UMB Financial Corporation — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; comparisons are primarily with Q2 2020 and, for balance-sheet items, December 31, 2020. UMB is a financial holding company with Commercial Banking, Institutional Banking, and Personal Banking businesses. The filing states that interim results may not indicate full-year results.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $332.7 million | $298.7 million | +$34.0 million, 11.4% |
| Net interest income | $201.1 million | $178.2 million | +$22.8 million, 12.8% |
| Net income | $87.4 million | $60.5 million | +$26.9 million |
| Diluted EPS | $1.79 | $1.26 | +$0.53 |
| Noninterest income | $131.6 million | $120.5 million | +$11.1 million, 9.2% |
| Noninterest expense | $201.3 million | $208.5 million | -$7.2 million, 3.5% |
| Tax-equivalent net interest margin | 2.56% | 2.79% | -23 basis points |
| Return on average assets / equity | 1.02% / 11.43% | 0.87% / 8.95% | Higher |
- For the six months ended June 30, net income was $180.1 million versus $57.1 million; diluted EPS was $3.70 versus $1.18. Net interest income rose 12.2% to $395.2 million, while noninterest income rose 9.9% to $240.5 million.
- Q2 provision for credit losses was $24.0 million, up from $21.5 million. First-half provision was $16.5 million, down from $109.5 million in 2020, when pandemic-related economic uncertainty drove substantial provisioning.
- At June 30, total assets were $36.6 billion, loans $16.9 billion, deposits $30.0 billion, and shareholders’ equity $3.1 billion. Since year-end 2020, loans grew 5.0% and deposits 11.1%.
- Cash and cash equivalents were $5.45 billion at June 30. First-half operating cash flow was $177.3 million, investing cash outflow $1.67 billion, and financing cash inflow $3.44 billion.
- Long-term debt was $270.6 million; federal funds purchased and repurchase agreements were $2.8 billion. The company also reported a $200 million subordinated-note issuance in 2020. Its $30 million revolving credit line and $1.5 billion FHLB borrowing capacity were unused at quarter-end.
- Regulatory capital ratios at June 30 included 11.91% common equity Tier 1, 13.84% total risk-based capital, and an 8.00% leverage ratio. The quarterly dividend was $0.32 per share; a $0.37 dividend payable October 1, 2021 was declared after quarter-end.
Material changes and management commentary
- Higher average loan and securities balances and lower funding costs lifted net interest income, but lower asset yields, excess liquidity, and the low-rate environment compressed net interest margin. Management described the company as slightly asset-sensitive and expects market and pandemic-related volatility to continue; no specific earnings guidance was provided.
- Trust and securities processing income rose 16.3% in Q2, while service charges and bankcard fees also increased. Trading and investment banking, brokerage, and other income declined year over year. Q2 investment securities gains were $15.5 million, including increased equity-investment gains primarily associated with Tattooed Chef; these gains are market-sensitive.
- Q2 expenses declined, chiefly from lower salaries and employee benefits and equipment costs. First-half expenses nevertheless increased 1.3%, reflecting higher salaries, processing, and legal and consulting costs.
- Credit indicators improved overall: nonperforming loans were $58.2 million, down from $87.8 million at year-end 2020; the loan allowance was 1.19% of loans versus 1.34% at year-end. However, first-half net charge-offs increased to $33.7 million from $13.2 million, including a $31.9 million specialty-lending charge-off in Q2.
- COVID-19-related modified loans outstanding fell to $8.4 million across 15 loans from $67.6 million across 136 loans at year-end. The company reported that approximately 99.5% of more than 1,400 modified loans had resumed principal or interest payments; six modified loans totaling $7.5 million were on nonaccrual.
- On March 31, 2021, UMB sold its Prairie Capital Management and UMB Merchant Banc subsidiaries, a component of Personal Banking. The sale reduced goodwill by $6.3 million and also involved customer-relationship intangibles. The company also attributed changes in securities-related income to equity valuation movements and market conditions.
- Liquidity is supported by deposits, cash, and available-for-sale securities, but $8.7 billion, or 84.5%, of available-for-sale securities were pledged or used as collateral. Management cited risks from interest rates, credit conditions, deposit and liquidity management, competition, regulation, cyber and operational events, and COVID-19. It reported no material change in previously disclosed risk factors and said pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the large specialty-lending charge-off signals further deterioration, and how subsequent net charge-offs and the allowance develop.
- How sustainable earnings are after considering lower net interest margin, PPP-related income, market-sensitive investment gains, and pandemic-era provision comparisons.
- Whether deposit growth and elevated liquidity persist, and the impact of pledged securities and funding costs on liquidity and margins.
- The ongoing revenue and expense effects of the subsidiary sale, including any nonrecurring gains, valuation changes, and lost business contributions.
- Actual loan demand, credit quality, and performance of the remaining COVID-19-modified loans relative to management’s forecasts.