UMB Financial: A Look at a Super Regional Bank

We entered into a long position in UMB Financial Corporation (NASDAQ:UMBF) towards the end of July 2011 because we were impressed with the results of the company from 2004-2010 and because it didn’t need a bailout, nor was it dragooned into taking TARP.  We think it is ridiculous for the Federal Reserve to include banks like UMB Financial Corporation (NASDAQ:UMBF) as part of the stress test because UMB Financial is a well-respected, steady-growing superregional banking and diversified financial services. Headquartered in Kansas City, it has a conservative, credit risk management oriented and deposit gathering centric business model.  UMB is also a well-capitalized bank with Tier One, Leverage and Total Risk-Based Capital Ratios of 11.69%, 7.15%, and 12.62% respectively.

UMB Financial Corporation (NASDAQ:UMBF) knocked the ball out of the park in Q1 2012 and Q2 2012, although Q3 2012 results missed expectations due to higher marketing and salary expenses.  We’ll give UMB the benefit of the doubt on this since these expenses are being used to build and develop the company’s operations; we expect this to translate into future revenue growth.  UMB achieved Q3 2012 quarterly net income of $26.125M, or $0.64 per share.  Non-Interest income grew by 5.3% and continues to drive UMB’s revenue and profit performance. UMB Financial Corporation (NASDAQ:UMBF) generated quarterly revenue of over $165M in Q3 2012 and was $5M shy of $500M in YTD 2012 revenue.

Despite facing a flattening yield curve, the company still managed to increase Net Interest Income by 1.63% versus Q3 2011.  This was due to increased earning assets and a continued reduction of Treasury Securities in favor of higher-yield municipal and other credit securities.  Non-Interest Income increased by 5.3% and this was driven by an 11.78% increase in revenue from its investment markets activities (asset management, asset servicing, brokerage, wealth management and I-Banking).  If we stripped out the change in nonrecurring gains from the sale of fixed income securities, non-interest income increased by 7.6%.  Although UMB saw an 8.9% decrease in bankcard fees due to headwinds from the Durbin Amendment limiting how much can be charged on PIN Debit transactions, we see that purchase volume across UMB’s entire suite of card products increased 38.6% to a record $1.83 billion when compared to the third quarter of 2011.

At the beginning of the year, UMB Financial Corporation (NASDAQ:UMBF) realigned its business reporting segments. They are as follows:

  • Institutional Investment Management (Scout Investments, Inc)
  • Asset Servicing (UMB Fund Services)
  • Payment Solutions (UMB’s card services business, institutional cash management and healthcare services)
  • UMB Bank, (commercial/consumer banking, wealth management, brokerage and investment banking)

Scout Investments’ Institutional Investment Management Fees increased by 14.8% versus Q3 2011 and were $24.8M in Q3 2012.  Scout had positive operating leverage as operating expenses only increased by 2.3% and this enabled pre-tax income to increase 58.3% to $7.6M in Q3 2012 versus $2.8M in Q3 2011.  Scout benefited from stronger capital markets during the quarter, which was offset by $600M in outflows relating to a client that changed its fixed income asset management strategy from core fixed income to a liability-driven-investment style and ultimately chose another manager pursuant to a consultant’s decision.  Scout ended the quarter with $22.6B in AUM, up 14% from Q1 2011.  Scout had $15.4M in positive fund flows from its equity mutual funds, $36.2M from its equity separate accounts and $58.5M from its fixed income mutual funds.  Scout generated a 30.65% operating margin and this was higher than State Street Global Advisors even though SSgA has 90X as much AUM as Scout.  In Q3, Scout released the Scout Low Duration Fund and in Q4, it released the Scout Emerging Markets Debt Fund.

Source: UMB’s Q3 2012 Earnings Call

UMB Fund Services Asset Servicing Fees increased by 6.9% versus Q3 2011 and were $18.7M in Q3 2012.  UMBFS assets under administration were $150B in Q3 2012, up 1.83% from Q3 2011 and down 20% from Q3 2011.  The decline in year-over-year asset levels was due to the defection of an $80B low-revenue custody-only legacy client that went to BNY Mellon (BK) because Mellon offered a much lower price and UMBFS has focused its business on pursuing asset management boutique.  Despite this client loss, Asset Servicing’s pre-tax income jumped by $931K (120.8%) and reached $1.7M in the quarter.  Pre-tax margin increased from 4.4% in Q3 2011 to 9.1% in Q3 2012.  Non-interest expenses increased by only 1.6% to $17M compared with $16.7M in Q3 2011.  This was driven by new higher margin clients replacing the low-margin legacy client as well as UMBFS’s new multiple series trust product.  Revenues actually increased by almost 6.9% even with the absence of this client’s assets in the current quarter.

Source: UMB’s Q3 2012 Earnings Call

UMBF’s Payment Solutions Business’s results faced negative headwinds due to the Dodd-Frank law’s Durbin Amendment taking effect in Q4 2011.  The business had operating income of $6.2M versus $9M in Q3 2011, a decrease of 31.2%.  Expenses and payment solutions include payment processing fees, which fluctuates based on transaction volumes. As the total number of credit and debit card accounts grows, the transactions and spending related to these accounts will drive additional processing fees. Also impacting non-interest expense for the segment this quarter were additional salary and benefit expense for newly added sales and operational positions, consulting and legal fees related to new products and services, and a timing difference of cash payments and accruals related to advertising initiatives. The pre-tax profit margin for payment solutions was 23.6% for the third quarter. UMB’s commercial credit card customers increased spending by 9.7% over the same period last year. Purchase volume in this area has grown consistently and commercial credit cards provided 45% of interchange revenue during the quarter and this represents the largest portion of UMB’s interchange revenue. UMB Financial Corporation (NASDAQ:UMBF) continues to develop new relationships, build pipeline strength and look at innovative products and technologies in the payment space.

On October 11th, UMB Financial Corporation (NASDAQ:UMBF) successfully launched a new technology called ePlate, an electronic payment device that allows the consumer to choose real time tangible rewards programs. Moving now to Healthcare Services, deposits in its custody accounts stood at $395.8 million at quarters’ end – an increase of 34.6% compared to the third quarter of 2011. Flexible spending arrangements in health saving accounts totaled 2.3 million, representing a 12% increase from a year ago. UMB had another strong quarter in the business with purchase volumes of $448 million, an increase of 13.8% over the same period last year.  Interchange revenue from healthcare card purchases increased 18.3% over last year to $1.8 million. Healthcare services continues to be a reliable, strategic and low cost source of deposits and a growing source of debit card interchange for the bank.

UMB Financial Corporation (NASDAQ:UMBF) is known for strong credit quality and the quality of its card portfolio is certainly no exception. Credit card quality remains superior to industry averages and has improved over the past

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