UMB Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. UMB is a financial holding company providing banking, institutional, personal and healthcare payment services. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $271.8 | $250.5 | +8.5% |
| Net interest income | $166.4 | $150.2 | +10.8% |
| Provision for loan losses | $11.0 | $7.0 | +$4.0 |
| Noninterest income | $105.4 | $100.3 | +5.1% |
| Noninterest expense | $193.4 | $177.2 | +9.1% |
| Net income from continuing operations | $57.0 | $55.4 | +2.8% |
| Diluted EPS from continuing operations | $1.16 | $1.11 | +$0.05 |
For the first half of 2019, net interest income was $330.3 million (+10.8% year over year), noninterest income was $212.8 million (+3.4%), noninterest expense was $384.0 million (+8.8%), and continuing-operations income was $114.7 million (+1.5%). Diluted EPS was $2.34 versus $2.26. The 2018 first-half comparison included a $0.7 million discontinued-operations loss; 2019 reported none.
Q2 return on average assets was 0.98% and return on average equity was 9.46%, down from 1.08% and 10.18%, respectively. Tax-equivalent net interest margin was 3.19%, down 5 basis points year over year; net interest spread was 2.72%, down 24 basis points. Higher asset yields and growth lifted interest income, but deposit and other funding costs rose faster. Management reported average loans up 10.3% and average earning assets up 12.9% year over year in Q2.
Financial position, cash flow and credit
- Balance sheet: Total assets were $24.0 billion at June 30, up 2.8% from year-end 2018 and 17.0% from June 2018. Loans were $12.9 billion, up 5.9% from year-end and 10.9% year over year. Investment securities totaled $8.46 billion.
- Funding and debt: Deposits were $19.40 billion, up 0.6% from year-end. Federal funds purchased and repurchase agreements were $1.71 billion; long-term debt was $88.6 million. The filing reports $1.1 billion of FHLB borrowing capacity and no outstanding FHLB advances at quarter-end.
- Liquidity and cash flow: Cash and cash equivalents were $1.28 billion, down from $1.67 billion at the start of 2019. First-half operating cash flow was $134.0 million, investing cash outflow was $815.5 million, and financing cash inflow was $283.0 million. The company cites available-for-sale securities and core deposits as key liquidity sources; 78.4% of available-for-sale securities were pledged or used as collateral, including $777.5 million pledged at the Federal Reserve Discount Window but unencumbered.
- Credit: The allowance for loan losses was $102.1 million, or 0.79% of loans, versus 0.85% a year earlier. First-half provision was $23.4 million versus $17.0 million; net charge-offs were $24.9 million versus $19.3 million. Nonperforming loans were $53.4 million, or 0.41% of loans, compared with $43.0 million at December 31, 2018 and $56.0 million at June 30, 2018. The allowance was 1.91 times nonperforming loans.
- Capital and shareholder returns: Shareholders’ equity was $2.48 billion, up $249.3 million from year-end, substantially reflecting improved accumulated other comprehensive income. The total risk-based capital ratio was 13.63%, common equity Tier 1 ratio 12.65%, and leverage ratio 9.69%. Q2 dividend was $0.30 per share; the board declared another $0.30 quarterly dividend payable October 1, 2019. The company repurchased 396 shares in Q2 at an average $69.10.
Material changes and management commentary
- Loan and securities growth supported higher net interest income, while rising funding costs compressed spread and margin. Deposit interest expense rose materially alongside higher interest-bearing deposit balances and rates.
- Noninterest income growth was driven mainly by other income, including company-owned life insurance, derivative income, asset-sale gains and alternative-investment earnings, as well as trading and brokerage fees. Bankcard fees declined, partly due to higher rebates and rewards costs; first-half trust and securities processing revenue also declined.
- Expenses increased faster than revenue in Q2. Salary and benefits, technology and processing costs, legal and consulting, and other expenses were notable contributors. Management described technology and systems spending as investment intended to support growth and future operating efficiencies.
- Available-for-sale securities’ unrealized losses narrowed substantially versus year-end, contributing to the $158.4 million first-half other comprehensive income and higher reported equity. Management attributed unrealized securities losses primarily to interest-rate changes and stated it did not intend, and did not expect to be required, to sell the affected securities before recovery.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management’s stated priorities include operating efficiency, profitable loan and deposit growth, noninterest revenue expansion and capital management. Interest-rate simulations indicate the balance sheet was slightly asset-sensitive: modeled net interest income generally rises under rising-rate scenarios and falls under declining-rate scenarios. These are assumption-dependent estimates, not forecasts.
Key risks include economic and credit deterioration, interest-rate and funding-cost changes, deposit attraction and retention, liquidity and capital management, market-sensitive fee revenue, competition, regulatory changes, cybersecurity and operational controls. The company had $10.5 billion of commercial commitments, including loan commitments and letters of credit; many may expire undrawn and are not necessarily expected cash requirements. It reported ordinary-course legal proceedings that management did not expect to materially adversely affect results or financial condition, and no material change to previously disclosed risk factors.
The company adopted lease accounting in 2019, recording an initial $58.2 million right-of-use asset and $63.0 million lease liability; at June 30, lease assets and liabilities were $65.1 million and $70.5 million. The company was preparing for the expected-credit-loss standard effective in 2020 and said adoption could increase its allowance; the impact was still under evaluation.
Important facts for investors to verify
- Whether loan growth and fee income can continue to offset rising deposit costs and margin pressure.
- Whether the higher provision and net charge-offs signal worsening credit trends, particularly in commercial lending; monitor nonperforming loans and allowance coverage.
- How operating expenses, technology investment and operational losses affect efficiency and profitability.
- How much liquidity remains readily available given pledged securities, substantial off-balance-sheet commitments and ongoing loan growth.
- The eventual allowance impact of the expected-credit-loss standard, and the durability of securities-related AOCI and capital gains.