Q2 2021 UMB Financial Corp Earnings Call
Good day and welcome to you wouldn't be financial second quarter 2021 financial results Conference call all participants will be in a listen only.
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Please note. This event is being recorded I would now like to turn the conference over to Kay Gregory Investor Relations. Please go ahead.
Good morning, and welcome to our second quarter 2021 call Mariner, Kemper, President and CEO and Ralph Shakur, CFO will share a few comments about our results Jim Rine.
You know of you won't be bank and Tom Terry 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, including the longer term potential impacts of the pandemic.
The risks are included in our SEC filings and are summarized on slide 43 of our presentation.
Actual results may differ from those set forth in any forward looking statements and forward looking statements speak only as of today and we undertake no obligation to update them, except to the extent required by securities laws.
<unk> 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 Dot you wouldn't be dot com now I'll turn the call over to Mariner Kemper.
Thank you Kay and thanks, everyone for joining us today, our strong second quarter results.
Again demonstrates the benefits of our diverse business model and our investment thesis, which includes above peer loan growth.
Solid net interest income and fee income growth in all environments, something that we've been able to do for many years.
Second quarter highlights include 19% average loan growth on a linked quarter.
All of our basis, excluding PPP balances and a 21% increase in fee income.
We announced that the board approved a 5 or 15, 6% increase in our quarterly dividend.
As you saw in our release, our provision expense was higher than previous levels due to strong loan growth and.
Annualized charge offs, which were driven entirely by 1 commercial factoring relationship.
Excluding this credit event, we would have had net recoveries in the quarter.
The underlying quality of our loan portfolio remains strong with nonperforming loan balances down $24.1 per cent from the first quarter.
As we've shared in previous quarters, we have refocused our factoring efforts targeting largely transportation companies and smaller receivables.
And we are comfortable with the characteristics of this portfolio.
Looking ahead with what we know today and the quality, we see across our portfolio, we expect charge offs to come in closer to our historical level of about 20.
5% to 30 basis points for the full year of 2021.
Sentiment in our markets continues to move towards more normalized levels and our customers remain cautiously optimistic while keeping a close eye on the trajectory of the pandemic modified loan balances are down to just a handful of loans and those are slated.
Resolved in the coming months.
As with many of our peers, we have begun the transition to return our work force So the office.
Our banking centers have reopened we've begun to do more face to face client meetings and are working towards staggered returns of our non branch teams after labor day, while we.
To be maintained our high level of productivity and customer service in recent months much of that was fostered by relationships have been built over time.
Cited for the energy from Rotary and collaboration that comes with seeing each other on a day to day basis and with our customers more regularly.
Turning to our second quarter results net income was $87.4 million or $1.79 per share and pretax pre provision income on an FTE basis was $138 million or $2.83 a share.
Slide 18 shows the primary drivers behind our results and I'll provide some.
Some high level comments, then turn it over to Ron for.
For more detail.
Net interest income increased 3.6 per cent.
From the first quarter as the positive impact and a strong balance sheet growth was mitigated by lower P. P fee income and some modest margin compression.
On.
On a year over year basis net interest income increased 12, 8%. Despite a 31 basis point decline in earning asset yields.
Our track record for relative outperformance in asset growth and the opportunities we see for that to continue should allow us to grow net interest income overtime.
The net income for the quarter increased 21%.
On a linked quarter basis.
<unk> largely by a $7.2 million gain and our position in tattooed share compared to a $16.1 million loss from the first quarter.
This gain included realized gains from the sale of 3.5 million shares attached to chest as well as a mark to market adjustment on.
1.2 million shares.
As I noted earlier in the year equity investment similar to tap to chat for a part of our ongoing strategy to provide capital financing to our customer base across all credit structures and while we don't expect them all to have similar size. We will continue to see liquidity events from time to time include.
There remain a couple of smaller pre tax gains this quarter, which total $5.2 million and are included in our $15.5 million in investment security gains.
1 such investment a combination of mezzanine debt and equity yielded an internal rate of return.
A 41%.
This included a 114.
<unk> per cent return on the equity portion of our investment upon the sale to another entity.
Our focus on expanding our fee income businesses continues and we saw success across the company institutional banking provided more than half of that fee income in 2020.1.
Both of our traditional corporate trust and specialty trusting.
14th teams have experienced phenomenal growth year to date with new business dollar volumes, increasing 68 per cent and 109% respectively over the 2020 levels we've.
We've seen a resurgence in aviation financing activity and our location in Dublin provides additional opportunities to capitalize on these trends internationally.
Trust Fund services assets under administration now stand at 379 billion compared to 286 billion a year ago and fund services contribution to fee income has increased 30% over that time.
And Investor solutions, we continue to add Fintech partnerships, which we've.
On slide 39, and this has been the best 6 months on record for.
For public finance for 52 deals close year to day, an increase of 79% compared to 2020 per.
Turning to private wealth, we now at $16 billion in customer assets and we're on track to exceed sales volumes from 2020.1.
We've had anything to see activity and our new family office offering and we have a solid pipeline there.
Moving to the balance sheet slide 24 is a snapshot of our loan portfolio.
Showing strong 19% annualized growth I mentioned earlier.
Growth in C&I came from a variety of industries.
Where we looked across our book this quarter importantly, approximately 2 thirds of that growth was from new borrowers commercial line utilization ticked up slightly to 32 per cent. Following a couple of quarters in the high Twenty's.
The CRE multifamily and industrial projects led the growth during the quarter and we continue to make headway.
Trees in our expansion markets with Utah, among the top 3.
Average residential mortgage balances increased 6.2% from the first quarter to $1.7 billion funded mortgage loans for the quarter increased 33% to 276 million, including $39 million in the secondary market.
Total.
Headway offline loan production for the quarter was $1.3 billion outside of P. P. P policy changes with payoffs and Paydowns of 4.7% of loans.
Looking to the third quarter, we see a robust pipeline in both C&I and CRE.
As we see opportunities to continue to gain market share in many of her.
Total underpenetrated markets and verticals.
On slide 26, we've updated our exposure to sensitive industries as we move further through the pandemic. We've adjusted this list to reflect both the characteristics of our portfolio and the evolving outlook for various categories changes. This quarter include the removal of retail CRE.
For us on our borrower performance and the composition of our book, which is almost 50% anchored by grocery stores.
And the remaining 2 categories hotel and senior living totaled 928 million for $5.7 per cent of total loans excluding PPP.
After our typical analysis of mitigating factors, including.
Strong sponsors and guarantors, we feel that approximately $472 million or just under 3 per cent of our loans werent closer monitoring.
As always we are in constant communication with these borrowers.
Our average loan to deposit ratio remains 61 per cent for the quarter and it was 64%.
Including our held to maturity portfolio, which tends to perform similarly to loans.
Our differentiated customer base, which drives diverse sources of funding and revenue comes with larger deposit balances and deposit growth. This quarter was driven by commercial banking and Investor solutions, along with the continued impact.
Recent stimulus payments.
Finally, as I mentioned the board approved a 15, 6% increase in our quarterly dividend.
This will increase our dividend payout ratio, while still maintaining our priorities for use of capital.
Our number 1 focus is to grow shareholder value through investing in growth both.
Packed day.
And opportunistically through acquisitions.
To wrap it up we continue to see positive momentum across the company and I'm pleased with our second quarter performance.
And I am excited by the opportunities that we see in the second half of the year now I'll turn it over to Rob for a few additional comments Rob.
Yeah.
<unk> Mariner.
Net interest income of $201.1 million represented an increase of 3.6% from the first quarter.
We realized $9.2 million of P. P P fees and the PPP contribution to the second quarter net interest income was $12.4 million compared to $13.4 million last quarter.
At quarter end, our PPP balances stood at $766 million down from $1.4 billion at March 31.
Approximately $18 million in amortized fees remain at the end of the second quarter.
Average, earning asset yields decreased 4 basis points to 270%.
Due to a 6 basis point declines in both loan and security yields and asset mix changes, including the $137 million decline in average <unk> balances.
Our levels of liquidity remain elevated with our fed account reverse repo and cash balances comprising 14% of average earning assets with.
The yield of 30 basis points down slightly from 32 basis points in the first quarter.
The 3 basis point decline in net interest margin on a linked quarter basis was driven by repricing pressure and mix changes in both the loan and securities portfolio as well as the lower PPP income I noted.
We continue.
To deploy a portion of excess liquidity as well as cash flows from our securities book book into our <unk> portfolio as evidenced by the $2 billion increase in average balances from last year.
Portfolio composition and activity trends are shown on slide 29, and during the quarter. We had cash flows of 430.
$37 million at a yield of 177% and we purchased $1.1 billion of securities that yielded 1.4%.
So far in 2021, we've executed just over $900 million of fair value hedges with varying delayed starts and 7 year terms on average.
Continue these are designed to mitigate earnings and capital impact in a rising rate environment. These hedges are matched to long dated municipal bonds and fixed a portion of index funding costs and in wall, making fixed rate payments in exchange for receiving variable rate payments over the life of the agreements.
Looking ahead the.
And trajectory, we're largely depend on levels of liquidity pace and timing of PPP forgiveness and reinvestment rates on cash flows in the securities portfolio.
Overall, we would expect some additional modest margin pressure in the second half of this year.
Non interest income for the second quarter was 1.
For the March $31.6 million and contained a $7.2 million pre tax gain on the valuation of our <unk> investment compared to $16.1 million pre tax loss in the first quarter.
Mark to market adjustments on the remaining $1.2 million shares we will continue to flow through the securities gain and losses.
Losses line item within fee income.
Other drivers to fee income for the quarter when the additional gains from our capital Corp initiatives that Mariner mentioned, along with an increase of $1.4 million in bankcard fees offset by lower trading and investment banking income and $1 million reduction in trust and securities processing.
Assessing income.
As Youll see on Slide 22 fund services income increased during the quarter offset by the impact of the sale of Prairie capital management announced last quarter.
The full details of our various fee income line items are shown on that slide and Mariner commented on some other growth opportunities.
Entities, we have in several of those businesses.
Noninterest expense trends are shown on slide 23 expenses were essentially flat from the first quarter at $201.3 million as the increases outline there were largely offset by seasonal decreases in payroll taxes insurance and 401 K expense.
As well as lower bonus and commissions.
Our effective tax rate for the first 6 months of the year was 17%.
For the full year 2021, we anticipate it'll be approximately between 16% to 18%.
We continue to maintain strong capital ratios with our total risk based capital at.
At $13.8 4% CET, 1 ratio at 11, 91% and leverage ratio at 8%.
Our tangible book value per share increased 11, 9% during the last 12 months to $59.96 at June 30th.
That concludes our prepared remarks and I'll now.
Back over to the operator to begin the Q&A portion of the call.
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The first question, saying it will come from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hey, good morning, everybody.
Good morning.
Yeah, maybe just to start can we start.
With the factoring a loss can you give us any.
Any details around that that seems like a.
A larger loss.
I'm guessing, it's probably not tied to the targeted transportation small receivables if it's if it's that large and then <unk>.
After that could you also let us know what portion of the book.
Book is still maybe apart from transportation and smaller receivables after this charge.
Yeah, Thanks, Jerry I guess sort of level set for the whole deal I take you to page 28, just for all of US on the call. It's a really great page to sort of summarize what credit really looks like.
You'll notice on that slide.
That the path for quarters.
There were no losses, and specialty lending where we're.
We're factoring our lives and debt in this recent quarter without that loss, we would have had 9 basis points of recovery for.
For the quarter and as in previous comments, we've made about factoring you know dating back for the first original loss. We had this was an acquired business we changed out the management, we've refocused the business as you said on transportation and smaller receivables.
And.
So that I guess I'd say, that's all still true still the case, we've refocused the business.
This this particular credit.
It was.
It was identified back then and and I guess I'd just point you to everything's been chained.
Altered and we feel good about the business. That's left it's a very small business and it is as you said refocus on smaller and transportation credits.
And really overall the reality is.
Significant reductions in our nonperforming for the company and excellent.
Quarter inclusive of this loss and we expect to get back to our historic charge off rate by the end of the year for the full year of.
30, 30 basis points for less and charge offs.
Okay.
Loan included.
Nonperforming or classified loans before.
Our adjusted it was not it was not.
<unk>.
Yep.
So that okay echoes echoes the performance of our nonperforming loans. So it has that much even that much better.
It's sort of describing the whole portfolio.
I think 28 doesn't really nice.
Bob.
Talking about our long term trends in our and track record on the call with me. Other 2 guys that do that was May 1 has been 1 of those 34 years on 2025 and Jim here.
27 years. So it's the same team doing the same thing managing it the same way.
For a very long time.
Okay and then just.
Finished this component up are there any other components of factoring that were identified in 2018 that or more.
More along the lines of this loss for the loss back in 2018.
No everything that's left in the portfolio as our conforming factoring.
And are all performing.
Okay.
Maybe maybe shifting a little bit to expenses.
Good to see expenses came in on target from from commentary before going back to fourth quarter, you had expressed some potential.
Optimism for positive operating leverage this year do you think we're on track to potentially see that.
On a fully for the vet.
If you back out PPP in future periods, yes.
Back out the.
Yes, I mean in revenue next year.
You don't want to compare.
For next year to this year with the PPP gains right. So if you back that out.
I would say yes.
Okay.
And then I guess.
Finally for me just.
Looking at can you give any update on expectations or drivers for <unk> growth.
So go forward through the rest of the year.
Well you know that at some level of hard to predict a lot of that has to do with what's going on in our in the marketplace with asset values, if youre talking about new business, specifically the pipelines remain very very strong across all of those businesses. So I would say pipeline very.
Strong app.
Asset values as another is another question, but but definitely.
New business in our private wealth management group.
Group is up 20%, that's new business from new customers.
Including market action on the organic book.
As we've seen.
Unexpectedly strong sales activity and when I say unexpectedly just because we're still in the COVID-19 environment.
Which shows our sales force is getting out there and finding new business.
Which in being able to have face to face appointments, which has been part of what has made.
A successful over time, so that has been nice to see the fund services business.
This continued to be strong there have been some delays in conversions just due to our clients being back in the office as well.
We have signed contracts and a strong backlog there also and the only thing I'd add.
Not naming names as a couple of our competitors major competitors in that space or are struggling mightily right now so.
The opportunity is fantastic for fund service on a go forward basis.
Great. Thanks, I'll step back thanks.
The next question.
There was a day will come from Nathan race with Piper Sandler. Please go ahead.
Yes, hi, guys good morning.
Good morning.
Pretty impressive loan growth.
In the quarter.
Her team is b.
Currently C&I line utilization increased in the quarter.
Questions.
What we see from some other of your peers. So for the quarter. So would just love to get some color on the geographies for increase in line utilization this quarter and just the overall C&I growth that was again impressive and just kind of the outlook for overall loan growth in the back half of this year X P. P T.
Yeah. Thanks.
It's interesting the loan growth question I've been following the comments myself and I actually I'm, just as interested as to why others arent seeing loan growth as to why people are interested is why we are seeing loan growth.
And my comments around that are we as a backdrop you've got a huge.
Listen the market you've got PPP funds.
Company level, you got a monster a level of liquidity you have a recovering economy.
And for me, that's a backdrop for loan growth. So I've I've actually struggled to understand why other than we're talking about not having loan growth. So for me. It's just the sort of the basic backdrop or a nicer.
Same every.
The backdrop for our loan growth.
Coupled with the fact that what we've said for years now is we're underpenetrated geographically and Underpenetrated vertically and we don't budget our loan growth based on a multiple of <unk> GDP like a lot of banks, who we do ours based on the ability of our loan officers to build.
Build to execute on their pipelines and gain market share so.
With that backdrop for our pipeline and what we've seen and been able to demonstrate year in year out.
That's what drives our loan growth that comes across all categories and is in the prepared comments for C&I side 3 quarters of that was new business from new customers.
On the.
Line utilization I would I wouldn't get too excited 1 way or the other about that that's a point in time that thing can go bounce around a little bit what I would say, it's stable I wouldn't point too much for 1 or the other it's up slightly on a point in time basis for what I'd say it's stable.
And.
So those would be my for my Mic.
My Big comments, there about it it's business as usual for us on loan growth and and I think we typically give you a quarter ahead look and Jim comment on that.
Looks as strong as it has been.
And just.
Just.
And nothing new on the loan growth front, we did mentioned.
Net.
<unk>.
Anticipated more closings in the first quarter that did roll to second quarter. So that did have some.
Some impact on the outsize growth for second quarter, but third quarter remains strong.
We've also seen a lift from our.
Consumer mortgage business that we placed on balance sheet as well as roughly $100 million. So that's been additive also.
Okay.
Okay, Great and then just maybe shifting to capital we'd love to get some updated.
Excess capital deployment priorities, what youre seeing in terms of acquisition opportunities as well and just any thoughts on the buyback.
A little bit of a retreat and thank you Ryan.
Valuations recently.
So.
In our prepared comments, we talked about our priorities the increase from the dividend was really what I would call a catch up dividend increase to get us kind of level set with the kind of experience that our shareholders have been used to from us.
So that's what that was a sort of a catch up get us back to our payout ratio that we've historically demonstrate.
As far as just regular use of our capital we would very much like to find a way to deploy capital to grow our business.
Obviously with the loan growth that we have.
That's the place that's going to go first.
And secondly, we'd love to find M&A activity M&A opportunities.
<unk>.
It won't come as a surprise to you that there's nothing to announce to you.
But but we are asking for I would very much like to.
Add value to our business through through some M&A activity and all I can say about that is we remain active we remain we're making phone calls or count.
<unk> found in the street using shoe leather building relationships and doing everything we can but we're not going to do something just to do something right. So it's got to be.
Something that fits culturally and really add value.
<unk>.
We're not going to do what I call a ticker tape acquisition, 1 just to.
On the to announce something it's kind of it's got to fit.
Got it.
If I could just ask 1 more on overall overall.
Balance sheet dynamics.
For your forgiveness process continues on for what it looks like from your commercial clients are working through excess liquidity and drawing on lines.
So any expectations for deposit flows and just the overall size of the balance sheet over the back half of 2021 as well.
Well, that's the million dollar question and net.
We debate that ourselves internally, so it's almost hard to answer that 1 when everybody on the phone on my end would.
Just a different answer.
But.
I think.
Yes.
Theres definitely excess liquidity on our balance sheet.
Whether thats $1.2 billion or $4 billion is anybody's guess and.
So I think I think.
Theres, some excess liquidity on our balance sheet for.
From our vantage point.
We are always focused on deposit growth and we always have the ability to bring deposits back on balance sheet that is off balance sheet.
If that were ever if that were ever was something we needed. The other thing to think about for.
So I think it's kind of unique.
In this space is our loan to deposit ratio is so low to start with not sure. It really matters, how much excess liquidity, we have because really at some of the order roll off our ratios will just look better anyway.
Right got it okay. Thanks.
US for all the color.
Yeah.
As a reminder, I would like to ask a question. Please press Star then 1 other question queue.
Our next question will come from Chris Mcgratty with <unk>. Please go ahead.
Yeah.
Good morning, Chris.
Hey, Glenn this is Andrew.
Thanks for getting on for Chris Mcgratty.
The other.
Im just wondering so I noticed your.
Fee income came up a little higher than expected can you just go into.
I guess the pieces of fees this quarter and what that run rate looks looks.
Like going into the back half of the year. Thank you.
Yeah, I mean high level and I'll, let my team jump in if they want to add color, but high level I'd say.
It came really across the board so.
All of our asset based businesses, there was great business development new client activity.
The markets have been stronger than I think we all thought they would be.
Certainly in my shop, we felt that we have felt that way.
So really across all the asset backed asset based businesses. The activity has been very strong and then our corporate trust business with the economy opening back up Aviation Trust.
This has come back on.
Yes, I mean, just really.
Really saw it across the board in all of our business as Jim mentioned.
Strong asset growth client growth in our.
Our private wealth business, you want to add anything else Jim.
We had.
We had additional swap income this quarter commercially.
We saw additional growth with the.
The case no.
Now for that.
And our capital markets group.
K C a S.
Another win.
Group, where we're you saw you saw that fee income on book page would that be in the 22 net.
Equity return on another another other private investment obviously, not as large as a tattooed chef, but obviously outside richer outsize returns for.
Our investments.
And then.
Mariner so it was really across the board those would be a couple of other key highlights and then off of fee income.
Account fees.
I'd like to come back for the steel.
Still you know you've seen the returns from tattooed chef.
We don't expect to see those kinds of returns.
In that business every time, but you should expect to see us see liquidity events in our equity investments.
On an ongoing basis and as evidenced by having 1 in this quarter.
Yeah.
Alright, great. Thank you.
And then just 1 more on the tax rate it looks like it.
Came in a little higher than <unk>.
Last quarter in the previous 2 quarters.
What do you think is it good run rate for <unk>.
The tax rate going forward. Thank you.
Yes, we would say 16% to 18% Andrew for the full year 2021.
Every quarter, we adjusted the tax rate based on just expected earnings.
And also.
<unk> tends to jump around a little bit but for the full year I would say 16% to 18.
Alright, thank you.
The next question is a follow up from Nathan race with Piper Sandler. Please go ahead.
Yes, hi.
Just a question going back to the.
And everything I will discussion around fee income.
The public finance and trading line continues to perform fairly well.
In the past you've talked about the upside of that business would you agree that infrastructure spending. So just wondering if you guys could kind of quantify it infrastructure bill ends up getting done.
The.
The earnings power that debt.
Debt to be realized within that line going forward.
That's really hard to judge Theres still debating it in the first place and you got to go through appropriations on it's kind of get distributed at the state levels and then the other side, where I think there's a pretty long path, it's hard to tell you.
And we might see that.
So I don't know when we might see it.
Certainly.
Not in the next quarter.
I don't know I don't know when we will see that stuff is still still as he made it out of them.
Out of Washington, yet, we can tell you, though that we have.
Per.
When we are adding additional associates in that area for and.
And we've seen success.
The.
Documented as far as our.
Our activities and we do anticipate that being beneficial for us Scott I mean, some of what we've seen there too is taxable municipals.
<unk> made their way into the marketplace in a meaningful way. So some of some other business we've been underwriting as taxable municipals.
So the other markets changing and there's a lot of liquidity I think the real key here is regardless theres, an enormous amount of liquidity, so institutions and banks.
Our needing to deploy it.
Now that the commissions are different based on the.
The kinds of securities that are being traded and built and sold but theres a lot of activity still because of the liquidity and thats, what youre seeing and I think youll continue to see that probably up till the time through until the time that we do benefit from what might happen from infrastructure.
Got it and just 1 other question around expenses.
For the institutional segments are performing well I'm curious if they're shifting capital.
Structure of incentive compensation I believe historically that business has had a higher a higher variable cost component to it historically.
So I'm just curious if any of that shifted more recently.
That kind of supports.
How it's been.
They've been a little bit more.
Controlled in terms of overall growth recently.
No I would say the opposite some other expense.
<unk> expense growth that we do have is from kind of paying out on commissions and sales rise I spend more control than the other areas in the end.
What expense increases we have had it because of the sales activities.
We've tried to be more balanced over time to make sure that our sales officers are bringing in the business that we all the different.
A business that we offer so that's where we continue to tweak our sales incentives to make sure that.
Or that our officers are become more generalists in specialists when it comes to selling all that we have to sell and Jim Yes, no. We make sure that our incentives are balanced with what is in the.
Types of best interest of the bank such as.
Additional incentives for cross, even though we don't know that the industry likes this term very much anymore as far as cross sell activities, but we make sure we're partnering with the other lines and exposing a dip.
For lines of business 2 different.
Customer basis.
Where they can have.
Referral activity that makes for rewarding that activity more handsomely in the past.
There are benefits for the bank, but.
Just like any organization, we constantly evaluate our programs, but they have not.
Changed drastically or we're not seeing pressure from the market to do that we believe were.
Extremely competitive.
Actually book.
<unk> of choice for all our divisions.
It was a little plug for U M b for it.
Yeah.
Of course very good.
Super helpful. I appreciate all the color again, thanks guys.
Thanks, Dan.
This now concludes for everybody.
This will conclude today's question and answer session and I would like to turn it back over to management for any closing remarks.
No. Thanks for that we covered it all I appreciate everybody's time.
Thanks for joining us today, you can access the replay on our website and as always you can contact investor relations at 8168607106 with any follow up questions. Thanks for your interest and your time.
The conference has now concluded thank.
Thank you for attending today's presentation you may now disconnect.
Yeah.