UMB Financial Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. UMB is a U.S. financial holding company providing banking, asset servicing, trust, fund administration, and healthcare payment services through four segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services.
Financial performance and position
| Metric | FY2019 / year-end | Prior comparable period |
|---|---|---|
| Net interest income | $670.9 million | $610.4 million in 2018 |
| Noninterest income | $426.8 million | $401.7 million in 2018 |
| Total revenue (net interest income plus noninterest income) | $1,097.7 million | $1,012.1 million in 2018 |
| Income from continuing operations | $243.6 million; diluted EPS $4.96 | $196.3 million; diluted EPS $3.94 in 2018 |
| Net interest margin, tax-equivalent | 3.12% | 3.21% in 2018 |
| Net cash from operating activities | $341.4 million | $297.1 million in 2018 |
| Total assets | $26.56 billion | $23.35 billion at year-end 2018 |
| Loans, before allowance | $13.43 billion | $12.18 billion at year-end 2018 |
| Deposits | $21.60 billion | $19.28 billion at year-end 2018 |
| Long-term debt | $97.5 million | $82.7 million at year-end 2018 |
| Shareholders’ equity | $2.61 billion | $2.23 billion at year-end 2018 |
- Net income was $243.6 million, versus $195.5 million in 2018; the latter included a $0.7 million loss from discontinued operations. 2019 income from continuing operations rose 24.1%.
- Average loans grew 10.0%; year-end loans increased 10.3%. Deposits rose 12.0% year over year. Loan growth and earning-asset volume lifted net interest income, while higher funding costs pressured the margin.
- Net interest margin fell nine basis points as interest-bearing liability costs increased more quickly than earning-asset yields. Total interest expense rose to $192.0 million from $121.5 million.
- Provision for loan losses declined to $32.9 million from $70.8 million, primarily because 2018 included provision for a single factoring-credit loss. Net charge-offs were $34.7 million, down from $67.7 million; the allowance was $101.8 million, or 0.76% of loans, versus 0.85% a year earlier.
- Noninterest expense increased 8.5% to $778.9 million, matching the reported 8.5% revenue growth. Salaries and benefits, processing, and technology/equipment costs were major increases.
- Full-year diluted EPS from continuing operations was $4.96. The fourth-quarter unaudited result was $66.5 million of continuing-operations income, or $1.35 diluted EPS, compared with $25.5 million and $0.52 in Q4 2018. Q4 provision was $2.0 million versus $48.0 million a year earlier.
- Cash and cash equivalents were $1.67 billion at year-end, essentially unchanged from 2018. Operating cash flow was $341.4 million; investing activities used $3.00 billion and financing activities provided $2.65 billion.
- Regulatory capital remained above minimums: company total risk-based capital ratio 13.26%, CET1 12.33%, and leverage ratio 9.37%. The Bank was categorized as well capitalized. The company declared $59.6 million in dividends and repurchased about 68,000 shares during 2019.
Changes, outlook, risks, and unusual items
- Noninterest income rose 6.2%, led by trading and investment banking, brokerage, trust and securities processing, and other income. Bankcard fees and deposit service charges declined.
- Personal Banking reported a $3.4 million loss from continuing operations, compared with $10.9 million of income in 2018, as higher expenses and lower noninterest income outweighed increased net interest income. Commercial Banking, Institutional Banking, and Healthcare Services reported higher continuing-operations income.
- Available-for-sale securities were $7.45 billion, 85.4% of the securities portfolio; their net unrealized gain was $123.4 million at year-end, compared with a $127.3 million unrealized loss in 2018. The portfolio’s longer average life increased to 70.9 months from 56.8 months. About $5.8 billion of these securities were pledged or used as collateral.
- Management’s stated priorities are operating efficiency, profitable loan and deposit growth, expansion of fee-based revenue, and capital management. It described continued technology, digital-channel, and core-system investment. The filing does not provide specific numerical earnings or growth guidance.
- Interest-rate modeling showed the company slightly liability-sensitive over the next year: a 300-basis-point upward rate ramp was modeled to reduce first-year net interest income 1.7%; in year two the modeled effect was a 1.2% increase. Outcomes depend on assumptions, including deposit pricing behavior.
- The company expected adoption of the current expected credit loss standard (CECL) in 2020 to have an immaterial day-one financial-statement effect, with an estimated approximately $7 million after-tax cumulative adjustment, about a 10% increase in the allowance, and a four-basis-point reduction in CET1.
- Key risks include interest-rate and yield-curve changes, LIBOR transition, credit deterioration, real-estate exposure, liquidity and funding costs, cyber and operational incidents, competition, regulation, and dependence on fee revenues and key employees. Real-estate-secured loans represented 45.4% of the loan portfolio.
- Nonperforming loans increased to $56.3 million from $43.0 million; nonperforming loans were 0.42% of loans versus 0.35%. Management said ordinary-course legal proceedings were not expected to materially affect financial position, results, or cash flows. Off-balance-sheet commitments totaled approximately $11.0 billion; management did not anticipate material losses, and many commitments may not be drawn.
- The financial-statement audit and internal-control audit received unqualified opinions; management and the auditor concluded internal control over financial reporting was effective. KPMG identified the allowance for collectively evaluated loans as a critical audit matter due to judgment and estimation involved.
Important facts for investors to verify
- Whether loan growth, especially commercial and commercial real-estate lending, is accompanied by stable credit quality and adequate allowance coverage.
- How deposit costs, deposit mix, and repricing respond to rate changes, and whether the modeled interest-rate sensitivity assumptions hold.
- Whether expense growth and technology investments translate into improved operating leverage, particularly given the Personal Banking segment’s 2019 loss.
- The impact of CECL adoption and subsequent credit-loss estimates, including any changes to the allowance and regulatory capital.
- The liquidity implications of pledged securities, repurchase funding, and the $11.0 billion in off-balance-sheet commitments.
- Developments in LIBOR-linked contracts, real-estate exposure, and the company’s disclosed operational, cyber, regulatory, and litigation risks.