UMB Financial Corporation — Q1 2018 Form 10-Q
Business context and reporting period
UMB Financial Corporation is a financial holding company providing banking and related financial services through four reportable segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services. This unaudited filing covers the three months ended March 31, 2018; balance-sheet comparisons are primarily to December 31, 2017. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparison |
|---|---|---|
| Net interest income | $147.9 | Up 10.1% year over year |
| Net interest margin, tax-equivalent | 3.19% | 3.09% in Q1 2017; management says the Tax Act lowered the 2018 tax-equivalent rate by about 11 basis points |
| Noninterest income | $105.5 | Up 2.5% year over year |
| Total revenue (net interest income plus noninterest income) | $253.4 | Up 6.8% year over year |
| Noninterest expense | $175.9 | Up 1.2% year over year |
| Provision for loan losses | $10.0 | $9.0 in Q1 2017 |
| Income from continuing operations | $57.5; diluted EPS $1.15 | Up 37.1%; diluted EPS was $0.84 in Q1 2017 |
| Net income, including discontinued operations | $56.8; diluted EPS $1.14 | $44.2; diluted EPS $0.89 in Q1 2017 |
| Return on average assets / equity | 1.12% / 10.80% | 0.84% / 8.58% in Q1 2017 |
| Net cash from operating activities | $19.6 | $16.7 in Q1 2017 |
| Total assets | $21,987.9 | Down $783.7 from year-end 2017; up 2.0% year over year |
| Loans | $11,458.8 gross | Up 1.6% from year-end and 6.5% year over year |
| Total deposits | $17,218.3 | Down 4.5% from year-end; up 8.3% year over year |
| Shareholders’ equity | $2,167.4 | Down $14.1 from year-end; up $156.5 year over year |
| Total risk-based capital ratio | 14.45% | 12.96% in Q1 2017 |
Cash and cash equivalents ended the quarter at $929.5 million, down $786.8 million from the beginning of the quarter. Investing activities used $79.8 million and financing activities used $726.7 million; financing cash use included net deposit outflows. Long-term debt was $78.7 million, while federal funds purchased and repurchase agreements were $1,354.6 million. The company reported $883 million of FHLB borrowing capacity and no FHLB advances outstanding. Its $50 million revolving credit line also had no advances outstanding.
Credit quality indicators showed some deterioration: nonperforming loans were $67.6 million, or 0.59% of loans, versus $59.1 million and 0.52% at year-end. Net charge-offs were $10.3 million, compared with $7.3 million in Q1 2017. The allowance was $100.3 million, 0.88% of loans, and 1.48 times nonperforming loans. Securities available for sale had $160.9 million of gross unrealized losses; management attributed these primarily to interest-rate changes and said it did not intend, and did not believe it was more likely, that it would need to sell before recovery of amortized cost.
Material changes versus the prior comparable period
- Higher loan balances, asset yields, and interest rates increased net interest income; average loans rose $726.4 million year over year. Deposit interest expense rose substantially, from $6.0 million to $13.8 million.
- Noninterest income growth was led by trust and securities processing, brokerage, and other income. Trading and investment banking income fell 45.6%, partly due to lower bond trading fees and lower seed-investment income.
- Noninterest expense increased modestly. Salary and benefits, equipment, and processing costs rose, partly offset by lower other expense, legal and consulting, and regulatory fees.
- The effective tax rate fell to 14.9% from 22.9%, primarily reflecting the Tax Act’s reduction in the federal corporate tax rate.
- Accumulated other comprehensive loss widened to $117.4 million from $45.5 million at year-end, largely reflecting unrealized securities losses. Comprehensive loss was $15.1 million despite net income of $56.8 million. The company also reclassified $12.9 million of stranded tax effects from accumulated other comprehensive income to retained earnings on adoption of ASU 2018-02.
- Scout Investments was sold in November 2017 for approximately $172.5 million, with a reported disposal gain of $103.6 million. Scout’s results are presented as discontinued operations; Q1 2018 included a $0.7 million after-tax discontinued-operations loss, versus $2.2 million of income in Q1 2017.
Outlook, commentary, risks, and unusual items
Management described strategic priorities of improving operating efficiency, growing net interest income through profitable lending and balance-sheet optimization, expanding noninterest revenue, and managing capital. It cited continued technology, cybersecurity, regulatory, and core-system investments. The filing provides no quantified earnings or revenue guidance; management cautions that interim results may not indicate full-year results.
Interest-rate simulation results were mixed: a gradual 300-basis-point increase projected a 0.7% decline in net interest income in year one and a 4.6% increase in year two; an immediate 300-basis-point increase projected increases of 2.6% and 7.7%, respectively. The company described its position as relatively neutral and noted that results depend on assumptions, including deposit pricing.
Liquidity risks include deposit retention and funding availability, as well as collateral demands: 83.4% of available-for-sale securities were pledged or used as collateral, although $1.7 billion pledged at the Federal Reserve Discount Window was unencumbered. Off-balance-sheet commitments totaled approximately $9.6 billion, including loan commitments and letters of credit; many may expire unused. Other disclosed risks include credit deterioration, interest-rate and market movements, economic and regulatory changes, competition, cybersecurity and operational disruption. Management said pending legal proceedings were not expected to have a material adverse effect; there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether deposit outflows persist and how the funding mix affects deposit costs, liquidity, and net interest margin.
- Whether higher nonperforming loans and net charge-offs continue, and whether allowance levels remain adequate as the loan portfolio grows.
- The extent to which the increase in earnings reflects recurring operating performance versus the lower tax rate and market-sensitive alternative-investment, trading, and other income.
- Whether unrealized securities losses, pledged collateral, and changing interest rates create constraints on liquidity or capital.
- Whether management’s efficiency and technology investments translate into improved operating leverage without further material expense growth.