Ram Shankar, UMB chief financial officer, provides an overview of the second quarter 2023 earnings highlights. For more information, please review the full investor presentation given on July 26, 2023.
Review our second quarter performance fact sheet for additional information.
Second quarter 2023 earnings summary
We reported our second quarter results on July 26 and below are highlights from our financial performance.
As we discussed last quarter, much of March and April, the news was dominated by the banking industry following the failure of a couple of banks. While that exaggerated noise has largely subsided, banks continue to experience a challenging operating environment.
Despite these challenges, our second quarter 2023 results reflect strong trends highlighted by:
- Strong asset quality and overall portfolio health
- Continued yet prudent opportunities to grow loans, particularly in commercial and industrial lending
- Consistent fee income that helps us navigate this elevated interest rate environment
- Strong client engagement and traction across our diverse lines of business
These solid results in several areas were masked by higher interest expense on our deposits and other funding sources that support our growth, driven by the Federal Reserve’s monetary tightening actions.
Since March of 2022, the Federal Reserve increased rates 10 times through the end of June 2023, effecting a 500-basis-point, or 5%, increase in short-term interest rates. The Fed added an 11th increase for an additional 25 basis points in late July, in its continued efforts to curb inflation.
The deposit pricing pressures the industry is experiencing are not dissimilar to the price of commodity or raw materials for other industries. And, as other industries would, we are reacting to the cost of raw materials by pricing our products (primarily loans) for the current environment. However, given the aggressive pace of the Federal Reserve’s actions and some turbulence related to the bank failures, the current environment has impacted all banks’ net interest margin, including ours this past quarter.
Fee income and income drivers
Through the recent industry volatility, we’ve maintained our focus as a growth company, which is reflected in our financial results. The second quarter of 2023 included double-digit annualized loan growth, excellent credit metrics, solid fee income generation and a largely stable and diverse deposit base.
Net income for the second quarter was $90.1 million, or $1.85 per share.
The main drivers behind our second quarter results were:
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Loan growth and balance sheet stability and flexibility
Average loan balances increased 17.3% from first quarter on an annualized basis. This growth stood out, as many in the industry reported slowing loan demand. Our peer group of banks reported median average annualized loan growth of 9.9%. We have been pricing our loans prudently and with discipline for the current environment and refocused on relationship-based lending.
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Excellent asset quality
We maintained our excellent asset quality, reporting net recoveries of loans this quarter. Our nonperforming loan levels remained steady at just 0.09% of loans. For comparison, our peers reported median net charge-offs of 0.15% of loans and median nonperforming loans of 0.44%.
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Deposit stability
On the deposit side, our large commercial and institutional customer base differentiates us from peers with larger retail businesses. Balances naturally ebb and flow for typical business purposes, including payroll, dividends, taxes and other activity. Deposit balances at June 30 were $33.5 billion, an annualized increase of 19.9% compared to March 31. For comparison, our peers reported a median annualized increase of 5.8%.
Since the March bank failures, our deposit balances have increased more than $2.6 billion. Noninterest-bearing deposits help support our cost of funding and our overall net interest margin. These deposits averaged 33% of total deposit for the second quarter, compared to a median of 31% for our banking peers.
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Liability management
The flexibility we’ve built on the asset side of our balance sheet, which includes our loans and investment securities, have helped to mitigate the rising costs on the liability side. We have a lower loan-to-deposit ratio than many of our peers. And, 69% of our loan balances re-price within 12 months, allowing us to reset pricing as interest rates rapidly change. We have more than $1.6 billion of cash flow expected during the next 12 months from maturing investment securities or bonds, which can now be reinvested at higher rates.
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Strong liquidity
And finally, our capital levels improved in the second quarter. We have many available sources of liquidity that more than cover our adjusted uninsured deposit balances, a metric that has been discussed in recent quarters.
We believe our strong liquidity and capital levels provide the flexibility to support our customers, grow our business and deliver returns for our shareholders, while giving us the ability to address uncertainty in the industry as well as any upcoming regulatory changes.
Managing risks for the long haul
One of our core principles is risk management. UMB and our associates aim to deliver superior returns, but we look at risk-adjusted returns, because we do not believe banks and asset managers should roll the dice in the pursuit of short-term profit. Of course, risk management goes in and out of fashion with economic cycles. Fundamentally, we believe sound, prudent practices are a long-term competitive advantage, particularly in the financial services sector.
UMB is committed to managing risks for the long haul, not the quarter. With a focus on stable and consistent earnings and performance no matter the economic environment.
As always, our success is driven by our associates across the country who continue to work hard supporting our customers and communities.
I look forward to updating you again in October on our third quarter financial results.
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