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Earnings Explained: Third quarter 2021 earnings

Each quarter following UMB’s earnings results, Ram Shankar, UMB chief financial officer, provides an overview of the earnings highlights. Included below is an audio recording of his remarks. Slide references reconciling non-GAAP numbers to GAAP numbers may be found in the full investor presentation issued on October 26, 2021.

Third quarter 2021 earnings summary

We had strong results in several metrics in the third quarter, including growing net interest income, solid loan growth, and strong asset quality, with net charge-offs of just 7 basis points and a $5.0 million negative provision for credit losses.

We continue to see the benefits of our diverse business model which helps drive the key points of our investment thesis—above-peer loan growth, solid net interest income and strong fee income contributions.

Balance sheet highlights

For the third quarter, we earned $94.5 million, or $1.94 per share, above analyst estimates of about $1.80 per share. This slide (below) shows the highlights and some of the factors driving our third quarter results as compared to the second quarter and the third quarter from 2020. As you can see, strong growth on either side of the balance sheet drove overall improvement from these comparable periods.

UMB diversified deposit mix

We continue to see more than our fair share of strong deposit growth that the industry is experiencing driven by the unprecedented levels of stimulus. And, for UMB, organic growth in our unique businesses such as  asset servicing and aviation trust, further drive this outsized growth – as evident by the nearly 24% annualized increase in average deposits.

Strategizing excess liquidity and serving our customers

The question for banks now is, “how long does this excess liquidity stay around, and how best to deploy it to increase earnings?”

Our deployment of some liquidity during the quarter resulted in the addition of $643 million in average balances in our investment portfolio and $598 million in our loan portfolio. This represents a 15.3% increase in loan balances on an annualized basis, excluding PPP balance changes.

Our loan growth stood out, as many banks continue to experience slower growth or even shrinking loan balances. Our growth was driven by strong commercial and industrial lending as well both commercial and residential real estate balances.

Our lending teams in commercial and mortgage put up strong loan production numbers during the third quarter, bringing in over $900 million in loans. Offsetting that, we saw payoffs and paydowns of commercial loans increase as well, impacting our ending balances. This is part of the cycle, particularly in commercial real estate lending, and payoff levels will ebb and flow with economic conditions.

We continue to see opportunities to grow market share across our footprint and within several different loan verticals. This ability to grow, along with prudent management of our investment portfolio, helps drive another important part of our investment thesis: net interest income outperformance relative to our peers over time.

Net interest income increased 4.3% from the second quarter of 2021, driven by the strong earning asset growth I noted. Industry observers and participants are keenly awaiting benefits from the Federal Reserve policy to increase short-term interest rates sometime in 2022 or in early 2023.

Our noninterest income, which is income that is not earned from our lending and deposit operations, provides diversity in our revenue sources in all rate environments.

While reported noninterest income declined for the linked quarter, it was largely driven by valuation changes in several of our equity positions, including a $10.7 million swing in our position in Tattooed Chef from the second quarter. These are just unrealized gains or losses due to fluctuations in the price of the underlying stocks.

Exciting growth and opportunities ahead

We saw positive results across several of our fee income businesses. Fund Services experienced 8.5% income growth in the quarter. Assets under administration and their business surpassed $400 billion for the first time, with roughly half of the growth for the quarter coming from new clients.

Deal volume in public finance has already surpassed full-year 2020 levels and we’ve had phenomenal year-to-date growth in new business in both corporate trust and specialty trust. Our credit card and debit card spending is now above pre-pandemic levels, driving interchange revenue for us.

Other recent highlights include investments in healthcare services to expand our direct-to-employer network, solid growth in our mortgage business, including the addition of the new servicing capability and the formal launch of our Family Wealth offering.

Our asset quality metrics remain solid. As I mentioned, our net charge-offs—the losses we take on loans—were just 0.07% of loans for the quarter. And based on the high quality of our portfolio as a whole and improving economic metrics, we were able to take a negative provision for credit loss this quarter, reducing the reserves we hold to cover potential future loss on loans.

As Mariner explained to the investment community during our earnings presentation, UMB has been quick to take action and manage credit through our long history. We will see peaks and valleys in our credit metrics, including the increase we saw in nonperforming loans this past quarter. Our track record shows very little migration from nonperforming to loss.

strong credit history UMB

We have a long history of both strong and resilient credit. Consistent underwriting will continue to be part of our DNA.

We have often discussed our strong capital position with investors. Our top priority for use of capital remains supporting organic growth, and we’ll continue to look for opportunities to augment that growth with strategic acquisitions as market conditions allow. Along these lines, we recently announced a single branch acquisition with approximately $250 million in deposits in the Kansas City market.

Overall, we had a great third quarter and we continue to see positive momentum across the company. I am excited by the opportunities we see as we head into fourth quarter and into 2022. I hope you all have an enjoyable holiday season, and I look forward to updating you again in January with our fourth quarter and full-year results.

Stay informed on industry trends and noteworthy company news by visiting our Industry News section on umb.com. Follow UMB on LinkedIn, Facebook‡ and Twitter‡ to see regular updates about our company, people and timely financial perspectives.

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