UMB Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. UMB is a financial holding company providing banking and other financial services. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
- Third-quarter revenue: Net interest income plus noninterest income was $362.2, up 14.0% from $317.7 a year earlier. Net interest income was $233.5, up 11.3%; noninterest income was $128.7, up 19.3%.
- Third-quarter earnings: Net income was $88.0, down 6.9% from $94.5; diluted EPS was $1.81 versus $1.94. Income before taxes was $108.8 versus $113.8.
- Year-to-date earnings: Nine-month net income was $331.5, up 20.8% from $274.5; diluted EPS was $6.80 versus $5.64. Results included a $66.2 pretax gain from selling Visa Class B shares.
- Interest margins: Q3 tax-equivalent net interest margin rose to 2.76% from 2.52%, while net interest spread declined to 2.25% from 2.43%. The nine-month margin was 2.56% versus 2.55%.
- Credit costs: Q3 provision for credit losses was $22.0, compared with a $5.0 provision reduction in Q3 2021. Nine-month provision was $28.9 versus $11.5. The loan allowance was $184.9, or 0.93% of loans, at September 30.
- Expenses: Q3 noninterest expense increased 10.8% to $231.4; nine-month expense increased 8.0% to $660.3. Management cited higher compensation, processing, legal and consulting, bankcard, and regulatory costs among the drivers.
- Cash flow: For the first nine months, operating activities provided $625.1; investing activities used $2,908.4; and financing activities used $4,920.7. Cash and cash equivalents declined $7,204.0 to $2,010.5, principally amid deposit outflows and lending growth.
Balance sheet, capital and liquidity
- Total assets were $37,581.1 at September 30, down 12.0% from year-end 2021. Loans were $19,883.6, up 15.8%; deposits were $31,806.4, down 10.7% from year-end.
- Interest-bearing balances due from banks fell to $1,768.0 from $8,841.9 at year-end. Federal funds purchased and repurchase agreements totaled $2,314.2; long-term debt was $381.5.
- Shareholders’ equity was $2,523.5, down $621.9 from year-end, primarily reflecting the interest-rate-driven decline in accumulated other comprehensive income (AOCI). AFS securities had $864.6 of gross unrealized losses. HTM securities had a $5,079.8 fair value versus $5,837.7 amortized cost; management attributed the unrealized losses principally to interest rates.
- The Company transferred securities with $4.0 billion amortized cost from available-for-sale to held-to-maturity during the nine months. The associated unrealized loss remains in AOCI and is to be amortized over the securities’ remaining lives.
- Regulatory capital ratios were 11.18% common equity tier 1, 13.13% total risk-based capital, and 8.66% leverage. The Company reported $1.9 billion of FHLB borrowing capacity and no outstanding FHLB advances; its $30 million revolving credit line was also undrawn.
- In September, UMB issued $110 million of subordinated notes due 2032 at a 6.25% stated rate, with net proceeds of $108 million for general corporate purposes, including potential Bank capital support.
Changes, outlook and risks
- Loan growth and higher market rates supported interest income, while higher deposit and wholesale funding costs weighed on spread. Average Q3 loans rose 15.1% year over year; management also noted lower PPP income.
- Fee income reflected mixed market conditions: trust and securities processing increased, trading and investment banking declined, and brokerage fees rose substantially. The Visa share sale materially boosted year-to-date noninterest income; the factoring portfolio sale generated a $2.4 gain in Q1.
- Nonperforming loans were $19.8 at September 30, down from $96.5 a year earlier. Nine-month net charge-offs were $37.7 versus $36.8 in 2021. Management said the allowance reflects loan growth, portfolio credit metrics, and current and forecast economic conditions.
- Management provided no specific earnings or financial guidance in the supplied filing text. It expects continued volatility from inflation, interest rates, geopolitical tensions, supply constraints, and pandemic-related conditions, which may affect deposits, markets, fee income, and the balance sheet. Asset-based trust and investment fees are exposed to market values.
- Interest-rate simulations showed modest first-year sensitivity overall, but outcomes vary by rate path and depend on assumptions, including deposit repricing. Risks also include credit deterioration, liquidity and funding changes, operational and cyber risks, regulation, and third-party service disruptions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said pending legal matters are not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether loan growth, deposit trends, and deposit pricing sustain net interest income as rates and funding costs change.
- The extent to which Q3 earnings and year-to-date growth depend on one-time securities gains, particularly the Visa sale.
- How unrealized securities losses, AOCI, and the AFS-to-HTM transfer affect capital, liquidity, and financial flexibility.
- Whether credit quality and allowance levels remain appropriate as the loan portfolio expands and economic forecasts change.
- How management’s interest-rate sensitivity assumptions and available liquidity sources perform under alternative market conditions.