Earnings explained for fourth quarter 2019
UMB’s Chief Financial Officer Ram Shankar discusses earnings results for the fourth quarter and full year of 2019.
Record earnings for 2019
It was a great quarter and year for UMB and for our beloved Kansas City Chiefs. Our results included strong loan and deposit growth and continued fee income momentum, which helped produce earnings of $66.5 million in the fourth quarter and $243.6 million for the full year – a new record for us and nearly 5.7 times what we earned back in 2004.
Our earnings per share for both the quarter and the year – and our outlook for 2020 – exceeded what our analysts expected, and this was recognized in how our stock has performed since our earnings report.
Net interest income, the difference between the interest we earn on assets (loans and bonds) and what we pay to fund those assets (primarily interest on deposits) increased $4.1 million compared to the third quarter.
In this challenging lower-rate environment, growing our net interest income is a notable accomplishment because the yields on more than 60 percent of our loans are variable in nature, meaning they reset lower along with interest rates. Our strong loan growth volume more than offset the rate decline.
Average loan balances increased 2.6 percent for the fourth quarter or 10.6 percent on an annualized basis. For comparison, about half of all publicly-traded banks have reported results so far and have shown a median linked-quarter annualized increase of 6.1 percent in average loans balances.
Total loan production for the quarter was a record $1.0 billion, and after payoffs and paydowns, net loans grew $341 million led by commercial and industrial (C&I) and commercial real estate (CRE). Additionally, the recent growth in residential real estate loans, originated both in private banking and consumer, continued in the fourth quarter.
Over the past five years, we’ve grown loan balances at a compound annual growth rate (CAGR) of 12.5 percent. We funded our growth in the fourth quarter with deposits, which increased $1.1 billion, or 5.6 percent. We see good opportunity for growth in our markets. Our deposit gathering efforts are paying off, bringing in the dollars to fund our asset growth.
A history of consistency
As has been the case for our 107-year history, our credit quality for the quarter was among the best in the industry. Net charge-offs totaled just 0.23 percent of average loans. And, consistent with our comments last quarter, nonperforming loan balances did indeed decline by 22 percent from the third quarter. While credit trends will vary from quarter-to-quarter, this level is consistent with our historic averages. These results and the quality of our portfolio drove the lower provision expense in the fourth quarter.
In 2004, our net charge-offs were 0.22 percent of loans, and we’re still running near that level, even though our loan book has grown from $2.8 billion to $13.2 billion during that time.
Growth and investments
Another highlight for the quarter was the strong growth we saw in noninterest income, the other portion of our revenue. Growth in fee income helps offset the impact of lower interest rates on our interest income.
Total noninterest income of $110.4 million represented an increase of 6.5 percent compared to the third quarter. Our corporate trust and asset servicing businesses both posted strong results. And our investment banking teams had their best month ever in December, with strong underwriting activity and customer demand that drove solid increases in trading revenue.
Our growing revenue has a relationship to our expense levels as well, as we reward our teams for bringing in that revenue. In the fourth quarter, we estimate that about three-fourths of the increase in expenses was tied to business and revenue growth, hiring in several growing businesses and overall company performance in 2019.
We continue to invest in our businesses as well by adding technology and other features to improve customer experience, marketing new products and services and occasionally opportunistically adding to our teams. For example, we’ve hired an experienced team of commercial bankers in the Minneapolis area and a successful group of business banking professionals in Salt Lake City.
A strong year for UMB
Overall, this was a great fourth quarter, which provided a strong finish to a really strong year. You’ll remember that in 2018, we crossed the $1 billion threshold in revenue. We built on that in 2019, and brought in $1.1 billion, an increase of 8.5 percent.
Our success in 2019 has set the bar high for us in 2020. With the current interest rate backdrop, we may see some headwinds as an industry, but we aren’t slowing our focus. We’ll continue to invest in growing our businesses, while keeping an eye on efficiency, always looking for ways to work smarter. I look forward to updating you again in April, when we’ll discuss our first quarter 2020 results
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