UMB Financial Corporation — FY2015 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2015, and compares results primarily with FY2014. UMB is a diversified financial holding company operating through Bank, Payment Solutions, Institutional Investment Management, and Asset Servicing. It completed the acquisition of Marquette Financial Companies on May 31, 2015.
Key financial metrics
| Metric | FY2015 / year-end | FY2014 / comparison |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $878.5 million | $848.7 million |
| Net interest income | $412.1 million | $350.1 million |
| Noninterest income | $466.5 million | $498.7 million |
| Net income | $116.1 million | $120.7 million |
| Diluted EPS | $2.44 | $2.65 |
| Net interest margin, tax-equivalent | 2.64% | 2.49% |
| Return on average assets / equity | 0.65% / 6.43% | 0.75% / 7.54% |
| Total assets at year-end | $19.1 billion | $17.5 billion |
| Loans at year-end, before allowance | $9.43 billion | $7.47 billion |
| Deposits at year-end | $15.09 billion | $13.62 billion |
| Shareholders’ equity at year-end | $1.89 billion | $1.64 billion |
- Net interest income rose 17.7%, principally due to loan growth, the Marquette acquisition, and a 15-basis-point increase in tax-equivalent net interest margin. Average loans increased 20.8% to $8.43 billion.
- Noninterest expense increased 5.7% to $703.7 million; the ratio of noninterest expense to total revenue was approximately 80.1%, versus 78.4% in 2014.
- Provision for loan losses was $15.5 million, down from $17.0 million. Net charge-offs were $10.5 million, or 0.12% of average loans.
- Operating cash flow was $211.0 million, compared with $243.8 million in 2014. Cash and cash equivalents ended the year at $819.1 million, down from $1.79 billion.
- Borrowed funds totaled $1.91 billion at year-end, including $1.82 billion in federal funds purchased and repurchase agreements and $91.1 million in short- and long-term debt. Long-term debt rose substantially following the Marquette acquisition.
- Regulatory capital ratios: Company common equity tier 1 11.74%, tier 1 11.86%, total risk-based capital 12.80%, and leverage 9.08%. The Bank was classified as well capitalized.
Material changes versus FY2014
- Marquette added $1.31 billion of assets, including $980.4 million of loans, and $1.15 billion of liabilities at acquisition. UMB issued approximately 3.47 million shares valued at $179.7 million. FY2015 included $9.8 million of Marquette acquisition expenses; purchase accounting remained provisional at year-end.
- Noninterest income declined $32.2 million, mainly from a $26.0 million reduction in trust and securities processing income and a $16.2 million swing in alternative-investment results to a loss. Securities-sale gains increased to $10.4 million from $4.1 million.
- Salary and benefit expense increased $47.9 million, including $23.2 million attributable to Marquette. Equipment expense rose $9.9 million, partly reflecting technology, cybersecurity, and core-system investments.
- Institutional Investment Management net income fell 40.9% to $17.2 million; Scout assets under management declined to $27.2 billion from $31.2 billion, and its mix shifted toward fixed income. Asset Servicing assets under administration fell to $185.6 billion from $198.3 billion.
- Credit indicators weakened: nonperforming loans rose to $61.2 million from $27.4 million; restructured loans increased to $36.6 million from $9.3 million; and loans more than 90 days past due rose to $7.3 million from $3.8 million. The allowance was $81.1 million, or 0.86% of loans, versus 1.02% a year earlier.
- Available-for-sale securities had a $6.1 million net unrealized loss at year-end, compared with a $17.7 million unrealized gain in 2014. The filing attributes the change primarily to higher intermediate- and long-term market rates.
Outlook, risks, contingencies, and unusual items
- Management identified $32.9 million in annualized savings expected to be realized over coming quarters through position eliminations and process improvements. This excludes further expected Marquette integration savings and ongoing efficiencies; it is not earnings guidance.
- Management said future margins are difficult to anticipate and depend substantially on Federal Reserve policy and market movements. Interest-rate simulations indicated higher modeled net interest income under rising-rate scenarios, subject to deposit-pricing and other assumptions; the company did not model a 100-basis-point decline scenario because rates were already low.
- Key risks include interest-rate and funding sensitivity, credit quality and real-estate exposure, market-related fee revenue, regulatory and capital requirements, cybersecurity and operational disruptions, competition, and acquisition integration. Real-estate-secured loans were 37.8% of the loan portfolio.
- About $5.9 billion, or 86.7%, of available-for-sale securities were pledged or used as collateral. The company reported $409.7 million of FHLB Des Moines borrowing capacity, no outstanding advances there, and an undrawn $50 million revolving credit line.
- Off-balance-sheet commitments totaled approximately $10.1 billion, including $6.67 billion of loan commitments and $2.99 billion of credit-card commitments; management did not anticipate material losses. Management stated that ordinary-course legal proceedings were not expected to have a material financial effect.
- The 2014 $20.3 million contingency reserve related to a Prairie Capital Management settlement had no comparable 2015 expense; the remaining settlement liability was paid in 2015. Management reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions. Marquette’s controls were excluded from the year-end internal-control assessment during integration.
Most important facts for investors to verify
- Whether the $32.9 million annualized cost savings are achieved, when they appear in results, and what implementation or integration costs remain.
- Whether the acquired Marquette loan book integrates as expected, including final purchase-accounting adjustments and performance of acquired specialty-lending portfolios.
- Whether the increase in nonperforming and restructured loans persists, and whether the allowance remains adequate as loans and real-estate exposure grow.
- Whether Scout assets under management and fee revenue stabilize, given the decline in AUM and shift toward lower-fee fixed-income strategies.
- How rising rates, deposit repricing, securities valuations, and pledged collateral affect net interest income, liquidity, and capital.
- Whether cash-flow conversion, operating expenses, and diluted share count support earnings recovery after acquisition-related growth and share issuance.