UMB FINANCIAL CORP annual report, FY2016

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UMB Financial Corporation — 2016 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. UMB is a diversified financial holding company offering banking, institutional investment management, and asset servicing. Comparisons below are primarily with 2015.

Financial performance and position

  • Revenue: Net interest income was $495.3 million, up 20.2%; noninterest income was $476.1 million, up 2.1%. Combined revenue was approximately $971.4 million, up 10.6%.
  • Earnings: Net income was $158.8 million, up 36.8%; diluted EPS was $3.22 versus $2.44. The effective tax rate declined to 23.3% from 27.1%. Fourth-quarter net income was $42.9 million versus $29.6 million in fourth-quarter 2015.
  • Margins and returns: Tax-equivalent net interest margin rose to 2.88% from 2.64%. Return on average assets was 0.81% versus 0.65%; return on average equity was 8.01% versus 6.43%.
  • Expenses and credit costs: Noninterest expense increased 4.0% to $731.9 million, led by salaries and benefits. Provision for loan losses more than doubled to $32.5 million. Net charge-offs were $22.0 million, up from $10.5 million.
  • Balance sheet: Total assets were $20.7 billion, up 8.3%; loans were $10.5 billion, up 11.8%; deposits were $16.6 billion, up 9.8%. Shareholders’ equity was $2.0 billion. Long-term debt was $76.8 million, down from $86.1 million; federal funds purchased and repurchase agreements totaled $1.86 billion.
  • Cash flow: Operating activities provided $296.4 million, compared with $211.9 million. Investing activities used $1.50 billion, mainly reflecting loan growth and securities purchases; financing activities provided $1.45 billion, including deposit growth. Cash and cash equivalents ended at $1.06 billion.
  • Capital and liquidity: Company total risk-based capital ratio was 12.87% and leverage ratio 9.09%; the Bank was categorized as well capitalized. The Company reported $505.9 million of available FHLB borrowing capacity and no FHLB advances outstanding. A $75 million revolving credit line was also undrawn.

Material changes versus 2015

  • Loan growth and a higher earning-asset yield drove most of the increase in net interest income; average loans rose 18.6%. Management also attributed growth to the first full year of Marquette acquisition assets in the results.
  • Credit indicators were mixed: nonperforming loans rose to $70.3 million from $61.2 million, and restructured loans increased to $52.5 million from $36.6 million. Loans past due more than 90 days fell to $3.4 million from $7.3 million. The allowance was $91.6 million, or 0.87% of loans, versus $81.1 million, or 0.86%.
  • Trust and securities processing income fell 8.5% to $239.9 million, including lower Scout fund advisory fees. Scout assets under management edged up to $27.3 billion, but the mix shifted toward fixed income. Institutional Investment Management net income fell 90.7% to $1.6 million; Asset Servicing net income rose 16.1% to $14.4 million.
  • Available-for-sale securities had a $92.2 million net unrealized loss at year-end versus $5.9 million in 2015, primarily reflecting higher market interest rates. The after-tax loss in accumulated other comprehensive income was $57.5 million.
  • The Company reorganized reporting in 2016 by combining Payment Solutions with the Bank segment. It also repurchased 323,058 shares during the year and paid $49.0 million in dividends.

Outlook, commentary, risks and unusual items

  • Management emphasized operating efficiency, profitable loan and deposit growth, noninterest revenue, and capital management. Of $32.9 million in annualized savings identified in 2015, all but $3 million had been recognized by year-end 2016; the remainder was expected to phase in during 2017. The filing provides no specific earnings or revenue guidance.
  • Management said the Company was positioned to benefit from rising rates; modeled net interest income increased under rising-rate scenarios. Results depend on deposit pricing and other modeling assumptions. A 100-basis-point falling-rate scenario was not modeled because rates were already low.
  • Management expected approximately $1.1 billion of available-for-sale securities principal repayments during 2017, including $386 million in the first quarter. These are expectations, not a formal earnings forecast.
  • Key risks include interest-rate and securities-value volatility, worsening credit or real-estate conditions, deposit and funding pressures, regulatory requirements, competition, operational and cyber risks, and dependence of fee income on market levels and assets under management or administration. About 37.1% of loans were commercial real estate and construction real estate combined.
  • Unusual items include the higher 2016 loan-loss provision; alternative-investment results swung from a $12.2 million loss in 2015 to $2.7 million of earnings in 2016; and 2014 included a $20.3 million contingency reserve related to a settlement involving PCM earn-out and incentive calculations. The 2016 tax rate also benefited from tax credits and life-insurance-related income.
  • Management stated that routine legal proceedings were not expected to materially affect financial position, results, or cash flows. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Whether loan growth, especially in commercial real estate and construction, is accompanied by stable delinquencies, nonperforming loans, charge-offs, and allowance adequacy.
  • Whether the increase in net interest margin persists as deposit costs reprice and market rates change; review the rate-sensitivity assumptions.
  • Whether the securities portfolio’s unrealized losses recover, and the effect of further rate changes on reported equity and liquidity; assess the amount of pledged securities.
  • Whether Scout advisory-fee trends and trust and securities processing revenue stabilize, given the shift in assets toward fixed income.
  • Whether the remaining efficiency savings are realized in 2017 without impairing revenue growth or requiring higher technology, staffing, or compliance costs.
  • Whether deposit growth and short-term secured funding remain reliable, and how material unused lending commitments might affect liquidity if drawn.