Ram Shankar, UMB chief financial officer, provides an overview of the first quarter 2023 earnings highlights. For more information, please review the full investor presentation given on April 25, 2023.

First quarter 2023 earnings summary

Thank you for tuning into the first quarter 2023 edition of Earnings Explained. We reported our first quarter results on April 25, and I will give a quick recap of the quarter and some investment community feedback.

As you know, for much of March and April, the news was dominated by the banking industry following the failure of a couple of banks. Our management team has spent significant time with our customers, investors, and the media over the past several weeks, providing perspective on the strength of regional banks and the importance of strong balance sheet management and diversity in all areas.

The impact of continued inflation and the rapid increase in interest rates over the last 12 months contributed to the challenging economic environment, long before the events that transpired in March.

At UMB, our business model ensures we are prepared for difficult environments – through our variable asset base, diverse, deeply entrenched deposit base, ample sources of liquidity, growing fee income businesses and a long track record of conservative underwriting, resulting in excellent asset quality. And we have taken additional steps to enhance our position over the past few weeks.

Balance sheet highlights

Our strong first quarter results included average deposit growth of 2.4% and average loan growth of 19.3%, on a linked-quarter annualized basis. We had continued momentum in our fee businesses, and credit quality remains strong.

Net income for the first quarter was $92.4 million, or $1.90 per share. This was slightly ahead of the $1.89 per share that was expected by the equity analysts who cover our company.

Key drivers of results

The main drivers behind our first quarter results were:

  1. We were able to grow loans, maintain deposit balances and report balance sheet stability, even in the challenging environment.
  2. Our fee income increased 3.7% from fourth quarter levels, benefitting from solid performance and robust customer acquisition in several of our businesses.
  3. We generated positive operating leverage, meaning our revenue growth was higher than our expense growth. Our expense levels for the quarter were well-managed, even as we continue to invest in our business.
  4. We maintained our strong asset quality, with improvements in our levels of nonperforming loans and reporting net charge-offs of just 9 basis points, or 0.09%, of average loans, which is below the median of 0.16% reported by our peers for the first quarter of 2023.

Hallmarks of strength and stability

UMB’s prudent risk management and close monitoring of our assets and liabilities has been key to navigating all economic environments. We regularly review and test our interest rate risk and liquidity positions, ensuring we are prepared to meet changing customer needs and to fund our growth.

We’ve purposely built flexibility on the asset side of our balance sheet which includes our loans and investment securities.

We have a lower loan-to-deposit ratio than many of our peers, and, within our loan portfolio, 67% of balances reprice within 12 months allowing us to reset interest rates in a rapidly changing environment.

Additionally, we have nearly $1.6 billion of cash flow expected in the next 12 months from maturing investment securities. This gives us the ability to reinvest those funds at higher rates, which will help offset the increased cost of deposits.

There was quite a bit of speculation following the March bank failures that the issues that contributed to those isolated incidents would apply to all banks. This included concerns about unrealized losses in investment portfolios, something that impacted many financial institutions in the rapidly rising rate environment.

Because of UMB’s intentional balance sheet flexibility, we have no need to sell bonds in our securities portfolio which could result in realized losses.

These bonds are an important asset class that can be used as collateral to support our municipal and trust deposits, and they represent an additional source of liquidity.

Takeaways and looking ahead

The big takeaways for the first quarter of the year are:

  • Our relationship-based business model helped us navigate the recent volatility + our long-tenured customer base knows our track record of stability and of responsiveness
  • Good balance sheet management is paramount
  • Our long record of loan growth while maintaining excellent credit quality stands out among peer banks
  • We need to maintain our focus on controlling costs while supporting our business goals

Firms that cover our stock published updated research reports after our presentation and release, and many noted that our balance sheet resiliency was a differentiator.

Comments from the analysts

A few highlights from those reports are shown here.

“Having seen 1Q23 trends, investors should feel better about the stability of UMBF’s balance sheet.”

“UMBF has good balance sheet flexibility with a low loan-to-deposit ratio and solid capital levels, which may come in handy as deposits are becoming scarcer and investors are focusing more on credit quality and capital levels.”

“UMBF was able to have remarkable stability in a quarter that strained the industry, with limited pressure on deposit funding while still growing cash and on-balance sheet liquidity.”

“We think that while UMBF still has good capital and growth outlook, profitability may still lag the group by a decent margin due to the size of the fee income business.”

In closing, UMB continues to be strong after more than a century in business. Our business model, which has survived world wars, the Great Depression, and a global pandemic, remains consistent and strong, and is successfully serving our customers.

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 July on our second quarter 2023 results.

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