UMB Financial Corporation — Q3 2023 Form 10-Q
Business context and period. UMB Financial is a financial holding company offering banking and related financial services. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are primarily with December 31, 2022. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $222.3 | $233.5 | $689.6 | $668.6 |
| Noninterest income | $133.3 | $128.7 | $401.6 | $428.7 |
| Total revenue (net interest income plus noninterest income) | $355.6 | $362.2 | $1,091.2 | $1,097.4 |
| Provision for credit losses | $5.0 | $22.0 | $41.2 | $28.9 |
| Noninterest expense | $231.4 | $231.4 | $709.2 | $660.3 |
| Net income | $96.6 | $88.0 | $279.1 | $331.5 |
| Diluted EPS | $1.98 | $1.81 | $5.73 | $6.80 |
| Tax-equivalent net interest margin | 2.43% | 2.76% | 2.54% | 2.56% |
- Quarterly results: Revenue declined 1.8%, but net income increased 9.7%, mainly as the credit-loss provision was $17.0 million lower year over year. Net interest income fell 4.8%; noninterest income rose 3.6%; expenses were essentially flat.
- Year-to-date results: Revenue was down about 0.6% and net income fell 15.8%. The comparison includes a $66.2 million gain on the sale of Visa Class B shares in 2022. Net interest income rose 3.1%, while noninterest income declined 6.3% and expenses increased 7.4%.
- Margins and returns: Q3 return on average assets was 0.97% and return on average equity 13.25%, compared with 0.96% and 12.90%, respectively, a year earlier. Nine-month figures were 0.95% and 13.18%, versus 1.18% and 16.05%.
- Cash flow: For the first nine months, operating cash flow was $387.6 million, investing cash outflow $584.2 million, and financing cash inflow $2.566 billion. Cash and cash equivalents ended at $3.927 billion, up from $1.558 billion at the start of the year. Financing included $2.3 billion of short-term debt proceeds net of repayments.
- Balance sheet: Total assets were $41.465 billion, up 7.7% from year-end 2022. Loans were $22.882 billion, up 8.8%; deposits were $33.432 billion, up 2.4%; and shareholders’ equity was $2.807 billion.
- Funding and debt: Borrowed funds totaled $4.440 billion, including $2.3 billion short-term debt, $1.758 billion in federal funds purchased and repurchase agreements, and $382.8 million long-term debt. Short-term borrowings included $1.5 billion from the FHLB and $800 million through the Federal Reserve Bank Term Funding Program.
- Liquidity and deposits: Noninterest-bearing deposits declined to 33.7% of deposits from 40.6% at year-end. Estimated uninsured deposits were $20.7 billion, or 62.0% of deposits; excluding affiliate and collateralized balances, the adjusted estimate was $14.2 billion, or 42.6%. Management reported $7.4 billion of additional liquidity from cash, unpledged securities, federal funds markets and the IntraFi program, plus $10.2 billion of Discount Window capacity. FHLB and BTFP remaining capacities were $436.7 million and $20 million, respectively.
- Capital: The company reported a 10.77% common equity tier 1 ratio, 12.68% total risk-based capital ratio and 8.55% leverage ratio, all above stated regulatory minimums. The quarterly dividend was $0.38 per share; a $0.39 dividend payable January 2, 2024 was declared after quarter-end. No shares were repurchased in Q3.
Material changes, risks and outlook
- Higher interest rates lifted loan yields and interest income, but funding costs rose sharply. In Q3, the cost of interest-bearing liabilities was 3.82%, versus 1.28% a year earlier; management attributed the lower net interest margin chiefly to higher costs and a less favorable funding mix.
- Loans grew, particularly commercial real estate. Nonperforming loans were $17.0 million, or 0.07% of loans, down from $19.8 million a year earlier. The allowance for credit losses on loans was $221.5 million, or 0.97% of loans; nine-month net charge-offs were $9.1 million.
- Investment securities remain exposed to interest-rate-driven valuation losses. At September 30, pre-tax unrealized losses were $917.8 million on available-for-sale securities and $876.1 million on held-to-maturity securities. Management said the losses were primarily related to interest rates, not underlying credit deterioration. One available-for-sale corporate security impairment of $4.9 million was recorded during the first nine months.
- Fee income was mixed and market-sensitive: Q3 trust and securities processing increased 11.9%, while trading and investment banking declined 30.0%. Year-to-date noninterest income was affected by the prior-year Visa gain and the 2023 securities impairment. Management noted that asset-based and market-related fees may fluctuate with securities markets.
- Management cited continuing economic and market volatility, inflation and recession concerns, and heightened industry attention to liquidity, uninsured deposits and unrealized investment losses. It expects these conditions may affect the balance sheet and income statement for the remainder of 2023; the filing provides no specific earnings or margin guidance.
- Interest-rate simulations showed a relatively neutral position over the first year, with the largest modeled net-interest-income change about 2% or less. Outcomes depend on assumptions, including the company’s ability to price deposits in line with historical behavior.
- Risks identified include deposit retention and funding costs, credit quality and collateral values, securities valuation, interest-rate and liquidity exposure, competition, regulation, cybersecurity and operational disruptions, and economic or geopolitical developments. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; risk factors were unchanged from the 2022 Form 10-K. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Deposit trends: the shift from noninterest-bearing to interest-bearing accounts, uninsured-deposit estimates and reliance on wholesale funding.
- Funding costs, net interest margin and the maturities or renewal of the $2.3 billion short-term borrowings.
- Realized and unrealized securities losses, AOCI, pledged collateral and available liquidity under stressed conditions.
- Loan growth and concentrations, especially commercial real estate; delinquency trends, charge-offs and allowance adequacy.
- Whether fee income and expense trends, capital ratios and dividend capacity remain consistent with management’s stated priorities.