Q3 2020 UMB Financial Corp Earnings Call
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Good morning, and welcome to the U.N.B. financial third quarter 2020 financial results Conference call.
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I would now like to turn the conference over to Kay Gregory Investor Relations. Please go ahead.
Good morning, and welcome to our third quarter 2020 call Mariner, Kemper, President and CEO and wrong Shocker CFO will share a few comments about our results Jim.
Jim Ryan CEO of you on the bank and Tom Perry Chief Credit Officer 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.
Putting me currently I know potential impacts of the cold at night pain crisis.
That's right.
And in our SEC filings and are summarized on page two of our presentation Act.
Actual results and other future circumstances or aspirations may differ from those set forth in any forward looking statement.
When looking statements speak only as of today and we undertake no obligation to update them, except to the extent required by securities laws.
Oh earnings per share metrics discussed on this call today are on a diluted share basis.
Presentation materials and press release are available online at Investor Relations Dot U.M.B. dotcom.
Now I'll turn the call over to Mariner Kemper.
Thank you Kay and thanks, everyone for joining us today.
Hope you and your families are safe and well.
As we approach the nine month this adjusted way of doing business, serving our customers. Our systems are performing well and we're continuing our measured approach to the return to the workplace. We had a multiphase plan and currently have about 18% of our non branch associates and our corporate facilities. The majority of our says here.
They still remains remote.
We continue to meet with our customers and our branches by appointment or through our drive up operations at most locations.
Our teams are very adept at virtual meetings and had success with calling efforts but.
What I know will all be ready for an eventual return to in person interaction and a handshake.
These kinds of reinforced well, we've always known relationships matter.
I'm extremely proud and impressed with how our associates continue to adapt well maintaining those relationships with our customers and each other.
Doing what's right to support our workforce customers and communities is one of our priorities along.
Along with maintaining our high quality underwriting standards.
Capital liquidity levels.
Our third quarter results reflect those priorities with net charge offs, just <unk>, 0.13% of total loans, improving past trends and double digit year over year growth on both sides of the balance sheet.
On the credit front provision for the quarter was 16 million, reflecting the quality of our loan book and the reduction in modified loan balances third quarter provision represents 3.1 times net charge offs.
5.1 million.
The reserve build in the third quarter brings our total allowance for credit losses on loans to 211.7 million at September 30.
With an allowance to loan coverage of 1.33%.
Excluding P.P.P. loans that coverage is 1.46% or nearly two times what it was at year end 2019 prior to the adoption of Cecil.
Total reserves were 214.5 million or 2.2 times nonperforming assets compared to the peer median of 1.7 times based on those who've reported today.
We expect the bulk of our reserve build maybe behind US our portfolio is well positioned and we haven't seen material science, a deterioration in our markets today.
However, there are several significant factors, including the election, the next round of stimulus and the duration of the pending that will impact the economy and our borrowers. This underscores the importance of our strong credit and capital position.
During the quarter, we completed our first subordinated debt issuance with 200 million, 3.7% fixed to fixed rate notes the opportunity to bring in the tier two capital at an attractive rate strengthens our already solid capital levels and reduces our overall cost of capital our total risk based capital ratios improved.
A 100 basis points to 14.17% for the third quarter.
Our top priority for use of capital remains organic growth as we have opportunities for deeper penetration in many of our markets and lending verticals and as market conditions allow we'll continue to look for the opportunities to augment that growth with strategic acquisitions.
Returning capital to our shareholders has long been important to us and as stated in the press release. The board just approved a 3.2% dividend increase payable in January.
Another anecdotal share today is that next spring bars or did it anniversary of our listing on the NASDAQ. We went public in 1971 and have paid a dividend for each of the past 49 years more recently weve increased our annual dividend uninterrupted since 2002 that night.
10 years of increases.
Even through the great recession.
For a total increase of nearly 229% that's something I'm very proud of.
Now moving back to our results.
We posted net income of $73.1 million or $1.52 per share for the third quarter pre tax pre provision income of 99.4 million represents a 10.2% increase over the linked quarter and a 23.5% increase compared to the third quarter of 2019.
Total fee income was strong at 113 million a quarter over quarter decrease of 7.5 million. It was largely driven by market related adjustments, including coal evaluations along with decreased gains on sale of securities.
But we had positive trends in the trust and Securities processing line and card spending volume increase from the lower levels in the second quarter driving improved interchange income from well share more details on those driver shortage that.
Net interest income increased 3.5% from the second quarter as we posted strong loan volumes and growth in the past, but well lower deposits and borrowing costs helped to partially mitigate reduced earning asset yields.
Despite these unprecedented times average loans, excluding PPP balances increased 9.4% on a linked quarter annualized basis and I'll note that we surpassed for the first time 30 billion in assets.
New loan production outside of PPP was 924 million.
Hi, its origination level year to date merge.
Commercial line utilization remained stable from the prior quarter at 31% this.
This is similar to the recent averages after the spike in March and April.
Average loan growth was again, driven largely by commercial and consumer real estate last quarter, I mentioned that mortgage prequalification applications hit record high and we saw some of that and result in growth with average consumer real estate loans, increasing 14.8% linked quarter.
Our loan portfolio remains diverse and well balanced across several product lines geographies and industries.
Total composition is shown on slide 20, followed by loan activity during the quarter and breakdowns of our commercial portfolio by asset class.
Our 1.5 billion PPP loan portfolio is shown by industry and geography on slide 24.
We're preparing to accept forgiveness applications in the next few days.
On slide 25, you see updated our exposure to sensitive industries.
June 30, we reported that approximately 10.3% of our total loans, excluding PPP balances were in what we call potentially for impacted category.
In the September that was down to 9.6%.
Total loans in these categories are 2.6 billion, representing 17.7% of our loan portfolio.
However, after analysis, we feel that approximately 1.4 billion or 9.6% to possibly carry more risk against the crisis is prolonged.
We are closely monitoring these relationships that have regular communication with these borrowers.
Granular look at these loan types is included in the loan risk table on page 27, and the asset quality session.
This data shows the quality of our loan portfolio and contains detailed on our modified loans by category on the following slide you'll see that we have a reduction of more than 47% and modified loan balances compared to the second quarter.
As you recall based on initial requests we approved approximately 2.1 billion a modification. However, many of those were ultimately not needed by the customers.
At September 30 loan modification balances had dropped to 698 million or 4.8% of loans down from 1.3 billion or 9.6% of loans last quarter.
And if you exclude the portion related to our business banking portfolio, we had just 322 million remaining.
In business banking, which includes our practice solution clients largely dental offices, we proactively offered six month deferrals. Many were made in April and May. Therefore, the deferrals are scheduled to expire during the fourth quarter. We expect the vast majority of our clients to return to normal payment status and early indication.
It's a very positive.
Finally, as you may have seen in our press release early last week.
We're excited about a recent success story in our small business investment company, you'll be capital Corporation, our 7 million dollar investment and I tell a international initiated in 2019 resulted in a 7% ownership stake in tattooed chef following its IPO, which was completed on October 15th.
This is truly a lifecycle investment for us showcasing capabilities or a capital Finance division our relationship with I tell began in our asset based lending group and we were able to partner with them as they grow.
Our capabilities allow us to meet a variety of capital needs for our clients at each stage of development for mezzanine to working capital.
In closing I reiterate that we continue to manage for the long term with a strong capital and liquidity position a history of prudent risk management and diverse revenue sources.
This helps to provide buffers in the interest rate environment and serves us well as we navigate through the crisis.
Now I'll turn it back over to Rob.
From.
Thank you Mary and her looking.
Looking at the quarterly results net interest income of 184.4 million represents an increase of $6.2 million from the second quarter driven by strong growth in CLL, Mcl reloads and a larger fs portfolio.
Total, earning asset yields fell 10 basis points to 2.91% from the linked quarter driven by yield declined 13 basis points in both loans and total securities.
Net interest spread decreased four basis points from the second quarter and was down only one basis point from a year ago.
Net interest margin compressed by six basis points on a linked quarter basis drivers of this change included negative four basis points from lower reinvestment rates and market changes to the Airbus portfolio, a three basis point reduction from the reduced benefit of free funds and negative two basis points related to earning assets.
Mix shift, partially offset by a three basis point impact from deposit mix, along with CD and money market rate changes.
Liquidity levels remain elevated and consistent with the second quarter levels, but over 2.3 times level seen a year ago.
As we noted in the release, we terminated ARQ $750 million interest rate floor hedge for 34.1 million during the third quarter, the unrealized gains remaining in AOCI.
18.4 billion, which will be amortized into net interest income through September of 2024.
Non interest income as shown on slide nine was 113 million for the quarter, a reduction of seven and a half million valuation adjustments in company owned life insurance income accounted for 6.2 million of the sequential decline.
This decrease is offset by a similar decrease in deferred compensation expense.
Gains on sale of Securities accounted for an additional 3.7 million dollar declined from the linked quarter.
We saw improved trends in asset servicing with our alternative investment registered fund administration and custody business is right the.
The largest portion of the 4.2 million increase in trust and securities processing income.
Bankcard fees improved 18.4% or 2.4 million from the second quarter, driven by a 21% linked quarter increase in card spending volume.
We've seen spending levels improved 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 shutdown earlier in the year and health care spending surpassed your over your levels.
Commercial credit purchase volumes improved 24% over the second quarter, but are still below prior year levels with corporate travel and entertainment still on hold for many companies.
Public sector spending is down due to significant decreases in new fiscal year budgets in many schools across our footprint or either not open or limited capacity.
The 4.2 million linked quarter reduction in investment banking fee income was driven largely by lower municipal and corporate bond volumes. After a very strong second quarter.
Additionally market valuation adjustments in our trading portfolio accounted for 1.9 million of the decrease.
Beginning in the fourth quarter, our fee income will be subject to some volatility from market value adjustments to our position in tattooed show.
As part of the transaction. It was the 9 million in cash and just over 4 million shares of TPC, a publicly traded entity.
Changes in market values on our shared ownership will flow through our income statement as unrealized gains or losses at each reporting it.
Based on recent trading levels, our fourth quarter games, maybe approximately 68 to 70 million, but obviously will be adjusted to reflect the stock price at quarter end.
Expenses for the quarter decreased 5.1% or 10, and a half million compared to the second quarter, largely driven by an 8 million dollar decrease in deferred compensation expense. He also led to the decrease coli income I mentioned.
Further detail is shown on slide 12.
The tax rate for the quarter was 12.3% and for the full year 2020, we anticipate it will be approximately 14% to 15%.
Moving to the balance sheet.
Deposits increased 5.9% on a linked quarter basis.
DTA balances grew by 7.8%.
Refunds now comprise just over 34% of total deposits.
We continue to maintain strong regulatory capital ratios bolstered by the sub debt offering during the quarter with our total risk based capital at 14.17% see tier one ratio at 11.93% and a leverage ratio of 8.19%.
Changeable common equity to assets was 8.8%.
Trends in our capital ratios are shown on slide 15.
Our tangible book value per share increased to $55.19 at the end of the quarter up 14% from a year ago.
For comparison, our peers that have reported so far have shown an increase of 5.9%.
That concludes our prepared remarks, and I'll now turn it back over to the operator to begin the Q and a portion of the call.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Our first question today comes from Chris Mcgratty with KBW.
Good morning, Chris.
Hey, good morning on somewhere in there.
Nice quarter overall, I'm, hoping to talk a little bit about expenses to start you guys had them pretty well controlled this quarter, but we.
We read the transcript from last quarter, you talked about just it's a really big focus on expenses given the revenue environment I'm interested in your thoughts about you know expenses you know investments you may need to make in potential sources.
Rationalizations at 21 thanks.
Yes. This is mariner thanks for the question.
You know as we've been talking last few quarters we.
We remain very focused on being efficient company.
And we've.
Undertaken overtime any number of exercises, but really it's more of the way, we're operating and we are able to with.
You know with Digitization and acceptances Digitization from the customer base, where we've been able to continue to find efficiencies through the use of technology, we continue to manage.
Staffing levels based on performance.
And and continue to look at our physical plan and you should expect us to continue to.
Now to focus on on expenses without giving you any particular guidance.
Maybe just on the on one line item and then expenses the personnel number Rob.
It was somewhat higher in the last couple of quarters I'm interested how much of that was kind of a catch up from really low first quarter and bonus accruals and you know maybe that line item is that you know in this mid 2020, there's gotta be decent a good jumping off point to kind of forecast growth yeah.
Yeah. The one thing that flow through that line item is also or deferred comp expense right. So quarter over quarter. We saw some movement over there depending on what happens with the market, but usually there is a equal off said on the call. These sites. So if you look at just what happened. This particular quarter, we had you.
Deferred comp expenses of just under 4 million, which was down about 8 million from the prior quarter, but if you exclude that noise. You know there's always the usual seasonal resets in FICA, but the overall incentives were just impacted by some of the trading volumes, but do you see that the bond trading has been a pretty strong.
Headline for US other fee income opportunities have also been a strong headline so anything volume related will always increase salaries from one period to another period, but these salaries just you need a good salaries and wages.
What you see in the fourth quarter is probably a good starting point enter 2021.
Great.
And if I could just on a couple of modeling questions. The PPP can you, let us know what was in the quarter for the fees.
You know what remains.
And then yeah, I guess into 2021 like the cadence of the fees.
Rob.
Yeah, that's what's in our fees right now just a plain vanilla finance charge of 1% and the amortization of the origination fee as you know Oh.
As Mariner said, we'll be we're gearing up to take forgiveness applications and so none of that is really in our fee income or net interest income base for the third quarter chances are you know with the way. The process is playing out there will be a very little impact if any in the fourth quarter and most of it will be probably in 2021.
Okay, and then on the taxes I could sounds like the fourth quarter.
A bit of a higher tax rate ROM and then.
How do we think about the sensitivity if we do get a change administration to to some of the proposals that are being floated in Washington with tax hikes. Yeah. It is it isn't it yeah.
On the first part so we said 14% to 15% yes.
A higher tax rate for the fourth quarter a lot of it will depend on our pre tax income as I said in my script, we might have as much of the 70 75 million dollar gain from our investment in tattooed chef. So when you look at pre tax income goes up the tax rate effective tax rate will also go up on the on the second part about if corporate tax rate went from 20.
You want a 28%, we'll see probably about a 400 basis point increase in RTT, Our island that goes into effect.
Awesome. Thank you very much.
Thanks, Chris.
Our next question comes from Nathan race with Piper Sandler.
Yes, hi, guys good morning.
I was hoping to start on credit it looks like this quarter reserve build was largely a function of.
Criticized classified trends in the quarter. So just curious to get a sense of how that trended.
During Threeq, you and a lot of that criticized classified inflow was just concentrated in that at risk.
Portfolios that have been outlined.
There's some other areas that also saw some influence [noise].
On the provision expense large.
Largely it is definitely based on.
Mostly credit performance don't have much macro.
You know modeling related.
Provision expense in the third quarter or two.
To speak of not much so it's mostly just credit performance.
And and it was a good quarter from that perspective were 13 basis points.
And charge offs.
And you know the typical growth level, we've been seeing so we had some nice growth in the quarter too.
So performance. This performance was strong growth is strong and that's basically what you saw in the provision expense for the most part.
That answers the question.
Yes, that's.
That's helpful. Thanks, Mariner I guess it was also just hoping to get some color just in terms of broader criticized classified trends in the quarter I don't think those sites for sure.
You know you noticed so so they're on a we don't you'll see this in the Q. Our criticized are down so overall criticized or slightly down.
Nothing to note as it relates to overall.
The way, we think about lets so npls ticked up slightly.
The criticized and total are down nothing to note really we don't expect anything different when it comes to charge offs in the coming periods that we don't see or expect today as we look at her at the data. It's the same kind of comment I've made before which is we will see some spikes.
On the top as it relates to.
Pudding credits on the watch list or a credit going in P.A. As we are very quick to manage credits. It used to be you know were quick to identify problems were quick to manage them. So you'll see you.
You know peaks and valleys long the top but what's really important the way we look at it and when we think about it is is very little migration to telephone loss and that's the one that's what we care about and that's what we think about and we don't expect anything different and as far as we can see right now as it relates to migration to telephone line.
Yes.
Okay, Great Yeah, that's super helpful. And then just thinking about the margin trajectory going forward.
Ppps.
Any thoughts obviously securities reinvestment rates, there's a challenge these days.
It seems like the loan growth outlook remains pretty solid so hopefully that.
But.
Change in earning assets should.
Should help going forward, but just kind of any thoughts on how you see that core margin trajectory through the fourth quarter.
21, yeah.
Sure I can take that.
If you think about the two main reasons for margin compression today right. As you mentioned, it's the reinvestment rates on our Facebook or lower than what's rolling off and we have some data in our slide deck that so.
Close to $1.7 billion of maturities coming over the next 12 months at 193 rate and for instance would be reinvested in September we had a 160 handle on it right. So there's some compression and then the other thing that's happening is also the earning asset mix shift not only within the loan book, but between loans and earning assets a lot of it is.
Because of the liquidity built so the big wildcard as you rightly pointed will be the pace of PPP run offs right and for instance, if you assume to all our PPV balances ran off in the third quarter and were replaced by non PPP logs or margin would have been seven basis points higher this quarter, but that's not how it's going to play out in the short run.
So SPP be loans that we would expect our loan to deposit ratio probably come down a point or two and that's going to probably drive a little bit more of the unfavorable mix shift that I talked about and then the other a wildcard is also the excess liquidity parts. So well was stable as I said on a linked quarter basis, it's still about two and a half times, where it was pre.
The pandemic levels and for us in our business as you all know we will see more liquidity in the fourth and first quarters from public funds business. So all said I would say probably expect margin to troughs in the next couple of quarters because of excess liquidity and as other PBP dynamic I'm talking about but.
But what we do well they said this in these long.
Low interest rate environments, we tend to focus on net interest income growth. So that always will be a differentiator for us we'll keep the dry powder in terms of deposits to deploy later.
That's great color.
Because you guys are taking the questions. Thank you thanks, Dave.
Again, if you have a question. Please press Star then one.
Our next question comes from Ebrahim Poonawala with Bank of America.
Hey, good morning, guys.
Hey, Brian.
Okay. I guess, just celebrate with you to follow up on the and I focus is it safe to assume just given the kind of growth that you guys are seeing XP PPV should expect and I guess it looks to continue or do you see any reason why and I could actually decline over the coming quarters.
I mean, just based on what Ron just said.
It's likely that we'll continue to increase.
Just bought it and go.
Got it I guess just on credit Mariner, if you take a step back I know, we do feel very good about your loan book Oh for a bank that is actually going Oh, the loan portfolio just talk to US as you think about the puts and takes in terms of the macro outlook looking into the next year do you see or are you more.
Why did about credit are you more optimistic about growth. When you think about what can you do you want.
Ebrahim you you know me pretty well, even if you've watched us for a while I'm.
I'm a career pessimist. So you know we we the thing about the way we underwrite is we're always underwriting for the next crisis. So.
As it relates to how we underwrite in general we're we're always prepared for the worst we always underwrite to the worst case scenario. So we're really not doing anything different in the way that we underwrite were were.
We we want to bank customers that know that things can get bad and have.
Build equity and have global cash flow and sponsor strengths and all those kinds of things people that we bank people, who believe what we believe is that we believe in gravity, we believe that what goes up must come down and so.
We're always underwriting that way so we don't wait for a crisis to operate like there is a crisis.
And so as we think of of the first quarter couple of comments first quarter and second quarter. A couple of comments I would make about our outlook for that.
No I don't we don't believe that the economy cares, who the president and his.
We also don't believe that we're going to go into the new year without another stimulus package and so so we believe that there will be stimulus and we don't believe that the market's care who's president.
Well, we worried about is if the kroner virus.
Pandemic.
Were to get worse.
That would likely apply some pressure to our more sensitive.
Impacted credit list that Weve provided for you the investor community.
So that's what we worry about we I think that as it relates to the rest of our book I think we'll go on into the next year.
Uninterrupted for that with with the rest of the book, but as it relates to some of those industries that we've identified that are sensitive to the pandemic.
We would we would likely see some stress there however, I would revert back to my original comments, which is that when we originated those credits we originated them knowing that things could get worse and so we assess global cash flows sponsors strain loan to values location.
Cap rates.
We're very conservative about the way, we look at those things and so we know that there while there will be stress.
We don't worry, particularly about.
Higher than normal loss levels.
Well that is helpful. Thanks.
Thanks <unk>.
And again, if there are any further questions. Please press star and then one joined RPM.
Seeing no further questions I'd like to hand, the call back over to Kay Gregory for any closing remarks.
Thank you and thanks for joining us today. This call can be accessed via replay on our website and as always you can contact you in the Investor Relations at 816.
Eight 607 106 with any follow up questions again, we appreciate your interest and time. Thank you have a great day.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.