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Earnings Explained: Third 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. Slide references reconciling non-GAAP numbers to GAAP numbers may be found in the full investor presentation issued on October 27, 2020.

Third quarter 2020 earnings summary

Our strong third quarter results were a testament to our diversified business model, prudent underwriting standards and the overall strength of our customer base, with strong credit quality metrics, balance sheet growth and several bright spots in our fee income businesses.

For the third quarter, we earned $73.1 million, or $1.52 per share, well above analyst estimates of just $1.02 per share. The biggest variance from expectations was our continued solid credit performance, which allowed us to book a smaller loan loss provision compared to the last two quarters as well as a larger balance sheet. The third quarter provision adds to the reserves we hold to cover any potential future losses in our loan portfolio.

Even with the smaller third quarter provision, our reserves cover our non-performing assets by 2.2 times, compared to a median peer coverage of 1.7 times.

Net charge-offs of just 0.13% of loans for the third quarter is consistent with our longer-term performance. Our levels of losses on loans has remained steady, even through difficult economic periods, such as the Great Recession. The end of that period at the left of the below chart depicts the levels reached by the industry and peers, compared to UMB’s performance. This is where our long, consistent history of quality underwriting will help set us apart as we go through this crisis.

Balance sheet highlights

Moving to the balance sheet, we saw strong growth on both the asset side—including loans and securities—and the liability side—deposits and other sources of funds. One highlight this quarter is that we exceeded $30 billion in assets at quarter-end for the first time in our history.

Despite the unprecedented times we are in, our average loan balances—excluding the Paycheck Protection Program (PPP) loans—increased 9.4 percent on an annualized basis.

Average loan growth was again driven largely by commercial and consumer real estate. In the second quarter, mortgage prequalification applications hit record highs, and we saw some of the resulting growth in the third quarter, with average consumer real estate loans increasing 14.8%.

Average deposits increased 5.9% compared to the last quarter, including interest-free deposits – a strategic focus area for us – that increased nearly 8%.

Our net interest income, the difference between what we earn on earning assets and what we pay out on deposits and other funding sources, was $184.4 million in the third quarter, an increase of 3.5% compared to second quarter. The strong earning asset growth we experienced helped offset the impact of lower yields in this current rate environment.

Reported noninterest income for the quarter was $113 million, a decrease of $7.5 million from the second quarter. Just as we saw a benefit from favorable equity and debt markets in the second quarter, we had some negative market adjustments in the third quarter that lowered our fee income. Excluding these adjustments, our fee income improved sequentially, driven by favorable trends in our asset servicing and asset management businesses this quarter, which include Fund Services, corporate trust and wealth management. And, income from our payment card products improved by 18.4% from lows we saw in the second quarter.

The pandemic’s impacts

Credit and debit card spending has been greatly impacted by the pandemic, as people are staying in more and travel has been curtailed for both individuals and businesses. Third quarter saw spending levels improve from April lows, but they remain below pre-pandemic levels.

We believe there has been some catch up in routine medical and dental care following the shutdowns earlier in the year, and healthcare spending surpassed year-over-year levels.

A positive outlook and exciting opportunities

Overall, we are very pleased with our third quarter results and look forward to continuing the progress into the fourth quarter. The analyst community has been positive on our positioning as well. One of our analysts upgraded his investment rating on us to a “Buy” from a “Hold” based on his view that UMB exhibits strong balance sheet defensibility, above average growth potential, and fee revenue diversity.

Another analyst pointed to our growing loan balances, saying “trends were good across the board … on the back of strong loan growth which, based on our model, is UMB’s best quarterly growth rate since 2015.”

Another development during the quarter was a success story from our small business investment company, UMB Capital Corporation. This subsidiary invests in companies with potential to help them achieve their goals. One such investment is a $7 million equity stake in a brand called Tattooed Chef, a business that produces plant-based foods.

Following an initial public offering by that company, UMB has an ownership position in Tattooed Chef. We received a cash payment of $9 million and a little more than 4 million shares of stock, valued at approximately $70 million.

This relationship began in our asset-based lending group, and we were able to partner with the client as they grew, showcasing some of the diverse financing capabilities we have. In many ways, we are a 100-year-old start up with an entrepreneurial spirit that supports clients to realize their full potential.

Strong capital position and history

Finally, the board of directors increased the quarterly dividend on our stock by 3.2% for the next payment to be made in January 2021. We have a solid capital position, and dividends are an important way to provide value to our shareholders who have helped provide that capital.

Next spring will mark the 50th anniversary of our listing on the Nasdaq stock exchange and we have paid a dividend every year since 1971. And in more recent years, we’ve had 19 consecutive annual dividend increases, from 2001 through 2020. That’s 19 years of increases, even through uncertain economic times, for a total increase of nearly 230%.

Looking ahead, the industry is not without challenges related to the pandemic, the outcome of the fiscal stimulus discussions in Washington D.C., and the results of the elections. However, we feel we are well positioned to weather these events.

I look forward to sharing our full-year results with you in January. And I wish you all a great holiday season.

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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