UMB Financial Corporation Reports First Quarter 2020 Results

KANSAS CITY, Mo.--(BUSINESS WIRE)-- UMB Financial Corporation (Nasdaq: UMBF), a financial services company, announced results for the first quarter of 2020. "On a GAAP basis, we reported a net loss of $3.4 million, driven by the adoption of a new accounting standard on January 1, 2020, which resulted in significantly higher provision expense based on the possibility of future credit losses under the current environment created by the COVID-19 crisis,” said Mariner Kemper, chairman, president and chief executive officer. “Excluding this impact, business and financial results remained strong as demonstrated by a 5.6 percent increase in pre-tax pre-provision income, to $83.7 million, from the linked quarter. As many industry participants have noted, the ill-timed adoption of this new accounting standard has resulted in adding more undue volatility in this critical environment and rendered comparability of financial results across the banking industry extremely difficult.”

2020 First Quarter Highlights

• Average loan balances increased $385 million, or 11.6 percent, on a linked-quarter annualized basis.
• Average deposits grew $439 million to $20.8 billion compared to the fourth quarter of 2019.
• GAAP book value per share of $55.33, a 15.5 percent increase, and tangible book value per share of $51.04, a 16.1 percent increase compared to a year ago.
• Efficiency ratio improved to 68.93 percent compared to 70.00 percent a year ago.
• Credit quality remained strong, with net charge-offs of just 0.23 percent of average loans, consistent with the company’s historical performance.

“As we, as a nation, navigate our way through this unprecedented and challenging time, I have never been prouder of how the banking industry and UMB associates have rallied in response to the COVID-19 crisis,” said Kemper. “Our deepest gratitude goes to all those at the frontline combating this crisis. We are humbled to be in a position to offer critical financial support and services to our clients as we all adapt to these global impacts. As we’ve worked through the CARES Act legislation and helped our customers navigate the Paycheck Protection Program during the past few weeks, I have been inspired by the enduring sense of service, duty and patriotic responsibility demonstrated by UMB associates. To date, we have processed more than 3,000 applications in excess of $1.4 billion as part of this program. Our capital and liquidity remain strong. Our legacy is built on being there for our customers and communities, and our history of prudent risk management gives us the strength and flexibility to serve our customers in their greatest hour of need.”

For the first quarter of 2020, the company recognized a net loss of $3.4 million, or $0.07 per diluted share, compared to net income of $66.5 million, or $1.35 per diluted share, in the fourth quarter of 2019 (linked quarter) and net income of $57.7 million, or $1.18 per diluted share, in the first quarter of 2019. The results for 2020 include significantly higher provision expense related to the implementation of the current expected credit losses (CECL) methodology for estimating allowance for credit losses, including the current and forecasted economic downturn related to the COVID-19 (coronavirus) pandemic.

Pre-tax, pre-provision income (PTPP), a non-GAAP measure which is reconciled to the nearest comparable GAAP measure later in this release, was $83.7 million, or $1.72 per diluted share, for the first quarter of 2020, compared to $79.3 million, or $1.61 per diluted share, for the linked quarter, and $80.6 million, or $1.65 per diluted share, for the first quarter of 2019. These PTPP results represent increases of 5.6 percent on a linked-quarter basis and 3.9 percent compared to the first quarter of 2019.

Net interest income

• Net interest income totaled $173.9 million, an increase of $1.6 million, or 0.9 percent, from linked quarter levels, driven by a $384.7 million, or 2.9 percent, increase in average loans, and a 4.3 percent increase in average earning assets. These benefits were offset by the impact of recent reductions in short-term interest rates on net interest margin.
• Net interest spread of 2.67 percent for the first quarter represents an increase of one basis point as compared to the linked quarter despite a 150-basis-point reduction in short-term interest rates.
• Net interest margin for the first quarter was 2.97 percent, down five basis points from the linked quarter, in large part due to lower short-term interest rates. Earning asset yields declined 18 basis points from the linked quarter, driven by declining yields in the loan portfolio due to recent reductions in short-term interest rates. The cost of interest-bearing liabilities decreased 19 basis points to 0.91 percent, driven by an 18-basis-point decline in the cost of interest-bearing deposits and lower borrowing costs.
• On a year-over-year basis, the increase in net interest income was driven by a $1.3 billion, or 10.7 percent, increase in average loans, and a $0.8 billion, or 10.5 percent, increase in average investment securities. These benefits were partially offset by declining yields in the loan portfolio due to recent reductions in short-term interest rates.
• Average deposits increased 2.2 percent on a linked-quarter basis and 11.2 percent compared to the first quarter of 2019. Average noninterest-bearing demand deposit balances increased 1.5 percent on a linked-quarter basis and 8.5 percent compared to the first quarter of 2019.

Noninterest income

• First quarter 2020 noninterest income decreased $11.9 million, or 10.8 percent, on a linked-quarter basis, largely due to:
  • Decreases of $16.6 million in company-owned life insurance income, reflecting the impact of lower market valuations of the underlying investments, and $0.8 million in derivative income, both recorded in other income. The decrease in company-owned life insurance income is offset by a proportionate decrease in deferred compensation expense noted below.
  • A decrease of $5.0 million in trading and investment banking, primarily driven by a decrease of $3.5 million in market valuation of investments in the company’s trading portfolio due to the overall market decline in March.
  • These decreases were partially offset by the following increases:
    • An increase of $5.7 million in healthcare income, recorded in service charges on deposits, related to customer transfer and conversion fees recorded in the first quarter.
    • An increase of $1.0 million in brokerage fees, primarily driven by higher 12b-1 income.
    • An increase of $2.0 million in equity earnings on alternative investments and a $1.9 million gain on the sale of a building, both recorded in other income.

• Compared to the prior year, noninterest income in the first quarter of 2020 decreased $9.0 million, or 8.3 percent, primarily driven by:
  • Decreases of $19.2 million in company-owned life insurance and $1.1 million in derivative income, both recorded in other income. The decrease in company-owned life insurance income is offset by a proportionate decrease in deferred compensation expense noted below.
  • A decrease of $3.9 million in trading and investment banking, primarily driven by a decrease of $4.3 million in market valuations of investments in the company’s trading portfolio due to the overall market decline in March.
  • These decreases were partially offset by the following increases:
    • An increase of $5.0 million in trust and securities processing, driven by an increase of $2.7 million in corporate trust income and $1.8 million in fund servicing revenue.
    • An increase of $3.8 million in service charges on deposits, largely driven by healthcare customer transfer and conversion fees recorded in the first quarter of 2020 in the company’s healthcare services business.
    • An increase of $2.6 million in brokerage fees, due to higher 12b-1 and money market income.
    • An increase of $1.9 million in equity earnings on alternative investments and a $1.9 million gain on sale of other assets, both recorded in other income.

Noninterest expense

• GAAP noninterest expense for the first quarter of 2020 was $188.6 million, a decrease of $14.8 million, or 7.3 percent, from the linked quarter and a decrease of $2.0 million, or 1.1 percent, from the first quarter of 2019.
• The linked quarter decrease in noninterest expense was driven by:
  • A decrease of $9.7 million in salaries and employee benefits, largely driven by a $15.7 million decrease in deferred compensation expense, which is offset by the decrease in company-owned life insurance income noted above. Additionally, there was a decrease of $2.0 million in bonus and commission expense. These decreases were partially offset by a seasonal increase of $8.1 million in payroll taxes, insurance, and 401(k) expense recognized in the first quarter.
  • A decrease of $3.9 million in legal and consulting expense and $3.7 million in marketing and business development due to the timing of multiple projects.
  • A decrease of $2.1 million in supplies and services expense largely driven by a decline in postage expense related to reduced credit card campaign mailings in the first quarter of 2020.
  • These decreases were partially offset by an increase of $4.2 million in derivative expense, recorded in other expense.
• The year-over-year decrease in noninterest expense was driven by:
  • A $5.0 million decrease in salaries and employee benefits, primarily due to a decrease of $15.5 million in employee benefits expense, offset by increases of $6.0 million in salary and wage expense and $4.5 million in bonus and commission expense. The decrease in employee benefits expense was primarily driven by a decrease of $18.0 million in deferred compensation expense, which is offset by the decrease in company-owned life insurance income noted above.
  • These decreases were partially offset by increases of $1.6 million in equipment expense and $1.3 million in processing fees due to investments in digital channel and integrated platform solutions to support business growth and the ongoing modernization of the company’s core systems.

Income taxes

• The company recognized an income tax benefit of $0.8 million, or 19.2 percent, on a pre-tax loss of $4.3 million for the three months ended March 31, 2020, compared to income tax expense of $10.5 million, or 15.4 percent, on pre-tax income of $68.3 million for the same period in 2019. The amount of tax benefit recorded for the three months ended March 31, 2020 reflects management’s estimate of the annual effective tax rate applied to the year-to-date loss adjusted for the tax impact of items discrete to the quarter.

Balance sheet

• Average total assets for the first quarter of 2020 were $26.0 billion compared to $25.1 billion for the linked quarter and $22.9 billion for the same period in 2019.

• Average loans for the first quarter of 2020 increased 2.9 percent on a linked-quarter basis and 10.7 percent compared to the first quarter of 2019.

• Average securities available for sale increased 1.2 percent on a linked-quarter basis and increased 12.4 percent compared to the first quarter of 2019.

• Average deposits increased 2.2 percent on a linked-quarter basis and 11.2 percent compared to the first quarter of 2019.

Capital

• At March 31, 2020, the regulatory capital ratios presented in the foregoing table exceeded all “well-capitalized” regulatory thresholds.
• The company has elected to adopt the option to use a five-year transition of the impact of CECL on regulatory capital, as allowed by the Interim Final Rule of the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, for purposes of calculating its March 31, 2020 regulatory capital.
• During and subsequent to the first quarter of 2020, approximately $55 million, or 1.0 million shares, were repurchased through a combination of open market activity and a $30 million accelerated share repurchase (ASR) program entered into in early March. The ASR will be completed during the second quarter. The company has no plans for additional repurchases at this time.

Asset Quality

• On January 1, 2020, the company adopted CECL, a new accounting standard that establishes an allowance for credit losses (ACL) on all financial assets. The ACL is based on an estimation of credit losses over the full remaining expected life with consideration to current and expected changes in key macroeconomic conditions.
• At adoption on January 1, 2020, the company’s ACL increased by $9.0 million, or 8.9 percent. This increase in the ACL resulted in a $7.0 million decrease to retained earnings, net of deferred tax balances.
• The subsequent increase in ACL and provision through March 31, 2020 largely reflects the impact of the current and forecasted deterioration of key macroeconomic variables related to the COVID-19 pandemic, and to a lesser extent, to cover net charge-offs, loan growth, and the impairment of one commercial loan transferred to nonaccrual status.
• Provision for credit losses for the first quarter totaled $88.0 million, an increase of $86.0 million from the linked quarter, and $75.7 million from the first quarter of 2019. The provision expense for 2020 includes increased provision expense related to the implementation of CECL, coupled with the impact on various economic variables due to the COVID-19 pandemic.
• Increased expense for credit loss provision under CECL resulted in a buildup of reserves which now stand at a strong 1.3 percent of assets at amortized cost.
• Net charge-offs totaled $7.7 million, or 0.23 percent, of average loans, compared to $7.6 million, or 0.23 percent, of average loans in the linked quarter.

Dividend Declaration and Common Share Repurchase Authorization

At the company’s quarterly board meeting, the Board of Directors declared a $0.31 per share quarterly cash dividend, payable on July 1, 2020, to shareholders of record at the close of business on June 10, 2020.

As in prior years, the Board has approved the repurchase of up to 2,000,000 shares of the company’s common stock. Share repurchases may occur from time to time at any point until the regular meeting of the Board that immediately follows the 2021 annual meeting of the company’s shareholders. Shares acquired under the repurchase program may be available for reissuance or resale, including in connection with the company's compensation plans and dividend reinvestment plan. Under the repurchase program, the company may acquire the shares from time to time in open market or privately negotiated transactions, at the discretion of management.

Conference Call

The company plans to host a conference call to discuss its first quarter 2020 earnings results on Wednesday, April 29, 2020, at 8:30 a.m. (CT).

Interested parties may access the call by dialing (toll-free) 877-267-8760 or (international) 412-542-4148 and requesting to join the UMB Financial call. The live call may also be accessed by visiting investorrelations.umb.com or by using the following link: UMB Financial 1Q 2020 Conference Call

A replay of the conference call may be heard through May 13, 2020 by calling (toll-free) 877-344-7529 or (international) 412-317-0088. The replay access code required for playback is 10141589. The call replay may also be accessed at investorrelations.umb.com.

Non-GAAP Financial Information

In this release, we provide information about net operating (loss) income, operating (losses) earnings per share - diluted (operating EPS), operating return on average equity (operating ROE), operating return on average assets (operating ROA), operating noninterest expense, operating efficiency ratio, pre-tax, pre-provision income, pre-tax, pre-provision earnings per share – diluted (PTPP EPS), tangible shareholders’ equity, and tangible book value per share, all of which are non-GAAP financial measures. This information supplements the results that are reported according to generally accepted accounting principles in the United States (GAAP) and should not be viewed in isolation from, or as a substitute for, GAAP results. The differences between the non-GAAP financial measures – net operating income, operating EPS, operating ROE, operating ROA, operating noninterest expense, operating efficiency ratio, PTPP, PTPP EPS, tangible shareholders’ equity, and tangible book value per share – and the nearest comparable GAAP financial measures are reconciled later in this release. The company believes that these non-GAAP financial measures and the reconciliations may be useful to investors because they adjust for acquisition-, severance-, and COVID-19 related items that management does not believe reflect the company’s fundamental operating performance. COVID-19 related expense includes hazard pay for branch associates, computer hardware expense to support associates working remotely, and additional cleaning and janitorial supplies to disinfect the company’s premises.

Net operating income for the relevant period is defined as GAAP net income, adjusted to reflect the impact of excluding expenses related to acquisitions, severance expense, COVID-19 related expense, and the cumulative tax impact of these adjustments.

Operating EPS (diluted) is calculated as earnings per share as reported, adjusted to reflect, on a per share basis, the impact of excluding the non-GAAP adjustments described above for the relevant period. Operating ROE is calculated as net operating income from continuing operations, divided by the company’s average total shareholders’ equity for the relevant period. Operating ROA is calculated as net operating income from continuing operations, divided by the company’s average assets for the relevant period. Operating noninterest expense for the relevant period is defined as GAAP noninterest expense, adjusted to reflect the pre-tax impact of non-GAAP adjustments described above. Operating efficiency ratio is calculated as the company’s operating noninterest expense, net of amortization of other intangibles, divided by the company’s total non-GAAP revenue (calculated as net interest income plus noninterest income, less gains on sales of securities available for sale, net).

Pre-tax, pre-provision income for the relevant period is defined as GAAP net income, adjusted to reflect the impact of excluding income tax and provision expenses.

Tangible shareholders’ equity for the relevant period is defined as GAAP shareholders’ equity, net of intangible assets. Tangible book value per share is defined as tangible shareholders’ equity divided by the Company’s total shares outstanding.

Forward-Looking Statements:

This press release contains, and our other communications may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast,” “target,” “trend,” “plan,” “goal,” or other words of comparable meaning or future-tense or conditional verbs such as “may,” “will,” “should,” “would,” or “could.” Forward-looking statements convey our expectations, intentions, or forecasts about future events, circumstances, results, or aspirations. All forward-looking statements are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond our control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Our actual future objectives, strategies, plans, prospects, performance, condition, or results may differ materially from those set forth in any forward-looking statement. Some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements are described in our Annual Report on Form 10-K for the year ended December 31, 2019, our subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, or other applicable documents that are filed or furnished with the U.S. Securities and Exchange Commission (SEC). In addition to such factors that have been disclosed previously, the COVID-19 pandemic (the Pandemic) may also cause actual results or other future events, circumstances, or aspirations to differ from our forward-looking statements. The Pandemic has created a global public-health crisis that has resulted in widespread volatility and deteriorations in household, business, economic, and market conditions. It is currently adversely affecting the company and its customers, counterparties, employees, and third-party service providers, and the continued adverse impacts on our business, financial position, results of operations, and prospects could be significant. We are not able to accurately predict the extent of the impact of the Pandemic on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects at this time, and we believe it will depend on a number of evolving factors, including: (i) the duration, extent and severity of the Pandemic; (ii) the response of governmental and non-governmental authorities to the Pandemic, which is rapidly changing and not always coordinated or consistent across jurisdictions; (iii) the effect of the Pandemic on our customers, counterparties, employees and third-party service providers, which may vary widely, and which is generally expected to increase our credit, operational, and other risks and (iv) the effect of the Pandemic on economies and markets, which in turn could adversely affect, among other things, the origination of new loans and the performance of our existing loans. The Pandemic is also expected to have a significant impact on our CECL calculation and related provision under a new accounting standard that we were required to phase in beginning January 2020. The CECL calculation includes periodic estimates of the net amount expected to be collected over the contractual term of certain financial assets, and requires us to take into account, among other things, economic conditions forecasted over the life of the financial asset, including the current and anticipated effects of the Pandemic. Any forward-looking statement should be evaluated in light of these considerations. Any forward-looking statement made by us or on our behalf speaks only as of the date that it was made. We do not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except to the extent required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that we may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K, or other applicable document that is filed or furnished with the SEC.

About UMB:

UMB Financial Corporation (Nasdaq: UMBF) is a financial services company headquartered in Kansas City, Missouri. UMB offers commercial banking, which includes comprehensive deposit, lending and investment services, personal banking, which includes wealth management and financial planning services, and institutional banking, which includes asset servicing, corporate trust solutions, investment banking, and healthcare services. UMB operates branches throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, and serves business and institutional clients nationwide. For more information, visit UMB.com, UMB Blog, UMB Facebook and UMB LinkedIn, or follow us on Twitter at @UMBBank. For information about UMB’s operations, approach and relief measures during the COVID-19 pandemic, please visit umb.com/COVID-19.

The company has strategically aligned its operations into the following three reportable segments: Commercial Banking, Institutional Banking, and Personal Banking. Senior executive officers regularly evaluate business segment financial results produced by the company’s internal reporting system in deciding how to allocate resources and assess performance for individual business segments. Previously, the company had the following four business segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services. The company’s reportable segments include certain corporate overhead, technology and service costs that are allocated based on methodologies that are applied consistently between periods. For comparability purposes, amounts in all periods are based on methodologies in effect at March 31, 2020.

Non-GAAP Financial Measures

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Media Contact: Stephanie Hague: 816.860.5088 Investor Relations Contact: Kay Gregory: 816.860.7106

Source: UMB Financial Corporation