UMB Financial Stock: A Little-Known But Well-Run Bank (NASDAQ:UMBF)

UMB Financial Corporation (NASDAQ:UMBF) is a bank headquartered in Kansas City, Missouri. While not well known, of all the regional banks I have analyzed in recent weeks, in my opinion, UMBF is one of the best in terms of soundness and reliability. Its loan and deposit growth is steady over time, plus its loan portfolio is well managed from a credit risk perspective. The NIM is not very high, but it was difficult to assume otherwise given the low risk of the loans issued. Finally, the dividend continues to be a certainty.

Its Q4 2023 results were once again positive and fueled the successes of the past 15 years.

Loans and investment portfolio

The loan portfolio reached $23.10 billion, up 1.54% from the previous quarter and 14% from Q4 2022. Notably, much of the growth was generated by the CRE/Construction loans segment rather than others. In addition, the average loan yield improved by 13 basis points from the previous quarter and reached 6.54%.

Overall, this is solid growth considering the macroeconomic environment we are in. After all, the demand for credit has weakened and it is not easy to issue new loans to creditworthy individuals.

UMBF has historically achieved steady loan portfolio growth, however, I would not rule out a short stall in 2024 as the Fed Funds Rate may remain high for a long time to come. Moreover, net loan growth is gradually decreasing with each passing quarter.

In any case, it will not be a few low-growth quarters that will erase all the progress this bank has made since 2008. The 15-year CAGR of average loans has been 11.80% and there has not been a single period of contraction.

As anticipated, UMBF’s strength is credit risk management, and we can see this in the very low NPLs ratio, only 0.06%. Management is very proud of the achievement, in fact, this bank has consistently outperformed both peer medians and the industry benchmark.

Nate, that’s my favorite question, because it’s the thing that we’re really most proud of. And I think that when you think, I think about this investor community and looking at your alternatives and the investment pieces looking into banks, the thing that you look at with us I’m sitting at the table right here with two other guys that have been making credit decisions with me for 20 years through all of the cycles that we’ve looked at and we’ve outperformed the peer group in all of those cycles.

CEO Mariner Kemper about NPLs.

Let us now turn to the investment portfolio, as it is probably UMBF’s weakest point.

As we can see from this image, the average blended yield is gradually increasing on both AFS and HTM securities. However, we are still facing yields that are too low and give rise to significant unrealized losses given the current Fed Funds Rate. The strategy adopted by management is simply to let these securities mature and reinvest a portion of them at current rates, but it will take time for the unrealized losses to reset. The Fed may anticipate the process by reducing the Fed Funds Rate sooner than expected.

As of December 31, 2023, total unrealized losses amounted to $1.13 billion, which is not insignificant given that total equity is worth $3.10 billion. This is certainly not a permanent problem, but if the bank were to need liquidity it could incur large losses by selling its securities. At the moment this seems an unlikely scenario since the LTD ratio is only 65%, but in the banking industry prevention is never too much. It only took a few days for New York Community Bancorp to be in a terrible situation.

Deposits and NIM

Deposits reached $31.33 billion, up 4.30% from the previous quarter. Rather than their increase, the more important news is that demand deposits seem to have finally stabilized. There had already been an early sign in the previous quarter, but now we have confirmation. Barring any glaring unforeseen events, UMBF has found a balance for its demand deposits around 31% of total deposits. This factor could lead the bank not to refinance expensive brokered CDs once they mature, leading to an improvement in NIM.

Just as with lending, here too the bank has achieved excellent long-term performance in terms of deposit growth. Each year they have increased, registering a 15-year CAGR of 11.10%. By the way, their cost has never been too high compared to benchmark market rates, this is because there has always been a strong presence of non-interest bearing deposits.

Let us now turn to NII and NIM.

NII was $230.50 million, up 3.70% from the previous quarter but down 6.10% from last year. During 2023, the yield on interest-earning assets was able to cope with the rising cost of liabilities, which averted a drop in profitability. On an annual basis, the NIM also fell, but the current 2.46% seems to be the bottom from which to restart.

The worst may be behind us as non-interest-bearing deposits have stabilized. It could be further downward pressure in Q1 2024, but it would not shift the balance too much. In light of this last consideration, from a short-to-medium-term perspective, the “higher for longer” rate scenario would be the most profitable economic environment for UMBF. In fact, the cost of liabilities would remain about the same and maturing assets would be gradually replaced by loans and securities at current market rates. The overall result could lead NIM to recover quarter after quarter.

Finally, from 2008 to the present, the bank has always achieved an increasing NII, regardless of the macro environment it was in. This is an impressive achievement.

Conclusion

UMB Financial Corporation is a bank that has demonstrated its ability to operate in a variety of macroeconomic environments. Its deposits, loans, and NII are continuously growing year over year, but it is obvious when analyzing individual quarters that there is a more up-and-down performance. Management has not provided any guidance; I personally expect a 2024 in which loan growth will be low as well as deposit growth. In any case, now that the cost of liabilities has stabilized, repricing of low-yielding assets may be enough to make this year positive.

Finally, let’s take a look at the dividend. The yield is today at 1.96%, so not too high. However, we should consider the consistency with which it has been raised even during crisis periods such as 2008 and 2020. Not all banks have such a track record.