Welcome to the second quarter 2021 edition of Earnings Explained. Hope you have had a safe, healthy and relaxing summer.
- Our second quarter results again demonstrate how differentiated our business model is. We experienced above-peer loan growth, and solid net interest income and fee income growth with each line of business firing on all cylinders this past quarter. This diversity of revenue streams is always something that has set us apart for many years, regardless of the operating environment.
- Highlights for the quarter include 19% average loan growth on a linked-quarter annualized basis, excluding PPP loan balances, and a 21 percent increase in fee income. For the second quarter, we earned $87.4 million, or $1.79 per share, above analyst estimates of about $1.76 per share.
- Our loan growth stood out, as many banks have experienced slower growth or even shrinking loan balances in recent quarters. In fact, both the peer banks we follow and all public banks that have reported results so far showed a median decline of 3% in loan balances on an annualized basis.
We continue to see opportunities to grow market share across our footprint and within several different loan verticals. For example, our commercial and industrial loan balances (excluding PPP loans) increased an annualized 28% from the prior quarter.
- Our net loan charge-offs, the losses we take on loans, were higher this quarter, but was driven entirely by one commercial factoring relationship. Excluding this credit event, we would have had net recoveries in the quarter. And the asset quality of our overall loan portfolio remains strong, with lower nonperforming loans that decreased 24% from the last quarter.
- Looking ahead, with what we know today and the quality we see across our total portfolio, we expect charge-offs to moderate to our historical levels, which are shown in these slides.
- Deposits, which are the fuel that fund our loan growth, grew by an impressive 14% on an annualized basis.
We continue to see strong deposit growth across the industry due in part to the impacts of unprecedented levels of stimulus, including PPP loans, that has been injected into the economy.
- This excess liquidity and high levels of cash weigh on banks’ net interest margin, which is the spread between what they charge borrowers and pay depositors. However, our track record of relative outperformance in loan and other asset growth, and the opportunities we see for that to continue, should allow us to grow our net interest income over time.
- Another tenet of our investment thesis is our higher level of fee income. This provides diversity in our revenue sources and helps support earnings in challenging interest rate environments.
- Fee income for the quarter increased 21% over the prior quarter and was favorably impacted by the valuation changes in several of our equity positions, including in our shares of Tattooed Chef that we’ve talked about previously. As part of our ongoing strategy, we’ll continue to make these types of investments as we help our customers with all their financing needs. Other capital markets revenues, such as derivative or swap income, was up 73% compared to the prior six-month period in 2020. Our other fee income businesses had some great successes during the quarter as well.
- Both our traditional Corporate Trust and Specialty Trust teams have experienced phenomenal growth year-to-date, with new business dollar volumes increasing 68 percent and 109 percent, respectively, over 2020 levels. We’ve seen a resurgence in aviation financing activity and our location in Dublin, Ireland provides additional opportunity to capitalize on these trends.
- In Fund Services, assets under administration now stand at $379 billion, compared to $286 billion a year ago, and the Fund Services contribution to fee income has increased 30% over that time.
- In Investor Solutions, we continue to add fintech partnerships.
- And, this has been the best six months on record for Public Finance, with 52 deals closed year-to-date, an increase of 79% compared to 2020.
- Turning to Private Wealth, we now have $16 billion in customer assets and we’re on track to exceed sales volumes from 2020. We’re beginning to see activity in our new Family Office business, and they have a solid pipeline. That’s certainly not an exhaustive list, but it’s clear we have a lot of great things going on across the company and we’re excited for the opportunities we see for the rest of 2021.
- Finally, the board of directors approved an increase of $0.05/share in our quarterly cash dividend on UMBF stock. This is nearly a 16% increase and was positively received by investors. Our consistent record of increases stands out among peer banks, and as you can see in this chart, our dividend has grown by more than 200% over the past 20 years.
To wrap up, I’ll share a couple of comments from equity analysts that cover our company. These analysts serve as additional sources of information about UMB in the investment community. It’s important that they understand our business and long-term strategy so they can better tell our story to their clients, large institutional investors.
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