UMB Financial Corporation — Q1 2016 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2016; balance-sheet comparisons are primarily with December 31, 2015. UMB is a financial holding company providing banking and financial services across multiple U.S. states. The quarter includes Marquette Financial Companies, acquired May 31, 2015, so year-over-year comparisons reflect the acquisition as well as organic performance. All dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2016 | Comparable / prior date |
|---|---|---|
| Net interest income | $117.9 | $90.4 in Q1 2015 |
| Noninterest income | $116.4 | $125.2 in Q1 2015 |
| Total revenue (net interest income plus noninterest income) | $234.2 | $215.6 in Q1 2015 |
| Provision for loan losses | $5.0 | $3.0 in Q1 2015 |
| Noninterest expense | $180.7 | $164.4 in Q1 2015 |
| Income before taxes | $48.5 | $48.2 in Q1 2015 |
| Net income | $36.2 | $33.8 in Q1 2015 |
| Basic / diluted EPS | $0.74 / $0.74 | $0.75 / $0.74 in Q1 2015 |
| Tax-equivalent net interest margin | 2.79% | 2.46% in Q1 2015 |
| Return on average assets / equity | 0.75% / 7.51% | 0.81% / 8.18% in Q1 2015 |
- Net interest income rose 30.5%, supported by Marquette and loan growth; average earning assets increased 14.2% year over year to $18.0 billion. Management cited favorable volume and asset-yield effects, with liabilities repricing more slowly.
- Noninterest income fell 7.1%, chiefly because Scout Funds advisory income declined $7.6 million and securities-sale gains fell $4.4 million. Noninterest expense rose 9.9%, including higher salaries, technology and other costs.
- Loans were $9.70 billion, up 2.9% from year-end; deposits were $15.42 billion, up 2.2%. Total assets were $19.30 billion and shareholders’ equity was $1.95 billion at March 31.
- Cash and cash equivalents ended the quarter at $599.1 million, down from $819.1 million at the start of the period. Operating cash flow was $27.7 million; investing cash flow was negative $412.4 million, including a $274.1 million net increase in loans; financing cash flow was positive $164.6 million.
- Federal funds purchased and repurchase agreements were $1.68 billion; short-term debt was $5.0 million and long-term debt was $85.2 million. The company reported $15.0 million of acquired FHLB San Francisco advances and no FHLB of Des Moines advances; available Des Moines borrowing capacity was $563.4 million. A $50 million revolving credit line had no balance outstanding.
- Common equity Tier 1 and Tier 1 risk-based capital ratios were 11.80%; total risk-based capital was 12.85%, and leverage was 8.78%. These ratios exceeded stated regulatory requirements, though risk-based ratios were lower than a year earlier.
Material changes versus the prior comparable period
- Net income increased 7.3%, but basic EPS declined from $0.75 to $0.74; weighted-average basic shares rose to 48.8 million from 45.0 million, reflecting the Marquette stock issuance and other share activity.
- Average loans increased 27.8% year over year. Marquette-acquired loans totaled $997.9 million at March 31, 2016; management attributed the remainder of year-over-year loan growth to legacy UMB channels.
- Net charge-offs rose to $5.7 million from $1.7 million. Nonperforming loans were $54.9 million, or 0.57% of loans, versus $29.2 million, or 0.39%, at March 31, 2015; they improved from $61.2 million at year-end. Restructured loans were $46.1 million versus $7.7 million a year earlier.
- The allowance for loan losses was $80.4 million, or 0.83% of loans, versus $77.5 million, or 1.03%, a year earlier. The lower coverage ratio accompanies higher year-over-year nonperforming loans and net charge-offs and merits monitoring.
- Institutional Investment Management net income fell to $0.9 million from $6.4 million, with assets under management declining to $27.3 billion from $30.6 billion. Asset Servicing net income increased to $3.7 million from $2.2 million.
- Other comprehensive income was $36.2 million, lifting accumulated other comprehensive income to $32.5 million from a $3.7 million loss at year-end; the increase chiefly reflected unrealized securities gains.
Outlook, commentary, risks and unusual items
- Management identified $32.9 million of annual savings expected over coming quarters from position reductions and process improvements; this estimate excludes additional anticipated Marquette integration savings. The filing provides no formal earnings or revenue guidance.
- The company repurchased 269,522 shares at an average $47.79 during Q1 and announced a new authorization for up to two million shares through April 25, 2017. The board declared a $0.245-per-share dividend payable July 1, 2016.
- Marquette integration and acquisition-related expenses were $3.0 million in Q1, including severance and legal and consulting costs. Management also reorganized reporting segments, combining Payment Solutions into Bank.
- Management expects the company to benefit from rising interest rates in its modeled scenarios, subject to assumptions including deposit pricing. A 100-basis-point falling-rate scenario was not modeled because rates were already low. These simulations are estimates and depend on assumptions.
- Risk factors include economic and market conditions, interest-rate and liquidity movements, credit quality, regulatory change, competition, cybersecurity and operational controls, and successful integration of acquisitions. Management reported disclosure controls were effective; Marquette-related control integration remains underway. Routine legal proceedings were not expected to have a material adverse effect.
- Most available-for-sale securities were pledged or used as collateral: $5.7 billion, or 82.5% of the portfolio. The filing states $1.5 billion pledged at the Federal Reserve Discount Window was unencumbered at quarter-end. Customer commitments and letters of credit totaled approximately $9.8 billion, but may not be drawn in full.
Important facts for investors to verify
- Whether the projected $32.9 million in annual savings is achieved, on what timetable, and with what implementation or restructuring costs.
- Whether loan growth, net interest margin and deposit mix can be sustained as interest rates and funding costs change.
- Trends in charge-offs, nonperforming and restructured loans, allowance coverage, and credit exposures associated with Marquette and commercial real estate.
- Whether Scout Funds assets under management and related advisory revenue stabilize or recover, and the impact of market performance and fund flows.
- How share repurchases, dividends, liquidity needs, pledged securities and capital ratios evolve alongside loan growth and acquisition integration.
- The effect and implementation timing of pending accounting standards; management had not yet determined the impact or selected a transition method for certain new standards.