UMB Financial Corporation Reports Third Quarter Income from Continuing Operations of $57.8 Million or $1.16 per Diluted Share

UMB Financial Corporation (Nasdaq: UMBF), a financial holding company, announced income from continuing operations for the third quarter 2018 of $57.8 million, or $1.16 per diluted share, compared to $55.4 million, or $1.11 per diluted share, in the second quarter 2018 (linked quarter) and $48.9 million, or $0.98 per diluted share, in the third quarter 2017. The reported GAAP income from continuing operations represents increases of 4.4 percent on a linked-quarter basis and 18.4 percent compared to the third quarter 2017.

Net operating income from continuing operations, a non-GAAP financial measure reconciled to income from continuing operations, the nearest comparable GAAP measure, later in this release, was $58.0 million, or $1.16 per diluted share, for the third quarter 2018, compared to $56.1 million, or $1.12 per diluted share, for the linked quarter and $48.9 million, or $0.98 per diluted share, for the third quarter 2017. These results represent increases of 3.5 percent on a linked-quarter basis and 18.6 percent compared to the third quarter 2017.

“Highlights for the third quarter 2018 included strong loan growth, with average balances increasing 9.6 percent on a linked-quarter annualized basis, and 7.4 percent compared to the third quarter 2017,” said Mariner Kemper, chairman and chief executive officer. “This compares to 4.0 percent growth on a linked-quarter annualized basis for the industry, per Federal Reserve data. In addition, average deposits for the quarter increased 5.4 percent compared to the third quarter of 2017, driven by continued growth in asset servicing and healthcare balances, and our recent deposit campaigns.”

Discussion of results from continuing operations

Following the enactment of the Tax Cuts and Jobs Act, beginning in the first quarter of 2018, net interest margin is computed using net interest income adjusted to a fully taxable equivalent (FTE) basis assuming a statutory federal income tax rate of 21 percent and, where applicable, state income taxes; prior period net interest margins are computed using the then-statutory federal income tax rate of 35 percent and, where applicable, state income taxes.

Net interest income

• Net interest income totaled $150.5 million and increased modestly from linked quarter levels, impacted by a 2.4 percent, or $274.1 million, increase in average loans and one additional day of net interest income. These impacts were offset by increases in cost of certain interest-bearing deposits driven by the cumulative effect of recent increases in short-term rates and recent deposit campaigns.
• Earning asset yields improved 10 basis points from the linked quarter primarily due to earning asset mix changes and improved loan yields of 13 basis points to 4.87 percent, in part driven by favorable re-pricing from recent increases in short-term interest rates. The cost of interest-bearing liabilities increased 24 basis points to 1.07 percent, driven by a 25-basis point increase in cost of interest-bearing deposits. Total cost of deposits, including noninterest-bearing deposits, was 62 basis points, an increase of 17 basis points from the linked quarter.
• On a year-over-year basis, the increase in net interest income was driven by a 7.4 percent, or $807.4 million, increase in average loans as well as higher average loan yields, which increased 54 basis points from one year ago, primarily driven by higher short-term interest rates, volume, and mix changes.

Noninterest income

• Third quarter 2018 noninterest income increased $0.6 million, or 0.6 percent, on a linked quarter basis, largely due to:
  • A $1.0 million increase in derivative income recorded in other income.
  • An increase in trust and securities processing due to a $0.4 million increase in wealth management revenue.
  • These impacts were partially offset by a decrease of $0.9 million in trading and investment banking due to decreased bond trading volume.
• Noninterest income in the third quarter of 2018 decreased $3.4 million, or 3.3 percent, compared to the same quarter in 2017 primarily driven by:
  • A $2.2 million decrease in gains on available-for-sale securities.
  • A $2.3 million decline in fund servicing revenue due to customer repricing and losses, which was partially offset by an increase of $1.0 million in corporate trust income, both recorded in trust and securities processing.
  • A $0.7 million decrease in trading and investment banking income due to decreased trading volume.
  • These impacts were partially offset by an increase of $0.7 million in 12b-1 fees recorded in brokerage fee income, and an increase of $0.7 million in derivative income recorded in other income.

Noninterest expense

• GAAP noninterest expense for the third quarter of 2018 was $180.4 million, an increase of $3.2 million, or 1.8 percent, from the linked quarter and $8.6 million, or 5.0 percent, from the third quarter of 2017.
• On a non-GAAP basis, operating noninterest expense (as reconciled later in this release) was $180.2 million for the third quarter 2018, an increase of $3.8 million, or 2.1 percent, compared to the linked quarter, and $8.4 million, or 4.9 percent, compared to the third quarter 2017.
• The linked quarter increase in noninterest expense was driven by:
  • A $1.9 million increase in consulting expense incurred in conjunction with the company’s ongoing investments in digital channel and integrated platform solutions to support business growth and the continued modernization of its core systems.
  • Increased processing fees expense of $0.8 million, primarily related to larger asset servicing transaction volumes as new customers were added.
  • These impacts were partially offset by a $1.2 million decline in salaries and employee benefits, largely driven by lower medical insurance expense as compared the second quarter of 2018.
• The year-over-year increase in noninterest expense was driven by:
  • A $3.2 million increase in salaries and employee benefits, comprised of a $1.9 million increase in salary and wage expense and a $1.2 million increase in bonus and commission expense.
  • A $2.9 million increase in consulting expense due to investments in digital channel and integrated platform solutions to support business growth and the continued ongoing modernization of the company’s core systems.
  • A $1.3 million increase in advertising expense related to timing of multiple projects and campaigns, including recent deposit promotions.
  • Increased processing fees expense of $1.2 million partially attributed to larger asset servicing transaction volumes as new customers were added.

Income Taxes

• The company’s effective tax rate was 14.2 percent for the nine months ended September 30, 2018, compared to 21.4 percent for the same period in 2017. The decrease is primarily a result of the Tax Cuts and Jobs Act, which lowered the federal corporate income tax rate to 21 percent from 35 percent, effective January 1, 2018. The decrease is also attributable to a discrete tax benefit of $3.0 million related to provision-to-return adjustments.

Balance Sheet

• Average total assets for the third quarter 2018 were $20.7 billion compared to $20.6 billion for the linked quarter, and $20.3 billion for the same period in 2017.

• Average loans for the third quarter 2018 increased 2.4 percent on a linked-quarter basis and 7.4 percent compared to third quarter 2017.

• Average securities available for sale decreased 2.3 percent on a linked-quarter basis and 4.4 percent compared to the third quarter of 2017 driven by the ongoing reinvestment of cash flows from such securities to partially fund growth in the loan portfolio.

• Average deposits increased 5.4 percent compared to the third quarter of 2017, in part driven by recent deposit campaigns.

Capital

• At September 30, 2018, the company’s risk-based capital ratios presented in the foregoing table exceeded all “well-capitalized” regulatory thresholds.

Asset Quality

Dividend Declaration

At the company’s quarterly board meeting, the Board of Directors declared a $0.30 per share quarterly cash dividend, an increase of 3.4 percent or $0.01 per share. The cash dividend will be payable on January 2, 2019, to shareholders of record at the close of business on December 10, 2018.

Accelerated Share Repurchase

The company has entered into an agreement with Bank of America Merrill Lynch (BAML) to repurchase an aggregate of $50 million of the company’s common stock through an accelerated share repurchase (ASR). The company will receive an initial delivery of shares representing approximately 85 percent of the expected total to be repurchased. The final number of shares repurchased and delivered under the ASR will be based on the volume weighted average share price of the company’s common stock during the term of the transaction. The final settlement of the transactions under the ASR is expected to occur no later than the end of the first quarter of 2019 and may be accelerated at the option of BAML. The ASR is part of the company’s authorization to repurchase up to two million shares of the company’s common stock, which was announced April 24, 2018.

Conference Call

The company plans to host a conference call to discuss its third quarter 2018 earnings results on Wednesday, October 24, 2018, at 8:30 a.m. (CT).

Interested parties may access the call by dialing (toll-free) 877-267-8760 or (international) 412-542-4148 and requesting to join the UMB Financial call. The live call may also be accessed by visiting the investor relations area of umbfinancial.com or by using the following the link:

UMB Financial 3Q 2018 Conference Call

A replay of the conference call may be heard through November 7, 2018, by calling (toll-free) 877-344-7529 or (international) 412-317-0088. The replay access code required for playback is 10124649. The call replay may also be accessed at umbfinancial.com by visiting the investor relations area.

Non-GAAP Financial Information

In this release, we provide information about net operating income from continuing operations (net operating income), operating earnings per share from continuing operations - diluted (operating EPS), operating return on average equity (operating ROE), operating return on average assets (operating ROA), operating noninterest expense, and operating efficiency ratio, all of which are non-GAAP financial measures. This information supplements the results that are reported according to generally accepted accounting principles in the United States (GAAP) and should not be viewed in isolation from, or as a substitute for, GAAP results. The differences between the non-GAAP financial measures – net operating income, operating EPS, operating ROE, operating ROA, operating noninterest expense, and operating efficiency ratio – and the nearest comparable GAAP financial measures are reconciled later in this release. The company believes that these non-GAAP financial measures and the reconciliations may be useful to investors because they adjust for acquisition- and severance-related items and divestiture costs that management does not believe reflect the company’s fundamental operating performance.

Net operating income for the relevant period is defined as GAAP net income, adjusted to reflect the impact of excluding expenses related to acquisitions and divestitures, severance expense, and the cumulative tax impact of these adjustments.

Operating EPS (diluted) is calculated as earnings per share as reported, adjusted to reflect, on a per share basis, the impact of excluding the non-GAAP adjustments described above for the relevant period. Operating ROE is calculated as net operating income from continuing operations, divided by the company’s average total shareholders’ equity for the relevant period. Operating ROA is calculated as net operating income from continuing operations, divided by the company’s average assets for the relevant period. Operating noninterest expense for the relevant period is defined as GAAP noninterest expense, adjusted to reflect the pre-tax impact of non-GAAP adjustments described above. Operating efficiency ratio is calculated as the company’s operating noninterest expense, net of amortization of other intangibles, divided by the company’s total non-GAAP revenue (calculated as net interest income plus noninterest income, less gains on sales of securities available for sale, net).

Forward-Looking Statements:

This press release contains, and our other communications may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast,” “target,” “trend,” “plan,” “goal,” or other words of comparable meaning or future-tense or conditional verbs such as “may,” “will,” “should,” “would,” or “could.” Forward-looking statements convey our expectations, intentions, or forecasts about future events, circumstances, results, or aspirations. All forward-looking statements are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond our control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Our actual future objectives, strategies, plans, prospects, performance, condition, or results may differ materially from those set forth in any forward-looking statement. Some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements are described in our Annual Report on Form 10-K for the year ended December 31, 2017, our subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, or other applicable documents that are filed or furnished with the U.S. Securities and Exchange Commission (SEC). Any forward-looking statement made by us or on our behalf speaks only as of the date that it was made. We do not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except to the extent required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that we may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K, or other applicable document that is filed or furnished with the SEC.

About UMB:

UMB Financial Corporation (Nasdaq: UMBF) is a financial services company headquartered in Kansas City, Mo. UMB offers personal banking, commercial banking, healthcare services and institutional banking, which includes services to mutual funds and alternative-investment entities and registered investment advisors. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas. For more information, visit UMB.com, UMB Financial.com, UMB Blog or follow us on Twitter at @UMBBank, UMB Facebook and UMB LinkedIn.