Earnings Explained: Second quarter 2022 earnings

Ram Shankar, UMB chief financial officer, provides an overview of the second quarter 2022 earnings highlights. For more information, please review the full investor presentation given on July 27, 2022.

Second quarter 2022 earnings summary

UMB had another strong quarter, with results that included robust loan growth that came in near the top of the industry, solid net interest margin expansion, and continued momentum in our fee income businesses.

For the second quarter 2022, we earned $138 million, or $2.83 per share, compared to $1.79 per share in the second quarter of 2021. For comparison, the equity analysts who cover our company had predicted we would earn $1.90 per share.

The biggest driver of the “better than estimated” results was the sale of our ownership of Visa® Class B stock during the quarter, which resulted in a pre-tax gain of $66.2 million, included in our non-interest income. In conjunction with this gain, we made a one-time contribution of $5 million to our charitable foundation, included in other expense.

These Visa shares were issued in 2007 to member banks as part of its initial public offering of stock. Our decision to sell these shares this quarter helped shore up our already strong capital position.

Balance sheet highlights

Noninterest income

Total noninterest income, or fee income, increased $53.7 million from the first quarter to $176.3 million.

Comparisons to the first quarter of 2022 included the gain on the Visa B shares, as well as some variations related to the equity markets – particularly assets held for our company-owned life insurance program.

Additionally, we had some items in the first quarter of 2022 that make such comparisons difficult, including the sale of our factoring business. Excluding these variances, second quarter fee income compared favorably to first quarter levels.

One component of our business that positions us well compared to peers is the revenue share income we receive from our money market funds that are held in off-balance-sheet accounts for customers. With rising interest rates, we’ve seen a return of that fee income, which provided an additional $9 million compared to the first quarter.

Net interest income

The other component of our revenue is net interest income, which is what we earn on loans and other assets, offset by what we pay for deposits and other funds. Net interest income was $224.8 million for the second quarter 2022.

Our strong loan growth, coupled with the benefits from higher short and long-term interest rates drove this 6.9% linked-quarter increase.

Revenue growth for the first six months of the year drove positive operating leverage, excluding the impact of Paycheck Protection Program (PPP) and the sale of the Visa B shares.

Recently, the Federal Reserve increased its target rate by 75 basis-points, or three-quarters of one percent. This is the fourth increase in 2022 demonstrating how the Fed is working to slow down the economy to help curb inflation.

As I’ve discussed in recent quarters, the banking industry had built up high levels of cash related to government stimulus and customer behavior through the pandemic. The question has been how long these funds will stick around in a rising interest rate environment.

Diversified deposit mix

During the second quarter 2022, the industry as well as UMB, saw decreases in excess liquidity balances driven in large part by the actions of the Federal Reserve, which drove a decline in deposit balances as well as excess cash on hand.

Total deposits, which are the most important source of funding our growth, declined by 3.0% from the first quarter, or just over 12% on an annualized basis. This was primarily driven by a decline in commercial deposits, as customers are deploying their cash to grow, along with typical seasonal trends in public funds. Public funds, which are accounts for local and state municipalities, generally peak in the fourth quarter of each year as taxes are collected, then run out over the next few quarters as the funds are spent.

Our unique mix of businesses, such as corporate trust, aviation trust and asset servicing, provide strong funding sources. And our average loan-to-deposit ratio of 58% compares favorably to past highs in the low 70s and provides us flexibility to deploy funds to support growth opportunities we see in our markets.

Diversified loan portfolio

Our steady loan growth over time has stood out and, particularly in the second quarter 2022, we ranked near the top. One of the equity analysts who covers our company said:

“UMB continues to surprise on loan growth, with their second quarter growth being one of the strongest results we’ve seen quarter-to-date.”

Average loans for the second quarter 2022, excluding PPP balances, increased 13.8% year-over-year and 23% on a linked-quarter annualized basis.

We saw phenomenal growth in commercial and industrial (C&I) balances – with those balances increasing 30% on a linked-quarter annualized basis. Line of credit utilization picked up some in the second quarter, as many companies are needing capital to continue growing.

But much of our growth is due to consistent efforts of our sales teams paying off in new customer acquisitions. Demand remains strong in several other categories as well, including commercial real estate and residential mortgages.

Strong asset quality

Strong asset quality has been an important part of UMB’s story, and we’ve performed well through a variety of economic cycles. That said, lending is a risk-taking business, and we will have occasional ups and downs.

For the second quarter, our net charge-offs were elevated driven entirely by a $27.7 million write-off related to one commercial credit. While this quarter’s charge-offs were elevated, we expect our full-year loss rate will be consistent with our long-term historical average of approximately 30 basis points or less.

Nonperforming loans declined 84% from the prior quarter to 10 basis points of total loans, as the overall portfolio continues to perform well.

Fee income business performance

The fee income I mentioned is driven by several different lines of business, and we saw positive results across the company, and pipelines and sales activities continue to be strong.

• We continue to focus on growing our healthcare services business. In June 2022, we announced an agreement to acquire Old National Bancorp’s HSA business, which provides an extremely strong team, along with more than $400 million in deposits that will complement our organic growth efforts.
• In Private Wealth Management, we’ve brought in nearly $750 million in new assets year-to-date, on track to significantly outpace 2021 full-year sales of $836 million.
• Year-to-date new business volumes have increased 15 percent in corporate trust and escrow services and 68 percent in specialty trust.
• Public finance has closed 68 deals so far in 2022, compared to 52 for the same period last year. The team recently closed its largest bond issue to date, a $146 million general obligation bond.
• Our lending teams had a great quarter, with top-line loan production at $1.3 billion, nearing record levels.
• In our consumer business, average mortgage balances have increased by 27% on a year-over-year basis, and our new down-payment assistance program has brought in more than 500 new applications year-to-date.

Market strength

To conclude, our business model is built to withstand different economic and operating environments – whether it is uncertainty related to interest rates or overall uncertainty about the strength of our economy.

We’re excited to execute on the opportunities we see in the second half of the year and beyond. I look forward to updating you again in October with our third quarter 2022 results.

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