UMB Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are primarily with Q1 2022. Balance-sheet comparisons are identified separately. UMB is a financial holding company providing banking and other financial services. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2023 / Mar. 31, 2023 | Comparable period |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $371.9; up 11.3% | $334.0 in Q1 2022 |
| Net interest income | $241.7; up 14.9% | $210.4 in Q1 2022 |
| Net interest margin, tax-equivalent | 2.76% | 2.35% in Q1 2022 |
| Net interest spread | 1.71% | 2.26% in Q1 2022 |
| Noninterest income | $130.2; up 5.3% | $123.7 in Q1 2022 |
| Noninterest expense | $237.1; up 10.4% | $214.8 in Q1 2022 |
| Provision for credit losses | $23.3 expense | $6.5 benefit in Q1 2022 |
| Net income / diluted EPS | $92.4 / $1.90 | $106.0 / $2.17 in Q1 2022 |
| Loans | $21,813; up 3.7% from Dec. 31, 2022 | $21,031 at Dec. 31, 2022 |
| Total deposits | $31,932; down 2.2% from Dec. 31, 2022 | $32,639 at Dec. 31, 2022 |
| Total assets / shareholders’ equity | $40,607 / $2,815 | $38,512 / $2,667 at Dec. 31, 2022 |
| Borrowed funds | $5,343, including $2,800 short-term debt | $2,603 total at Dec. 31, 2022 |
| Cash and cash equivalents | $3,523 at quarter-end | $6,687 at Mar. 31, 2022 |
| Operating cash flow | $1.7 | $196.1 in Q1 2022 |
- Return on average assets was 0.97% and return on average equity was 13.76%, versus 1.10% and 14.65%, respectively, in Q1 2022.
- Loan allowance for credit losses was $210.5, or 0.97% of loans. Net charge-offs were $4.6, compared with $8.4 in Q1 2022.
- Nonperforming loans were $15.5 (0.07% of loans), down from $110.4 a year earlier and $19.3 at year-end 2022.
- Regulatory capital ratios: common equity tier 1 and Tier 1 risk-based capital were each 10.57%; total risk-based capital was 12.49%; leverage ratio was 8.35%. The company reported these ratios exceeded regulatory requirements.
Material changes versus comparable periods
- Higher rates and loan growth lifted interest income, but funding costs rose sharply: Q1 interest expense was $167.1 versus $11.4 in Q1 2022. Average interest-bearing deposit cost increased to 2.64% from 0.13%; total interest-bearing liability cost rose to 2.91% from 0.21%.
- Net interest margin expanded 41 basis points year over year, while net interest spread contracted 55 basis points. Management attributed the margin gain to asset repricing and interest-free funding, partly offset by higher deposit and borrowing costs.
- Net income declined 12.8%, reflecting the larger credit-loss provision and higher expenses despite revenue growth. Compensation, processing fees, intangible amortization and regulatory fees were notable expense increases.
- Brokerage fees rose $10.2, largely from higher mutual fund and 12b-1 income; trust and securities processing increased $2.8. Deposit service charges fell $3.5, and net investment securities losses increased to $5.3, including a $4.8 impairment on an available-for-sale subordinated debt security.
- Commercial Banking net income fell to $57.1 from $83.5; Institutional Banking increased to $41.3 from $20.0; Personal Banking moved to a $5.9 loss from $2.4 income.
- Loans grew $4.1 billion, or 23.0%, year over year. Deposits fell $2.4 billion, or 7.1%, year over year, with a shift from noninterest-bearing to interest-bearing balances.
Liquidity, securities, outlook and risks
- Estimated uninsured deposits were $21.3 billion, 66.6% of deposits. Excluding $2.0 billion of affiliate deposits and $5.5 billion of collateralized deposits, estimated uninsured deposits were $13.8 billion, or 43.1% of deposits. UMB reported $811.2 million in the IntraFi Cash Service program.
- At quarter-end, UMB had $2.8 billion of short-term borrowings: $1.8 billion from the Federal Home Loan Bank and $1.0 billion from the Federal Reserve Discount Window, each at 5.0% and maturing in Q2 2023. Remaining stated borrowing capacity was $866.2 million at FHLB and $7.4 billion at the Discount Window. Management also cited $5.1 billion of additional liquidity from cash, unpledged bond collateral and IntraFi; these sources should not be assumed to be additive to stated facilities without reviewing the filing’s definitions.
- Available-for-sale securities had $677.7 million of pretax net unrealized losses; held-to-maturity securities had $489.8 million of unrealized losses. Management attributed the declines principally to interest rates, not issuer credit deterioration. After-tax unrealized losses on both portfolios represented 31.5% of common equity tier 1 capital. AOCI was a loss of $626.8 million.
- Management highlighted banking-industry volatility, interest rates, liquidity, uninsured deposits, deposit mix, unrecognized investment losses and capital as areas of heightened attention. It expects continued economic and market volatility, which could affect the balance sheet and results for the remainder of 2023. The filing provides no specific full-year earnings or margin guidance.
- Interest-rate simulations indicate a relatively neutral position over the next year; the largest modeled change in net interest income in year one was less than 2%. Results depend on assumptions, including the ability to price deposits consistently with historical practice.
- Other risks include economic slowdown, credit deterioration, deposit competition and funding costs, securities-market volatility, regulatory changes, operational and cyber risks, and the ability to manage capital and liquidity. Management said pending legal proceedings are not expected to have a material adverse effect; it reported no material change to previously disclosed risk factors.
- The board declared a $0.38 quarterly dividend payable July 3, 2023. The company repurchased 89,036 shares during Q1 at an average $88.75 per share; the filing states it was not then engaging in repurchases. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Deposit stability: uninsured and adjusted uninsured balances, concentration, outflows, and the pace of migration into interest-bearing deposits.
- Liquidity and funding: the repayment or replacement of the $2.8 billion of Q2-maturing short-term borrowings, collateral availability, and actual usable borrowing capacity.
- Securities exposure: the size and duration of unrealized AFS and HTM losses, pledged securities, and implications for liquidity and regulatory capital.
- Earnings sensitivity: whether asset yields continue to outpace deposit and borrowing costs, given the widening funding expense and narrower net interest spread.
- Credit quality: provision trends, commercial real estate and commercial loan performance, criticized-credit migration, and whether the low nonperforming-loan balance is sustained.
- Expense trajectory and fee durability, including compensation, technology and regulatory costs and market-sensitive trust and brokerage revenue.