UMB Financial Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with 2016. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
UMB is a regional financial holding company offering banking and asset-servicing services. Its two reported segments are Bank and Asset Servicing. On November 17, 2017, the company sold Scout Investments, its institutional asset-management subsidiary, and reported Scout’s results as discontinued operations.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total assets at year-end | $21,771.6 | $20,682.5 | Up 5.3% |
| Loans, before allowance | $11,280.5 | $10,540.4 | Up 7.0% |
| Deposits | $18,023.0 | $16,570.6 | Up 8.8% |
| Net interest income | $558.9 | $495.3 | Up 12.8% |
| Net interest margin, tax-equivalent | 3.15% | 2.88% | Up 27 basis points |
| Noninterest income | $423.6 | $402.5 | Up 5.2% |
| Noninterest expense | $705.1 | $666.7 | Up 5.8% |
| Provision for loan losses | $41.0 | $32.5 | Up 26.2% |
| Income from continuing operations | $183.0 | $153.6 | Up 19.1%; diluted EPS $3.67 versus $3.12 |
| Net income, including discontinued operations | $247.1 | $158.8 | Basic EPS $5.02 versus $3.25; includes Scout disposal gain in 2017 |
| Cash and cash equivalents at year-end | $1,716.3 | $1,064.0 | Up $652.3 |
| Shareholders’ equity at year-end | $2,181.5 | $1,962.4 | Up 11.2% |
- Cash flow: Operating activities provided $326.5 million; investing activities used $478.6 million; financing activities provided $804.3 million. Net cash and cash equivalents increased $652.3 million.
- Credit quality: Nonperforming loans fell to $59.1 million from $70.3 million; nonperforming loans were 0.52% of loans versus 0.67%. Net charge-offs rose to $32.0 million from $22.0 million. The allowance was $100.6 million, or 0.89% of loans, versus $91.6 million, or 0.87%.
- Funding and debt: Year-end deposits were $18.0 billion. Federal funds purchased and repurchase agreements totaled $1.26 billion, down from $1.86 billion; long-term debt was $79.3 million. The company reported $1.7 billion of available FHLB borrowing capacity and no FHLB advances outstanding.
- Capital: Company common equity Tier 1 and Tier 1 risk-based ratios were each 12.95%; total risk-based capital was 14.04%; leverage ratio was 9.94%. The Bank was classified as well capitalized.
- Returns and shareholder distributions: Return on average assets was 0.90% and return on average equity was 8.79%. The company paid $51.9 million in dividends and repurchased 217,071 shares during 2017.
Material changes and unusual items
- Revenue from continuing operations, defined as net interest income plus noninterest income, increased 9.4% to $982.5 million. Management attributed higher net interest income to loan growth, improved earning-asset yields, and higher rates; average loans grew 8.5%.
- Noninterest income growth reflected trust and securities processing, brokerage, bankcard, and life-insurance-related income. Lower securities-sale gains and alternative-investment earnings partly offset those increases.
- Expense growth was led by salaries and benefits, processing fees, and equipment. Management linked technology and processing costs partly to regulatory requirements, cybersecurity investment, and core-system modernization.
- The Scout sale generated approximately $172.5 million in cash proceeds, subject to customary adjustments, and a reported disposal gain of $103.6 million. Discontinued operations contributed $64.1 million of net income in 2017, making total net income materially higher than continuing-operations income.
- The Tax Cuts and Jobs Act was enacted in December 2017, reducing the federal corporate rate to 21% beginning in 2018. UMB recorded $3.0 million of additional tax expense in the fourth quarter to reflect its estimated tax-law impact; management said further refinement was possible as guidance became available.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management described priorities of improving efficiency, growing profitable loans and deposits, expanding fee income, and maintaining capital strength. It expected approximately $900 million of available-for-sale securities principal repayments during 2018, including about $243 million in the first quarter. Management said the Tax Act was expected to benefit after-tax results, while noting potential interpretation and remeasurement uncertainty.
- Key exposures include interest-rate and funding sensitivity, credit deterioration, real-estate concentration, securities valuation, and competitive pressure. Real-estate-secured loans represented 43.7% of the loan portfolio.
- Interest-rate simulations showed estimated two-year net interest income increases under certain rising-rate scenarios and declines under a 100-basis-point increase or decrease in ramp scenarios; outcomes depend on assumptions, including deposit pricing behavior.
- Available-for-sale securities totaled $6.3 billion at fair value; $5.7 billion was pledged or used as collateral. The portfolio had a $75.4 million net unrealized loss before tax at year-end, which affected reported equity through accumulated other comprehensive income.
- Off-balance-sheet commitments and contingencies totaled approximately $10.0 billion, principally loan and credit-card commitments and standby letters of credit. Management did not anticipate material losses from these arrangements; many commitments may expire unused.
- Management stated that normal-course legal proceedings were not expected to materially affect financial position, results, or cash flows. The financial-statement and internal-control audits received unqualified opinions; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Separate recurring continuing-operations earnings from the Scout disposal gain and discontinued-operations results.
- Track whether loan growth, net interest margin, and deposit costs sustain net interest income growth as rates change.
- Review trends in commercial and commercial-real-estate credit, net charge-offs, criticized loans, and allowance adequacy.
- Assess the liquidity implications of pledged securities, deposit mix, short-term repurchase funding, and unused credit commitments.
- Confirm the realized effects of the 21% federal tax rate and any subsequent adjustments to deferred taxes.