UMB Financial Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. UMB is a financial holding company providing banking and financial services through Commercial Banking, Institutional Banking, and Personal Banking.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Net interest income | $224.8 million | $201.1 million | +11.8% |
| Noninterest income | $176.3 million | $131.6 million | +34.0% |
| Total revenue | $401.1 million | $332.7 million | +20.6% |
| Provision for credit losses | $13.4 million | $24.0 million | Down $10.6 million |
| Noninterest expense | $214.1 million | $201.3 million | +6.4% |
| Net income | $137.6 million | $87.4 million | +57.4% |
| Diluted EPS | $2.83 | $1.79 | — |
| Tax-equivalent net interest margin | 2.60% | 2.56% | +4 basis points |
For the six months, net income was $243.5 million versus $180.1 million; diluted EPS was $4.99 versus $3.70. Net interest income rose 10.1% to $435.1 million, while noninterest income rose 24.8% to $300.0 million. Six-month tax-equivalent net interest margin was 2.47%, down from 2.57%. Return on average assets and equity were 1.47% and 20.83% for Q2, compared with 1.02% and 11.43% a year earlier.
Balance sheet, credit, liquidity, and capital
- At June 30, total assets were $37.5 billion, down from $42.7 billion at year-end 2021. Loans were $19.0 billion, up 10.5% from year-end; deposits were $31.5 billion, down 11.6%.
- Cash and cash equivalents ended the six-month period at $2.1 billion, versus $9.2 billion at the start. Six-month operating cash flow was $405.8 million; investing cash outflow was $2.5 billion and financing cash outflow was $5.0 billion. Deposit outflows were a major financing use.
- Long-term debt was $272.5 million. Federal funds purchased and repurchase agreements were $2.7 billion; total borrowed funds were reported at $2.9 billion. UMB reported no outstanding advances on its $30 million revolving credit line or its FHLB facility, with FHLB borrowing capacity of $1.6 billion.
- Shareholders’ equity was $2.64 billion, down from $3.15 billion at year-end. Accumulated other comprehensive loss shifted to $564.8 million from income of $126.3 million, principally reflecting securities valuation losses as rates rose.
- Regulatory ratios at June 30 included common equity Tier 1 of 11.44%, total risk-based capital of 13.00%, and leverage of 8.17%; the filing states these exceeded regulatory requirements.
- Nonperforming loans were $18.1 million, or 0.10% of loans, compared with $92.3 million and 0.54% at year-end 2021. The loan allowance was $164.3 million, 0.87% of loans, versus $194.8 million and 1.13% at year-end. Six-month net charge-offs were $36.5 million, up from $33.7 million.
Material changes and unusual items
- Q2 noninterest income included a $66.2 million pre-tax gain from selling all of UMB’s Visa Class B shares, which had no carrying value. The gain materially contributed to reported earnings growth.
- During the first half, $3.8 billion amortized cost of available-for-sale securities was transferred to held-to-maturity. The related unrealized losses remain in accumulated other comprehensive income and are to be amortized over the securities’ remaining lives. At June 30, HTM securities had $5.25 billion fair value versus $5.71 billion amortized cost.
- Available-for-sale securities had $581.3 million of gross unrealized losses at June 30, largely attributed by management to interest-rate changes rather than issuer credit deterioration. No AFS credit-loss allowance was recorded.
- UMB sold its factoring loan portfolio in Q1: $82.6 million of loans were sold, generating a $2.4 million gain. It also acquired a bank branch in March, adding $43.0 million of loans and $226.8 million of deposits and recording $7.7 million of goodwill.
- Q2 noninterest expense growth reflected, among other items, higher processing, legal and consulting, bankcard, and other expenses. Management cited increased software costs, project timing, higher fraud losses, charitable contributions, and operational losses.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided. Management expects continued volatility from inflation responses, geopolitical tensions, supply-chain constraints, COVID-19, and financial-market conditions; these could affect the balance sheet and results for the remainder of 2022.
- Management described UMB as slightly asset-sensitive: its simulations project higher net interest income in rising-rate scenarios and lower income in falling-rate scenarios. Outcomes depend in part on deposit pricing behavior. The filing’s June 2022 simulations show a 10.3% first-year and 19.7% second-year increase under an immediate +300-basis-point shock, and a 7.0% and 11.9% decline under an immediate -100-basis-point shock.
- Market volatility can affect asset-based trust fees, brokerage, trading, and investment valuations. Management noted pressure on trading activity and sensitivity of fee income to market values and rates.
- Off-balance-sheet commitments included $11.2 billion of loan commitments (excluding credit cards), $3.8 billion of credit-card commitments, and $423.6 million of standby letters of credit. Many commitments may expire undrawn.
- Management said pending legal proceedings are not expected to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting during the six months.
Most important facts for investors to verify
- How much of earnings growth is repeatable after excluding the Visa share-sale gain and other investment valuation effects.
- Whether deposit outflows continue and how deposit pricing affects funding costs, liquidity, and net interest margin.
- The extent and duration of securities unrealized losses, the implications of the AFS-to-HTM transfers, and resulting effects on equity and capital.
- Whether elevated commercial and industrial charge-offs persist and whether the 0.87% loan allowance remains adequate under changing economic conditions.
- Actual performance versus the filing’s interest-rate sensitivity assumptions, particularly deposit repricing and asset yields.