UMB Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. UMB is a financial holding company providing commercial, institutional, and personal banking and related financial services. Unless otherwise noted, amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $225.6 million | Up 0.4% from Q2 2022 |
| Net interest margin, tax-equivalent | 2.44% | 2.60% in Q2 2022 |
| Noninterest income | $138.1 million | Down 21.7% from Q2 2022 |
| Noninterest expense | $240.7 million | Up 12.4% from Q2 2022 |
| Net income | $90.1 million | $137.6 million in Q2 2022 |
| Diluted EPS | $1.85 | $2.83 in Q2 2022 |
- For the six months, net interest income was $467.3 million, up 7.4%; noninterest income was $268.3 million, down 10.6%; noninterest expense was $477.7 million, up 11.4%; and net income was $182.5 million versus $243.5 million.
- Six-month diluted EPS was $3.75 versus $4.99. Tax-equivalent net interest margin was 2.59% versus 2.47% for the first half of 2022.
- Q2 average loan balances rose 21.1% year over year, while average interest-bearing liabilities increased 30.1%. Higher asset yields and loan volumes were offset by sharply higher funding costs and a shift toward interest-bearing deposits and borrowings.
Balance sheet, liquidity, capital and credit
- At June 30, 2023, total assets were $41.24 billion, loans were $22.48 billion, securities were $12.93 billion, and deposits were $33.52 billion. Versus December 31, 2022, assets increased 7.1%, loans 6.9%, and deposits 2.7%.
- Deposit mix shifted: noninterest-bearing deposits were 36.2% of total deposits, down from 40.6% at year-end 2022. Estimated uninsured deposits were $22.0 billion, or 65.5% of deposits; excluding affiliate and collateralized deposits, the estimated amount was $13.7 billion, or 40.9%.
- Short-term debt was $1.8 billion: a $1.0 billion FHLB advance due in 2024 and an $800 million Federal Reserve Bank Term Funding Program borrowing due in 2023. Total borrowed funds, including repurchase agreements and long-term debt, were $4.23 billion.
- Management reported $5.6 billion of additional liquidity from cash, unpledged bond collateral, the federal funds market, and the IntraFi program; remaining stated capacity was $721 million at the FHLB, $40 million under the BTFP, and $9.6 billion at the Federal Reserve Discount Window. These sources are subject to collateral and other conditions.
- Six-month operating cash flow was $155.4 million, compared with $405.8 million in the prior-year period. Investing activities used $439.6 million and financing activities provided $2.47 billion. Cash and cash equivalents ended the period at $3.74 billion.
- Total shareholders’ equity was $2.83 billion. The total risk-based capital ratio was 12.59%, common equity Tier 1 was 10.65%, and the leverage ratio was 8.16%. Each exceeded the applicable regulatory minimums described in the filing.
- Nonperforming loans were $19.3 million, or 0.09% of loans, versus $19.3 million at year-end 2022. Loans over 90 days past due and still accruing rose to $10.7 million from $1.6 million at year-end. The loan allowance was $222.2 million, or 0.99% of loans, compared with 0.91% at year-end; six-month net charge-offs were $4.5 million.
Material changes and unusual items
- Q2 noninterest income comparison was affected by a $66.2 million pre-tax gain from the sale of Visa Class B shares in Q2 2022. Q2 2023 also included a $13.8 million increase in company-owned life insurance income and a $4.0 million gain on sale of other assets.
- Six-month investment securities income included a $4.9 million impairment loss on one available-for-sale corporate security. The filing attributes most portfolio unrealized losses to interest-rate changes rather than deterioration in issuer credit.
- At June 30, available-for-sale securities had a $765.9 million pre-tax net unrealized loss; held-to-maturity securities had a $576.4 million unrealized loss. The HTM portfolio’s fair value was $5.23 billion versus $5.81 billion amortized cost. Securities transferred from AFS to HTM in 2022 retain $226.7 million of unamortized unrealized losses.
- Salary and benefits expense rose 18.1% in Q2, including higher deferred compensation expense. Processing fees and regulatory fees also increased; management cited software subscription costs and deposit insurance expense, respectively.
- Personal Banking reported a Q2 net loss of $6.9 million, compared with net income of $15.6 million a year earlier; the six-month segment loss was $12.9 million. Higher deposit costs and lower noninterest income contributed.
Outlook, risks and contingencies
- The filing provides no specific earnings or net interest margin guidance. Management expects continued economic and market volatility and says changing conditions may affect the balance sheet and income statement during the remainder of 2023. It is pursuing operating efficiencies, technology investment, profitable loan and deposit growth, fee-income growth, and capital management.
- Management describes the company as relatively neutral to rate changes over the next year. Its simulations show the largest projected net interest income change in year one is approximately 2% or less; results depend on assumptions, including deposit pricing behavior.
- Key exposures include interest-rate movements, deposit retention and mix, uninsured deposits, liquidity and funding costs, credit deterioration, securities valuation, commercial real estate and construction lending, and market-sensitive fee income. The company also identifies operational, cybersecurity, regulatory, competitive, and macroeconomic risks.
- Off-balance-sheet commitments included $12.70 billion of loan commitments excluding credit cards, $4.58 billion of credit-card commitments, and $437.7 million of standby letters of credit. Many commitments may expire unused. Securities pledged for deposits, trust activity, derivatives, and repurchase agreements totaled $10.2 billion.
- Management said ordinary-course legal proceedings are not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the six months.
- The board declared a $0.38 per-share quarterly dividend payable October 2, 2023. On July 25, 2023, it authorized repurchases of up to one million shares through April 30, 2024; no shares were repurchased in Q2.
Important facts for investors to verify
- Deposit trends and the composition, stability, and collateralization of uninsured deposits, alongside use and renewal of short-term borrowings.
- Net interest margin and funding costs as interest-bearing deposits and other funding continue to reprice.
- Credit quality trends, particularly past-due accruing loans, commercial real estate exposures, provision levels, and allowance adequacy.
- Interest-rate sensitivity and liquidity assumptions, including the availability of stated borrowing capacity and unpledged collateral.
- Size and duration of unrealized securities losses, AOCI effects, and any future securities impairments or dispositions.
- Whether fee income can offset expense growth and the absence of prior-year Visa sale gains; monitor Personal Banking performance and deferred compensation expense.