UMB Financial Corporation Reports Second Quarter Net Income from Continuing Operations of $44.8 Million, or $0.90 per diluted share

UMB Financial Corporation (Nasdaq: UMBF), a diversified financial holding company, announced net income from continuing operations for the second quarter 2017 of $44.8 million or $0.90 per diluted share, compared to $42.0 million or $0.84 per diluted share in the first quarter 2017 (linked quarter) and $36.5 million or $0.74 per diluted share in the second quarter 2016. Results from continuing operations exclude the impact of previously announced divestiture of Scout Investments, Inc., the company’s institutional investment management subsidiary. Reported GAAP net income represents an increase of 6.7 percent on a linked-quarter basis and 22.8 percent compared to the second quarter 2016. For the six months ended June 30, 2017, GAAP net income from continuing operations was $86.7 million or $1.74 per diluted share, an increase of 22.5 percent compared to $70.8 million or $1.44 per diluted share for the six month period ended June 30, 2016.

Net operating income from continuing operations, a non-GAAP financial measure which is reconciled to the nearest comparable GAAP measure later in this release, was $44.9 million or $0.90 per diluted share for the second quarter 2017, compared to $42.3 million or $0.85 per diluted share for the linked quarter and $37.5 million or $0.76 per diluted share for the second quarter 2016. These results represent an increase of 6.3 percent on a linked-quarter basis and an increase of 20.0 percent compared to the second quarter 2016. For the six months ended June 30, 2017, net operating income from continuing operations was $87.2 million or $1.75 per diluted share, compared to $74.1 million or $1.51 per diluted share for the six month period ended June 30, 2016.

“Overall, I’m pleased with our results for the first half of the year, as we continue to focus on improved operating leverage across the company,” said Mariner Kemper, chairman and chief executive officer. Net interest margin improved three basis points on a linked quarter basis, driven primarily by the favorable change in our earning asset mix, combined with higher interest rates and increased loan volumes. We are pleased with this progress, as loan growth continued to be strong for the second quarter, up 9.4 percent year-over-year. In addition, noninterest income for the quarter improved 7.3 percent, reflecting, in part, solid contributions from our wealth management and asset servicing businesses.”

Discussion of results from continuing operations

Net interest income

• On a linked quarter basis, the increase in net interest income was driven by a three basis point improvement in net interest margin, coupled with a 2.4 percent, or $251.9 million, increase in average loans.
• Earning asset yields improved ten basis points from the linked quarter driven by improved loan yields of nine basis points. The cost of interest-bearing liabilities also increased ten basis points due to increased federal fund borrowing costs of 23 basis points coupled with a seven basis point increase in interest-bearing deposit rates.
• The cost of interest-bearing liabilities for the second quarter 2017 was 45 basis points, and total cost of funds including noninterest-bearing deposits was 31 basis points.
• On a year-over-year basis, the increase in net interest income was driven by a 9.4 percent or $924.7 million increase in average loans as well as higher average loan yields, which increased 36 basis points from a year ago, primarily driven by higher interest rates and mix changes.
• For the second quarter 2017, average earning assets stood at $18.9 billion, which is flat compared to the linked quarter and an increase of 4.7 percent over the second quarter 2016.

Noninterest income

• Second quarter 2017 noninterest income increased $7.4 million, or 7.2 percent, on a linked quarter basis largely due to:
  • a $1.0 million increase in fund servicing revenue from new business growth and higher custody fees and a $0.9 million increase in wealth management revenue both recorded in trust and securities processing;
  • higher bankcard fees driven by a $1.4 million decrease in retail and commercial card program rewards and rebates expense recorded and a $0.9 million increase in interchange income;
  • a $0.8 million increase in gains on sales of available-for-sale securities;
  • an increase in other noninterest income of $1.7 million which was primarily due to a $1.0 million gain on the sale of a branch building and a $0.4 million increase in derivative income;
  • which were partially offset by a $0.7 million decrease in bond trading fees and $0.7 million decrease in the company’s seed investments in certain Scout Funds, both recorded in trading and investment banking income.
• Noninterest income in the second quarter of 2017 improved $7.5 million, or 7.3 percent, compared to the same quarter in 2016 primarily driven by:
  • a $1.9 million increase in wealth management revenue and a $1.1 million increase in fund servicing revenue both recorded in trust and securities processing;
  • higher bankcard fees driven by a $2.2 million decrease in retail and commercial card program rewards and rebates expense and a $1.0 million increase in interchange income;
  • an increase in other noninterest income due to a $1.2 million increase in the fair value of company-owned life insurance;
  • a $1.6 million increase in 12b-1 income recorded in brokerage fees;
  • which were partially offset by a $1.3 million decrease in gains on available-for-sale securities.

Noninterest expense

• GAAP noninterest expense for the second quarter of 2017 was $176.9 million and increased $3.1 million, or 1.8 percent from the linked quarter.
• On a non-GAAP basis, operating noninterest expense (as reconciled later in this release) was $176.7 million for the second quarter 2017, an increase of $3.3 million, or 1.9 percent, compared to the linked quarter, and $9.8 million, or 5.9 percent, compared to the second quarter 2016.
• The linked quarter increase in noninterest expense and operating noninterest expense was driven by increases in marketing and business development, legal and consulting expenses, and processing fees. These increases were partially offset by decreases in other expenses driven by lower operating losses.
• The year over year increase in noninterest expense of $8.5 million, or 5.1 percent, was primarily driven by:
  • a $3.4 million increase in salary and wage expense, a $1.3 million increase in employee benefits partially driven by a $1.1 million increase in fair value adjustments on the company’s deferred compensation plan, and a $0.8 million increase in bonus and commission expense; and
  • higher consulting expense and equipment expense for computer and hardware costs related to investments for regulatory requirements, cyber security, and the ongoing modernization of the company’s core systems, as well as higher processing expenses in healthcare, fund servicing, and institutional businesses.

Income Taxes

• For the six months ended June 30, 2017, the company’s effective tax rate decreased to 21.6 percent compared to 24.8 percent for the same period a year earlier. The decrease is primarily a result of an increase in excess tax benefits associated with stock compensation recorded in the first and second quarter of 2017 compared to the same period a year earlier.

Balance Sheet

• Average total assets for the second quarter were $20.3 billion compared to $20.2 billion for the linked quarter, and $19.4 billion for the same period in 2016.

• Average loans for the second quarter 2017 increased 2.4 percent, on a linked-quarter basis, and 9.4 percent, compared to second quarter 2016.

• The growth in the company’s held to maturity securities portfolio is attributed to increased activity in private placement bonds, primarily used to refinance existing revenue bonds in the healthcare and education sectors.

• Average noninterest-bearing demand deposits increased 2.0 percent from the second quarter of 2016, but declined 2.7 percent on a linked-quarter basis primarily due to institutional customers deploying more funds in the markets.

Capital

• At June 30, 2017, the company’s estimated risk-based capital ratios presented in the foregoing table exceeded all “well-capitalized” regulatory thresholds.

Asset Quality

• Nonperforming loans, defined as restructured loans on nonaccrual and all other nonaccrual loans, decreased $5.2 million from the linked quarter and decreased $7.0 million from the prior year period.
• The increase in net charge-offs to $10.0 million or 0.37 percent of total loans, was driven primarily by a charge-off of one commercial credit to a manufacturing and distribution company.
• Provision for loan losses increased $5.5 million from the linked quarter, consistent with our methodology, which considers the inherent risk in our loan portfolio, as well as other qualitative factors, such as macroeconomic conditions, loan growth, increased impaired loans, and increased net charge-offs.

Divestiture

On April 20, 2017, the company announced the execution of an agreement to sell 100 percent of the stock of Scout Investments, Inc. (Scout), its institutional investment management subsidiary, to Carillon Tower Advisers, a unit of Raymond James Financial, for $172.5 million in cash, subject to purchase price adjustments at closing, which is expected to occur in the fourth quarter of 2017. The company plans to use the proceeds from the transaction to support its current growth strategies. See the company’s Current Report on Form 8-K filed with the Securities Exchange Commission on April 20, 2017 for additional information.

Results attributed to Scout’s performance are designated as discontinued operations in the current and prior periods. Loss from such discontinued operations for the second quarter 2017 was $2.0 million or ($0.04) per diluted share, compared to income from discontinued operations of $2.2 million or $0.05 per diluted share in the first quarter 2017 and income from discontinued operations of $1.1 million or $0.02 per diluted share in the second quarter 2016. Year-to-date income from discontinued operations as of June 30, 2017, was $0.3 million or $0.01 per diluted share, compared to $3.1 million or $0.07 per diluted share for the six month period ended June 30, 2016. The loss from discontinued operations in the second quarter resulted primarily from $7.1 million in pre-tax divestiture expenses incurred.

Income from discontinued operations-general operations, a non-GAAP financial measure which is reconciled to the nearest comparable GAAP measure later in this release, was $2.6 million or $0.05 per diluted share for the second quarter 2017, compared to $2.2 million or $0.05 per diluted share for the linked quarter and $2.0 million or $0.04 per diluted share for the first quarter 2016. Year-to-date income from discontinued operations-general operations as of June 30, 2017, was $4.8 million or $0.10 per diluted share, compared to $4.1 million or $0.09 per diluted share for the six month period ended June 30, 2016. The primary non-GAAP adjustment is the $7.1 million in pre-tax divestiture expenses incurred in the second quarter of 2017.

Dividend Declaration

At the company’s quarterly board meeting, the Board of Directors declared a $0.255 per share quarterly cash dividend, payable on October 2, 2017, to shareholders of record at the close of business on September 8, 2017.

Conference Call

The company plans to host a conference call to discuss its second quarter 2017 earnings results on Wednesday, July 26, 2017, at 8:30 a.m. (CT).

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

UMB Financial 2Q 2017 Conference Call

A replay of the conference call may be heard through August 9, 2017, by calling (toll-free) 877-344-7529 or (U.S.) 412-317-0088. The replay pass code required for playback is 10109956. The call replay may also be accessed via the company's website umbfinancial.com by visiting the investor relations area.

Non-GAAP Financial Information

In this release, we provide information about net operating income, operating earnings per share - diluted (operating EPS), operating return on average equity (operating ROE), operating return on average assets (operating ROA), operating noninterest expense, operating efficiency ratio, net income from discontinued operations-general operations, and earnings per share from discontinued operations-general operations, all of which are non-GAAP financial measures. This information supplements the results that are reported according to generally accepted accounting principles (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, operating efficiency ratio, net income from discontinued operations-general operations, and earnings per share from discontinued operations-general operations—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 fair value adjustments, acquisition- and severance-related items, one-time marketing agent termination costs, 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 the following: (i) fair value adjustments on contingent consideration for the acquisitions of Reams Asset Management Company (Reams), (ii) expenses related to acquisitions (iii) non-acquisition related severance expense, and (v) the cumulative tax impact of the previous adjustments. The company believes that the financial impact of excluding non-acquisition related severance expense will be immaterial in the near future. It is excluded from certain GAAP financial measures as it has an unusually large impact on the company’s financial statements.

Operating EPS (basic and 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 in clauses (i)-(v) above for the relevant period. Operating ROE is calculated as net operating income, divided by the company’s average total shareholders’ equity for the relevant period. Operating ROA is calculated as net operating income, 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 in clauses (i)-(v) 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 revenue (tax equivalent net interest income plus noninterest income less gains on sales of securities available for sale, net).

Net income from discontinued operations-general operations for the relevant period is defined as GAAP net income from discontinued operations, adjusted to reflect the impact of excluding non-GAAP adjustment (iii) and (v) above and (iv) divestiture expenses related to Scout for the relevant period. The company believes that the financial impact of excluding non-acquisition related severance expense will be immaterial in the near future. It is excluded from certain GAAP financial measures as it has an unusually large impact on the company’s financial statements.

Earnings per share from discontinued operations-general operations (diluted) is calculated as earnings per share from discontinued operations (diluted) as reported, adjusted to reflect, on a per share basis, the impact of excluding non-GAAP adjustment (iii) and (v) above and (iv) divestiture expenses related to Scout for the relevant period.

Forward-Looking Statements:

This 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—such as our statements about expected cost savings and other results of efficiency initiatives and our statements about the timeframe or amount of expected proceeds from the closing of the sale of Scout. 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, 2016, 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. 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 diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing, and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors. For more information, visit umb.com, umbfinancial.com, blog.umb.com or follow us on Twitter at @UMBBank, Facebook at facebook.com/UMBBank and LinkedIn at linkedin.com/company/umb-bank.