Q1 2020 Earnings Call

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Good morning, and welcome to the U MB Financial Corp, first quarter 2020 earnings conference call all participants. We in listen-only mode. Should you need assistance, please say to a conference Special by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask you a question. I press store then one on your telephone keypad. So which are your question, please press * then two, please note this event is being recorded or now. It's a conference ever 2K Gregory with investor relations, please go ahead.

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And Welcome to our first quarter 2020 call Mariner camper president and CEO and CFO will share a few comments about our results Jim Ryan. CEO of UMB Bank will also be available for the question-and-answer session before we begin. Let me remind you that today's presentation contains forward-looking statements all of which are subject to assumptions risks and uncertainties, including the currently unknown potential impacts of the covid-19 crisis. These risks are included in our SEC filings and are summarized on page two of our presentations off the results and other future circumstances our aspirations May differ from those set forth in any forward-looking statement forward-looking statements speak only as of today and we undertake no obligation to update them except to the extent required by applicable Securities laws.

All earnings-per-share metrics discussed on this call are on a diluted share basis. Our presentation materials and press release are available online at investor relations office now, I'll turn the call over to Mariner camp.

Thank u k and thanks everyone for joining us today. I hope you and all your family and friends are safe and healthy. Our thoughts are with the most impacted by this pandemic and our dog gratitude goes to those on the front lines, including health care workers and First Responders.

I'm going to go off script a bit this morning like everyone on this call. I've had a great deal of time over the last 45 days to think and prepared for what lies ahead.

And my twenty-five years at unb 16 of those have CEO. I primarily been a risk manager.

I've come to believe a few simple truths about what we're likely to experience some of the next couple of years. I believe it's Cecil is the worst designed accounting rule in US history poorly time and horribly mismanaged bypass be in the accounting industry. If we were to return to the incurred loss model investors would have a much easier time understanding the underlying risk at any particular issue, but that's not a reality.

And with Cecil now deployed it will nearly be impossible to understand the actual risk that exists in A bank's portfolio. However, the unintended consequence of this should be home or all more prepared for the unknown risks ahead.

What I do know is that it's better to be prepared for the worst rather than only preparing for outcomes. That would be better.

With all that as a backdrop, I'll share it with you. The three most important things to focus on as we look at what lies ahead First Capital and liquidity our King. None of us has any idea how bad this crisis will be? No matter what any self-proclaimed genius will tell you and you can't have enough capital or liquidity right now second doing what's right axle matters, not only because it feels good, but it builds franchise value by bonding both employees and our customers you would be or laser focus on helping are assisting customers manage through these very difficult times more on that in my prepared comments and lastly and importantly to you are investors. Our primary mission is to make sure that our current investors can count on us to be standing strong at the end of this crisis and benefit along side us when we take advantage of the opportunities that will sure present themselves in recovery. And yep.

Need to those of us who are not too badly wounded to capitalize on it.

Here is where our track record is lenders comes into play. I can't make any promises about how will perform during the situation but what I can tell you is that I will treat the money that we lend out as my own. It happens to be the only investment I have.

I along with most of our loan committee have been overseeing our lending activities together for twenty-five years. It's easy to look good when things are good. The real test of credit quality is how it performs when conditions are negatives. We have a track record on that issue. We outperformed nearly every Bank in the 08 crisis in conclusion UMB. It's always preparing for the worst month. We have strong Capital levels and a very strong liquidity position along with a loaner deposit ratio that allows us to be there for our customers. We demonstrated to our customers and employees that we put them first. And lastly most importantly we have a credit team that is battle-tested with Superior results when it matters in times of crisis.

Now we'll return to the comments that we prepared. This quarter's release and investor call are certainly not routine. Our Focus today is less on quarterly resolved and more on how we're responding to protect and support our Associates customers and communities along with details on our portfolio and how we're positioned operate through this crisis. We came into this crisis in good position with healthy Capital levels and a balance sheet that gives us flexibility while we don't know how long this current environment will last we are prepared and in true to our style we have taken a conservative stance with our positioning.

First I'd like to share some of the actions we take in in light of the rapidly changing environment operationally, we activated our business continuity plans on March 16th and took steps to practise assisting customers. You envy was one of the first in our region to move to drive-thru only service in our branches and we were able to quickly transition much of our team two remotes model. We put additional safety practices in place as well as adding supplemental compensation and additional PTO days for roles that can't be performed off-site our technology digital and online banking platforms have performed well, and we've been able to continue to serve and support our customers on an uninterrupted basis.

Now I'll turn to our first quarter results announced yesterday afternoon. You'll see that on a gaap basis. We recorded a net loss of three point four million driven by the impact and Adoption of Cecil which resulted in significantly higher provision expense based on how the economic models calculate the possibility of future credit losses under the extreme conditions created by the covid-19 crisis, excluding this impact business and financial results remained strong and demonstrated by a 5.6% wage increase and pre-tax pre-provision income to 83.7 million from a linked quarter.

We seen our peer group report a median increase of 3% in PTP income.

Unfortunately, the ill-timed adoption the Cecil methodology during this unprecedented macro-environment has resulted in additional volatility at a critical time. This is Faith comparing financial institutions across the banking industry extremely difficult. If not impossible given all the subjectivity that has gone into these calculations month including the source and days of economic forecasts. The industry has spent months creating and testing Cecil models, but they weren't meant to operate with such significant movements and unemployment's GDP expectations interest rates and economic forecasts, especially in such a compressed time frame.

Arguably not all unemployment rates are created equal while today's rate has now exceeded Peak levels seen during the 2007-2009 recession different Industries are being impacted this time at varying degrees. Each bank's loan portfolio is inherently different and national unemployment rates aren't always relevant additionally Banks as UMB who have less Reliance on consumer lending including credit card and mortgage will likely see their portfolios react differently. Another consideration is the extraordinary amount of logical stimulus that is being injected into the addressing this crisis.

We're contacts during the prior financial crisis when employment rates jumped from 4 to 10% over a 12 quarter. Our cumulative losses were only 1% of our balances with over half of that in the card portfolio. Our performance was the second best in our midsize peer group for comparison credit card balance. We're 7% of our loans in the 2009 prices compared to just under 3% during this crisis.

You will be has always had a reputation for being responsive consistent and conservative as it relates to credit. We are quick to get in front of problems quick credit to the watchlist, but most importantly we have a good track record of keeping ranked credits from moving to Los based on our relationships with our clients.

The Cecil methodology makes it more difficult to provision in a way that we feel is appropriate for what we know about the quality of our portfolio.

We provided some additional information beginning on 5/9 of our materials and ROM will discuss those in more detail shortly aside from the seats will impact our asset quality would suck. Um with net charge-offs of to 3% of average loans are provision of $88 million under Cecil equates to 11.5 times net charge of 7.7 million for the first quarter and nearly eleven times the last four quarters average provision and another compelling statistic our reserves to non-performing assets, which is historically been above peer averages stands at one point nine times compared to peer median of 1.6 times wage average loans increased 11.6% on a link quarter annualized basis.

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Basis growth was 3.9% compared to a year end of 2019 as top-line Loan Production 816 million and a net increase in revolving balances of 321 million was partially offset by $611 million of payoffs and pay Downs the growth in commercial loans in the fourth quarter included approximately $388 million in net line and draw activity line utilization at March 31st was 41% compared to 39% at your end with similar to what we've heard from other Banks draw activity has slowed in April as shown on slide 13.

In early March, we began practically reaching out to our clients. We knew could be more severely impacted by the impending economic crisis our entire business banking customer pays large athletes are practice Finance portfolio of dentists doctors and professionals was offered a six month deferral to help them weather the storm.

Through our usual relationship management process. We've been working towards customized solutions for other borrowers and including the business banking deferrals. I mentioned before we have received a check for modifications on approximately 1.7 billion of our loan portfolio or about 12% of the book the breakdown of those requests by client type can be found on slide 13. This is similar to the levels reported and Industry surveys when the SVA is paycheck protection plan program opened up we were ready and moved quickly. We were able to gain access and get approved three thousand applications for more than 1.4 billion in funding loans. These loans have range in size from $2,000 to $10 a month with the median of $122,000.

I'm extremely proud of how our team stepped up to provide this critical support to our clients and we were ready to step back in with a backlog of another 1,700 applications when the second phase of the program began on Monday.

Now I'll turn it over to ROM to discuss some of the drivers of our results and I'll come back and provide a little more detail on the composition of our loan portfolio ROM.

Thanks, man. I'll begin with comments on Cecil in the drivers of our increase allowance for credit losses, which begin back on slide nine adoption on January one. Our allowance wage loss has increased by 8.8% or nine million two hundred ten point eight million net charge-offs drove a reduction of 7.7 million and portfolio packages, including loan growth and mix and qualitative changes added twenty one point two million for the economic Outlook adjustment of 66.8 million under the Cecil model. We use the March 27th Moody's Baseline economic forecast this brings our total allowance 291 Point 1 million at March 31st, the reserve build added 59th basis points to our allowance to loan coverage, which was 1.4% at quarter-end.

or economic models

Or built on regressions and correlations during the prior financial crisis the changes in some of the key economic variables applied to our loan portfolio actually disclose last quarter of these key variables considered in our model today include the unemployment rate and treasury rates. We have taken a conservative approach to our seasonal modeling in light of the volatility and freaked economic expectations, especially when you consider the modest address portfolio disclosures that Mariner will address shortly approximately two-thirds of the increase in monthly allowance can be attributed to RCN I portfolio

Since the end of the first quarter and subsequent to finalizing our Cecil estimate the economic forecasts have deteriorated further than our model inputs including conditions that clearly worse than prior recessionary periods. And what most models were built off but we've also seen an unprecedented amount of fiscal stimulus being injected to address the crisis would likely more to come additionally unlike prior recessions. This crisis has the potential to correct meaningfully in a very shortened time frame.

The direction of our future reserves will depend on more observable Trends within our portfolio and Loan growth coupled with macroeconomic forecasts that will be available at the measurements of the end of the quarter other factors such as the shape timing and magnitude of the recovery will also play a part in assessing future allowance levels. It is important to note that our first quarter provision isn't an indicator of a run rate for the remainder of the year.

Now looking at the quarterly results net interest income a hundred seventy three point nine million represents an increase of one point six million from the fourth quarter driven by the 11.6% off growth in average loans and exist liquidity and along with decreased deposit costs.

Total earning after the yields fell 18 basis points to 3.58% from the linked quarter driven largely by a 23 basis-point Decline and Loan yields interesting deposit cost also declined 18 basis points for a beta of 44% as the rate Cuts were in March will see this impact more clearly in the second quarter.

Nothing to spread increased one basis point despite a hundred and fifty basis point reduction in short-term interest rates net interest margin compressed by 5 basis points from the fourth quarter off living almost entirely by the declining benefit of free funds. The positive impact from lower interest bearing liabilities was offset by loan repricing

I stated fee income was 98.4 Million for the quarter and reflected some impacts from the volatile markets including negative Market valuation adjustments to a few line items off. The largest reduction was in company owned life insurance or call Ian, which decreased 16.6 million compared to the fourth quarter additionally derivative income and the valuation of some other investments in our trading inventory were impacted as discussed in our earnings release.

expenses

The quarter decreased 7.3% or 14.8 million compared to the fourth quarter largely related to a fifteen point seven million reduction in Deferred Comp expense offset to the reviews Kohli income. I mentioned partially offset include a typical and seasonal increases of 8.1 million in payroll taxes medical insurance and 401K expect the first quarter additional details on non-interest income and expense can be found on flights five through seven as you analyze our results.

We continue to maintain strong regulatory Capital ratios with the cet1 ratio of 11.9% based on the adoption of interagency guidance for regulatory Capital transition an average tangible common Equity to tangible assets of 9.7% during the quarter. We we purchased just over 1 million shares at an average price of $53.79 through both open market repurchases and an accelerated share repurchase program.

We have no additional plans for share repurchases at this time other than the completion and the settlement of the ASR entered into in early March.

Or tangible book value per share increased to $51.04 at the end of the quarter up 16.1% from a year ago for comparison our peers that reported so far have shown an increase of 9.1% Regulatory Capital ratios are shown on slide sixteen finally in addition to our lower loan-to-value ratio. We have multiple primary and secondary sources of liquidity to support our customers now, I'll hand it back to Mariner to go into the details on our loan book.

Thanks for a snapshot of our loan composition at the end of the first quarter is shown on slide twenty one and we have a break down of our commercial portfolios by asset class on the following pages are cni book shown on 5/23 stood at six point two billion at the end of the quarter representing 44.2% of our total book. The portfolio is well Diversified industry our commercial real estate portfolio detailed begins on page 24. Our total cre portfolio is good at five point three billion at the end of the quarter and approximately 50% is comprised of owner-occupied real estate farmland and residential construction. The remaining 60% is investment cre where our largest exposures are multifamily industrial properties and Office Buildings.

While loan-to-value ratio is very buy property type. The average is 63% You'll see the full mix and other detail on slide twenty-five. We have many long-term relationships with sponsors who have managed through priority economic cycles, and we were primarily a recourse lender. Our investments e r a portfolio overall is 90% recourse next month on 526. We've called outer exposure to industries that are viewed as having more exposure to the pandemic with additional detail on how we're viewing those we identify with the five categories shown then looked at each for specific characteristics or specific credits that we feel comfortable with as well as those which we may think carry more risk, if a current environment is prolonged. The balance is shown in the column labeled potentially more impacted subset are those we're monitoring more closely and you'll see dead.

That amounts to just under $9.

percent of our total loan book

I don't think it's appropriate to make a blanket statement about a particular industry or category as that's not how we look at our book. We know our customers well and have an active dialogue with them in office environments. We generally have strong sponsors. And as I mentioned rcra book is largely recourse, I'll begin with our oil and gas portfolio and the breakdown by segment is shown on that same slide.

We had $457 million outstanding at the end of the quarter representing 3.3% of total loans, which has remained steady since the last time oil prices were in focus in 2014/2015. Many of our energy clients have been with us for years and we've worked with them through the last cycle. We have strong Equity sponsors in place for me that the book and many customers are well hedged against oil price volatility as shown in the table 250 million of the oil and gas portfolio is currently receiving more scrutiny and is comprised of credits in the service sector as those customers are the most impacted in this environment and a few of our Upstream credits that are more heavily dependent on oil prices and possibly have less protection in place.

This brings us to a total in the more impact that column for our oil and gas loans down to 1.5% of total loans in c r e r multi-family home and student portfolios student housing portfolios had a combined $664 million outstanding at quarter in 14% of which is for projects under construction that are not expected to come to Market within the next 6 months. The largest portion of our multifamily loans are for class-a developments. We have not yet heard of significant stress, but a longer shutdown or deeper recession could obviously impact the professional Workforce as well and we are in close communication with our clients.

This book is 87% recourse and weighted average ltvs are 59% for multi-family and 67% for student housing Palm Springs the total in the more impact that column for multi-family down to 2.6% Total loans retail c r e a $445 million is broadly Diversified and a substantial portion carries guarantees from Top sponsors. 38% is grocery-anchored retail centers and less than 5% is for properties that are majority-owned by by restaurants. This book is 90% recourse and has a weighted average LTV a 61% this brings the total in the more impacted column for retail Tre down to 1.7% of total months.

our total

Tell portfolio 328 million representing 2.4% of total loans and you'll see that the portion we currently have under closer scrutiny is 201 million or 1.4% of loans off 16% of our outstanding Hotel balances are under construction. And again that excludes any that may come to Market within six months.

Our entire Hotel portfolio is recourse. All properties are flags with major brand families and the majority are limited service hotels versus full service.

The weighted average loan-to-value is 62% and the average debt service coverage ratio on our stabilized Hotel portfolio in 2019 was 1.90, right?

Enter transportation service category the largest portion of the $293 million and balances our truck transportation and Warehouse clients and much of that group are leaders in the industry with strong net worths and liquidity. We have minimal exposure to passage or travel or tour companies which are less than 1% of total loans off after review. The more impacted portion of that book is just about 1.5% of total loss after an in-depth analysis. The portion of balance is in a category that we view as being highly impacted represents about 9% of total loan balances.

Of course. This isn't any indication that we think those will all be losses, but we will continue to keep a close watch as conditions of all throughout this crisis by faith. We have a strong capital and liquidity position and a history of prudent risk management and believe our diverse Revenue sources help provide a buffer in this interest rate environment. We've been through many crisis in our hundred seven year history and we're proud to work alongside our peer Banks to help navigate through this one to wrap up after digesting other Banks earnings. This season is abundantly clear that there is a great deal of subjectivity that goes into the allowance process more so than ever as you've heard us say our club management team has been together for a long time with an average 10 year 21 years that you would be we take a conservative approach and proactive approach to credit management job.

And remain confident that our credit quality will remain one of our key differentiators, especially during periods of stress.

I want to recognize and thank our team members who continue to go above and beyond every day as we serve our clients.

It is brought everyone together during a difficult time and it is reinforced what we've always known relationships matter.

Concludes my repaired from arts and I'll turn it over to the conference call operator for the Q&A portion of the call. Thanks a lot.

Who now begin the question-and-answer session to ask you a question may press store then one on your touchtone. Then if you're using speakerphone, please take up your handset before pressing choose which are your question, please press * then two at this time. We will pause momentarily with similar roster.

At this time our first question comes from Abraham pin Wala BOS a Bank of America. Please proceed good morning, So I guess just first one credit. So I appreciate all the commentary and it's stupid question one just from quantitative perspective on his light bulb mentioned resolved levels that hundred and fifty basis points of projected. Under stress scenario or and we've seen all sorts of ranges there in terms of banks have been forty fifty sixty seventy percent to that just talk to us in terms of the the depth of downturn or or economic pain assumed in that loss scenario and is it's just to conclude that unless we see the macro Outlook deteriorate you are you should be done with the Reserve building part of this.

Yeah, Ron, why don't you once you take that it sounds like a modeling mostly modeling question. Hey, good morning angry. And so we've seen some of the data and and you know, I can't speak for others in terms of our losses first thing be fast. And Cecil are two different tracks. They're completely for two different purposes. Right obviously defense is a 9 quarter Outlook versus the life of the loan process, but I'll go back to what I said in the script in member mentioned this too. We have taken a pretty conservative approach based on you know, the volatility that we saw at the measurement date of March 27th in the movies economic forecast looking ahead. So those are considering we didn't we didn't lay any negative overlays and what the model output was in terms of, you know, some of the stimulus programs that are out there and how shallow this recession could potentially be so this is pretty much a straight up model exercise in terms of how we approach Cecil with it. And then there's the defrost which is expected said completely different ball game.

Got it, I guess so understood. So you didn't assume any lower losses relative to what the model spit out to account for the stimulus actions. If I heard you correctly month and the stimulus actions is all the things that matter just walked through in terms of the address portfolios right within the address portfolios that people have generally labeled. There's only half of that. We think we need to monitor a little bit more closely because we have recourse and we have a lot of different things that we protect us. So that's not fully taken into account either. I think also even sounds a little bit like your question is what about the second quarter and I think it's early to try to give you too much color about what will happen in the second quarter. But what what what is come clear to us is off the house Cecil was applied by all the different banks is that there were many many qualitative overlays put on by, you know, a lot of the banks and as we stare into the second call log

We being as conservative as we were we do believe if data were to get worse unemployment work.

To get worse that we you know, we sort of bought our way into the second quarter at some level by being conservative in the first quarter. We do plan on doing, you know deep analysis on the second quarter against what the unemployment rate will be what the stimulus is how to apply unemployment against different parts of our book so long, you know, we we will continue to apply qualitative analysis as we roll into the second and third quarter golden. I guess just following up. So you mentioned the difference. In fact folio credit card loans much smaller. There was a big driver of losses last cycle. I guess the other side of this grown the bank lot in terms of commercial lending a lot of that has been c r m a n c n i out of Market just talk to us in terms of your level of confidence going into the Cycles relative to your CEO going into the last cycle and and just in terms of your birth.

For PSU confidence in the customer credit quality. Yeah, great question. First of all, you you made one statement about out of Market. We have very little in the way of out-of-market. So that's that's so I'm I'm you know, not got that misunderstood that a bit about our portfolio. So most of our loans are are I I guess I meant all of the Legacy market so expansion of them to be Texas Denver Tech Center. I mean again, we've been in Denver since I have 95, so I don't I don't know that we I would call any of our markets particularly wage in markets other than I suppose Texas is

You know under ten years, but we were lending in Texas before we opened offices there. So anyway, I I think really what we've talked about before about our loan growth is is is you'll recall about it about 10 years ago. We went through an exercise right to penetrate the markets that were in by doing a few things that that are independent of taking more risk. I creating the verticals right? So we were generous ten years ago and we hired marketing people and went to conferences and created marketing material and special pricing that helped us compete with particular segments verticals and and you know, and then we invested in staff in in the markets that uh that we were you didn't have as much money.

Closure in and we also you know change our compensation practices fifteen twenty years ago to to you know, pursue and help help our teams pursue. So I think the biggest thing I would say as we spend saying for some time is we were under-penetrated and a big part of our outsized growth was and continues to be being under-penetrated in the markets that were in and just getting our piece of the market share. So we are not we in order to go from the growth rates. We had, you know, twenty fifteen years ago to the ones were having now, the the only difference really is is the things I mentioned and it changed our credit underwriting. It's the same team as I said before. So we're underwriting the same way. We're just woke we've awakened our marketing capabilities and our sales capabilities over the last decade dead.

To pursue what's rightfully Ours from a market share.

Effective we have really low market share in in all the markets that we're at. So I we've called that a Runway, you know for some time on these calls. We have a really long Runway to penetrate without taking any additional risk and on the cre side as we've talked at Great depth about how we do that, you know where recourse lender we pay attention to sponsors a global liquidity and things like that. So I I feel very comfortable and I would say the biggest thing I would say is that there really isn't anything different that I'm doing and I'm the same CEO. I was sixteen years ago when I took the job and I've been overseeing credit over that entire sixteen years Tom Tom who's our chief credit officer is 33 34 years on the job and Jim Ryan is twenty-six years on the job. So and that's just three of us, but the birth

So that that's what I'd say about it. I'm you know, like I said in my prepared comments, you know, I can't promise anything but what I can tell you is that we're very consistent.

Understood and just separately if I could Ram in terms of the margin understand there's a lot of volatility. But if the rate environment stays where it is. What's your sense in terms of the Cadence of margin compression from this point on and do we see stabilization at a higher level relative to where we were when rates was Zero back in 2015.

Yeah, if you said you bring him a lot of moving Parts with Morgan ahead. One of the disclosures that we have is the amount of PPP loans. For instance. We did so we've done at this point one point four billion dollars and I was you know, those fees will get amortized over at 24 months. Until the large portion of beans nones will pay off or be forgiven or just mature I touch which point all these fields will be amortized so that can be a big impact or third and fourth quarter results in terms of how the margin progresses but if you exclude people one of the things we've been really successful both on the off-side on the liability side of the equation is instituting loan floors in a majority of our new production and then that the backboard comes up for Renewal we've been able to be very successful in that as well. And you saw this quarter. We're also very prudent with our deposit pricing or a cost of deposits in March alone was 20 basis points lower than where one Q deposits are so we're taking up pretty good job.

Look at where a deposit cross need to be so we'll use up our excess liquidity that should be favorable to margin as well. And then the other side is what's happening with Libor 1-month Libor was at 99 volts Windsor. So it March Thirty One and it's now retreated down through about 40 basis points. And as you know, some of these are some of our loans are index to one month library, but as I said earlier these loans come up for Renewal, we are pretty successful at floating some of these rates. And the last point I'll make is just to buy yield on our portfolio given where the ten years, you know, six basis points that's flipped a little bit. Uh, you see the role of field on one of the pages. It's about $225. We're getting slightly lower than that between a mix of mortgage-backed Securities and. So it's going to be pretty stable the benefit of free funds and what happened to the value of our ETA balances, which are dead.

percent of our book it's uh

That's that's where we see the lower benefit going forward and have a long answer to say nothing. But I'm not you know, we don't give typical Morgan guidance and I think I think I think Ron mentioned their thoughts are that obviously a big part of our deposit repricing happened in late March. So a lot of that positive impact will see in in the second quarter.

Thanks for taking my questions.

Our next question comes from John wrote us a big partner John. Please proceed. Good morning everybody. Hope you're all doing. Well. That's not too bad. Not too bad interesting times for sure. Appreciate all the detail. Maybe maybe around maybe just a I guess a modeling question. As far as the bank account goes. You said the press release that you still have. I guess you'll complete the AAS are in the second quarter. So how does the Share account change from the end of the end of March to June I guess month. So the way the SR works is 85% of the 30 million through the SR has already been retired or put in treasury stock. So the 15% the broker-dealer just call us back for any volatility in stock price for the 15% you know could be another, you know hundred hundred fifty thousand shares from where more study one in.

Oh, okay. So not not a big difference. But and and then aside from that the buyback is on hold. Is that correct? Correct?

You mentioned the the PPP Loan program. What is sort of the average fee that we should expect is. I assume it's probably in the two to 3% range, but can you break down? Yeah, I'll do that. So based on the profile we've seen and would be you know, uh disclose the average loan size is about $122,000 and you know, right now we're trending closer to $250 on the loan origination fee and that's you know, gross. Obviously. The other things that will factor in is the funding cost. We could Avail of the month ending facility which fund this loan is at 35 basis points, and then there's any costs incremental and marginal costs that are associated with the program of its, you know, legal regulatory wage system that we purchased two enabled us to be able to serve our customers really well. So those are kind of the moving Parts on the economics of the PPP program. Yeah, just as a reminder to age.

This is really a service we're providing we we we don't really see this as something we're making any money on at all. You know, this is a government program where an agent and not if my if we cover our costs at the end of this thing, I'll be surprised.

No, I listen to understand. It's obviously extraordinary time. So I mean the the banks are part of the part of the solution this time around to other questions from you guys. Just I guess just one your comment your thoughts as far as the loan pipeline going forward. Um, obviously the first quarter was very strong, but I would I would think things have slowed pretty dramatically and there's just one other question.

or just if you could

Dress the other question was on service charges you saw a bump up related to health care and just your thoughts as far as that going forward or is that more sort of one time? I'll take the this is Mariner. I'll take the first question that I'm going to turn that second over to the gym Rhine. The the first question about the pipeline. We have a pretty long history of giving you our investors on these calls will look into the app the upcoming quarter and and then that's about as much for looking as we are able and willing to give and so the dog second quarter looks based on the pipeline to be as strong as the first quarter or thereabouts. And so it looks to be a solid second-quarter loss. You know, I have no idea what third and fourth quarter will be given kind of the conditions and and you know the inability to kind of get out and play play golf and and you know have have have lunch Thursday.

Cup of coffee with a perspective that borrower. So those you know that that I imagine in third and fourth quarter of things don't open up, you know significantly with slow some but the second quarter looks pretty good Mariner. So I'm sorry. So you saw the pipeline strong. Would you sort of assume though that the pole birth rate would be lower just given everything that's going on or know the way we the way we do our pipeline for you guys is it's the that's a pretty strong indication of of you know things that are going to be accepted in life and book. So we expect the second quarter to be pretty strong like the first quarter.

Okay, thank you. And then no guarantees of course, right? But I pull it I fully understand. Yeah, and that's about fees. I've got Jim Ryan r r c e o of the bank who is prepared to those businesses roll up to him. He can he can give you a little color on on the fees on on health-care. I saw a spike in the service charges and that was related to one relationship that we still have the deposits and the business that was transferring the actual custodial relationship on the account. Um the deposit still or growing in our Healthcare space, um, the pandemic up to Still Remains to be seen as far as how it will impact the industry in general but the high-deductible plan should become much more in favor as employers. Look to birth.

Continue to reduce costs of going forward. So we're well right now we don't see the full impact of how things will play out through the course of the year. We did see some of the card activity reduce also in March, but we will know more in the next few months how the rest of the year plays out there.

Okay, so

Move over though from one relationship is sort of a one-time item that I guess it was it was one time and we continued to maintain those deposits off. Okay, super thank you. Everybody. Be safe. Yeah, me too. Thanks God.

Next question comes from David long of Raymond James David. Please proceed. Good morning. Everyone the first question. I had relate to the large commercial customer you talked about that that cause an increase in your nanak rules. If you talk about maybe what industry that was or what what changed with that relationship or if there's anything else you can disclose that cause that move or it's actually two relationships that caused that that move and I think I'll just point you back for a moment just to get out of the way non-performing and and you know criticized credits work at UMB and we have a long history of sort of seeing some volatility on that and and the wrong reason for that is the way we operate which is we are very quick to take action and recognize problems and work them we have, you know a pretty long.

A track record of doing so and what is if you take a look at our long, you know the chart from criticize to to doubtful or loss you'll see that the migration from non-performing or criticized to Los is de minimis. And so again, I guess what I would just point you to is from time to time, you'll see two or three credits that end up in that non-performing category that that you know, cause a spike to to those numbers, but typically that's just because we're working with identifying them early and working them early for for a solution and in this particular case as two credits one in the energy space and one in the app space off the one in the app space. We feel like we have adequate collateral coverage to to bring us home. The one in the energy space we have already reserved.

For what we believe to be today believe to be the exposure on that one. And so I think you know, you'll overtime see our our our number come back down into its averages. So that's that's a high level of what has impacted that and how we're thinking about those two credits.

Got it. Thank you. And then my second question relates to your trust and securities processing line. And is that more driven by market values transaction volumes wage or a mix there? And and and what type of Trends have you seen in that business? Why don't you take that? I've got some good news there to share and then of course Market impact is is definitely off of it. Yeah. So the fees in that business is it's two-fold somis Market action, but we we've had nice backlog in that business or Thursday and our wealth management business the new business from new customers is bed up 50% over q1 to q1 19th, and the growth in from new customers is up 79% and the fund Services business. We've had continued to convert new customers.

and we

Seeing strong growth on that and so we feel very good about what we're we're positioned. But as far as the decline in the market, we we were off the market equities were off roughly 35% We were only off roughly 10% and portfolio values. So we weren't seeing the declines like the our declines didn't mirror the actual Mark and some of the fees are tied to the actual market returns, but some obviously are more flat fee as well. So it's there's a mix there but the businesses contribute to do it grow. We've invested in it. We have new platform being brought on for the private wealth management space this year that will allow us to hold additional think alternative Investments on that platform and be a better experience for our clients. So there's a lot going on in that space But we we've continued to invest in, Georgia.

We haven't cut back on the projects related to Growing the business.

regarding that state

Excellent. I appreciate the color. Thanks guys.

Thanks, David.

Our next question comes from Chris Chris, please morning buddy Chef modeling question for you on the expenses understanding the offsets on the the Kohli that ran through both fees and expenses. But if I adjust for that 16 million and then also the

Seasonal I think you call that eight million bucks of seasonal expenses. Is that the right way to kind of think about you know, where expenses, you know could be near-term understanding you may go back on some cost given restrictions on travel and marketing you got this from it. Yeah, that's that's his office. And you just heard your right talk about hey, you know in this environment we haven't really scaled back any of the investments from that standpoint, right? We're continuing our parts on that one. So you should see some information related to that. But at the same time as we've always said will be really watchful on some of those discretionary items and lockdown is creating some of those Synergy opportunities just from a home entertainment and marketing perspective. So we'll we'll watch our expenses from that standpoint.

I agree. Yeah, we we should definitely you know continue to outperform their as both the lockdown conditions persist as well as we continue to through this environment learn that uh, we can, you know, we can continue to be more efficient in the way. We're operating.

Hey Christian, the disclosures. We also have some of the expenses that we tracked related to the crisis. And in the first quarter, we had, you know, two hundred fifty thousand or so or less of that, you know, some of these programs and man or talked about whether it's the supplemental paying or just in terms of our Readiness and preparedness for cold it. You can see some of that impact or Experience line. But again, it depends on how long the offer lasts so building back door expense projector as well.

Okay, and just a couple small ones the disclosures were great and the deck.

The reserve ratios we're getting some questions just for banks on specific of those portfolios that you deem somewhat higher risk. Do you have the reserve that that you have set aside on on both the hotel and the the portfolio?

The the energy book we have, you know, a qualitative Reserve about thirteen million, which is 3 and a half percent of that book the hotel. I don't know if I know the answer Chris Palm Springs hotel book. But again when we talked about the human the hotel bill Whittle it down when you take out it's a very small part of our exposure there. Yeah, you know, it's been my perception as I sort of look at all of the other announcements coming out that they've been sort of standard account. It's been kind of a standard counting exercise a bit of a lazy exercise if if you will to me just sort of taking the whole book saying. Oh, okay, everybody's interested in you know Hotel so here's our hotel book Boomtown. So we we took some extra effort to actually show you what we actually are worried about because it isn't I don't think the right approach just to take the whole book club.

It's a risk because that's just not true. So that that was really what we we did was instead of just kind of doing a blanket simple accounting exercise and just showing you what we had in each category wage. We broke it down to tell you, you know what we worry about and and then how we you know, think about where the real risk is and that's in those two columns to the right page on page twenty-six where we talk about reasons reasons for excluding and then the and then the farther column to the right are just additional comments as to why we may or may not worried about something that is even still on that list, you know, so just cuz it's on that list as I mean where we think we kind of take a loss because hey, it's also got liquid sponsors on there or or for example doesn't come to Market, you know within the next six months. So if something we can read address later six months from now depending on where we're dead.

No, no that that level of disclosure was helpful. I appreciate it. May be the last one ROM. Could you help us on the the effective tax rate going for?

It's it's tough because of all the volatility in earnings and you know, the percentage of tax free income of the related to pre-tax. My best guess Chris at this point would be closer to 14%

Is that ft or is that not empty? Sorry, you know, yeah, thank you. I might add too. I think it might be interesting for a buddy know on oil and gas because I you know, everyone's concerned about that as we are that remains about the same percent of the book as it was during the 14 energy pricing crisis and it's generally the same clients that are in that book for us 30% of it is service, which is really where most of the concern would be the the great majority of the rest of it has some Hedges and on the service side the customers that we ranked and worried about during the last cycle are the same customers this cycle and the sponsors in in those credits stepped up during the last cycle. So we have great confidence really in the ones that remain in that book because of the same people who stepped up behind the credits during the last crisis.

Great. Thanks.

Yes.

As a reminder. If you have a question, please press * then 1.

All right question comes from Abraham poonawala Bank of America, please.

Are you bringing just a follow-up maybe minor or jamming? It might be a tough one to answer, but I was wondering if you've seen any Improvement in customer sentiment activity took the course of the last month means everything obviously shut down in a big way in the middle of March. I'm just wondering if things have kind of steadied in the last few weeks. If there are any kind of green shoots Thursday pickup in activity that you noticed that might be worth calling out there that will one thing I would point you to is just line utilization. So as I'm trying to start a new one full we went from 39 to 41 and utilization. And if this is any indication of sentiment that is drop back down to 39 as we sit here all day, so that that is some indication maybe of how the customers feel I would say just generally anecdotally as we speak to our clients and I'll let maybe Tom type in

Here for a second. I think everyone's still nervous and cautious. So, you know, I don't see anybody really reacting as I say, they see light at the end of the month right now would be my take and I'll let Tom add to that. I think just it's in general. Um, you know, there's there's in my opinion and I think customers would share that with a there's there's a long road to hoe here and I don't think there's a much of a cinema change you want to add to that phone. No, I think you said I just dried I think there's a o c attitude and I think we have a very patient client base and I I think people are going to walk before they run certainly before they start borrowing off an expanding too quickly.

I would just add as I think you already know just about how we lend. Our borrowers are in General on the stronger end of things that got better balance sheets off and and you know, that's sort of what kind of lenders that we are. So so, you know, we we have we have borrowers generally speaking that always operation of things can get worse and then that's the right way to think about things.

But thinking and Abraham, this is Jim Ryan. We also have a lot of borrowers that are also essential businesses that are still active that are quite busy that are also I'm going through the motions of employing safe work spaces while going about construction contracts and things like that while while they're busy. There's certainly experiencing The New Normal they haven't experienced. They've experienced some delays and projects but not outright cancellations yet. So it really is a a mixed bag which isn't the exact answer you would be looking for but I'm sure that's the consistent answer that you're hearing from others. I also think you you didn't really ask me that way but, you know offer it as it relates to just how this thing's unfolding, you know, I don't believe so when we there's a lot of conversation about when we go back

and what that looks like to me going back, you know is going

Going to be a very very slow ride. You know, you think you hear what Texas is doing is they're calling in a complete open but at 25% capacity, so I think until Thursday until we have a vaccine some things are going to when they when they do open and we call things open broadly. It's going to look a lot more like Texas than it's going to look like what we left behind, you know in February. So I I think the road is is long and hard even when we come out because coming out doesn't mean 80% capacity. It means 25% 30% That's my that's my personal opinion until we have a vaccine.

I appreciate the perspective. Thank you. All right question comes from Wells Fargo, please.

Hey, good morning. This is this is actually a team or Brazil or filling in for Jared just missed a couple of questions. Remain here looking at slides 13 the same process modifications is the composition of that 448 million. Is that any different from the existing modifications or is it pretty similar?

I'm going to ask that again. I'm sorry.

So for the 448 million of em process modifications by 13, I'm just saying if the industry's those are in are similar to the existing modifications or if that's cute off any particular industry know there's nothing there's no skewing going on there with just you know, I also just might add that in my opinion on modifications and and forbearance in general. I don't know exactly how the investor populations thinking about it, but it feels like

It's something you all are looking for to see if what existing problems might exist and the color I would give you is really at least for you and be modifications and four marriages really is forward-looking and relief based to help people avoid problems rather than a recognition of existing problems.

Okay, that's helpful and just in terms of clients seeking modifications is that also slowed similar to the utilization rates or that pay still fairly often referred to order the other any color on that? Yeah, it has slowed. We had quite a few right out of the gate. I think PPP caught some people's attention, you know, you talked to some of the other Chief credit officers and various meetings. There are some feeling that certainly the longer this goes if it goes past May or pass them in terms of how long it takes for for the economy to come back there. Maybe another wave. We haven't seen that yet?

Yeah, and by the way, my comments a moment ago just to clear them up about the 25% or 30% you know come back. That would be I was thinking more along the lines of service not GDP like the utilization of what what what restaurant activity and concerts and such and things like that not so much GDP so if it's clarification

and then just

One last one for me. Maybe a big picture question as it relates to Cecil methodology. Do you actually need to see an improvement in in the GDP and then unemployment rates or is there enough qualitative overlay where you can preemptively begin to lower Reserve levels in advance of those metrics actually coming down. This is wrong. It's a little bit early to talk about it. But if you look at the movies forecast and we have a little synopsis of what the forecast entails right? So it has unemployment rate page to an average of 8.7% at least half of the March 27th forecast and then coming down back to a 6% level. So I'm kind of recovery is already built into a remodeled it and we would call it may be a bathtub you would cover as opposed to any kind of recovery. That's not what we're assuming in terms of, you know, unemployment getting back to normal. What time?

You normally but so it's it's an echo or or one extra layer there on ROMs comments if that were the case, that's the answer your question, but then the flip side is obviously a smoothie is changes its forecast in the second quarter to to match something more like with jpmorgan's talking about with a 20% unemployment and a 40% reduction, you know, if that type of thing were to take to take hold and to the Moody's forecast that you know, we we would have to react to that and that's where that's where you start assessing what you think the nine trillion dollars in a stimulus what kind of impact that has from a qualitative perspective you we start doing qualitative overlay that is related to how unemployment specifically impacts different categories within our book and how we feel about how National Data plays into our book in the middle part. Bob.

Country in those those types of things that we would overlay.

And that's good color. Thank you.

Thanks, dear.

Last time if you have a question, please press * then 1 and next question will come from Nathan Nathan. Hi everyone. Good morning morning a murder. He answered my first question just on the oil and gas book in terms of how that portfolios changed in both sides and client compositions since the 2015-2016 downturn but I'm just curious if you guys have a sensor when you look back at that. What you know, ultimate laws content looked like across that portfolio process portfolio.

We had very little losses in it it actually, you know, we we ranked credits and worried about them, but ultimately had very little in the way of losses.

Okay, great. And then just going back to the people that you guys have funded any sense for you know that 1.4 1.5 volt feeling that you funded how much of that is actually been kind of geared towards those clients that you guys outlined on this on that side that I've been more so impacted.

We don't I don't think we have an overlay to get into that with you to match those two up.

So I don't I don't think we have that level of detail, Tom.

What we don't yeah.

Okay, and then just a couple of housekeeping questions from the Securities book came up a little bit in the quarter. Obviously. I said good seasonal deposit growth as well. She sends her how that security that was going to turn it over the next few quarters, obviously with the PPP Lonesome on balance sheet and so forth and just how those how you expect those to be.

I would say I would say consistent with current levels obviously every month were evaluating whether we want to reinvest in this market. As I said earlier on a roll on roll up heels heels on the security, especially the mortgage-backed Securities will split so we're going to be very cautious about reinvesting and and at the end of the day we might have excess liquidity because you know at some point we do anticipate and we're seeing the halo effect of you know, excessively pretty that we did see it through the last crisis from a deposit standpoint, but at some point we'll have excess liquidity that we may have to deploy between movies and mortgage-backed securities that you know, as we as I look for the next, you know quarter or two, I would keep it consistent with with where it's been, you know that we have definitely as we did in the last price of seen some flight to safety deposit Gathering activity for sure and expect to continue to seal that and in particular without naming any banks dead.

Some of the myths steps that have taken place on in in the industry as as relates to how PPP rolled out we have that we're seeing some benefit from that as we were early and took action and started, you know adding non-customers to that pipeline as they were not being served in other places. So so I think we're going to continue to see some of that flight to safety flight to Quality deposit building and deposit Gathering activity.

Got it makes sense. And if I could just ask one more just with an expensive. I know you guys don't give guidance but marketing was down pretty pretty substantially sequentially and then during $29 and you guys obviously had a ramp in legal and Consulting fees. So just you know, how those line items could Trend this year. It sounds like you guys have some delays in the timing of some projects and so forth. So just trying to put that in context in terms of the Run rate of those items.

You go ahead and run. Yeah, so and you can see that it's consistent with what the last first quarter was. So there's always a seasonal drop off in the first quarter. We did xcelerate some of the spending for Concepts in the fourth quarter. I'd say that's why it's a little bit higher than usual as well. But as I said earlier, that's one of the discretionary items that we will consider as we live in our expenses. Obviously then log down the, you know, some of the things that roll up into that line item or travel and entertainment and and sponsorships and things like that. So to the extent those don't happen, you might see those trending lower. But if you come out of the crisis, it's already been to go back on the customer acquisition side and start to market for both the consumer and card portfolio specifically.

Okay. Got it. Very helpful. I appreciate you taking the questions. Thank you.

Oh now like to turn the conference back over to take Gregory for any closing remarks.

Thanks everybody for joining us today. As always. You can reach us at 806-860-7106 if you have any follow-up and thanks for your time and have a great day.

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