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Earnings explained for the first quarter of 2020

UMB’s Chief Financial Officer Ram Shankar explains the company’s quarterly earnings results.

First quarter results

For the first quarter, we had phenomenal loan growth, with average balances increasing $385 million, which is 11.6% on an annualized basis. And, the deposits that fund that growth and allow us to lend to our customers grew by $439 million.

For comparison, our peer group has reported median loan growth of 7.9% on a linked-quarter annualized basis.

Loan and other asset growth, along with decreasing deposit costs as interest rates fell during the quarter, helped boost our net interest income by $1.6 million as compared to the last quarter.

And, we had several bright spots in our fee income businesses, including in Fund Services, where we continue to convert new customers. Additionally, in wealth management, new customer business is up nearly 50% and assets under management from new customers has grown almost 80% over the past 12 months.

New accounting standards

Yet, even with the positives I’ve discussed, we reported a net loss of $3.4 million for the first quarter. The primary reason for the loss resulted from the application of negative economic factors to a new accounting standard that became mandatory this quarter, which changed how we report credit losses.

This standard, called current expected credit losses, or CECL, requires us to record an estimated potential future loss for loans based on various economic factors instead of booking a loss on a loan only if and when it actually occurs. Factors such as unemployment, home prices and interest rates, which are part of the calculations, have been greatly impacted by the pandemic and related economic stresses. To give you context, during the great financial crisis, the unemployment rate went from 4% to 10% over a full three-year period. This time, because of the pandemic, it happened in a matter of three weeks.

Because of this unprecedented move, we booked an expense or provision for loan losses of $88 million for the first quarter, which is nearly 11 times the last 4-quarter average provision. This provision does not mean that this will translate into future losses to this magnitude. It is a very quantitative modeling approach based on changing macroeconomic patterns and forecasts.

Excluding this impact, our financial results remained strong as demonstrated by a 5.6% increase in pre-tax pre-provision (PTPP) income, to $83.7 million, from the linked quarter.

The implementation of the new CECL standard has made it very difficult to compare banks’ financial results this past quarter, and most investment analysts that follow us are focusing on this PTPP metric, which is our income, both from our lending activities and fee businesses, less our expenses for the quarter. Or, said another way, the core fundamentals of our business. For the first quarter, our peer group reported a median increase of 2.3% in PTPP income, versus our 5.6% increase.

Capital and liquidity are king

Our credit quality remains strong, with net charge-offs of just 0.23% of average loans, in line with our historical performance. Our long-term track record, which can be viewed in the slides, shows that our levels of nonperforming loans and losses on loans has remained steady, even through stressful times such as the 2008 financial crisis (indicated by the gray boxes). Our long, consistent history of quality underwriting will help set us apart as we go through this health crisis.

Additionally, capital and liquidity are king. None of us knows how long this crisis will last, and we are well positioned to weather this storm, with solid capital levels and a loan-to-deposit ratio that gives us flexibility to serve our customers.

 In this together

Throughout these unprecedented times, I have been amazed at the incredible amount of hard work demonstrated by UMB associates, and the sense of community and collaboration we’ve created as we pull together to serve our clients. UMB continues to be an engaged partner across our footprint and we’re supporting local initiatives to battle the crisis. We are definitely in this together.

I look forward to updating you again in July on our second quarter results, in hopefully a much different environment.

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