UMB Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. UMB Financial is a financial holding company providing commercial, institutional and personal banking and related financial services. Figures below are unaudited unless noted; dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Prior comparable period / change |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $398.7 million | Up 7.2% from $371.9 million in Q1 2023 |
| Net interest income | $239.4 million | Down 0.9% from $241.7 million |
| Net interest margin, tax-equivalent | 2.48% | Down 28 basis points from 2.76% |
| Provision for credit losses | $10.0 million | Down from $23.3 million |
| Noninterest income | $159.2 million | Up 22.3% from $130.2 million |
| Noninterest expense | $254.8 million | Up 7.5% from $237.1 million |
| Net income / diluted EPS | $110.3 million / $2.25 | Up from $92.4 million / $1.90 |
| Operating cash flow | $56.1 million | Up from $1.7 million |
- Interest income rose 27.2% to $520.1 million, but interest expense increased 68.0% to $280.6 million, chiefly reflecting higher deposit costs and a greater volume of interest-bearing liabilities.
- Net interest margin compression reflected a 112-basis-point increase in the cost of interest-bearing liabilities, compared with a 69-basis-point increase in earning-asset yield.
- Return on average assets was 1.06% versus 0.97%; return on average equity was 14.11% versus 13.76%. The effective tax rate was 17.6%, compared with 17.2%.
Financial position, liquidity and credit
- At March 31, total assets were $45.3 billion, loans were $23.6 billion, deposits were $36.9 billion and shareholders’ equity was $3.15 billion. Compared with December 31, 2023, assets increased 3.0%, loans 2.0% and deposits 3.1%.
- Loans grew $465.2 million from year-end. Commercial real estate loans increased $391.2 million and credit-card loans increased $114.5 million; the credit-card increase included a purchased co-branded portfolio with $109.4 million of receivables.
- Cash and cash equivalents were $6.94 billion, up $1.41 billion during the quarter. Management reported an additional $9.5 billion of liquidity from cash, unpledged securities, federal funds and the IntraFi program, as well as $11.0 billion of Federal Reserve Discount Window capacity. Remaining FHLB capacity was $952.7 million.
- Borrowings included $1.0 billion of FHLB advances due in Q2 2024 and $800 million under the Federal Reserve Bank Term Funding Program due in Q1 2025. Total borrowed funds, including federal funds purchased and repurchase agreements, were $4.41 billion.
- Estimated uninsured deposits were $25.3 billion, or 68.4% of deposits. Excluding $2.0 billion of affiliate deposits and $5.4 billion of collateralized deposits, adjusted uninsured deposits were $17.9 billion, or 48.6% of deposits.
- The allowance for credit losses on loans was $226.2 million, or 0.96% of loans. Net charge-offs were $3.0 million; nonperforming loans were $17.8 million, or 0.08% of loans, versus $13.2 million at year-end. More than 90-day-past-due loans still accruing were $3.1 million.
- Commercial real estate was 39.3% of loans; investment CRE, including non-owner-occupied and construction loans, was 27.8%. Management highlighted ongoing monitoring of CRE, particularly office exposure. Office loans averaged $9.0 million, had a 64% average loan-to-value ratio, and 84% were recourse loans.
- Regulatory capital ratios exceeded minimum requirements: common equity tier 1 and tier 1 risk-based capital were each 11.09%; total risk-based capital was 13.03%; leverage ratio was 8.39%.
Material changes and unusual items
- Noninterest income increased $29.0 million, led by trust and securities processing fees (+11.4%), bankcard fees (+20.9%) and investment securities gains. Q1 2024 investment securities gains included a $10.7 million gain on disposition of an equity investment; Q1 2023 included a $4.8 million impairment of an available-for-sale security.
- Other income included a $4.0 million legal settlement and a $1.8 million gain on sale of land. These items, along with securities gains, contributed to revenue growth and may not recur.
- Noninterest expense rose $17.8 million. Regulatory fees increased $13.8 million, primarily because of a $13.0 million FDIC special assessment following an updated estimate of losses from 2023 bank failures. Processing and bankcard expenses also increased.
- Available-for-sale securities had a $665.9 million pretax net unrealized loss at quarter-end; held-to-maturity securities had a $601.3 million pretax net unrealized loss versus $508.5 million at year-end. Management attributed unrealized losses principally to interest rates, not deterioration in issuer credit. AOCI loss was $594.5 million.
- Operating cash flow improved year over year; investing activities provided $158.4 million and financing activities provided $1.20 billion. The filing’s interim results and cash flows may not indicate full-year results.
Outlook, risks and contingencies
- The filing gives no specific earnings, revenue or margin guidance. Management expects continued economic and market volatility and notes that changing rates and economic conditions may affect the balance sheet and results for the rest of 2024.
- Interest-rate simulations indicate sensitivity to rate paths: under gradual upward-rate scenarios, net interest income is projected to decline in year one but rise in year two; falling-rate scenarios show the converse pattern. Results depend on assumptions, particularly deposit pricing.
- On April 29, 2024, after quarter-end, UMB announced a definitive agreement to acquire Heartland Financial USA, Inc. in an all-stock transaction with an approximate $2.0 billion market value. Heartland shareholders would receive 0.55 UMB shares per share. Closing is subject to customary conditions, including regulatory and shareholder approvals.
- In connection with the agreement, UMB entered forward sale agreements for 3.22 million shares, expected to provide approximately $201.6 million in proceeds. The underwriters exercised the option for an additional 420,000 shares on April 30.
- New merger-related risks include dilution, integration challenges and costs, regulatory approval or closing delays, possible termination (including a potential $70 million termination fee in specified circumstances), and exposure to Heartland’s credit portfolio, including CRE. The filing also notes goodwill impairment and execution risks.
- Off-balance-sheet commitments included $12.7 billion of loan commitments excluding credit cards, $5.3 billion of credit-card commitments and $431.3 million of standby letters of credit. Many commitments may not be drawn. Management stated that pending legal proceedings are not expected to materially adversely affect the company.
Important facts for investors to verify
- Track deposit costs, deposit mix and uninsured-deposit trends alongside net interest margin and loan growth.
- Review CRE and office credit quality, delinquencies, nonperforming loans, charge-offs and allowance assumptions as economic conditions evolve.
- Assess the scale and persistence of unrealized securities losses, including implications for liquidity and capital if securities must be sold.
- Monitor the FDIC special assessment and other expense pressures, and separate recurring performance from securities gains, settlement income and asset-sale gains.
- Confirm merger approvals, final consideration and share issuance, financing and integration costs, expected benefits, and any changes to capital or credit risk.
- Check repayment or refinancing of the $1.0 billion FHLB advance due in Q2 2024 and the $800 million BTFP borrowing due in Q1 2025.