UMB Financial Corporation — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2017. UMB provides banking and financial services; its reportable segments are Bank and Asset Servicing. Scout Investments was classified as discontinued operations following an April 20, 2017 agreement to sell it.
Financial performance and condition
| Metric | Q2 2017 / June 30, 2017 | Comparable period / change |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $247.7 million | $224.0 million in Q2 2016; up 10.6% |
| Net interest income | $137.4 million | $121.2 million; up 13.4% |
| Net interest margin, tax-equivalent | 3.12% | 2.86%; up 26 basis points |
| Noninterest income | $110.3 million | $102.8 million; up 7.3% |
| Noninterest expense | $176.9 million | $168.4 million; up 5.1% |
| Provision for loan losses | $14.5 million | $7.0 million in Q2 2016 |
| Continuing-operations income | $44.8 million; diluted EPS $0.90 | $36.5 million; diluted EPS $0.74 |
| Net income, including discontinued operations | $42.8 million | $37.5 million |
| Return on average assets / equity | 0.88% / 8.69% | 0.75% / 7.41% |
For the six months ended June 30, continuing-operations income was $86.7 million versus $70.8 million in 2016; diluted EPS was $1.74 versus $1.44. Net interest income rose 13.6%, and noninterest income rose 6.2%. Net income was $87.0 million versus $73.9 million.
- Balance sheet: Total assets were $20.35 billion, down 1.6% from December 31, 2016. Loans were $10.85 billion, up 2.9%; deposits were $16.10 billion, down 2.9%. Shareholders’ equity was $2.07 billion.
- Credit: Allowance for loan losses was $97.8 million, or 0.90% of loans, compared with 0.84% a year earlier. Six-month net charge-offs were $17.4 million versus $8.5 million. Nonperforming loans were $51.4 million, down from $70.3 million at year-end 2016; nonperforming loans were 0.47% of loans.
- Cash flow and liquidity: Six-month operating cash flow was $119.2 million. Cash and cash equivalents fell $402.4 million to $661.6 million, with net financing cash outflow of $464.6 million. Available-for-sale securities totaled $6.23 billion; $5.3 billion was pledged, including $1.8 billion pledged at the Federal Reserve Discount Window but unencumbered. The company reported $1.3 billion of FHLB borrowing capacity and no FHLB advances outstanding.
- Debt and capital: Federal funds purchased and repurchase agreements totaled $1.89 billion; long-term debt was $76.1 million. Total risk-based capital ratio was 13.32%, common equity tier 1 ratio 12.22%, and leverage ratio 9.28%; the filing states capital exceeded regulatory requirements.
Material changes versus prior periods
- Revenue and continuing-operations earnings increased, supported by loan growth, improved asset yields, and higher fee income. Average loans were up 9.4% year over year in Q2; management attributed the margin improvement to rates, volume, and asset mix.
- Funding costs rose: Q2 interest expense increased to $13.8 million from $6.7 million, including higher deposit and repurchase-agreement costs.
- Credit costs increased substantially. Q2 provision doubled year over year, and six-month net charge-offs more than doubled, although reported nonperforming loans declined from year-end.
- Noninterest expense increased 5.1%, with higher salaries and benefits, technology and equipment, processing, and legal and consulting costs. Management cited regulatory, cybersecurity, and core-system modernization investments.
- The company agreed to sell Scout for $172.5 million cash, subject to customary purchase-price adjustments at closing. Scout’s results were presented as discontinued operations; Q2 discontinued operations recorded a $2.0 million net loss.
Outlook, risks, and unusual items
- The filing provides no specific earnings or full-year financial guidance. Management described continued priorities of operating efficiency, profitable loan and deposit growth, fee-income expansion, and capital management.
- Interest-rate simulations indicated relatively neutral positioning over the next year: a 100-basis-point gradual increase was modeled to reduce net interest income by 0.9% in year one, while a 300-basis-point gradual increase was modeled to raise it by 0.9%. Results depend on modeling assumptions, including deposit repricing.
- Key stated risks include economic and market conditions, interest rates, credit quality, liquidity and deposit funding, regulatory change, competition, cybersecurity and technology operations, and execution of acquisitions or dispositions.
- Off-balance-sheet commitments included $6.36 billion of loan commitments excluding credit cards, $2.92 billion of credit-card commitments, and $321.3 million of standby letters of credit. The company notes many commitments may expire undrawn.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether the Scout sale closed, final proceeds after purchase-price adjustments, and the use of proceeds.
- Whether loan-loss provisions and charge-offs remain elevated, particularly in commercial lending, and how allowance coverage develops.
- Whether loan growth and higher asset yields continue to outpace deposit and wholesale funding-cost increases.
- Whether deposit outflows, pledged securities, and customer commitments change the company’s liquidity position.
- Whether technology, regulatory, cybersecurity, and personnel costs continue to rise, and whether management’s efficiency initiatives offset them.