UMB Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. UMB Financial is a financial holding company providing banking and other financial services across commercial, institutional, personal and healthcare businesses. Figures below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Financial performance and position
- Q3 revenue: Net interest income plus noninterest income was $271.9 million, up 8.2% from $251.4 million a year earlier. Net income was $62.4 million, up 7.8%; diluted EPS was $1.27 versus $1.16.
- Nine-month results: Net interest income was $498.5 million, up 11.1%; noninterest income was $316.4 million, up 3.2%. Net income from continuing operations was $177.1 million, up 3.7%, with diluted EPS of $3.61 versus $3.41.
- Margins and returns: Tax-equivalent net interest margin was 3.09% in Q3 (3.18% in Q3 2018) and 3.16% for nine months (3.20% in 2018). Q3 return on average assets was 1.03% and return on average equity was 9.69%, both below the year-earlier 1.11% and 10.32%.
- Expenses and credit costs: Q3 noninterest expense rose 6.1% to $191.4 million; the provision for loan losses rose to $7.5 million from $5.8 million. For nine months, noninterest expense increased 7.9% to $575.4 million and provision increased to $30.9 million from $22.8 million.
- Loans and asset quality: Loans were $13.04 billion at September 30, up 7.1% from year-end 2018. Nonperforming loans rose to $71.8 million from $43.0 million at year-end; nonperforming loans were 0.55% of loans versus 0.35%. The allowance was $107.4 million, or 0.82% of loans, compared with 0.85% at year-end. Nine-month net charge-offs increased to $27.1 million from $22.1 million.
- Balance sheet, funding and debt: Total assets were $24.14 billion, up 3.4% from year-end. Deposits were $19.31 billion, approximately flat with year-end; federal funds purchased and repurchase agreements were $1.79 billion, up from $1.52 billion. Long-term debt was $87.0 million. Shareholders’ equity was $2.56 billion, versus $2.23 billion at year-end.
- Cash flow: Nine-month operating cash flow was $190.5 million, compared with $224.1 million in 2018. Investing activities used $1.33 billion, largely reflecting loan growth and securities purchases; financing activities provided $258.7 million. Cash and cash equivalents ended at $793.0 million, down from $1.67 billion at the start of the period.
- Capital and liquidity: Total risk-based capital ratio was 13.51%, common equity Tier 1 was 12.53%, and leverage ratio was 9.62%; management stated capital exceeded regulatory requirements. The company reported $1.2 billion of FHLB borrowing capacity and no FHLB advances outstanding. Its $50 million revolving credit line also had no advances outstanding.
Material changes versus comparable periods
- Q3 net interest income increased 11.8%, supported by higher average earning assets and loan growth; higher funding costs partly offset the benefit. Average loans rose about $1.2 billion, or 10%, year over year, while Q3 net interest margin contracted by nine basis points.
- Q3 noninterest income increased 2.7%, with stronger trust and securities processing, trading and investment banking, brokerage, and realized securities gains. For nine months, bankcard fees declined 3.3%, while trading and brokerage income increased.
- Q3 noninterest expense rose 6.1%, notably from salaries and benefits, processing, and other costs. Management cited higher derivative expense and operating losses among drivers of the increase in other expense.
- Nonperforming loans and nonperforming assets increased from year-end 2018, while the allowance-to-loans ratio declined. Commercial and commercial real estate loans grew, and factoring balances fell year over year.
- Accumulated other comprehensive income shifted from a $95.8 million loss at year-end 2018 to $96.0 million of income, mainly reflecting improved unrealized gains on available-for-sale securities. This contributed to the increase in reported equity.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management describes priorities of improving operating efficiency, growing profitable loans and deposits, expanding fee income, and managing capital prudently; results may not indicate full-year performance.
- Interest-rate exposure: Management characterized the company as slightly asset-sensitive in most modeled scenarios, but slightly liability-sensitive in first-year rising-rate ramp scenarios. Simulations are assumption-dependent. Management also noted that deposit-pricing assumptions may overstate interest expense in rising-rate environments.
- Credit and regulatory risks: Key risks include economic and borrower deterioration, loan concentrations and charge-offs, interest-rate and liquidity changes, regulatory or legal developments, competition, operational and cyber risk, and the company’s ability to control costs and attract deposits. The allowance for credit losses standard (CECL) was scheduled for adoption in 2020; management was evaluating its impact and said adoption could increase the allowance.
- Commitments and contingencies: Off-balance-sheet commitments included $7.06 billion of loan commitments excluding credit cards, $3.08 billion of credit-card commitments, and $304.6 million of standby letters of credit. The company noted many commitments may expire undrawn. Management did not expect ordinary-course litigation to materially affect financial position, results or cash flows; no material risk-factor changes were reported.
- Accounting and other items: Adoption of lease accounting in January 2019 added a $58.2 million right-of-use asset and $63.0 million lease liability initially; September balances were $68.5 million and $74.6 million. Q3 included $3.1 million of securities sale gains. The filing reports no discontinued-operations loss in 2019; 2018 nine-month results included a $0.7 million after-tax loss related to discontinued operations.
- Shareholder returns: The quarterly dividend was $0.30 per share in Q3; the board subsequently declared $0.31 payable January 2, 2020. The company repurchased 3,302 shares during Q3 at an average $66.94 per share.
Important facts for investors to verify
- Whether the increase in nonperforming loans, net charge-offs and commercial real estate criticized loans continues, and whether the allowance remains adequate as loan growth proceeds.
- Whether loan and deposit growth can sustain net interest income while deposit costs and net interest margin face pressure.
- Whether expense growth—particularly compensation, technology and processing costs—moderates and operating leverage improves.
- The effects of market values, pledged securities and interest-rate movements on liquidity, securities-related AOCI and earnings.
- The eventual CECL transition impact and any resulting change to the allowance, capital or reported earnings.