UMB Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. UMB Financial is a financial holding company providing banking and other financial services. Unless noted otherwise, amounts below are in U.S. dollars; income-statement and cash-flow comparisons are with Q1 2018.
Financial results and condition
- Revenue and earnings: Net interest income was $163.9 million, up 10.8%; noninterest income was $107.4 million, up 1.8%. Together, these produced total revenue of approximately $271.3 million, up 7.0%. Net income was $57.7 million versus $56.8 million, including a $0.7 million after-tax discontinued-operations loss in Q1 2018 and none in Q1 2019. Diluted EPS rose to $1.18 from $1.14.
- Margins and returns: Tax-equivalent net interest margin was 3.20%, up one basis point; net interest spread fell 20 basis points to 2.76%. Return on average assets was 1.02% versus 1.12%, and return on average equity was 10.48% versus 10.80%.
- Expenses and credit costs: Noninterest expense increased 8.4% to $190.6 million, faster than revenue. Provision for loan losses rose to $12.4 million from $10.0 million. Net charge-offs were $12.3 million versus $10.3 million.
- Cash flow: Operating activities provided $46.2 million, compared with $19.6 million. Investing activities used $270.5 million, principally reflecting $383.8 million of net loan growth and $579.4 million of available-for-sale securities purchases, partly offset by maturities and lower federal funds sold. Financing activities provided $40.4 million. Cash and cash equivalents decreased $184.0 million during the quarter to $1.49 billion.
- Balance sheet and liquidity: Assets were $23.56 billion at quarter-end, up 0.9% from December 31, 2018. Loans were $12.55 billion, up 3.1% from year-end; deposits were $19.37 billion, up 0.4%. Available-for-sale securities were $6.89 billion. Management reported $1.1 billion of FHLB borrowing capacity with no advances outstanding, and an undrawn $50 million revolving credit line.
- Debt and capital: Long-term debt was $81.6 million; federal funds purchased and repurchase agreements were $1.49 billion. Shareholders’ equity was $2.35 billion. Q1 total risk-based capital ratio was 13.72%, common equity tier 1 and Tier 1 ratios were each 12.70%, and leverage ratio was 9.65%; the filing says capital exceeded regulatory requirements. The quarterly dividend was $0.30 per share, and 61,765 shares were repurchased at an average $66.16.
Material changes versus comparable periods
- Average loans grew 9.0% year over year and average earning assets grew 10.4%; higher balances and yields lifted interest income, while higher deposit and wholesale funding costs increased interest expense.
- Noninterest income growth was uneven: trading and investment banking rose 36.1% and brokerage fees 14.0%, while trust and securities processing fell 4.6% and bankcard fees fell 5.8%. Management cited fund-services repricing and customer losses, lower interchange income, and higher rewards expense among the factors.
- Expense growth reflected higher salaries and benefits, technology and processing investment, consulting costs, and operating losses. Personal Banking continuing-operations income fell 89.7% to $0.4 million; Healthcare Services income rose 31.7% to $7.0 million.
- At March 31, 2019 versus December 31, 2018, nonperforming loans increased to $63.3 million from $43.0 million; the nonperforming-loan ratio rose to 0.50% from 0.35%. The allowance was $103.7 million, or 0.83% of loans, versus 0.85% at year-end.
- Accumulated other comprehensive loss improved to $17.6 million from $95.8 million, primarily reflecting current-period after-tax unrealized gains on securities. This was a substantial equity movement outside net income.
Outlook, risks, contingencies, and unusual items
- Guidance: The filing provides no specific earnings or financial guidance. Management describes priorities of operating efficiency, profitable loan and deposit growth, noninterest-revenue growth, and capital management, and cautions that interim results may not indicate full-year results.
- Interest-rate risk: Management characterizes the company as slightly asset-sensitive. Modeling shows net interest income increasing in rising-rate scenarios and declining in falling-rate scenarios; results depend on assumptions, including deposit pricing behavior.
- Credit risk: Nonaccrual loans were $43.0 million and restructured loans on nonaccrual were $20.3 million. Commercial loan growth and increased net charge-offs contributed to the higher provision. The allowance for loan losses depends on management estimates and economic and portfolio conditions.
- Accounting and unusual items: Adoption of the lease standard on January 1, 2019 added a $58.2 million right-of-use asset and $63.0 million lease liability; at March 31, balances were $64.3 million and $69.6 million. The company was evaluating the expected-credit-loss standard, effective for it in 2020; adoption could increase the allowance. Q1 2019 included $0.8 million of net securities-sale gains.
- Commitments and legal matters: Off-balance-sheet commitments included $6.85 billion of loan commitments excluding credit cards, $3.19 billion of credit-card commitments, and $307.7 million of standby letters of credit. Management states many commitments may not be drawn. Various legal proceedings are described as not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether loan growth and higher net interest income can continue to offset rising funding costs and expense growth.
- Whether the increase in nonperforming loans from year-end and higher net charge-offs signal further credit deterioration, and whether the 0.83% allowance remains adequate.
- How fund-services and wealth-management revenue, bankcard income, and Personal Banking profitability develop after the reported declines.
- How much of the $10.4 billion in reported commercial commitments could be drawn, and the availability of liquidity if deposits or other funding sources weaken.
- The eventual allowance impact and implementation effects of the expected-credit-loss standard, as well as the sustainability of securities-related OCI gains and realized gains.