UMB Financial Corporation — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. UMB is a financial holding company providing banking and asset-servicing services. Results are presented for continuing operations, with Scout Investments classified as discontinued operations following an announced sale agreement.
Financial performance and position
| Metric | Q3 / September 30, 2017 | Comparable period / change |
|---|---|---|
| Net interest income | $140.9 million | Up 12.9% from Q3 2016 |
| Noninterest income | $104.3 million | Up 0.7% from Q3 2016 |
| Total revenue (net interest income plus noninterest income) | $245.2 million | Up 7.4% from Q3 2016 |
| Noninterest expense | $171.8 million | Up 4.0% from Q3 2016 |
| Provision for loan losses | $11.5 million | Down $1.5 million from Q3 2016 |
| Income from continuing operations | $48.9 million; diluted EPS $0.98 | Up 24.0%; Q3 2016 income was $39.4 million and diluted EPS $0.80 |
| Net income, including discontinued operations | $48.1 million; diluted EPS $0.97 | Q3 2016 net income was $41.9 million and diluted EPS $0.85 |
| Net interest margin, tax-equivalent | 3.16% | 2.87% in Q3 2016 |
| Return on average assets / equity | 0.95% / 9.17% | 0.80% / 7.76% in Q3 2016 |
- Nine-month results: Continuing-operations income was $135.6 million, up 23.0% year over year; diluted EPS was $2.72 versus $2.24. Net interest income rose 13.4% to $412.6 million, while noninterest income rose 4.4% to $317.5 million and noninterest expense rose 4.7% to $522.6 million.
- Balance sheet: Total assets were $20.28 billion, down 1.9% from December 31, 2016. Loans were $11.00 billion, up 4.3%; deposits were $16.00 billion, down 3.4%. Shareholders’ equity was $2.10 billion.
- Funding and capital: Federal funds purchased and repurchase agreements totaled $1.86 billion; long-term debt was $76.1 million. Total risk-based capital was 13.26%, common equity tier 1 was 12.18%, and the leverage ratio was 9.43%. The company reported $548.2 million of cash and cash equivalents at period end, versus $710.6 million a year earlier.
- Cash flows, nine months: Operating activities provided $244.3 million, investing activities used $146.5 million, and financing activities used $613.5 million. Cash and cash equivalents decreased $515.8 million during the period.
Material changes versus comparable periods
- Higher loan balances, loan yields, and interest rates contributed to stronger net interest income and a 29-basis-point increase in Q3 tax-equivalent net interest margin. Interest expense also increased, reflecting higher funding costs.
- Q3 noninterest income was broadly stable. Higher trust and securities-processing and brokerage fees were partly offset by lower trading and investment-banking income, lower securities gains, and losses on alternative investments.
- Q3 expenses increased most notably in equipment, processing fees, and legal and consulting, with technology modernization, regulatory work, and cybersecurity investments among the cited drivers.
- Year-to-date net charge-offs rose to $28.3 million from $15.7 million. The allowance for loan losses increased to $98.4 million, or 0.89% of loans, from $91.6 million at year-end 2016.
- Nonperforming loans declined to $54.2 million from $70.3 million at December 31, 2016; nonperforming loans were 0.49% of loans. Deposits fell from year-end, primarily as noninterest-bearing balances declined.
Outlook, management commentary, risks and unusual items
- Management emphasized operating efficiency, profitable loan and deposit growth, noninterest revenue, and capital management. The filing does not provide specific earnings or revenue guidance; management cautions that interim results may not indicate full-year results.
- The company agreed to sell Scout Investments for $172.5 million in cash, subject to customary purchase-price adjustments, with closing expected in Q4 2017. Scout’s results are reported as discontinued operations; it recorded a Q3 net loss of $0.7 million. Management planned to use sale proceeds for general corporate purposes and to support growth in other businesses.
- Interest-rate simulations show sensitivity to hypothetical rate changes; management described the company as relatively neutral over the next year in a rising-rate environment. Results depend on assumptions, including deposit repricing behavior.
- Key risks identified include economic and market conditions, interest rates, credit quality, deposit and liquidity management, regulatory change, competition, cybersecurity and technology, operational controls, and the execution of acquisitions or dispositions. The filing reports $9.7 billion of commercial commitments, including credit commitments and letters of credit; many may expire undrawn.
- Management stated that pending legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported, and disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the Scout sale closed on expected terms and how proceeds and any purchase-price adjustments affected results and capital.
- Whether loan growth can continue without further deterioration in credit costs; monitor charge-offs, criticized credits, nonperforming loans, and allowance coverage.
- Whether deposit trends and rising funding costs affect net interest margin, liquidity, and the company’s reliance on repurchase funding.
- Whether technology, regulatory, cybersecurity, and processing investments produce operating leverage as expenses continue to rise.
- How rate movements, securities valuations, and the large pledged-securities position affect earnings, capital, and available liquidity.