UMB Financial Corporation — Q3 2016 Form 10-Q
Business context and reporting period. UMB Financial Corporation is a diversified financial holding company providing banking, institutional investment management and asset-servicing services. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are primarily with December 31, 2015. Amounts below are in U.S. dollars unless noted.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $124.8 million | $109.9 million | $363.9 million | $297.6 million |
| Provision for loan losses | $13.0 million | $2.5 million | $25.0 million | $10.5 million |
| Noninterest income | $121.9 million | $109.1 million | $359.7 million | $353.9 million |
| Noninterest expense | $179.8 million | $185.3 million | $545.6 million | $521.7 million |
| Income before taxes | $53.9 million | $31.2 million | $153.0 million | $119.3 million |
| Net income | $41.9 million | $22.5 million | $115.9 million | $86.4 million |
| Diluted EPS | $0.85 | $0.46 | $2.36 | $1.84 |
- Growth and profitability: Q3 net income rose 86.8%; nine-month net income rose 34.1%. Q3 and nine-month return on average assets were 0.85% and 0.79%, respectively; return on average equity was 8.25% and 7.81%.
- Margins: Tax-equivalent net interest margin was 2.87% for Q3 and 2.84% for the nine-month period, up 14 and 24 basis points year over year. Average earning assets increased 9.1% in Q3 and 12.1% year to date.
- Revenue mix: Q3 noninterest income grew 11.8%, while nine-month noninterest income increased 1.7%. Trust and securities-processing income declined 7.6% in Q3 and 10.2% year to date, with management citing lower Scout Funds advisory fees and lower assets under administration. Nine-month institutional investment management net income fell 80.2% to $3.1 million.
- Expenses: Q3 noninterest expense fell 3.0%; nine-month expense rose 4.6%. Salaries and benefits increased 7.4% year to date, partly reflecting Marquette-related costs and higher incentives and benefits. Acquisition expenses were $4.5 million for the first nine months of 2016.
- Balance sheet at September 30: Assets were $19.73 billion, up 3.3% from year-end 2015. Loans were $10.29 billion, up 9.1%; deposits were $15.38 billion, up 1.9%. Investment securities totaled $7.43 billion. Shareholders’ equity was $2.02 billion.
- Credit and allowance: The allowance for loan losses was $90.4 million, or 0.88% of loans, versus $81.1 million and 0.86% at year-end 2015. Nine-month net charge-offs were $15.7 million, compared with $8.6 million a year earlier.
- Cash flow: For the first nine months, operating activities provided $169.8 million; investing activities used $708.1 million; financing activities provided $429.8 million. Cash and cash equivalents declined $108.5 million to $710.6 million.
Material changes and notable items
- Nonperforming loans increased to $79.6 million from $61.2 million at December 31, 2015; the company attributed the increase primarily to two commercial credits moving to nonaccrual in Q3. Nonperforming loans were 0.77% of loans, versus 0.65% at year-end.
- Loan growth, higher loan yields and a shift toward loans supported net interest income. Loans grew particularly in commercial real estate, construction real estate and commercial lending.
- The securities portfolio shifted: available-for-sale securities declined to $6.30 billion from $6.81 billion at year-end, while held-to-maturity securities rose to $1.01 billion from $667.1 million. Unrealized losses on available-for-sale securities narrowed to $7.8 million from $42.5 million; management attributed them to interest-rate changes and stated it did not expect to be required to sell before recovery.
- UMB early adopted ASU 2016-09 in September, recording a $482,000 cumulative-effect increase to opening equity. The adoption increased net income by $158,000 in Q1 and $220,000 in Q2, as reported in the filing.
- Payment Solutions was combined into the Bank reporting segment in Q1 2016; prior-period segment figures were reclassified for comparability.
Liquidity, capital, debt and risk
- Total risk-based capital was 12.82%, common equity tier 1 and tier 1 risk-based ratios were each 11.75%, and the leverage ratio was 8.99%. The filing says capital exceeded regulatory requirements.
- Federal funds purchased and repurchase agreements totaled $2.02 billion, up from $1.82 billion at year-end 2015; long-term debt was $75.4 million, down from $86.1 million. Short-term debt was zero at quarter-end.
- UMB reported $499 million of available FHLB borrowing capacity and no FHLB advances outstanding. It also had an undrawn $50 million revolving credit line. The company stated that core deposits, asset maturities and securities support liquidity.
- Approximately $5.1 billion, or 81.5%, of available-for-sale securities were pledged or used as collateral; $1.4 billion pledged at the Federal Reserve Discount Window was unencumbered at quarter-end.
- Off-balance-sheet commitments totaled $9.6 billion, including $6.52 billion of loan commitments excluding credit cards, $2.74 billion of credit-card commitments and $381.3 million of standby letters of credit. The company cautioned that many commitments may expire undrawn.
- Interest-rate simulations indicated the company was positioned to benefit from rising rates. A 100-basis-point falling-rate scenario was not modeled because rates were already low. Results depend on assumptions, including deposit pricing behavior.
Outlook, commentary and contingencies
- Management’s stated priorities were operating efficiency, loan and deposit growth, fee-based business growth and capital management. It identified $32.9 million in annual savings expected from organizational and process changes; this excludes Marquette integration savings and other ongoing efficiencies. No specific earnings or revenue guidance was provided.
- The filing identifies risks including economic and political conditions, interest-rate and market changes, credit quality, liquidity and deposit gathering, competition, regulatory changes, acquisition integration, cybersecurity and operational controls. Forward-looking statements are subject to risks and are not guarantees.
- Legal proceedings arising in the ordinary course were not expected by management to be material. The filing reported no material change to previously disclosed risk factors and no defaults upon senior securities.
- On October 25, 2016, the board declared a quarterly dividend of $0.255 per share, payable January 3, 2017. The company repurchased 10,750 shares in Q3 at an average $56.59 per share.
Important facts for investors to verify
- Whether the rise in nonperforming loans and provision expense reflects isolated commercial exposures or a broader deterioration in credit quality; review subsequent performance of the two credits moved to nonaccrual.
- Whether the $90.4 million allowance remains adequate given higher charge-offs, loan growth and the disclosed increase in nonperforming and restructured loans.
- Whether loan growth and higher net interest margin can continue, including sensitivity to deposit repricing and interest-rate movements.
- Whether Scout Funds fee trends, assets under management and assets under administration stabilize, and how fee income affects the contribution of the investment-management and asset-servicing businesses.
- Progress in realizing the stated annual cost savings, while monitoring compensation and other expense growth and Marquette integration.
- Capital and liquidity developments, including securities encumbrance, reliance on repurchase funding, and the potential drawdown of the $9.6 billion of off-balance-sheet commitments.