UMB Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. UMB is a financial holding company providing banking, trust, fund services, healthcare payment, and wealth management services through Commercial Banking, Institutional Banking, and Personal Banking.
Financial performance and position
| Metric | Q2 2020 | Comparable period / context |
|---|---|---|
| Net income | $60.5 million; diluted EPS $1.26 | Q2 2019: $57.0 million; diluted EPS $1.16 |
| Net interest income | $178.2 million | Up 7.1% year over year |
| Net interest margin, tax-equivalent | 2.79% | Q2 2019: 3.19% |
| Noninterest income | $120.5 million | Up 14.3% year over year |
| Noninterest expense | $208.5 million | Up 7.8%; includes $4.0 million of nonrecurring COVID-19 expenses |
| Net income, six months | $57.1 million; diluted EPS $1.18 | Six months 2019: $114.7 million; diluted EPS $2.34 |
| Net interest margin, tax-equivalent, six months | 2.88% | Six months 2019: 3.19% |
For the six months, provision for credit losses was $109.5 million versus $23.4 million in 2019. The filing attributes the increase primarily to CECL adoption and the COVID-19-related economic outlook. Six-month net income also reflects materially higher credit-loss provisioning; quarterly and year-to-date results should not be conflated.
At June 30, total assets were $29.75 billion, loans $15.31 billion, securities $9.80 billion, deposits $24.46 billion, total liabilities $26.98 billion, and shareholders’ equity $2.78 billion. Compared with December 31, 2019, assets rose 12.0%, loans 13.9%, and deposits 13.2%. PPP loans totaled $1.5 billion.
Six-month operating cash flow was $101.7 million, investing cash flow was negative $2.47 billion, and financing cash flow was positive $2.85 billion. Cash and cash equivalents ended the period at $2.15 billion, up from $1.67 billion at year-end 2019.
Credit quality and capital: nonperforming loans were $82.2 million, or 0.54% of loans, versus $56.3 million at year-end 2019. The loan allowance was $200.3 million, or 1.31% of loans; six-month net charge-offs were $13.2 million. Regulatory ratios were 11.92% CET1, 13.17% total risk-based capital, and 8.35% leverage. Long-term debt was $71.0 million; short-term debt was $15.0 million. Repurchase agreements and federal funds purchased totaled approximately $1.96 billion.
Material changes and management commentary
- Net income rose 6.3% in Q2 year over year, but six-month net income fell to $57.1 million from $114.7 million, principally amid sharply higher credit-loss provision.
- Lower interest rates and excess liquidity reduced Q2 net interest margin by 40 basis points year over year, despite loan growth and lower deposit funding costs. PPP loans contributed $6.9 million of Q2 loan interest income.
- Fee income growth was led by trust and securities processing, trading and investment banking, and securities-sale gains. Bankcard fees and Q2 deposit service charges declined. Management cautioned that market-linked fee businesses remain exposed to market and rate volatility.
- UMB reported 1,676 COVID-19-related loan modifications totaling $1.34 billion at June 30; these were treated as performing and not past due under applicable guidance. The company said it anticipated further modifications.
- Approximately 80% of associates were working remotely. The company recorded $4.0 million of Q2 nonrecurring COVID-19 expenses and reported no material adverse disruption to internal operations at that time.
- UMB adopted CECL on January 1, 2020, recording a $9.0 million increase to credit-loss allowances and a $7.0 million reduction to retained earnings, net of deferred taxes. It elected the regulatory-capital transition option for CECL.
- Management provided no specific earnings or margin guidance. It warned that the pandemic, economic conditions, government responses, interest rates, and market volatility could affect results for the remainder of 2020. The filing states that interim results may not indicate full-year performance.
Outlook, risks, and contingencies
Key disclosed risks include pandemic-related borrower deterioration, credit and collateral losses, market and interest-rate changes, liquidity and deposit funding, operational and cybersecurity risks, regulatory changes, and potential service-provider disruption. The company had $12.1 billion of commercial commitments, including unused credit commitments and letters of credit; actual funding needs may be lower because commitments may expire undrawn. Management stated that pending legal proceedings were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Track subsequent credit-loss provisions, allowance levels, delinquencies, nonperforming loans, and charge-offs as pandemic forecasts and borrower performance evolve.
- Verify the performance and repayment status of the $1.5 billion PPP portfolio and $1.34 billion of COVID-19-modified exposures.
- Assess whether deposit and asset growth persists, and how excess liquidity, repricing, and low rates affect net interest margin and earnings.
- Review market-sensitive fee income, including trust assets, trading, brokerage, and bankcard activity, alongside expense growth.
- Monitor capital, liquidity, pledged securities, borrowing capacity, and share repurchases; the company said it was not then conducting repurchases apart from ASR settlement.