earn-out and employee incentive calculation.
- Net interest income grew 5.0%, driven chiefly by higher average earning assets and loan growth. Average loans rose 12.1% to $7.0 billion, while net interest margin declined six basis points to 2.49%.
- Noninterest income increased 1.4%. Trust and securities processing income rose 8.3% to $288.1 million and bankcard fees rose 8.4% to $67.3 million; lower alternative-investment earnings and securities gains partly offset growth.
- Loans grew 14.5% year over year. Year-end deposits were nearly unchanged, while average deposits increased to $12.7 billion from $11.9 billion. Repurchase agreements and federal funds purchased at year-end increased to $2.03 billion from $1.58 billion.
- Available-for-sale securities had a $17.9 million net unrealized gain at year-end, compared with a $52.1 million net unrealized loss in 2013. The resulting after-tax accumulated other comprehensive position improved to a gain of $11.0 million from a loss of $32.6 million.
- Segment net income diverged: Bank fell 38.0% to $52.9 million; Payment Solutions rose 74.0% to $25.4 million; Institutional Investment Management rose 2.9% to $28.9 million; Asset Servicing rose 123.9% to $13.5 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management describes strategic priorities as growing fee-based businesses, expanding loans and deposits, improving operating efficiency, and managing capital.
- Management said a continued low-rate environment could negatively affect interest income; modeled gradual rate increases showed higher net interest income, but results depend on deposit pricing and other assumptions. The filing excludes a 100-basis-point falling-rate scenario because rates were already low.
- Approximately $1.2 billion of available-for-sale securities were expected to receive principal repayments during 2015, including about $335 million in Q1. Management anticipated a potential negative interest-income effect if rates remained at then-current levels.
- On December 15, 2014, UMB agreed to acquire Marquette Financial Companies in an all-stock transaction. The filing anticipated a mid-2015 close, subject to regulatory approval; approximately 3.4 million UMB shares, valued at about $182.5 million based on the stated reference price, were expected to be issued, subject to agreement terms.
- Key risks include interest-rate and credit exposure, competition, dependence on fee income and securities values, liquidity and funding pressures, regulatory change including Basel III and the Volcker Rule, operational and cyber risks, litigation, and acquisition execution. The Company said ordinary-course legal proceedings were not expected to have a material effect; management did not anticipate material losses from off-balance-sheet arrangements.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether loan growth and fee-income gains can offset margin compression and higher operating costs.
- The persistence and cash timing of the $20.3 million PCM settlement reserve, including remaining earn-out obligations and settlement payments.
- Credit trends behind loan growth, especially commercial and construction real estate exposure, charge-offs, criticized loans and allowance adequacy.
- Funding mix and liquidity resilience, including higher repurchase-agreement balances and the proportion of securities pledged as collateral.
- Marquette transaction approval, final consideration and share dilution, integration costs, and the acquired company’s asset quality and profitability.
- Exposure of capital and reported equity to Basel III requirements and changes in the fair value of the large available-for-sale securities portfolio.