UMB Financial Corporation

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 4/5

UMB Financial Corporation is a financial holding company that provides a range of banking and financial services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

UMB Financial Corporation’s business model is primarily focused on relationship banking and wealth management. They are not a low-cost provider and have very little to no differentiation in its offerings. Thus, it is very difficult for them to have a durable moat. They do not possess any strong or enduring competitive advantages.

While UMB Financial has a presence across eight states with a significant footprint in Missouri, Kansas and Arizona, it has yet to establish the scale necessary to achieve dominance. Competitors with larger asset bases may have higher earnings due to economies of scale, making it challenging for UMB to compete long-term without meaningful differentiation or a significant cost advantage.

The bank doesn’t have any network effects and has no significant switching costs. Their customers can easily switch to other financial providers.

Business Overview

UMB Financial Corporation (UMBF) operates as a financial holding company offering a range of banking and financial services. The company is organized into three core segments: Commercial Banking, Institutional Banking, and Personal Banking.

Commercial Banking: This segment provides a range of financial products and services to businesses, including commercial loans, treasury management services, and capital markets services. This segment typically contributes a significant portion of UMB’s net interest income and fee income.
Institutional Banking: This segment caters to institutional clients such as corporations, governments, and non-profit organizations, offering services like investment management, custody services, and trust solutions.
Personal Banking: This segment focuses on retail customers, providing services such as checking and savings accounts, mortgages, and other personal banking products.

The company is heavily investing in technology and digitization efforts to improve customer experience and streamline operations. While this has reduced costs, such investments do not provide any moat over the long-term.

Financials Deep Dive

Analyzing UMBF’s financial statements, particularly the most recent quarterly reports for September 30, 2023 and December 31, 2022, and the full annual report for the year ended December 31, 2022, and the year ending December 31, 2021, provides a clear view of the bank’s performance and its challenges:

Net Interest Income: Net interest income (NII) is the company’s core earnings stream and increased to $223.3 million for the three months ended September 30, 2023 compared to $176.1 million in same quarter 2022 and to 448.1 million for year ended December 31, 2022 compared to $337.9 million in previous year.

A key driver is the positive trend in interest rates and the mismatch between its assets and liabilities. * The increase in NII from higher interest rates has been partially offset by higher interest expense on its deposits and borrowings.
Net interest margin: UMB has been actively managing its liabilities to moderate the impact of higher interest rates. The net interest margin (NIM), the difference between interest earned and interest paid, shows some decline during this quarter. The NIM dropped to 3.46% in the most recent quarter compared to 3.5% in the prior quarter.
Non-interest Income: Non-interest income (revenue outside of interest income, such as fees from banking activities) was a bright spot in earnings and totalled at $177.7 million for the three months ended September 30, 2023 compared to 188.4 million in the same quarter of 2022 and at $570.3 million for year ended December 31, 2022 compared to $486.5 million for the prior year. This is the part of the business where the bank saw considerable growth, but again, it is not something that is unique, which would provide a moat.
Non-interest expense: Non-interest expense is at $402 million in the quarter ended September 30, 2023. This is an area of concern and is continuously increasing with time. This is an area that needs to be managed properly.
Loans and Credit Quality: The bank has shown a healthy loan growth of $1.1 billion from December 31, 2021 to the quarter ending September 30, 2023. However, the company has also had an increase in allowance for credit losses by about $12 million from September 2022 to September 2023 (9 months). The quality of loans held by the company is very important and changes need to be monitored.

Non-performing loans and those that are past due has been relatively stable through the year. The focus of the company has been to avoid too much of a negative impact.
Capital: The bank is well-capitalized according to regulatory guidelines. The Common Equity Tier 1 ratio stood at 11.40% and the total capital ratio at 12.71% as of September 30, 2023, indicating a relatively stable capital position.
Revenue Composition: The majority of the company’s revenue comes from net interest income (NII), making it susceptible to changes in interest rates. Non-interest income has increased in the last 3 years, which indicates a step in a good direction, however, the impact of fees is dependent on the economy, thus, not creating a sustainable advantage.

Risk Factors

Here are the factors which could potentially affect the performance and moat of UMB Financial Corporation.

Interest Rate Risk: UMB’s business is exposed to changes in interest rates. Higher rates increase NII but also increase costs and potentially loan defaults. As of today, we are seeing a pause in rate hikes by the federal reserve, but they may continue to raise rates. The current levels in interest rates would also cause a downward pressure on loan volume. Interest rates can also affect the yields in the investment portfolio.
Credit Risk: Deterioration in credit quality due to economic downturns and specific circumstances of the borrower could lead to higher loan losses for the bank, decreasing its profitability and value. The allowance for loan losses has been increasing.
Competition: The banking industry is highly competitive. UMBF competes with banks of all sizes and various fintech companies. Smaller regional banks might have strong local presence, larger banks may offer superior product range and the fintech firms are always looking to innovate. This poses a risk to market share and pricing power for UMB.
Regulatory Risk: UMB is subject to numerous federal and state regulations. In the current regulatory and economic climate, additional or new regulations may increase cost for the firm and/or limit the company’s strategic flexibility. Also, changes in accounting standards and/or changes in regulatory and legal frameworks may affect the company’s performance.
The bank needs to have sufficient liquidity to meet their regulatory requirements.
Economic and Market Risks: Economic conditions and market volatility affect the bank’s performance through customer behavior and credit quality. High inflation and interest rates could affect loan demand.
Technology Risk: Since banks rely heavily on technological infrastructure, they are at risk from cyber attacks. Also, there is a constant pressure to integrate new technologies while maintain the legacy systems.
Acquisition Risk: There was a recent merger with Heartland Financial, but the complexity of acquisitions can disrupt operations, increase risks, and reduce efficiency. There is no guarantee of the bank having a seamless integration.

Business Resilience

Although the bank has a relatively weak moat, due to the lack of a clear competitive advantage, it has several strengths that improve its resilience.

Conservative Lending: The bank’s conservative lending approach to its customers and its strong focus on relationship banking will help the bank in tough conditions.
High Tier 1 Capital Ratio: Having a strong tier 1 capital ratio, they can face a variety of situations with relative ease. They can use these funds to navigate market volatility.
Wealth Management Business: The bank has a well-functioning wealth management business, which can help it diversify its revenue streams and provide some stability.
Management Expertise: UMB’s management has some experience managing the bank through several economic cycles, helping in its resilience.
Operational Efficiencies: Although, there is space for improvement in the efficiency, UMB is focused on bringing operational efficiency, reducing costs and streamlining processes.

Recent Concerns and Management Insights

Recent earnings calls have expressed concerns regarding the decreasing net interest margins, but have also shown optimistic outlooks on improvements going forward. The bank is trying to actively manage its interest rates and the mix of assets. While the net interest margin has had a small decline, the company has been trying to control the level of decline.

Inflation continues to remain a risk and the bank is seeing increased operating expenses. The company has been trying to reduce the costs through technological adoption, but the costs are likely to remain elevated.

The acquisition of Heartland Financial has increased the level of debt held by UMB. Also, it is a complex integration, and there is always a possibility of issues. The company is trying to address this and integrate the two company well.

Management feels that they will be successful in making strategic investments, that they will be able to continue growing and produce consistent revenue. This gives confidence and they feel they will be able to deliver value.

Understandability Rating: 2/5

The business is moderately understandable. While the concept of banking and its core services are easy to grasp, a deeper understanding of UMB’s complex financial statements and its specific operations require some understanding of finance and business.

Balance Sheet Health Rating: 4/5

UMBF’s balance sheet is healthy. A strong capital level and good regulatory metrics provides confidence in the banks stability. Also, the assets and liabilities have a good mix of short-term and long-term options for the bank to manage its overall liquidity needs. The only factor that keeps it from being a 5/5 is the slightly increasing loan provisions and the higher leverage.