UMB Financial Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Unless otherwise stated, amounts below are U.S. dollars.
Business context
UMB is a financial holding company operating through Commercial Banking, Institutional Banking and Personal Banking. It provides banking, trust, asset servicing, fund administration and related services. In 2020, Healthcare Services was merged into Institutional Banking for segment reporting; prior-period segment results were reclassified.
Financial results and position
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Total revenue | $1.291 billion | $1.098 billion | Up 17.6%; calculated as net interest income plus noninterest income |
| Net interest income | $731.2 million | $670.9 million | Up 9.0% |
| Net interest margin, tax-equivalent | 2.81% | 3.12% | Down 31 basis points |
| Noninterest income | $560.2 million | $426.8 million | Up 31.3%; included $120.6 million of net securities gains |
| Noninterest expense | $822.0 million | $778.9 million | Up 5.5% |
| Provision for credit losses | $130.5 million | $32.9 million | Up $97.7 million; reflects CECL adoption and COVID-19-related economic forecasts |
| Net income | $286.5 million | $243.6 million | Up 17.6% |
| Diluted earnings per share | $5.93 | $4.96 | Up 19.6% |
| Operating cash flow | $373.6 million | $339.9 million | Investing cash outflow was $4.491 billion; financing cash inflow was $5.946 billion |
Fourth-quarter 2020 net income was $156.3 million, compared with $66.5 million in fourth-quarter 2019. Fourth-quarter noninterest income was $228.3 million, including the material investment gain described below.
At year-end, total assets were $33.13 billion, loans before allowance were $16.10 billion, deposits were $27.05 billion, and shareholders’ equity was $3.02 billion. Assets increased 24.7% and deposits increased 25.2% from year-end 2019. Cash and cash equivalents were $3.50 billion.
The allowance for credit losses on loans was $216.0 million, or 1.34% of loans, versus $101.8 million, or 0.76%, a year earlier. Nonperforming loans increased to $87.8 million from $56.3 million; nonperforming assets were $92.6 million. Net charge-offs were 0.13% of average loans, compared with 0.27% in 2019.
Regulatory capital remained above minimums: the Company’s total risk-based capital ratio was 14.26%, common equity Tier 1 ratio 12.10% and leverage ratio 8.37%. The Bank was classified as well capitalized. Long-term debt was $269.6 million, up from $70.4 million, following issuance of $200 million of subordinated notes in September 2020. The Company reported $1.5 billion of FHLB borrowing capacity with no advances outstanding and an undrawn $30 million revolving credit line.
Material changes versus the prior period
- Net interest income rose on loan and earning-asset growth, including PPP lending, but lower rates compressed the tax-equivalent net interest margin.
- Noninterest income growth was dominated by a $108.8 million gain on the Company’s investment in Tattooed Chef, Inc.; net investment securities gains were $120.6 million versus $2.2 million in 2019. Trust and securities processing and trading/investment banking income also increased, while brokerage and bankcard fees declined.
- Average loans increased $2.4 billion, or 18.5%. Year-end commercial and industrial loans included $1.3 billion of PPP loans. Deposits grew faster than loans, and interest-bearing due from banks increased to $3.11 billion from $1.23 billion.
- Credit costs rose sharply following adoption of CECL on January 1, 2020 and the deterioration in forecast economic conditions. The adoption increased the opening allowance by $9.0 million and reduced retained earnings by $7.0 million, net of tax.
- Shareholders’ equity increased $410.5 million, or 15.7%. The Company repurchased 1.2 million shares during 2020 and declared $60.7 million in dividends; it said it was not currently repurchasing shares.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said pandemic effects and government responses could affect the balance sheet and income statement in 2021, and that the scale and duration of disruption remained uncertain. It expected approximately $1.8 billion of AFS securities principal repayments in 2021.
- COVID-19 risks include higher credit losses, weaker demand and fee income, operational disruption, and pressure on capital or dividends. At year-end, 136 COVID-related loan modifications totaling $67.6 million remained; approximately 96% of more than 1,300 non-credit-card modifications had resumed principal or interest payments, and the Company reported no charge-offs on modified loans.
- Key sensitivities include low or changing interest rates, deposit pricing and funding costs, credit deterioration—particularly in real estate and commercial lending—and the transition away from LIBOR. Management’s rate simulations showed higher net interest income in rising-rate scenarios and lower income in falling-rate scenarios, subject to assumptions.
- About 84.1% of AFS securities were pledged or used as collateral at year-end, limiting unencumbered securities available for other liquidity needs. Management reported no material pandemic-related disruption to internal operations.
- In February 2021, the Company agreed to sell Prairie Capital Management, LLC and UMB Merchant Banc, LLC, including related limited partnership interests. The transaction was expected to close by March 31, 2021 and have an immaterial financial-statement impact.
- Management said routine legal proceedings were not expected to materially affect financial position, results or cash flows. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; the allowance for credit losses was identified as a critical audit matter.
Most important facts for investors to verify
- How much FY2020 earnings growth depended on the Tattooed Chef gain and whether the gain is repeatable.
- Whether credit quality, nonperforming loans and the CECL allowance remain adequate as pandemic-related support and loan modifications evolve.
- Whether loan growth and deposit mix can sustain net interest income despite margin compression and interest-rate changes.
- Available liquidity after considering the high proportion of pledged AFS securities, deposit trends and off-balance-sheet commitments.
- Execution and final financial impact of the announced Prairie Capital Management and UMB Merchant Banc sale.