Business context and reporting period
UMB Financial Corporation filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The financial holding company provides banking and financial services across several U.S. states. Comparisons below are with the corresponding 2019 period unless otherwise stated; dollar amounts are in millions except per-share data.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $184.4 | $168.3 | $536.6 | $498.5 |
| Provision for credit losses | $16.0 | $7.5 | $125.5 | $30.9 |
| Noninterest income | $113.0 | $103.6 | $331.9 | $316.4 |
| Noninterest expense | $198.0 | $191.4 | $595.1 | $575.4 |
| Net income | $73.1 | $62.4 | $130.2 | $177.1 |
| Diluted EPS | $1.52 | $1.27 | $2.69 | $3.61 |
- Q3 total revenue, defined as net interest income plus noninterest income, rose 9.4% to $297.4 million; net income rose 17.2%. Nine-month net income fell 26.5%, primarily reflecting the much higher credit-loss provision.
- Q3 tax-equivalent net interest margin was 2.73%, down 36 basis points; nine-month margin was 2.82%, down 34 basis points. Lower asset yields and excess liquidity weighed on margin, partly offset by lower deposit costs. Q3 net interest income benefited from PPP interest income of $8.7 million.
- At September 30, total assets were $30.25 billion, loans $15.95 billion, deposits $24.74 billion, and shareholders’ equity $2.85 billion. Loans increased 18.8% and deposits 14.5% from year-end 2019. PPP loans totaled $1.5 billion.
- Cash and cash equivalents were $2.02 billion. Available-for-sale securities were $8.72 billion; $6.9 billion were pledged or used as collateral. FHLB borrowing capacity was $1.4 billion, with no FHLB advances outstanding.
- Credit-loss allowance on loans was $211.7 million, or 1.33% of loans, versus 0.82% at September 30, 2019. Nonperforming loans were $93.7 million, or 0.59% of loans, versus $71.8 million a year earlier. Nine-month net charge-offs were $18.3 million, down from $27.1 million.
- Capital ratios at September 30 included a 11.93% common equity Tier 1 ratio, 14.17% total risk-based capital ratio, and 8.19% leverage ratio. The company reported these ratios exceeded regulatory requirements.
- Nine-month cash flows: operating activities provided $215.6 million; investing activities used $3.14 billion; financing activities provided $3.28 billion.
Material changes and notable items
- UMB adopted CECL on January 1, 2020. Adoption increased the allowance by $9.0 million and reduced retained earnings by $7.0 million, net of tax. The company attributed much of the year-to-date provision increase to CECL and COVID-19-related economic forecasts.
- In September, UMB issued $200 million of subordinated notes due 2030 at a 3.70% fixed rate, resetting in September 2025. Net proceeds were $197.4 million; the notes supported general corporate purposes, including capital contribution to the Bank. Long-term debt rose to $269.0 million from $70.4 million at year-end 2019.
- COVID-19 loan modifications remaining at September 30 totaled $707.1 million across 980 loans, including $476.6 million of commercial real estate loans. About 54% of non-credit-card modified loans had resumed principal or interest payments; the company reported no charge-offs on modified loans.
- Q3 noninterest expense included $1.4 million of nonrecurring pandemic-related costs and $2.9 million of severance. Approximately 65% of associates were working remotely. The company completed a $30 million accelerated share repurchase in Q2 and said it was not then actively repurchasing shares.
- On October 15, 2020, a subsidiary received 4.05 million Tattooed Chef shares and cash consideration in a business combination, with potential for up to 625,000 additional shares subject to trading milestones. The filing describes a significant gain but does not provide a clear value; shares were subject to a 180-day lock-up.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management anticipated continued market and economic volatility and said changing conditions and government responses to COVID-19 could affect the balance sheet and results for the rest of 2020. Risks include borrower credit deterioration, interest-rate and securities-market movements, liquidity and funding needs, operational and cyber risks, regulatory changes, and pandemic-related disruption. Interest-rate simulations show sensitivity to rate scenarios, but results depend on assumptions. Management did not expect pending legal proceedings to have a material adverse effect; it reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How credit quality and the $211.7 million loan allowance evolve, particularly in commercial real estate and among COVID-19-modified borrowers.
- Whether PPP-related balances, liquidity and deposit growth persist, and the effect of excess liquidity and low rates on net interest margin.
- The future earnings impact and realizable value of the Tattooed Chef shares and contingent consideration; the filing does not quantify the recognized gain.
- How the $200 million subordinated notes, repurchases and dividends affect capital, funding costs and shareholder returns.
- How much of the nine-month earnings decline reflects provision timing and CECL estimates versus underlying operating trends.