Each quarter following UMB’s earnings results, Ram Shankar, UMB chief financial officer, provides an overview of the earnings highlights. For more information, please review the full investor presentation given on January 26, 2022.
Fourth quarter 2021 earnings summary
In 2021, we delivered solid operating and financial results, with strong growth on both sides of the balance sheet, steady asset quality metrics and continued momentum in our fee income businesses. We feel UMB is positioned to benefit from the anticipated economic expansion, higher interest rates and continued investments we are making in our businesses and our people.
Some of the highlights for the year and quarter include a 12.3% increase in average loans in 2021, largely through market share gains. We’ve had positive feedback from the investment community on our outsized growth in both loans and deposits, along with the momentum in our fee income businesses. For the fourth quarter, we earned $78.5 million, or $1.61 per share.
There were a few factors that had outsized impacts on our results for the fourth quarter. We had higher-than-typical operating expenses, largely driven by higher incentive compensation for the strong business performance we experienced. As UMB grows and exceeds goals, our teams share in that growth. And on the revenue side, the large gains we had in 2020 from our investment in Tattooed Chef make year-over-year comparisons difficult.
Balance sheet highlights
We hope to leverage the successes of 2021 and continue to deliver in 2022 by driving revenue growth in our balance sheet and fee income businesses, while at the same time investing in our people and capabilities.
We will strive for positive operating leverage – which is revenue growth in excess of expense growth in 2022. There is a lot of speculation in the marketplace about the direction of short-term and long-term interest rates, which, if they materialize, can generally benefit business performance. Our goal in 2022 is to deliver this improved performance regardless of what happens to interest rates.
As you’ve heard us say, we are built to last all economic cycles based on the diverse businesses we operate.
- Net interest income was $210.6 million for the fourth quarter. The benefit from the strong balance sheet growth was partially offset by lower asset yields in the current rate environment and the changes in the composition of our assets.
- Along with our peer banks, we continue to see growing liquidity and high levels of cash, which weigh on net interest margin, which is the spread between the interest we earn on our loans and other assets, and the interest we pay for the deposits and other funds.
- For the fourth quarter, noninterest income increased $10.9 million to $119 million compared to the third quarter of 2021. Market fluctuations drove a $3.3 million positive variance in the value of our equity investments. These are unrealized gains or losses due to fluctuations in the price of underlying stocks, including the remaining shares of our investment in Tattooed Chef. On a year-over-year basis, you’ll see the variance that I mentioned, driven by that initial gain on Tattooed Chef.
Fee income business performance
We saw positive results across several of our fee income businesses, including revenue growth in bond trading and trust and securities processing.
Fund Services total assets under administration have grown nearly 25% from year-end 2020 to stand at an impressive $419 billion. Custody assets crossed the $150 billion threshold, driven by organic growth.
In specialty trust and agency solutions we saw a 149% increase in new business in 2021. And our teams continue to garner industry recognition for service and innovative products.
In Private Wealth Management, new asset sales for 2021 increased 17% over the prior year and we continue to build out and strengthen our family office offering with the launch of UMB Family Wealth. I’m looking forward to further momentum as we continue to invest in this business.
Other recent highlights include strong performance in residential mortgage lending, including a year-over-year 31% increase in our mortgage balances and a 70% increase in mortgages sold in the secondary market.
Expenses and giving
Over the past several quarters, we’ve seen higher-than-typical expenses, many of which will reset lower in the first quarter of 2022.
In addition to the variable compensation expense, the continued investments in our various businesses also will create some timing issues in our expense levels. In the fourth quarter, we posted higher software and processing costs compared to the third quarter, driven by the implementation of a new and improved Private Wealth Management platform.
Additionally, we increased our charitable giving in 2021, and in the fourth quarter, the other expense line included a $2.1 million linked-quarter increase in such contributions. These year-end gifts to organizations in our markets that support housing needs, small business efforts and education pushed our giving above the $6 million dollar mark for the full year 2021.
Assets, deposits and loan growth
At year-end 2021, our total assets stood at approximately $43 billion, or up 60% than the $26 billion we were at the end of 2019, just before the pandemic started.
On the funding side, our unique mix of businesses, such as corporate trust, aviation trust and asset servicing, provided strong deposit inflows. In the fourth quarter, we also saw some seasonal balance changes, which helped drive 30% annualized increase in average deposits.
The biggest question for the industry now is, “how ‘sticky’ are these deposits?” In other words, “how long does this excess liquidity stay around, and how best to put it to work?”
Our deployment of some of that liquidity during the fourth quarter resulted in the addition of $868 million in average balances in our investment portfolio, in addition to the $234 million increase in our loan portfolio. This represents a 5.7% increase in loan balances on an annualized basis, excluding PPP balance changes.
Our steady loan growth over time has stood out, as many in the industry have experienced slower growth. Our increasing balances were driven by strong performance in our commercial and industrial as well as residential real estate portfolios.
Company history and performance
Finally, in our fourth quarter investor presentation, we included a history of our strong dividend growth, something we’ve been really proud of (shown above).
We received some additional recognition this week, as S&P Dow Jones Indices announced that UMB would be added to their S&P High Yield Dividend Aristocrats Index. This index recognizes companies with a strong track record of consistently increasing dividends.
2021 officially marked UMB’s 20th consecutive annual dividend increase, one of the criteria for inclusion in the index. Through year-end 2021, UMB’s 20-year total shareholder return, which is what an investment in UMB would have returned assuming all dividends were reinvested in shares, was 624%. For comparison, the total shareholder return for the S&P 500 index over the same time period was 171%.
In the calendar year 2021, our stock price increased approximately 54% compared to the 34% median for our peer group. By comparison, the S&P 500 Index was up 29%.
More recently, bank investors and equity markets seem to be grappling with what is going on with the broader economy, including high inflation and comments from the Federal Reserve on interest rates, to geopolitical concerns. As it relates to banks, some experts have pointed out that although loan growth and higher interest rates may help improve income in the coming quarters, there is concern that elevated technology spending and rising labor and other costs may dampen results.
To conclude, UMB had a solid 2021. We’re really excited for the opportunities we see ahead of us in 2022. I look forward to updating you again in April with our first quarter 2022 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.