UMB Financial Corporation
Q4 2020 Earnings Call Transcript

Published: 27 Jan 2021

[Operator:]

Good day, and welcome to the UMB Financial Fourth Quarter and Full Year End 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kay Gregory. Please go ahead.

[Kay Gregory:]

Good morning, and welcome to our fourth quarter and year end 2020 call. Mariner Kemper, President and CEO and Ram Shankar, CFO will share a few comments about our results. Jim Rine, CEO of UMB Bank and Tom Terry, Chief Credit Officer will also be available for the question-and-answer session.

[Mariner Kemper:]

Thank you, Kay, and thanks to everyone for joining us today. I hope you and your families are safe and healthy. 2020 was certainly a year unlike any we have experienced. For banks, we saw the perfect storm. The timing of the implementation of CECL combined with the economic impact of the pandemic including 150 basis point cut in short-term interest rates and uncharacteristically low long-term interest rates created additional uncertainty and variability across our industries. Initially, we were hopeful that we would see faster resolution, but almost a year later the pandemic, along with the political and social concerns persists, despite all this turmoil, the strength of our diversified business model comes to the forefront as evidenced with our strong pre-provision results. We have posted solid asset growth, helping to drive higher net interest income even as the industry data shows weaker trends in most categories and our strategy to strengthen and build out our varied sources of fee income is paying off. Operationally, it’s status quo as our systems continue to perform well and most of our associate base remains remote. Even through the extended period of missing much of the face-to-face interaction that is so important to our business, our teams are working together and producing solid results. I am extremely proud of how our associates have adapted during this pandemic. I’ll repeat, because it’s so important, doing what’s right to support our workforce is a top priority. This in turn allows us to maintain our customer relationships and our commitment to high quality underwriting standards and solid capital and liquidity levels.

[Ram Shankar:]

Good morning. As Mariner noted, our pre-tax pre-provision results were impacted this quarter by elevated expenses due to operational losses, deferred compensation expenses, charitable contributions, timing of certain invoices, and higher incentive accruals tied to company and line of business results. Those items, plus the impact of two additional salary days drove the 14.6% linked-quarter increase in non-interest expense. Sequentially, net interest income increased 5.6% driven by earning asset growth in both loans and the securities portfolio, along with $6 million from the acceleration of PPP loan fees. Total earning asset yields increased four basis points to 2.95% from the linked quarter due largely to PPP origination fees which help drive loan yields to 3.78% for the quarter. Average total deposits increased 3.5% on a linked-quarter basis and 22.5% year-over-year to $25 billion. DDA balances grew by $687 million due to the typical year end build up of cash in corporate trust for municipal payments, the ramp up of public funds and by commercial banking at low rates have more customers leaving balances in DDA. The total cost of deposits including three funds was 13 basis points was 13 basis points, down from 15 basis points in the third quarter. Both net interest spread and net interest margin expanded by five basis points from the third quarter. Fourth quarter margin benefited 8 basis points from the acceleration of PPP origination fees and 2 basis points from deposit mix and rate changes. These were offset by the continued impacts of excess liquidity, and lower reinvestment rates on cash flows from our bond portfolio. Excluding the benefit of PPP acceleration this quarter, core net interest margin would have compressed approximately 3 basis points. Looking forward, the actual trajectory of our net interest margin will depend on multiple factors including short-term and long-term interest rates, prepayments fees on agency mortgage-backed securities, excess liquidity in the economy and the pace of PPP forgiveness. Given what we know now, we expect some additional margin compression relative to the 2.81% reported net interest margin in calendar year 2020, roughly in line with the current consensus outlook of 2.70%.

[Operator:]

Our first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.

[Ebrahim Poonawala:]

Hey. Good morning.

[Mariner Kemper:]

Good morning, Ebrahim.

[Ram Shankar:]

Good morning, Ebrahim.

[Ebrahim Poonawala:]

I guess, just first, Mariner, if you could just touch upon just the growth outlook I think you had one of the better loan growth performance both for the fourth quarter and full year. Just talk to us in terms of what we’ve heard from other banks as relatively slow first half of the year and then some pickup in the back half. Just talk to us in terms of what your expectations are on loan growth? And also tied to that, as you think about business development, on the fee income side, is there anything in particular that you see exciting from a growth opportunity standpoint?

[Mariner Kemper:]

Yes. Thank you, Ebrahim. As I said in my prepared comments, and as we have historically done, given a bit of a look into the first quarter which, so on a first quarter basis we expect to have the same kind of loan growth via the pipeline that we had – have had and had in the fourth quarter. As it relates to the remainder of the year, what I would say is, all things remains true – but true before which is we are underpenetrated across our geographic footprint and we are underpenetrated vertically on an asset class basis related to the maturity and getting our share within the markets that we do business. And so, and then we have, again deep, deep pipelines, uninterrupted sales activity, no reason to expect anything different than what we’ve been able to produce for many, many years related to the under penetration and have really exceptional sales force. On the fee income side, there are several things that continue to look at for us. Our trading and underwriting business both on the public private side and just the pure public side continues to be strong as we’ve built out offices in Dallas and New York. We expect to continue to see benefit from standing that business over the last couple of years. Corporate trust, one of the most exciting opportunity is yet to be seen yet, but it looks as the way that Biden is moving pretty quickly. An infrastructure bill would be very meaningful to our corporate trust and public – our public underwriting business as we are one of the major players on a national basis in that space. So we are excited about seeing that come to fruition. We stand ready to be a pretty major player when that does happen. Fund services continues to be well positioned as there are still a lot consolidation in that business and with consolidation that puts the player to the consolidated kind of on the sideline for a while as potential targets for business development. Wait to see how that plays out. So, our pipeline continues to grow there. We’ve had an year-over-year basis that businesses grow nicely. On the back half of the year, as things progress, if the economy continues to go as we all expected to, we expect to see our card business, particularly because it’s – a lot of it is related to commercial spend. We expect that to perform when and if that happens. And we agree with the most other banks to say at the back half of the year that should be the time we would see that. Our Investor Solutions business continues to be strong as we continue to see opportunities with Fintechs and our wire house and brokerage business remains strong and those – and with the markets being strong the way they are as activity is good there. And we are investing in our wealth management business. We’ve just invested in a brand new reporting and trading system and are dealing some hiring there, very excited about that. And back to the lending front, we also do have two expansion markets, which I noted in the conference call. Minneapolis now represents 1% of our total loans and we just expanded into that market just a year ago. So, prospects for that are pretty great. And we’ve also moved into Salt Lake City and have hailed for that.

[Ebrahim Poonawala:]

That will help me, Mariner I think. And then just, as we talk about margin pressure, I was wondering if you could help us just in terms of your thought process around core NII outlook and remind that how much of PPP fees are left around that you expect accrete as these loans are forgiven? I am sorry if I missed it. I joined the call late. Thank you.

[Mariner Kemper:]

Yes. So what I said, Ebrahim, on the margin was, if you exclude the PPP acceleration that we had in the months of November and December, in the fourth quarter, our margin would have been down about three basis points on a core basis excluding PPP acceleration. Now, just over a half of our PPP fees were recognized in 2020, so we have, call it, 45% of those fees from round one of PPP still remaining to be recognized in our income statement. And then the core margin, I mean, as I said in my prepared comments, lot of these will depend on what’s happening with excess liquidity with more stimulus coming our way and more programs the industry might be in for longer periods of excess liquidity, which will obviously impact net interest margin. The other thing is obviously long-term rates, as well. Now, with the ten year having prepped up a little bit, the mortgage rates haven’t reacted. So, prepayments feeds and what happens with the reinvestment rates on our mortgage-backed securities book are totally our bond book will also determine the path of margins. So, that’s kind of my thought process.

[Ram Shankar:]

And I would just add that we also do have round two on PPP. So it’s – we have to determine how much more we end up doing with that as the doors are opened for that business how we’ve been sending applications to SBA starting last week.

[Ebrahim Poonawala:]

Any sense how big that could be?

[Ram Shankar:]

Not yet. But highly likely to be a lot smaller.

[Ebrahim Poonawala:]

Okay. And just, to follow-up, I get what you said on the margin, in terms of the core net interest income, do you think you’ve bottomed out? Or do you still see more pressure on the NII?

[Ram Shankar:]

No, and Mariner said in his prepared comments, the same comments that he said on loan growth in terms of outperforming – a relative outperformance that’s still expected to be true for the net interest income side. So, we’ll certainly grow through the current rate environment, which is obviously not very conducive through our balance sheet growth opportunities. So those comments that Mariner talked about just also are pertinent to NII.

[Ebrahim Poonawala:]

Understood. Thanks for taking my questions.

[Mariner Kemper:]

Thanks, Ebrahim.

[Operator:]

Our next question comes from Chris McGratty with KBW. Please go ahead.

[Chris McGratty:]

Thanks. Good morning, Mariner.

[Mariner Kemper:]

Good morning, Chris.

[Chris McGratty:]

Ram, maybe start with you on the expenses, you call out in the deck, I think you called out some items not expected to recur and you talked about a little bit in your prepared remarks. I am interested, kind of what your view is kind of the right jumping off point for 2021 for expenses? Thanks.

[Ram Shankar:]

Yes. Sure, Chris. I mean, we don’t give any forward guidance like that. But I’ll go back to what Mariner said in his prepared comments, right if you exclude some of the noise that we talked about in our script, the fourth quarter 2020 runrate would have been similar to the $202 million or so that we had in the fourth quarter of 2019. And so, that’s a good comparison. So a lot of the – if you exclude the noise, I would say that’d be probably at a runrate that we would jump off from.

[Chris McGratty:]

Okay. And the operational expenses, what exactly is that? Operational losses?

[Mariner Kemper:]

We are not prepared to kind of get into the nuance of it. But there are expenses that would happen normally any way and we took advantage of 2020 to get them by this. And so, things will go expeditiously in our favor.

[Chris McGratty:]

Okay. And you had again to do that this quarter. In terms of kind of use of capital going forward, I hear you on the organic growth, are there just any comments about resuming the buyback which lot of banks have done and also thoughts on M&A? Thanks.

[Mariner Kemper:]

Sure. These comments, I feel a little – to them as they are similar to what we’ve said for a long time. Obviously, the first place is we want to use our capital to build our business. So that would be through the investment in people and technology and M&A, right? M&A, we continue to look. We are spending a lot of energy and time. So that we would sure like to be able to find something, but so the energy is being there. As far as buybacks and dividend increases outside of what we’ve historically demonstrated, that would just depend on whether we are successful investing – having opportunities to invest in the business first and then kind of where our stock is trading and how we are feeling about that related to market dynamics, et cetera. So, we are – I mean, the answer is, we’ve obviously seen our history. We have done buybacks. So, we are not opposed to them. We just – it’s lowered down on the ranking.

[Ram Shankar:]

Just to add to that, in the fourth quarter, we did buy back about a 67,000 shares when our stock was down lower than where it’s trading now. So, we will be opportunistic about buybacks and have commenced the resumption in order to resume buybacks.

[Chris McGratty:]

Yes. Okay. And Ram, if I could, just on the PPP, do you have total accelerated fees or the fees in the quarter and then what’s the 45% of interim dollar raise is going forward?

[Ram Shankar:]

That’s – we disclosed that the fees, the acceleration part is about $6 million incremental to the fourth quarter and most of it happened in the month of November and December. Previously, we disclosed, I think on the $1.5 billion of PPP loans based on the size of loans and the number of loans we had the average revenue that we expected was about, call it, 2.3%. So, you kind of can do the math based on that.

[Chris McGratty:]

All right. So, 45% of that, that’s correct. Got it. Thanks.

[Operator:]

Our next question comes from Nathan Rice with Piper Jaffray. Please go ahead.

[Nathan Rice:]

Yes.

[Mariner Kemper:]

Morning, Nathan.

[Nathan Rice:]

Good morning, guys.

[Mariner Kemper:]

Good morning, Nate.

[Nathan Rice:]

A question on credit. It looks like most of the items that you all improved in the quarter, MPH is down, charge-offs were very low, deferrals came down to less than 1%. But I guess, the ACL increased a little bit and it looks like that was due to portfolio changes. So, I guess, is there just increases in criticized loans? And if so, kind of what portfolios are driving those increases in criticized?

[Ram Shankar:]

Right. Mariner, I’ll take this first. I mean, part of it is the balance sheet growth. If you look at our point-to-point basis, our balances were up about $400 million. So, when you look at our allowance coverage ratio, it actually came down a couple of basis points. So that’s the primary driver of why we had a reserve build, if you will.

[Mariner Kemper:]

Yes. And as far, criticized, obviously you want to see that please see the 10-Q. Nothing will be unusual there and really the most important thing to think about when the Q come out is, we have very little migration in our criticized from first category of watch down to doubtful which has been the same case as long as that have been around 25 years.

[Nathan Rice:]

Got it. That’s helpful. And then just changing gears a little bit and going back to the growth in deposits in 2020, just curious if you guys have any updated thoughts just in terms of stickiness of that deposit growth entering 2021 and the plan just from every investment perspective within the securities will just continue to reinvest. Cash flows, as you guys kind of what you see yourselves and some net excess liquidity to work in the bond book absent where the growth opportunities are across loans?

[Ram Shankar:]

Nate, I would say, all of the above. Right, obviously, we are trying to invest it in the market. Obviously, as you’ve heard comments from Mariner about the loan pipeline that we see in the first quarter and maybe then into 2021, obviously the first choice is to deploy those deposits into loans. So we’ll continue to do that. And then on the bond portfolio too subject to all the due diligence that we do on municipal securities and what we buy on the mortgage-backed side, we continue to see the portfolio grow and then the rest of it is sitting on our balance sheet as a Fed account basically as liquidity. So it’s going to be a combination of those. And I think that will continue into 2021 just because of, as I mentioned all the stimulus programs and excess liquidity in the economy.

[Mariner Kemper:]

And just as far as the stickiness goes, we monitor that pretty closely. I think the diversity of our deposit base really makes up for any nuance to, whether there is excess liquidity in particular balance sheets, whether it be institutional corporate or within the personal categories, I think, we feel pretty comfortable with the diversity of our deposit base really cushions us against whatever excess liquidity might be in the system.

[Nathan Rice:]

Okay. All right. Appreciate all the color. Thank you.

[Ram Shankar:]

Thanks, Nate.

[Operator:]

Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

[Jared Shaw:]

Hi, good morning.

[Mariner Kemper:]

Good morning, Jared.

[Jared Shaw:]

Just looking at the ACL, you had pretty great info in there in terms of how you’ve built that out and about a third of the ACL is due to sort of macroeconomic conditions. How should we be thinking about that going forward as we are starting to see some modest improvement there? Are you sort of heavily depending on moving on the quality of ratio a bit longer or should we think like maybe second half of the year, you’ll start reevaluating that excess and we can see that back into the earnings or good growth?

[Mariner Kemper:]

Well, I’ll take the – a first stab at this and then, team wants to jump in out here add to as they can. That - top of that was related to my comments I already made. Our thought on that is it, the original purpose of the additional provision that we did in the first quarter of last year was tied to the pandemic and as far as I am concerned, we are still smack in the middle of that. So, it’s premature to think that we would do some of the releases that others have announced. I don’t – we don’t think that’s prudent. However, related to your question about when that would change, that will relate to what happens with the vaccine delivery and how quickly everybody gets it. Whether there is what the stimulus and all the extra government programs do. And to your point, whether the back half of the year, we really feel, like we are out of this thing or not, what I’d say it about just our sort of the algorithm that is tied to that is complex and it includes things like loan growth, old year’s rolling off and whatever performance good or bad within those years, macroeconomics that’s a whole - the whole thing in there and we have to kind of live by that algorithm. And so if the news gets better in a material way, we will be hard pressing that to do some sort of release of provision at some point in the year. But we have to watch the data and we are going to let the data. Data dictate what we do there and make sure we feel real comfortable with it.

[Jared Shaw:]

Okay. Thanks, and then, on expenses, if we use a sort of a 202 as the base for first quarter, and then some of the growth you are talking about, I mean, should we really, just 2021 going to be a year of good positive operating leverage where we should expect to see some decline in the efficiency ratio, I guess, how to contribute – we’d be thinking about operating leverage?

[Mariner Kemper:]

Well, I mean, improvement for sure. But I think where we come out on operating leverage, there are some headwinds related to the operating environment, the interest rate environment in particular. And so, I think, any meaningful improvement in operating leverage will be hard to get to, I mean, we’ll be working at it all year long. But I think the interest rate environment is a pretty – it’s a pretty heavy wind for all of us as an industry. So, we’ll be working hard at operating leverage and we may have some nominal improvement in operating leverage, but I wouldn’t expect in this year to see any meaningful improvement in operating leverage.

[Jared Shaw:]

Okay. Thank you.

[Operator:]

Our next question comes from David Long with Raymond James. Please go ahead.

[Ram Shankar:]

Good morning.

[David Long:]

Good morning, everyone.

[Mariner Kemper:]

Good morning, Dave.

[David Long:]

Hey, Ram. The period ending deposits were well above the average in the quarter. Now I know there is some seasonal impact that you have. But looking at the first quarter here, how much of that growth in deposits here it looks like at the end of the quarter it’s seasonal versus sticky and how do you expect to defend your NIM if you have this excess liquidity?

[Ram Shankar:]

So, yes. It’s really tough to look at our quarter end deposit balances, particularly as you enter public funds business. Obviously, we have a lot of – as Mariner has talked about, we have a lot of diverse businesses that have different seasonal aspects associated with it. Obviously, there is growth as well, organic growth that we are seeing in and then there is the impact of all the excess liquidity in the economy. So, it’s really hard to parse it out especially this year. But the balance sheet was higher because of public fund season, which usually ramps up in November and goes through the February timeline. So that happens every year. And then in the asset servicing or fund services business, there is always some volatility depending on what clients are doing with cash balances in there, as well. But, as Mariner said, we feel pretty good that all of our lines of businesses are provider of funds for us and all the initiatives that we’ve put in place will help us grow those core deposits. So, they will be pretty sticky from that standpoint.

[David Long:]

Got it. And then, reinvestment rates in the securities, what are you looking at right now? I think you said that the roll off in the quarter was in the mid-180 range?

[Ram Shankar:]

That’s right. And the new mortgage backs and municipal depending on the mix can be anywhere from 1.25 to 1.40.

[David Long:]

Got it. Okay. Okay. And then, a second question I had is related to your deferrals and obviously, real nice to see those numbers come down there, but the current deferrals, if you are still on deferral, have those been downgraded and where do they stand in the risk spectrum at this point?

[Mariner Kemper:]

Ram, do you want to take that?

[Ram Shankar:]

Yes. It’s case-by-case, some of those deferrals have been downgraded and typically those have been downgraded to a watch. And those would be as you would expect in the hospitality space. Other ones that maybe are on a second deferral, we haven’t necessarily downgraded if we are of the opinion that it’s totally pandemic related and the belief that once come out of this, and the economy gets back to a more normal state that the particular borrower gets back into – to the position they were in prior to that. So, it’s case-by-case and it’s the broad answer.

[David Long:]

Got it. Thanks. I appreciate the color. Thanks, guys.

[Mariner Kemper:]

Thanks, Dave.

[Operator:]

Our next question is a follow-up from Chris McGratty with KBW. Please go ahead.

[Chris McGratty:]

Great. Thanks for the follow-up. Just want to make sure I got a couple things written down right. Ram, the tax rate guide, is that a GAAP or is that a key guide?

[Ram Shankar:]

That’s a GAAP tax rate of 15% to 17%.

[Chris McGratty:]

Okay. And then the – I think you referenced a 2.70% margin in your prepared remarks. I guess, I was interested to know everyone get that right and was that a GAAP NIM or is that excluding the PPP?

[Ram Shankar:]

That is on a reported basis. So it’s fully taxable equal and of 2.70-ish, which is where your models – consensus models are at. So that’s on a reported basis. That assumes a straight line amortization of the PPP fees. So, to the extent forgiveness accelerates, then you could see some outperformance to that. But that’s just on a steady state normal amortization of the PPP balances.

[Chris McGratty:]

Okay. And that was the kind of you are blocking the 2.70% for the full year 2021, that’s the right way to hear you guys?

[Ram Shankar:]

Correct.

[Chris McGratty:]

Got it. Thank you.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Kay Gregory for any closing remarks.

[Mariner Kemper:]

Hey, Kay, I am going to add something here at the end, because nobody asked about this. And I was going to add something real quick, which is just that on the TTCF front, nobody really asked about that. It is a line of business we do expect to continue to see opportunities and gains in that line of business. So, anyway, nobody really asked about that. We don’t expect that to be a one-time opportunity. With that, I’ll turn it over to Kay.

[Kay Gregory:]

Thanks Mariner and thanks everyone for joining us today. This call can be accessed via replay at our website. And as always if you have further questions, you can reach us at 816-860-7106. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.