UMB Financial Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are primarily with December 31, 2016. UMB is a financial holding company with banking, institutional investment management, and asset servicing businesses. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Net interest income | $134.3 | $117.9 in Q1 2016; up 13.9% |
| Net interest margin, tax-equivalent | 3.09% | 2.79% in Q1 2016 |
| Noninterest income | $120.8 | $116.4 in Q1 2016; up 3.8% |
| Noninterest expense | $188.8 | $180.4 in Q1 2016; up 4.6% |
| Provision for loan losses | $9.0 | $5.0 in Q1 2016 |
| Net income | $44.2; diluted EPS $0.89 | $36.4; diluted EPS $0.74 in Q1 2016 |
| Cash flow from operations | $16.7 | $27.7 in Q1 2016 |
| Total assets | $20,576.1 | $20,682.5 at Dec. 31, 2016 |
| Loans, gross | $10,757.2 | $10,540.4 at Dec. 31, 2016 |
| Deposits | $15,895.2 | $16,570.6 at Dec. 31, 2016 |
| Federal funds purchased and repurchase agreements | $2,390.4 | $1,856.9 at Dec. 31, 2016 |
| Long-term debt | $76.1 | $76.8 at Dec. 31, 2016 |
| Shareholders’ equity | $2,010.9 | $1,962.4 at Dec. 31, 2016 |
| Cash and cash equivalents | $696.6 at quarter-end | Down $367.3 during the quarter |
Return on average assets was 0.89% and return on average equity was 9.04%, versus 0.76% and 7.54%, respectively, in Q1 2016. The total risk-based capital ratio was 12.96%; the leverage ratio was 9.11%. The filing states capital ratios exceeded regulatory requirements.
Material changes and management commentary
- Net income rose 21.4% year over year. Higher loan and securities income drove net interest income growth; management cited loan growth, improved yields and recent rate increases. Average loans increased 10.6% year over year, and average earning assets increased 4.7%.
- Noninterest income growth reflected stronger trading and investment banking, brokerage, and other income. Lower securities-sale gains partly offset those increases.
- Expenses grew more slowly than total revenue, which management reported increased 8.9%. Salary and benefits rose 6.5%; equipment expense increased 8.5%, partly due to regulatory, cybersecurity, and core-system investments.
- Quarter-end loans rose 2.1% from year-end, while deposits fell 4.1%. Management attributed the asset decline from year-end mainly to lower Federal Reserve balances and resale agreements; increased wholesale borrowing partly offset deposit outflows.
- Credit costs increased: provision was $9.0 million versus $5.0 million, and net charge-offs were $7.3 million versus $5.7 million in Q1 2016. The allowance was $93.3 million, or 0.87% of loans, versus 0.83% a year earlier. Nonperforming loans were $56.6 million, down from $70.3 million at year-end; nonperforming loans were 0.53% of loans.
- Investing activities used $228.4 million and financing activities used $155.6 million. Deposit outflows and loan growth were significant cash-flow factors; cash and cash equivalents ended the quarter at $696.6 million.
Outlook, risks, contingencies and unusual items
- Scout divestiture: On April 20, 2017, after quarter-end, UMB announced an agreement to sell Scout Investments for $172.5 million in cash, subject to customary purchase-price adjustments. Management expects the transaction to be accretive to income and capital; proceeds are intended for general corporate purposes and organic growth. The filing does not give a closing date or quantified accretion estimate.
- Interest-rate sensitivity: Modeling showed projected net interest income generally benefiting from rising rates, but a 100-basis-point gradual increase produced a 0.6% decline in year-one modeled income. Results depend on assumptions, including deposit repricing; management cautioned that actual deposit pricing had been lower than modeled to date.
- Liquidity and commitments: $5.5 billion of available-for-sale securities were pledged or used as collateral; $1.7 billion pledged at the Federal Reserve Discount Window was unencumbered. Commercial commitments totaled about $9.5 billion, although many may expire undrawn. UMB reported $842.2 million of FHLB borrowing capacity and no outstanding FHLB advances at quarter-end.
- Market and credit risks: Available-for-sale securities had $89.1 million of gross unrealized losses, which management attributed to interest-rate changes and did not consider other-than-temporary impairment. Credit losses depend on portfolio performance, economic conditions, rates, and regulatory factors. The filing also identifies operational, cybersecurity, regulatory, competition, and funding risks.
- Management said pending accounting standards were under evaluation, including revenue recognition, financial instruments, leases, and expected credit losses. The expected-credit-loss standard was scheduled for adoption after 2019, subject to the stated effective-date provisions.
- Management, after consultation with counsel, did not expect pending legal proceedings to materially adversely affect financial position, results, or cash flows. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether the Scout sale closes on the announced terms, and the realized effect on earnings, capital, and continuing business results.
- Whether loan growth continues alongside the higher provision and net charge-offs; monitor nonperforming, restructured, and past-due loans and allowance coverage.
- Whether deposit trends and increased federal-funds/repurchase funding affect liquidity, funding costs, and net interest margin.
- How actual interest-rate and deposit-pricing behavior compares with the company’s modeled sensitivity assumptions.
- Whether securities valuation changes, collateral pledging, or the substantial off-balance-sheet commitments materially alter liquidity or risk exposure.