UMB Financial Corporation — Q3 2018 Form 10-Q
Business context and reporting period
UMB Financial Corporation is a financial holding company providing banking and other financial services through four segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are primarily with the corresponding 2017 periods. Scout Investments was sold in November 2017, and its results are presented as discontinued operations.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $251.4 million | $245.2 million | +2.5% |
| Net interest income | $150.5 million | $140.9 million | +6.8% |
| Provision for loan losses | $5.8 million | $11.5 million | Lower by $5.8 million |
| Noninterest income | $100.9 million | $104.3 million | -3.3% |
| Noninterest expense | $180.4 million | $171.8 million | +5.0% |
| Income from continuing operations | $57.8 million | $48.9 million | +18.4% |
| Diluted EPS from continuing operations | $1.16 | $0.98 | Up $0.18 |
| Net interest margin, tax-equivalent | 3.18% | 3.16% | +2 basis points |
For the nine months, net interest income was $448.6 million (+8.7%), noninterest income was $306.7 million (-3.4%), noninterest expense was $533.5 million (+2.1%), and provision for loan losses was $22.8 million (down from $35.0 million). Income from continuing operations was $170.8 million (+25.9%); diluted continuing-operations EPS was $3.41 versus $2.72. Net income, including discontinued operations, was $170.1 million versus $135.1 million. The effective tax rate was 14.2%, compared with 21.4%, mainly reflecting the Tax Act and a $3.0 million discrete tax benefit.
At September 30, 2018, total assets were $21.46 billion, loans were $11.96 billion, investment securities were $7.28 billion, deposits were $17.74 billion, and shareholders’ equity was $2.20 billion. Compared with December 31, 2017, loans rose 6.1%, while assets declined 1.4% and deposits declined 1.6%. Long-term debt was $78.5 million; federal funds purchased and repurchase agreements totaled $1.19 billion. Capital ratios were 13.47% common equity Tier 1, 14.54% total risk-based capital, and 10.58% leverage.
Nine-month operating cash flow was $224.1 million, investing cash outflow was $540.0 million, and financing cash outflow was $415.6 million. Cash and cash equivalents ended the period at $984.7 million, down from $1.72 billion at the start of the year. The company reported $773 million of FHLB borrowing capacity and no outstanding FHLB advances; its $50 million revolving credit line also had no advances outstanding.
Material changes versus the prior comparable period
- Loan growth and higher rates lifted net interest income: average loans increased $807.4 million year over year in Q3. Deposit and borrowing costs also rose; the Q3 net interest spread narrowed 15 basis points even as tax-equivalent net interest margin edged up 2 basis points.
- Fee income declined, notably from lower bond trading, reduced asset-servicing revenue after the departure of a large client, customer repricing, and higher card rewards and rebates recorded against bankcard revenue. Brokerage fees and other income increased.
- Expenses grew faster than Q3 revenue, with increases in compensation, legal and consulting, marketing, processing, and technology-related costs. Management cited investment in digital platforms and core-system modernization.
- Credit indicators improved in several respects: nonperforming loans were $50.6 million, down from $59.1 million at year-end 2017; net charge-offs for the first nine months were $22.1 million versus $28.3 million. The allowance was $101.3 million, or 0.85% of loans, versus 0.89% at year-end.
- Accumulated other comprehensive loss widened to $155.6 million from $45.5 million at year-end, principally reflecting unrealized declines in available-for-sale securities. Management attributed the losses to interest-rate changes and said it did not intend, and did not expect to be required, to sell the securities before recovery.
Outlook, commentary, risks, and unusual items
Management emphasized operating efficiency, profitable loan and deposit growth, noninterest revenue diversification, and capital management. The filing gives no quantitative earnings or revenue guidance. Management noted that healthcare-services income may be affected by higher competition, industry consolidation, and interest rates. Interest-rate simulations indicate higher modeled net interest income in rising-rate scenarios and lower modeled income in falling-rate scenarios; results depend on assumptions, including deposit pricing.
Key risks disclosed include economic and political conditions, interest-rate and market changes, credit quality, deposit and liquidity management, competition and pricing, regulation, technology and cybersecurity, operational controls, and the ability to grow revenue while controlling costs. Available-for-sale securities of $4.8 billion were pledged or used as collateral; $1.6 billion of securities pledged at the Federal Reserve Discount Window were unencumbered at period-end. Off-balance-sheet commitments totaled approximately $9.8 billion, including loan commitments and letters of credit; many may expire undrawn.
The company repurchased 271,204 shares in Q3 at an average $74.50 per share and had a $50 million accelerated share repurchase agreement, expected to settle by the end of Q1 2019. The Board declared a $0.30 quarterly dividend payable January 2, 2019. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; no material risk-factor changes were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth can continue without deterioration in credit quality, and whether the 0.85% allowance remains adequate as the portfolio expands.
- Deposit pricing, deposit mix, and funding costs as interest rates change; Q3 interest expense rose substantially year over year.
- Whether recurring fee revenue offsets asset-servicing client loss, trading volatility, customer repricing, and card rewards costs.
- The scale and duration of unrealized securities losses, securities pledged as collateral, and potential liquidity needs from off-balance-sheet commitments.
- Execution and final share count under the $50 million accelerated repurchase agreement, alongside capital, dividend, and technology-investment priorities.
- Expected balance-sheet effects of adopting the lease accounting standard in 2019 and the still-under-evaluation impact of the expected-credit-loss standard.