Ram Shankar, UMB chief financial officer, provides an overview of the fourth quarter 2023 earnings highlights. For more information including a reconciliation of Non-GAAP numbers, please review the full investor presentation given on January 30, 2024..
Fourth quarter 2023 earnings highlights
We reported our fourth quarter results on January 30 and below are highlights from our financial performance.
- GAAP‡ net income of $70.9 million, or $1.45 per diluted share.
- Net operating income of $112.0 million, or $2.29 per share
- Average loans increased 6.3% on a linked-quarter, annualized basis, to $23.1 billion.
- Average deposits increased 17.2% on a linked-quarter, annualized basis, to $32.7 billion.
- Net interest income increased 3.7% from the linked quarter.
- Noninterest income increased 11.8% from the fourth quarter of 2022, equal to 37.8% of total revenue.
- Net interest margin was 2.46%, an increase of three basis points from the linked quarter.
- Credit quality remained strong, with net charge-offs of just 0.02% of average loans.
UMB earnings summary
During a challenging period for banks, UMB delivered strong results, closing out 2023 with a solid fourth quarter. We reported strong loan and deposit growth, expanding net interest income, solid fee income growth and exceptional asset quality.
In 2023, there were a couple of isolated bank failures that dominated the headlines, creating challenges across the industry, on top of unprecedented pace of interest rate increases by the Federal Reserve. Following these bank failures, the FDIC opted to cover both insured and uninsured deposits balances at those failed banks. In the fourth quarter, UMB, along with other FDIC member banks, recognized the expense for a special assessment to help restore those funds. Accounting rules dictate when we book the expense, although the funds will be paid to the FDIC over eight quarters.
The impact of this one-time expense was visible in our results, yet our underlying performance excluding this industry-wide assessment was very strong.
Net income
Net income for the fourth quarter was $70.9 million, or $1.45 per share. Adjusting for the FDIC assessment, net operating income was $112 million, or $2.29 per share, an increase of 13.9% compared to the third quarter of 2023. This was 36% higher than the expectations of equity analysts who cover our company – a testament to our momentum, managed growth strategies and strong asset quality.
Loans
We were once again able to grow loans, in a period with dampening customer demand driven by high interest rates and a stable but uncertain macroeconomic environment.
Average loan balances increased 6.3% from the third quarter on an annualized basis compared to a median increase of 2.6% for peer banks between $10 and $100 billion in assets. Compared to a year ago we had a 14% increase in our loan balances driven by commercial lending, commercial real estate, construction and residential mortgage balances across our footprint.
We continue to be selective, emphasizing lending relationships that bring deposits as well. Deposits are our “raw material”, funding our growth.
Deposits
Our average deposit balances increased 17.2% on an annualized basis from the third quarter. Deposit growth during the quarter benefited from ongoing deposit gathering initiatives in all of our businesses. Noninterest bearing deposits, or demand deposit accounts (DDA), typically represent the core operating accounts of our clients. These deposits help lower our cost of funding and are very valuable in a high interest rate environment. During fourth quarter, commercial accounts led the increase in DDA balances.
As a percentage of total deposits, we remain ahead of peers with fourth quarter DDA balances of 31% of average deposits compared to a median of 27% for peers.
The percentage of average loans to deposits on our balance sheet was 70.7% in the fourth quarter, versus a much higher median of 86% for peers. A lower level indicates greater flexibility to grow loans and meet customer needs. Deposits that are not used to fund loans are typically invested in our high-quality securities portfolio, in instruments such as treasuries, municipal bond and mortgage-backed securities.
Net interest margin
Our balance sheet trends, including the loan and deposit growth I mentioned, along with the continued slowing of deposit pricing pressure, contributed to 3.7% increase in net interest income. Net interest margin is the difference between what we earn on our assets and what we pay on our deposits and other funding.
Our net interest margin increased 3 basis points, or 0.03%, from the prior quarter to 2.46%. For comparison, peer banks had a median decline of 5 basis points in their net interest margin in the fourth quarter.
Fee income
The other source of our revenue is noninterest or fee income. This income is driven by a variety of growing lines of business, including fund services, corporate trust, private wealth, bond trading and card services. For the fourth quarter, fee income was $140.3 million, representing 38% of our revenue.
Fee income provides diversity in our revenue sources and helps offset net interest income, which is impacted by varying interest rate environments. This becomes even more important in a period of falling interest rates. We’ve historically earned a higher portion of noninterest income than many banks. In the fourth quarter, peer banks earned a median of 17% of their revenue from fee income sources compared to our 38%.
Asset quality
Even with loan growth trends that set us apart from peers, we’ve been able to maintain the excellent asset quality that’s been a hallmark for UMB throughout our history. We saw improvements across the board.
Net charge-offs for the quarter were just 2 basis points, or 0.02% of average loans. This compares to a peer median of 0.19% of loans, or more than 8 times what we experienced. For the full year, our charge offs were just 5 basis points. The level of nonperforming loans improved again this quarter and were just 0.06% of loan balances and we had solid improvements in levels of classified loans, which are loans ranked as substandard or doubtful.
Capital levels
And finally, our capital levels improved for the fourth straight quarter, as our earnings growth continue to support our capital position, in spite of the impact of the FDIC special assessment.
Capital ratios are an indicator of how well a bank can meet its obligations. Our Common Equity Tier 1 ratio improved by 17 basis points in the fourth quarter to 10.95%. We are well above the regulatory minimums in all of our capital metrics.
Following a period of rapid change, which included 11 interest rate increases since March of 2022, the Federal Reserve remains on pause, with varying expectations for the timing of eventual rate cuts in 2024. At this time, we see a muted, but resilient, macro-economic environment, and UMB remains well-positioned with an attractive loan-to-deposit level, strong capital ratios, and a high-quality loan portfolio.
UMB has a track record of sticking to the business model that has proven itself over time, and the positive results of our consistency are most evident in challenging times. We run our company with a focus on both short and long-term performance, through every stage of the economic cycle, and we feel good about our strategy.
I look forward to updating you again in early May following our first quarter 2024 results.
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