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Earnings Explained: Second quarter 2020 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. Some of the slide references correspond to the full investor presentation given on July 29, 2020.

Second quarter 2020 earnings summary

For the second quarter, we earned $60.5 million, or $1.26 per share, well above analyst estimates of just $0.37 per share, essentially tripling their expectations. The quarter highlighted our balance sheet strength and the quality credit underwriting that has been key to UMB’s story for more than 100 years.

Both loan and deposit balances increased from the first quarter. Loans grew by 10.9 percent, supplemented by the $1.5 billion of Paycheck Protection Program loans (PPP) that we booked during the quarter. Many of our associates were part of the herculean effort to process and fund more than 5,100 loans as part of this program. These loans have helped our neighbors and communities weather the crisis a bit better, and at 10% of our total loans, our PPP participation was one of the highest in the industry.

Balance sheet highlights

Excluding the impact of PPP loans, our loan balances increased an impressive 8.2% on an annualized basis. Commercial real estate was a large driver of our growth, as well as mortgage balances, where we funded $200 million in the second quarter, three times the production in the first quarter. Looking into the third quarter, we continue to see a good pipeline for growth.

Average deposits increased 9.4% compared to last quarter, including interest-free deposits – a strategic focus area for us – that increased 18% compared to the last quarter.

Net interest income, the difference between what we earn on earning assets and what we pay out on deposits and other funding sources, was $178.2 million in the second quarter, an increase of 2.5% compared to the first quarter, driven by lower deposit and borrowing costs, along with strong loan volumes.

We have done a great job managing the cost of our deposits – our raw materials – in this low interest rate environment. Our cost of deposits decreased from .83% to .30% in the second quarter.

Interest rates are very low after the Federal Reserve cut short-term interest rates to essentially zero. As a result, our net interest margin decreased 18 basis points this quarter. But this was far better than the 27 points we saw other banks report, thanks to our aggressive actions.

Noninterest income for the quarter was $120.5 million, an increase of 22.4% from the first quarter. We had a benefit of favorable equity and debt capital markets, along with strong bond trading sales volumes, which increased 116% from last quarter, as well as early successes in our private wealth growth efforts.

Industry challenges and accounting standards

We’ve seen some industry-wide challenges as well, including lower credit and debit card income as the pandemic has greatly curtailed customer spending on things such as entertainment, travel and routine doctor and dentist visits. But overall, we’re seeing positive momentum in several areas.

As you may recall from the first quarter, a new accounting standard took effect at the beginning of the year, dictating how we provision for losses on loans. Simply stated, we now need to record an estimated potential future loss for loans based on various economic factors instead of booking a loss on a loan only if it actually occurs.

The large provision expense last quarter was very conservative, and our calculated provision this quarter was much more muted, based on the historical quality of our loan portfolio, conditions in our Midwest markets and, perhaps most importantly, the stability of our borrower base.

Our credit quality remains strong, with net charge-offs of just $5.5 million for the second quarter, or 0.15% of average loans. Our provision expense was nearly four times those net charge-offs. Said another way, we had to cover the actual losses by four times because of expectations of a challenging macro-economic environment.

And the resulting allowance for credit losses covers our non-performing loans by 2.4 times, compared to a peer coverage of 1.8 times.

Over the long term, our levels of losses on loans has remained steady, even in stressful times such as the 2008 financial crisis. This is where our long, consistent history of quality underwriting will help set us apart as we go through this current crisis.

Analyst commentary

Overall, the investment community was impressed with our results this quarter as evident by the stock price reaction since our announcement. Some of the verbatim comments were “UMB is positioned to play offense and defense” and “impressive result for UMB, as pre-tax, pre-provision income exceeded forecasts.” While the lower provision for loan losses was a surprise, most think the levels remain “adequate given the strong credit history of the bank.”

Looking ahead, the industry is not without challenges during this pandemic. Mariner has shared some challenges of the COVID situation and you may have seen the headlines that our economy contracted 33% – the fifth worst performance in our history. Add to that mix the extremely polarized and politicized environment, and an election cycle, and the economic outlook for the near-term remains murky.

At UMB, we feel we’re well positioned to weather the crisis. We have been here before and we have stuck to what we do well by remaining focused on risk management and believe that our credit quality, ability to grow loans and our solid funding and capital levels will remain key differentiators, especially during periods of stress.

Community connection and support

UMB continues to be an active community partner across our footprint and we’re supporting local initiatives to battle the crisis. A few of the things we’ve been able to put into place include:

  • Nimble and adapted operational models so we can continue to serve customers in a pandemic, including remote working arrangements and drive-thru only service
  • Expanded health insurance coverage for COVID-19 testing and telehealth services
  • Donated and delivered 2,400 N95 masks to front line responders
  • Implemented multiple programs for customer financial relief and financial access

In closing, I want to remind you to read our 2019 Corporate Citizenship report we published in April, which highlights our efforts in just a few areas: inclusion and diversity, community impact, corporate governance and how we use our resources.

I look forward to updating you again in October, for our third quarter results.

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