UMB Financial Corporation Reports Third Quarter 2020 Net Income of $73.1 Million and Announces 3.2% Dividend Increase

Third Quarter 2020 Highlights

• GAAP net income of $73.1 million, or $1.52 per diluted share; net operating income of $76.4 million, or $1.59 per diluted share.
• Pre-tax, pre-provision (PTPP) income of $99.4 million, an increase of 10.2% from the linked quarter.
• Average loans increased 16.8% on a linked-quarter, annualized basis.
• Average deposits grew $1.3 billion to $24.1 billion compared to the second quarter of 2020.
• GAAP book value per share increased 13.8% to $59.43, and tangible book value per share increased 14.5% to $55.19, compared to a year ago.
• Credit quality remained strong, with net charge-offs of just 0.13% of average loans.

UMB Financial Corporation (NASDAQ:UMBF), a financial services company, announced net income for the third quarter of 2020 of $73.1 million, or $1.52 per diluted share, compared to $60.5 million, or $1.26 per diluted share, in the second quarter of 2020 (linked quarter) and $62.4 million, or $1.27 per diluted share, in the third quarter of 2019.

Net operating income, a non-GAAP financial measure reconciled to net income, the nearest comparable GAAP measure, later in this release, was $76.4 million, or $1.59 per diluted share, for the third quarter of 2020, compared to $63.8 million, or $1.33 per diluted share, for the linked quarter and $62.5 million, or $1.27 per diluted share, for the third quarter of 2019. Pre-tax, pre-provision income (PTPP), a non-GAAP measure reconciled to net income before taxes, the nearest comparable GAAP measure, later in this release, was $99.4 million, or $2.07 per diluted share, for the third quarter of 2020, compared to $90.2 million, or $1.88 per diluted share, for the linked quarter, and $80.5 million, or $1.64 per diluted share, for the third quarter of 2019. These PTPP results represent increases of 10.2% on a linked-quarter basis and 23.5% compared to the third quarter of 2019.

"Our strong third quarter results were driven by several factors. Despite unprecedented circumstances, average loans, excluding Paycheck Protection Program (PPP) balances, increased 9.7% on a linked-quarter annualized basis and we saw a 47.2% decrease in modified loan balances from the prior quarter. These were modifications designed during the height of the crisis to assist our customers and provide financial relief," said Mariner Kemper, chairman, president and chief executive officer. "In addition, we saw a 23.5% year-over-year increase in pre-tax, pre-provision income. We had year-over-year double-digit growth on both sides of our balance sheet and launched a successful inaugural subordinated debt issuance at an attractive yield, which further bolsters our capital position. And finally, as disclosed in our SEC filing on October 19, our fourth quarter is off to a great start with expected gains from our investment in Tattooed Chef, Inc."

Net interest income

• Net interest income totaled $184.4 million, an increase of $6.2 million, or 3.5%, from the linked quarter, driven by an increase of $1.2 billion, or 4.6%, in average earning assets. The increase in earning assets was driven by an increase of $638 million in securities and an increase of $633 million in loan balances.
• Net interest margin for the third quarter was 2.73%, a decrease of six basis points from the linked quarter, due to loan repricing and mix changes, net changes to securities, and lower contribution of free funds. Earning asset yields declined 10 basis points from the linked quarter, driven by declining yields in the loan portfolio due to reductions in short-term interest rates and an unfavorable earning asset mix shift driven by excess liquidity. The cost of interest-bearing liabilities decreased six basis points to 0.28%, driven by a seven-basis-point decline in the cost of interest-bearing deposits and lower borrowing costs. Net interest spread decreased four basis points to 2.63% from the linked quarter and was one basis point lower than the third quarter of 2019.
• On a year-over-year basis, net interest income increased $16.1 million, or 9.6%, driven by a $2.8 billion, or 22.0%, increase in average loans, and a $1.3 billion, or 15.8%, increase in securities. These increases were driven by organic loan growth and the company's participation in the PPP.
• Average deposits increased 5.9% on a linked-quarter basis and 25.0% compared to the third quarter of 2019. Average noninterest-bearing demand deposit balances increased 7.8% on a linked-quarter basis and 35.8% compared to the third quarter of 2019.
• During the third quarter, the company terminated a $750.0 million interest rate floor hedge for $34.1 million with a gain, net of unamortized premium, of $18.4 million to be amortized through September 2024.

Noninterest income

• Third quarter 2020 noninterest income decreased $7.5 million, or 6.2%, on a linked-quarter basis, largely due to:
  • A decrease of $6.2 million in company-owned life insurance income, reflecting the impact of lower market valuations of the underlying investments, recorded in other income. The decrease in company-owned life insurance income is offset by a proportionate decrease in deferred compensation expense as noted below.
  • A decrease of $4.2 million in trading and investment banking, primarily due to moderation of trading volumes from strong linked quarter levels, as well as a decrease of $1.9 million in market valuation of investments in the company's trading portfolio.
  • A decrease of $3.7 million in gains on sales of available-for-sale securities.
  • These decreases were partially offset by increases of $4.2 million in trust and securities processing due to higher trust services and fund services income and $2.4 million in bankcard fees, primarily driven by increased interchange income.

• Compared to the prior year, noninterest income in the third quarter of 2020 increased $9.4 million, or 9.0%, primarily driven by:
  • An increase of $5.3 million in trust and securities processing driven by increases of $3.7 million in fund services income and $1.6 million in corporate trust income.
  • Increases of $5.1 million in company-owned life insurance, $3.3 million in derivative income, and $1.2 million in equity earnings on alternative investments, all recorded in other income. The increase in company-owned life insurance income is offset by a proportionate increase in deferred compensation expense as noted below.
  • These increases were partially offset by decreases of $3.3 million in brokerage fees due to decreased 12b-1 income, and $2.7 million in gains on sales of available-for-sale securities.

Noninterest expense

• GAAP noninterest expense for the third quarter of 2020 was $198.0 million, a decrease of $10.5 million, or 5.1%, from the linked quarter and an increase of $6.6 million, or 3.4%, from the third quarter of 2019.
• The linked quarter decrease in noninterest expense was driven by:
  • A decrease of $6.7 million in salaries and employee benefits, largely driven by an $8.0 million decrease in deferred compensation expense, and a decrease of $1.9 million in bonus and commission expense. These decreases were partially offset by an increase of $2.7 million in severance expense. The decrease in deferred compensation expense is offset by the decrease in company-owned life insurance income noted above.
  • A $3.0 million decrease in operational losses, recorded in other noninterest expense.
  • A $0.9 million decrease in regulatory fees due to decreased federal deposit insurance expense.
• The year-over-year increase in noninterest expense was driven by:
  • A $14.0 million increase in salaries and employee benefits, primarily due to increases of $7.3 million in bonus and commission expense, including an increase of $2.7 million in severance expense. Additional increases include $4.2 million in employee benefits expense, including an increase of $3.4 million in deferred compensation expense, and an increase of $2.5 million in salary and wage expense, which included compensation expense tied to the company's COVID-19 response. The increase in deferred compensation expense was offset by the increase in company-owned life insurance income noted above.
  • These increases were partially offset by the following decreases:
    • A decrease of $2.6 million in marketing and development expense primarily due to a decline in travel and entertainment expense due to the pandemic.
    • Decreases of $1.3 million in operational losses and $1.1 million in derivative expense, both recorded in other noninterest expense.
    • A decrease of $1.8 million in consulting expense, recorded in legal and professional expense, due to timing of multiple technology initiatives.

Income taxes

• The company's effective tax rate was 11.9% for the nine months ended September 30, 2020, compared to 15.1% for the same period in 2019. The decrease in the effective tax rate for 2020 is primarily attributable to a larger portion of pre-tax income being earned from tax-exempt municipal securities.

Balance sheet

• Average total assets for the third quarter of 2020 were $29.5 billion compared to $28.1 billion for the linked quarter and $23.9 billion for the same period in 2019.
• During the third quarter, the company completed its inaugural public offering of $200 million in subordinated notes. These notes carry a rate of 3.7%, mature in September 2030, and are callable in September 2025.

• Average loans for the third quarter of 2020 increased 4.2% on a linked-quarter basis and 22.0% compared to the third quarter of 2019 due to increased commercial real estate and consumer real estate loans and the company's participation in PPP, which had an average balance of $1.5 billion in the third quarter.

• Average securities available for sale increased 8.1% on a linked-quarter basis and 17.7% compared to the third quarter of 2019.

• Average deposits increased 5.9% on a linked-quarter basis and 25.0% compared to the third quarter of 2019.
• Average noninterest-bearing demand deposits increased 7.8% on a linked-quarter basis to $8.3 billion.

Capital

• At September 30, 2020, the regulatory capital ratios presented in the foregoing table exceeded all "well-capitalized" regulatory thresholds.
• Total risk-based capital was favorably impacted by the $200 million subordinated note issuance during the third quarter. Additionally, the company contributed $100 million of capital to UMB Bank, n.a. during the third quarter.

Asset Quality

• Provision for credit losses for the third quarter totaled $16.0 million, a decrease of $5.5 million from the linked quarter, and an increase of $8.5 million from the third quarter of 2019.
• Net charge-offs totaled $5.1 million, or 0.13%, of average loans, compared to $5.5 million, or 0.15%, of average loans in the linked quarter.

Dividend Declaration

At the company's quarterly board meeting, the Board of Directors declared a $0.32 per share quarterly cash dividend, an increase of 3.2% or $0.01 per share. The cash dividend will be payable on January 4, 2021, to shareholders of record at the close of business on December 10, 2020.

Conference Call

The company plans to host a conference call to discuss its third quarter 2020 earnings results on Wednesday, October 28, 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 3Q 2020 Conference Call

A replay of the conference call may be heard through November 11, 2020 by calling (toll-free) 877-344-7529 or (international) 412-317-0088. The replay access code required for playback is 10148456. The call replay may also be accessed at investorrelations.umb.com.

Non-GAAP Financial Information

In this release, we provide information about net operating income, operating 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 equipment, cleaning, and janitorial supplies to protect the well-being of our associates and customers while on 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, counterparty, 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 adopt in 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.