It has been about a month since the last earnings report for UMB Financial (UMBF). Shares have lost about 10.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is UMB due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
UMB Financial Q2 Earnings as Expected, Revenues Escalate
UMB Financial reported second-quarter 2019 net operating earnings of $1.17 per share, in line with the Zacks Consensus Estimate. The reported figure compares favorably with the prior-year quarter’s earnings of $1.12.
Higher revenues, aided by rising loans and deposit balances, supported the results. However, reduction in net interest margin was a major drag. Further, higher provisions and elevated expenses were the undermining factors.
Including certain non-recurring items, the company reported net income of $57 million or $1.16 per share for the reported quarter, up from the $55.4 million or $1.11 recorded in the prior-year quarter.
Increase in Revenues, Loans & Deposits Balance, Costs Flare Up
Total revenues for the April-June quarter came in at $271.8 million, up 8.5% year over year. The revenue figure also outpaced the Zacks Consensus Estimate of $270.7 million.
Net interest income came in at $166.4 million, reflecting an increase of 10.8% from the year-ago quarter. Increase in average loans and securities, along with an additional day in the quarter, mainly led to this upside. Net Interest Margin (NIM) contracted 5 basis points (bps) to 3.19% from the prior-year quarter reported tally.
Non-interest income totaled $105.4 million, up 5.1% year over year. This upside resulted from a rise in most of the income components, partly muted by lower bankcard fees and net losses on sales of securities available for sale.
Non-interest expenses (GAAP basis) came in at $193.4 million, up 9.1% from the year-ago tally, mainly due to rise in most of the expense components. Adjusted non-interest expenses were $193 million, down 9.4% year over year.
Efficiency ratio (GAAP basis) increased to 70.32% from the prior-year quarter’s 70.21%. Rise in efficiency ratio indicates decline in profitability. Adjusted efficiency ratio was 70.19%, up from the year-earlier quarter’s 69.88%.
As of Jun 30, 2019, average loans and leases were around $12.6 billion, up 2.4% sequentially. Additionally, average deposits climbed marginally from the prior-quarter’s end to $18.8 billion.
Credit Quality: A Mixed Bag
Total non-accrual and restructured loans came in at $53.4 million, down 4.6% year over year. However, provision for loan losses came in at $11 million, up from the $7 million recorded in the year-earlier quarter. Also, the ratio of net charge-offs to average loans was 0.40% in the reported quarter, up 8 bps from the year-ago quarter.
Strong Capital & Profitability Ratios
As of Jun 30, 2019, Tier 1 risk-based capital ratio was 12.65% compared with 13.56% as of Jun 30, 2018. Further, total risk-based capital ratio was 13.63% compared with 14.63% at the end of the prior-year quarter. Tier 1 leverage ratio was 9.69% compared with 10.50% as of Jun 30, 2018.
Adjusted return on average assets at the quarter’s end was 0.99%, down from 1.09% in the year-ago quarter. Additionally, return on average equity was 9.51% compared with 10.30% in the prior-year quarter.
For full-year 2019, tax rate is likely to be between 15% and 16%.
Given the outlook for lower short-term and long-term rates, management expects some margin pressure, while with growth witnessed on the company’s robust pipeline, net interest income is expected to improve.
On the fee income side, management continues to see opportunity in many of the businesses. In bond trading, both taxable and tax-free trading volumes have picked up, and in Corporate Trust, attractive growth potential is anticipated.
Notably, the company continued with its strategy to extend duration in the securities portfolio, reinvesting cash flows into bonds with longer-dated maturities with call protection to mitigate interest rate risk. While the company is investing at accretive yields relative to roll-offs, buy yields have shrunk about 50 basis points since the fourth quarter given the shape of the curve. Since quarter end, one-month LIBOR has contracted an additional 13 basis points, impacting pricing on about 40% of the company’s loan portfolio with some benefit on the deposits, which is more closely aligned to the Fed target and the Fed effective rates.
Additionally, the previously-announced exit of the 70 million in higher-yielding factoring loans is likely to put downward pressure on loan yields. Therefore, the company expects these dynamics to affect third-quarter net interest margin more than subsequent quarters. However, with the ease of deposit pricing, management expects some benefit on interest-bearing deposit costs which is anticipated to moderate additional NIM compression. Based on these assumptions, net interest margin is expected to be down 8-10 basis points through the remainder of 2019.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
At this time, UMB has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, UMB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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