UMB Financial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless otherwise noted. UMB is a financial holding company providing banking, trust, investment, healthcare-payment, and related services. The quarter coincided with the onset of the COVID-19 economic downturn. Financial statements are unaudited.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net interest income | $173.9 million | $163.9 million; up 6.1% |
| Provision for credit losses | $88.0 million | $12.4 million |
| Noninterest income | $98.4 million | $107.4 million; down 8.3% |
| Noninterest expense | $188.6 million | $190.6 million; down 1.1% |
| Net income (loss) | $(3.4) million; $(0.07) diluted EPS | $57.7 million; $1.18 diluted EPS |
| Net interest margin, tax-equivalent | 2.97% | 3.20% |
| Operating cash flow | $9.4 million | $46.2 million |
Total revenue, comprising net interest income and noninterest income, was approximately $272.4 million, modestly above $271.3 million in Q1 2019. Comprehensive income was $132.8 million, including $136.2 million of other comprehensive income, largely reflecting unrealized securities and hedge gains.
Financial position and liquidity
- Total assets were $26.24 billion, down 1.2% from year-end. Loans were $13.95 billion gross, up 3.9%; deposits were $21.18 billion, down 2.0%.
- Shareholders’ equity was $2.66 billion. Cash and cash equivalents were $1.42 billion; available-for-sale securities were $7.64 billion, of which $6.0 billion were pledged as collateral. The filing identifies $979.2 million pledged at the Federal Reserve Discount Window as unencumbered at quarter-end.
- Federal funds purchased and repurchase agreements were $1.89 billion; short-term debt was $15.0 million and long-term debt was $121.6 million. The company also had $1.3 billion of FHLB borrowing capacity and no outstanding FHLB advances.
- Total risk-based capital ratio was 13.12%; common equity Tier 1 and leverage ratios were 11.90% and 8.81%, respectively. UMB elected the regulatory option to defer the CECL capital impact under the alternative transition rule.
- Cash declined $249.9 million during the quarter: investing activities provided $231.1 million, while financing activities used $490.4 million.
Material changes and unusual items
- Net interest income rose with loan and earning-asset growth and lower funding costs, but the tax-equivalent margin fell 23 basis points as lower asset yields offset volume benefits.
- The $88.0 million credit-loss provision reflected adoption of CECL and management’s updated economic forecasts amid COVID-19. CECL adoption increased the opening allowance by $9.0 million and reduced retained earnings by $7.0 million, net of deferred taxes. The loan allowance ended at $187.9 million, or 1.35% of loans.
- Nonperforming loans rose to $97.0 million from $56.3 million at year-end; management attributed much of the increase to two oil-and-gas and agricultural credits totaling $34.8 million placed on nonaccrual during the quarter. Net charge-offs were $7.7 million.
- Noninterest income declined primarily because of lower company-owned life insurance and derivative income and market-related declines in trading valuations. Trust and securities processing income rose 12.0%, while trading and investment banking income fell 69.1%.
- The company repurchased 1.02 million shares at an average $53.79 per share, including a $30 million accelerated share repurchase. Repurchases were paused except for settlement of the ASR. The quarterly dividend was $0.31 per share.
- Healthcare Services was combined with Institutional Banking beginning in 2020; prior segment results were reclassified for comparison. Management reported Q1 net losses of $18.7 million in Commercial Banking and $6.0 million in Personal Banking, while Institutional Banking earned $21.2 million.
Outlook, risks, and contingencies
- Management said COVID-19 effects and government responses could affect the balance sheet and income statement for the remainder of 2020; it did not provide numerical earnings guidance. It cited uncertainty in credit performance, market-sensitive fees, interest rates, loan demand, and operating conditions.
- At filing, UMB had processed more than 3,000 Paycheck Protection Program applications totaling over $1.4 billion. It was offering payment deferrals and other loan modifications; management anticipated additional COVID-related modifications not classified as troubled debt restructurings.
- The filing identifies risks from further credit deterioration and CECL-driven provision volatility, pandemic-related disruptions to customers and service providers, interest-rate and market movements, liquidity and capital demands, and operational or technology disruption. Management stated it was monitoring capital and liquidity and expected to maintain regulatory capital compliance.
- Off-balance-sheet commitments included $7.25 billion of loan commitments excluding credit cards, $3.29 billion of credit-card commitments, and $301.4 million of standby letters of credit. These contractual amounts do not necessarily represent future cash needs because commitments may expire undrawn.
- Management did not expect pending legal proceedings, considered in the ordinary course of business, to have a material adverse effect. The filing states disclosure controls were effective and there was no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-related borrower stress, particularly in commercial, real estate, oil-and-gas, and agricultural exposures, drives further increases in nonperforming loans, charge-offs, and credit-loss provisions.
- How CECL forecasts and allowances evolve as economic conditions change, including the effect of regulatory capital transition relief.
- Whether lower interest rates and market volatility further pressure net interest margin, trading results, life-insurance valuations, and asset-based fee income.
- Deposit trends, pledged-security availability, borrowing capacity, and actual liquidity needs as loan commitments are funded.
- Whether the $0.31 quarterly dividend remains supportable and whether share repurchases resume after settlement of the accelerated repurchase agreement.