UMB Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. UMB is a financial holding company providing banking and related financial services. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Net interest income | $150.2m | $137.4m | +9.3% |
| Noninterest income | $100.3m | $110.3m | -9.1% |
| Total revenue | $250.5m | $247.7m | +1.1% |
| Provision for loan losses | $7.0m | $14.5m | -$7.5m |
| Noninterest expense | $177.2m | $176.9m | +0.2% |
| Income from continuing operations | $55.4m | $44.8m | +23.8% |
| Net income | $55.4m | $42.8m | +29.4% |
| Diluted EPS from continuing operations | $1.11 | $0.90 | — |
| Tax-equivalent net interest margin | 3.24% | 3.12% | +12 bps |
For the six months ended June 30, continuing-operations income was $113.0m versus $86.7m, and diluted continuing-operations EPS was $2.26 versus $1.74. The effective tax rate declined to 15.6% from 21.6%, primarily reflecting the Tax Act. Q2 return on average assets was 1.08% and return on average equity was 10.18%, compared with 0.88% and 8.69%.
Balance sheet, funding and liquidity
- At June 30, assets were $20.53bn, down 5.7% from December 31, 2017, largely reflecting a $1.2bn reduction in Federal Reserve balances. Loans were $11.63bn, up $351m (3.1%) from year-end and 7.2% year over year.
- Total deposits were $16.39bn, down $1.64bn (9.1%) from year-end. Federal funds purchased and repurchase agreements were $1.67bn, up from $1.26bn at year-end; long-term debt was $78.7m.
- Cash and cash equivalents were $472.4m at period-end, versus $1.72bn at year-end. For the first six months, operating cash flow was $98.8m, investing cash outflow $82.8m, and financing cash outflow $1.26bn; financing outflows included deposit reductions.
- Shareholders’ equity was $2.20bn. The total risk-based capital ratio was 14.63%, common equity Tier 1 ratio 13.56%, and leverage ratio 10.50%; the filing says capital ratios exceeded regulatory requirements.
- Available-for-sale securities were $6.01bn, with $5.0bn pledged or used as collateral. The company reported $513.5m of borrowing capacity at the FHLB of Des Moines and no outstanding FHLB advances.
Material changes and management commentary
- Net interest income growth reflected higher rates, loan growth and earning-asset mix. Average loans increased 5.8% year over year in Q2. Net interest spread was unchanged; the 12-basis-point NIM increase included an approximately 11-basis-point effect from the lower tax-equivalent rate following the Tax Act.
- Noninterest income declined, principally from lower bond trading and securities gains, customer repricing, the exit of a large asset-servicing client, and higher card rewards and rebates recorded against revenue. Q2 bankcard fees fell 15.1% and trust and securities-processing fees fell 4.4% year over year.
- Expenses were broadly stable in Q2. Higher technology, cybersecurity, regulatory and core-system investment costs were partly offset by lower expenses in other categories.
- Provision expense was lower than in 2017, although six-month net charge-offs increased to $19.3m from $17.4m. The allowance was $98.3m, or 0.85% of loans, versus 0.90% a year earlier.
- Scout Investments was sold in November 2017 for approximately $172.5m; its results are presented as discontinued operations. The sale generated a reported gain of $103.6m in 2017.
- The company declared a $0.29 quarterly dividend payable October 1, 2018. It repurchased 3,373 shares in Q2 at an average $77.04 per share.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management describes ongoing priorities as operating efficiency, profitable loan and deposit growth, noninterest-revenue growth and capital management.
- Interest-rate simulations indicate sensitivity depends on the pace and size of rate changes and deposit pricing. Under modeled gradual increases, net interest income is projected to dip in year one; under immediate shocks, results vary by scenario. These are estimates dependent on assumptions, not guidance.
- Key disclosed risks include economic and market conditions, interest rates, credit quality, deposit attraction and liquidity management, competition and pricing, cybersecurity and technology resilience, regulatory requirements, and operational and reputational risks.
- Off-balance-sheet commitments totaled approximately $9.5bn, mainly loan commitments and letters of credit; many may expire undrawn. Management stated that pending legal proceedings were not expected to materially adversely affect the company. No material change to previously reported risk factors was disclosed.
- Available-for-sale securities had $176.6m of gross unrealized losses at June 30, compared with $89.3m at year-end, attributed primarily to interest-rate changes. Management said it did not intend, and did not expect to be required, to sell them before recovery of amortized cost.
Important facts for investors to verify
- Whether deposit outflows and increased reliance on repurchase-agreement funding persist, and how they affect funding costs and liquidity.
- Whether loan growth, credit quality, net charge-offs and the allowance remain consistent with management’s loss assumptions.
- Whether lower fee income—particularly asset servicing, trading and bankcard revenue—stabilizes or continues to weaken.
- How rising rates affect deposit pricing, net interest margin and unrealized securities losses; review the assumptions behind the interest-rate simulations.
- Whether planned technology and cybersecurity spending produces operating efficiencies without sustained expense growth.