UMB Financial Corporation — Q2 2016 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015 unless noted. UMB is a financial holding company with banking, institutional investment management and asset servicing businesses. Comparisons are affected by the May 2015 Marquette acquisition, which contributed for a full period in 2016 but only from May 31 in the 2015 comparison.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net interest income | $121.2 | $97.4 | $239.1 | $187.7 |
| Provision for loan losses | $7.0 | $5.0 | $12.0 | $8.0 |
| Noninterest income | $121.4 | $119.6 | $237.8 | $244.8 |
| Noninterest expense | $185.2 | $172.0 | $366.0 | $336.4 |
| Net income | $37.3 | $30.2 | $73.5 | $64.0 |
| Diluted EPS | $0.76 | $0.65 | $1.50 | $1.39 |
| Tax-equivalent net interest margin | 2.86% | 2.59% | 2.82% | 2.53% |
- Q2 net income rose 23.4%; first-half net income rose 14.9%. Q2 return on average assets/equity was 0.77%/7.58%, versus 0.70%/6.95%; first-half ratios were 0.76%/7.54%, versus 0.75%/7.55%.
- Q2 net interest income increased 24.5% and first-half income increased 27.4%. Management attributed the increase mainly to loan growth, higher average earning assets and improved loan yields; Marquette also added scale. Average earning assets rose 13.2% in Q2 and 13.7% in the first half year over year.
- Noninterest income increased 1.6% in Q2 but declined 2.8% for the first half. Trust and securities processing fell 11.3% in Q2 and 11.5% year to date, primarily reflecting lower Scout Funds advisory fees and assets under management. Higher brokerage, deposit service, securities gains and alternative-investment results partly offset declines.
- Expenses increased 7.7% in Q2 and 8.8% in the first half, led by salaries and benefits, equipment, regulatory fees and other costs. First-half Marquette acquisition expenses were $4.0 million.
Financial position, liquidity and credit
- At June 30, total assets were $19.73 billion, loans $10.08 billion, investment securities $7.77 billion, deposits $15.65 billion and shareholders’ equity $2.00 billion. Since year-end, assets grew 3.4%, loans 6.9% and deposits 3.7%. Loans grew $652.5 million, including commercial real estate growth of $322.4 million.
- Cash and cash equivalents were $625.8 million at June 30, down from $819.1 million at the start of the year. First-half operating cash flow was $82.2 million; investing activities used $769.3 million, principally reflecting loan growth and securities purchases; financing activities provided $493.8 million, primarily from demand and savings deposit growth.
- Borrowed funds totaled $1.88 billion, including $1.79 billion in federal funds purchased and repurchase agreements; long-term debt was $85.3 million. UMB reported $561.3 million of FHLB of Des Moines borrowing capacity and no outstanding advances there. It had $15.0 million of FHLB San Francisco advances at quarter-end and prepaid $10.0 million in July 2016.
- Available-for-sale securities totaled $6.77 billion; $5.5 billion, or 81.9%, were pledged or used as collateral. Of that amount, $1.5 billion pledged at the Federal Reserve Discount Window was unencumbered at quarter-end. Management cited core deposits, scheduled asset cash flows, securities and borrowing facilities as liquidity sources.
- Total risk-based capital was 12.70%; common equity tier 1 and tier 1 risk-based ratios were each 11.65%, and the leverage ratio was 8.91%. The company reported these ratios exceeded regulatory requirements. The quarterly dividend was $0.245 per share; the board authorized repurchases of up to two million shares, and 12,352 shares were repurchased in Q2.
- Nonperforming loans were $58.4 million, or 0.58% of loans, versus $37.6 million and 0.42% a year earlier; they were down from $61.2 million at year-end. The allowance was $84.7 million, or 0.84% of loans, and covered nonperforming loans 1.45 times. First-half net charge-offs were $8.5 million, up from $6.4 million in 2015. Loans more than 90 days past due declined to $4.7 million from $7.6 million a year earlier.
Material changes, outlook and risks
- Management identified $32.9 million of annual savings expected from organizational changes and process improvements; this excludes additional Marquette integration savings. The filing gives no quantified earnings or revenue guidance.
- Interest-rate simulations indicate higher net interest income under rising-rate scenarios. Management cautioned that results depend on assumptions, including deposit pricing; it did not model a 100-basis-point decline because rates were already low.
- Market-sensitive fee income is exposed to securities-market movements. Scout assets under management were $28.1 billion, down from $30.0 billion a year earlier; asset servicing assets under administration were $182.3 billion, down from $203.1 billion. Management noted these declines weighed on fees.
- Key stated risks include economic and market conditions, interest and currency rates, credit quality, deposit and liquidity management, regulation, competition, cybersecurity and operational controls, and the ability to integrate acquisitions and control costs. The company reported effective disclosure controls; Marquette systems integration remained ongoing. Management said routine legal proceedings were not expected to be material and reported no material change in previously disclosed risk factors.
- Unusual and accounting items include a sharp rise in accumulated other comprehensive income to $55.3 million from a $3.7 million loss at year-end, largely reflecting unrealized securities gains. Management attributed unrealized losses on securities to interest-rate changes and said it did not intend, and did not expect to be required, to sell them before recovery. The company was evaluating several future accounting standards, including expected credit losses, without yet quantifying their financial-statement impact.
Investor verification points
- Separate Marquette-related growth and expenses from underlying organic trends, especially in loans, net interest income and operating costs.
- Track deterioration or stabilization in nonperforming loans, charge-offs, allowance coverage and criticized commercial real estate credits.
- Assess whether Scout and asset-servicing fee declines persist and whether fee growth can offset continued expense increases.
- Review the amount and availability of unpledged liquidity, deposit composition, repurchase-agreement funding and the implications of pledged securities.
- Verify delivery and timing of the planned $32.9 million annual savings and additional Marquette integration benefits; the filing does not provide a specific realization schedule.
- Monitor interest-rate sensitivity assumptions, capital ratios, share repurchases and the effects of new accounting standards, particularly the expected-credit-loss model.