UMB Financial Corporation — FY 2018 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, comparing results primarily with 2017. UMB is a Kansas City-based financial holding company operating through Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services. It also provides fund administration, trust, asset servicing, and related financial services. The 2017 sale of Scout Investments is reported as discontinued operations.
Financial performance and position
| Metric | FY 2018 / year-end | Comparison |
|---|---|---|
| Net interest income | $610.4 million | Up 9.2% from 2017 |
| Noninterest income | $401.7 million | Down 5.2% |
| Total revenue, net interest income plus noninterest income | $1,012.1 million | Up approximately 3.0% |
| Income from continuing operations | $196.3 million; diluted EPS $3.94 | Up 7.3%; diluted EPS up 7.4% |
| Net income | $195.5 million | Down from $247.1 million, which included the 2017 Scout sale gain |
| Net interest margin, tax-equivalent | 3.21% | 3.15% in 2017 |
| Provision for loan losses / net charge-offs | $70.8 million / $67.7 million | Provision rose 72.6%; net charge-offs rose from $32.0 million |
| Operating cash flow | $297.1 million | $326.5 million in 2017 |
| Total assets / loans | $23.35 billion / $12.18 billion | Assets up 7.3%; loans up 8.0% from year-end 2017 |
| Deposits / long-term debt | $19.28 billion / $82.7 million | Deposits up 7.0%; long-term debt was $79.3 million in 2017 |
| Shareholders’ equity / book value per share | $2.23 billion / $45.37 | Equity up 2.2%; book value was $43.72 |
| Regulatory capital | Company total risk-based ratio 13.95%; Bank 12.29% | Bank categorized as well capitalized |
Cash and cash equivalents were $1.67 billion at year-end, down $42.1 million during 2018. The Company reported $1.52 billion of federal funds purchased and repurchase agreements and $814.6 million of available FHLB borrowing capacity, with no FHLB advances outstanding. Cash flow from investing activities was negative $1.75 billion and financing activities provided $1.41 billion.
Material changes versus the prior comparable period
- Loan growth and higher rates increased annual net interest income; average loans rose 7.0%. Deposit interest expense increased substantially, from $36.4 million to $92.1 million, alongside higher deposit costs.
- Noninterest income fell by $21.9 million, including lower bond trading, fund-services and bankcard revenue, and fewer securities-sale gains. A large asset manager client exited UMBFS during 2018.
- A single factoring relationship entered bankruptcy. UMB recorded a $48.1 million loss and charged off the exposure; the event drove much of the increase in provision and net charge-offs.
- Noninterest expense rose 1.8%, led by legal and consulting, processing, equipment, and salary costs. Management said revenue growth exceeded expense growth.
- The effective tax rate declined to 12.2% from 22.6%, primarily reflecting the federal corporate tax-rate reduction and a $5.1 million discrete tax benefit.
- Available-for-sale securities had a $127.3 million net unrealized loss at year-end, compared with $75.4 million in 2017; after-tax accumulated other comprehensive loss was $96.0 million.
Outlook, risks, contingencies, and unusual items
- The filing provides strategic priorities—operating efficiency, profitable loan and deposit growth, fee-income growth, and capital management—but no specific financial guidance for 2019.
- Management described the Company as slightly asset-sensitive: modeled rising-rate scenarios increase net interest income, while a 100-basis-point decline reduces it. Results depend on assumptions, including deposit pricing behavior.
- Credit risk remains a key focus following the factoring loss. Nonperforming loans declined to $43.0 million from $59.1 million, but loans past due over 90 days and still accruing rose to $6.0 million from $3.1 million. The allowance was 0.85% of loans, versus 0.89% a year earlier.
- Real-estate-secured loans represented 42.8% of the loan portfolio. Other disclosed risks include interest-rate and securities valuation exposure, funding and liquidity pressures, competition, cybersecurity, operational failures, and regulatory requirements.
- A material weakness in controls for identifying impaired factoring loans was disclosed after the relationship was not evaluated for impairment timely. UMB reported remedial measures and concluded the weakness was remediated by December 31, 2018; KPMG gave an unqualified opinion on internal control and the financial statements.
- Management said routine legal proceedings were not expected to have a material effect. The Company expects to adopt the new lease standard in 2019, recording estimated right-of-use assets of $58 million and lease liabilities of $63 million. The impact of the expected-credit-loss standard was still under evaluation.
Important facts for investors to verify
- Whether the factoring-control remediation is sustained, and whether the bankrupt borrower creates any further credit exposure or charges.
- Whether loan growth continues without deterioration in delinquencies, charge-offs, or allowance coverage.
- Deposit growth and repricing costs, and the sensitivity of net interest income to market rates and deposit competition.
- The effect of AFS securities losses, pledged collateral, and securities maturities on capital and usable liquidity.
- Whether fee-income declines, including the asset-servicing client departure, are offset by growth elsewhere and expense control.
- Implementation effects of the lease and expected-credit-loss accounting standards; the filing does not quantify the latter’s expected impact.