Q3 2021 UMB Financial Corp Earnings Call
Good morning, and welcome to MB financial third quarter, 2021 financial results conference call.
All participants will be in listen only mode.
If you need assistance. Please signal conference specialist by pressing this darcie followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded.
Now I'd like to turn the call over to MS. Kay Gregory.
Buster Relations. Please go ahead.
Good morning, and welcome to our third quarter 2021 call Mariner, Kemper, President and CEO and Ron Shankar CFO will share a few comments about our results Jim Rine CEO of the bank and Tom Carey 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. These risks are included in our SEC filings and are summarized on slide 43 of our presentation.
Actual results in circumstances may differ from those set forth in any forward looking statements.
We're looking statements speak only as of today and we undertake no obligation to update them unless required by securities laws.
Our presentation materials and press release are available online at Investor Relations Dot <unk> Dot Com now I'll turn the call over to Mariner Kemper.
Thank you Kay and thanks, everyone for joining US today, we continue to see the benefits of our diverse business model, which helps us drive key points of our investment thesis above peer loan growth solid net interest income and strong fee income contributions for.
For the third quarter, we posted 15, 3% average loan growth on a linked quarter annualized basis, excluding PPP balances.
Asset quality remains strong with net charge offs of just seven basis points and a $5 million negative provision for credit losses.
But in our markets continues to move towards more normalized levels, while supply chain dynamics and rising material costs weigh on businesses across our footprint pricing and customer demand led to strong loan growth.
Turning to our third quarter results net income was $94 5 million or $1 94 per share and pre tax pre provision income on an FTE basis was $115 3 million or $2.37 per share.
Slide 18 shows primary drivers behind our results and I'll provide some high level comments, and then turn it over to Ron for more details.
Net interest income increased four 3% from the second quarter, driven by strong, earning asset growth and controlled liability costs.
Net interest margin was 252% versus 2.56% last quarter impacted by continued elevated liquidity levels reinvestment rates core loan mix and repricing, we are working to deploy the excess liquidity as prudently as possible as the rate environment changes.
While reported noninterest income declined for the linked quarter. It was largely driven by unrealized mark to market adjustments in the equity holdings, including a $10 7 million dollar swing.
Two are tattooed chef position in the second quarter.
We saw positive momentum in fund services income and bank card fees with increases of eight 5% and 7.1% respectively.
Trading and investment banking income fell during the quarter on lower trading volumes after an extremely strong second quarter.
Moving to the balance sheet slide 24 is a snapshot of our loan portfolio showing the drivers behind our loan growth C&I led the growth in average balances this quarter as we continue to gain share across our footprint prospects are recognizing us as consistent stable player in our markets more than half of our commercial loan growth.
Came from new customers this quarter.
During the quarter, we saw some return of Capex spending and while the growing number of middle market companies selling to private equity firms contributes to pay off we've had success in building relationships with PE firms and are often unable to participate in those purchases.
Average mortgage balances increased seven 4% from the second quarter to $1 8 billion funded mortgage loans for the quarter were 236 million, including $30 million in the secondary market year to date, we've seen 53% in secondary market mortgages compared to the same period in 2020.
Top line loan production as shown on slide 25 was $905 million for the quarter outside of P. P. P balance changes payoff.
Payoffs and Paydowns were five 9% of loans.
Above recent levels.
We do expect acquisition activity among middle market companies to continue which makes estimating payoffs unpredictable. However, we see a robust pipeline for the fourth quarter with opportunities across all verticals.
On slide 26, we've updated our exposure to sensitive industries, we continue to monitor our hotel and senior living portfolios, which stood at a combined $885 million at quarter end, representing five 5% alone excluding PPP.
After analysis of mitigating factors, including strong sponsors and guarantors, we feel approximately $419 million or two 6% of loans weren't closer monitoring we've.
We've included this analysis again this quarter. However, as the economy continues to improve this will be less of a focus going forward.
Slide 27, and 28 show asset quality trends I'm pleased with the reported seven basis points of net charge offs for the quarter.
And as I mentioned last quarter, given what we know today and the quality, we see across our portfolio, we expect charge offs to come in near our historical levels of 25 to 30 basis points for the full year of 2021.
You will see the nonperforming loans ticked up this quarter, 2.59% of loans in line with the third quarter of 2020. This increase was largely driven by one credit relationship as.
As we've talked about often we will see peaks and valleys as we manage credit moving them to watch list or M. P. A's, but our historical track record has shown limited migration to loss.
Moving to capital we saw improvement in our already strong ratios with total capital of 14.17% compared to $13 eight 4% in the second quarter.
While we returned additional capital to shareholders through the increased dividend payment announced in July our top priority for use of capital remains supporting strong organic growth and as market conditions allow we will continue to look for opportunities to augment that growth with strategic acquisitions.
Along these lines, we recently announced a single branch acquisition with approximately $250 million in deposits and the Kansas City market.
Finally, we recently announced the formal launch of our family wealth offering.
This is a registered investment adviser, which focuses on providing entrepreneurial investment strategies sophisticated tax planning and generational wealth guidance to families with significant well.
We were already providing many of these services within private wealth management, and we decided it was time to formalize the offering including hiring and developing a dedicated team of investment professionals. Additionally, E&P capital Corporation, which holds our SBA C will be part of our family wealth offering and will focus.
On investment opportunities in private equity direct investments and other alternatives for our clients.
To wrap it up we continue to see positive momentum across the company and I'm pleased with our third quarter performance and I'm excited by the opportunities we see as we head into the fourth quarter and beyond into 2022.
Now I'll turn it over to Rob for a few comments.
Thank you Mariner net interest income of $209 8 million, representing an increase of four 3% from the second quarter, we amortized $8 $8 million of PPP origination fees into income and the overall <unk> contribution to the third quarter net interest income was $10 1 million compared to $12 4 million last quarter.
At quarter end, our PPP balances stood at $318 million down from $766 million at June 30, approximately $9 3 million and amortized fees remain at the end of the third quarter.
Average, earning asset yields decreased five basis points to 265% due to a three basis point decline in security yields and asset mix changes, including increased liquidity and a $659 million decline in average PPP balances.
Our fed account reverse repo and cash balances now comprise 16% of average earning assets compared to 14% last quarter with a yield of 30 basis points. This increased liquidity along with core loan repricing pressure and mix changes drove the decline in net interest margin.
We continue to deploy a portion of excess liquidity as well as cash flows from our securities book back into our <unk> portfolio, driving an increase of $643 million and average balances from the prior quarter and nearly 2 billion compared to the third quarter of 2020.
Looking ahead, our internal outlook for any fed actions are in line with the current consensus for an early 2023 increase.
We remain modestly asset sensitive with more than 50% of our loan portfolio tied to short term interest rates and over a third of our deposits and interest read demand deposits.
Actual experienced when rates do rise, we will depend on a number of factors, including the pace and source of liquidity reductions overall size of our investment portfolio mix shift within the deposit book steepness of the yield curve to include the 10 year treasury yields and the number of rate increases.
And then two are $1 billion and pay fixed receipt flow swap portfolio.
As we've noted in our investment thesis, we believe that our ability to grow our loan portfolio through market share gains potential to redeploy our over $4 billion in excess liquidity, coupled with opportunities to rotate within our earning asset base will also add to net interest income outperformance relative to our peers.
Additionally, a few of our fee income businesses benefit from higher interest rates, such as <unk>, one money market fees in our corporate trust business.
The portfolio composition and activity trends are shown on slide 29, and during the quarter. We had cash flows of $375 million at a yield of 198%.
Purchased $1 1 billion of securities that yielded one point to 8%.
Noninterest income for the third quarter was $107 9 million down $23 7 million from the last quarter, driven largely by market related adjustments the market value of our investment in tattooed chef Tcf resulted in a $3 5 million unrealized loss in the third quarter compared to $7 2 million.
Right up in the second quarter.
Additionally, as noted last quarter, our second quarter fees that included over $5 million in investment gains from liquidity events on portfolio companies held at <unk> Capital Corporation.
Other drivers to fee income for the quarter are shown on slide 22.
Noninterest expense trends are shown on slide 23 expenses increased $7 5 million or three 7% from the second quarter to two O $8 9 million driven by larger performance related incentive expense and $2 7 million in operational losses.
Our effective tax rate for both the third quarter and year to date was 17% for the full year 2021, we anticipate there will be approximately 16% to 18%.
Our tangible book value per share has increased nearly 10% during the past 12 months to $60 44.
At September 30th.
That concludes our prepared remarks, and I'll now turn it back over to the operator to begin the Q&A portion of the call.
I'll begin the question and answer session to ask a question May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
First question comes from Jared Shaw Wells Fargo Securities. Please go ahead.
Hey, good morning, everybody.
Hey, good morning Darren.
I guess, maybe first with with the loan growth outlook, you know good growth on an average basis quarter over quarter, I mean, I see the slide with the Paydown payoff activity.
How should we be thinking about loan growth going into the end of the year should we can.
Can we expect to see average growth from third quarter with the with the impact of PPP rolling off or I guess, how should we be thinking about the strong pipelines versus some of the some of the structural headwinds there.
Well.
I think the news. This is Mariner morning, Jerry I think the news is similar to what we've already talked about which is our topline growth we expect to continue to be strong.
The payoff paydown activity against that.
As an unknown.
This last quarter was I think representative of a bill a buildup from.
The coronavirus from last year, where we got low cap rates and low interest rates and there is some sales activity taking place within our largely our CRE book, but otherwise modest topline growth continues to look strong obviously ex PPP.
We continue to have the same trends as we always do with our loan growth.
Okay, and then you had mentioned.
Some strengthen with PE firm customers are you doing capital call lending with them or what's the what's the type of lending relationship that.
But that's driving.
Well, we do do some lending into our fund services clients, but that's not really what we're referencing we're really talking more about M&A.
M&A driven p/e lending, so as kind of as companies in our portfolio or through relationships with PE firms.
Get bought or sold and we're participating in that acquisition debt.
Okay, Great and then looking at loan yields do you think that overall, we've sort of hit a bottom here, assuming a stable stable rate environment or could there be maybe a little more incremental a squeeze on on loan yields.
Things remain very competitive.
They always do I don't know Tom do you want to add.
We're near the bottom I suppose yeah, no I would agree with that it is still very aggressive environment and.
I don't expect that part of it to change if rates stabilize however, you define that we.
We may be near the bottom, but it's still always a competitive environment, probably not a lot of downward pressure, but yes, that's certainly remains competitive.
Okay. Thanks, and then just finally for me any any color you can give on that increase in C&I in Seattle.
Whether it's.
Detail on the on the sector and then I guess, what gives you confidence that the loss content.
It could be.
Hello on that.
So it is as we mentioned in the call. It is one credit would I what I would tell you is which has been true for some time, you know I've been credit leadership.
For 25 years as of the two other gentleman on the call with me today are Jim Ryan and commentary.
And what it's always been true about the way we manage credits were quick to take action quick to recognize trouble.
And quick to manage credits and our history is very strong and long and not seeing migration much material migration from troubled credits to loss.
And we don't expect that to be.
Any any different on a go forward basis as there are peaks and valleys from time to time and typically very few credits. So theyre not really trends in any one it's never a trend in an industry, that's usually a particular credit or two.
Okay is that.
This quarter.
We would expect full year charge offs.
Remained within our 10 year average of 25 to 30 basis points.
Okay and then it was that was that growth in the factoring.
Yeah, no it is not from factoring.
Okay, great. Thank you to be in our core portfolio.
Thank you.
Our next question comes from Nathan race Piper Sandler. Please go ahead.
Yeah, Hi, everyone. Good morning.
Good morning, Dave.
A few questions on the fee income growth outlook.
It looks like the.
Fund services units continuing to post pretty impressive growth you know over the last several quarters here and I appreciate the additional breakouts on slide 22, along those lines. So just curious as you guys maybe look out over the next several quarters.
Total fee income growth has been kind of a low to mid single digit range over the last couple of years is that still a reasonable expectation to think about for 2022, and what do you see a lot of that growth coming from across the overall.
Composition of your.
Yes, Nate this is Jim Ryan.
We have had.
Great growth in the fund services area and half of that is coming from new clients.
We don't really give forward guidance on what we see for fee income I can tell you, though to our institutional business.
Our public finance area.
We anticipate additional strong growth there through the rest of the year. They are already having a record year corporate trust is up 61% over.
2020.
<unk> continued to expand and add additional associates in that area.
And we've made additional investments in our healthcare services area to expand our direct to employer network, where we're expecting.
Additional growth in the future there keep in mind.
Through our fund services as well as some of the other business. We are absent <unk> one fees due to the rate environment and if you go back to pre 2020, we had roughly $30 million in <unk> one fees on a run rate so.
Again, not providing guidance, but as rates do tick up we would see an additional fee income in that.
From that category as well.
And this is the drivers the backdrop for all of those businesses continue to see strong there's a lot of disruption in our competitors with the fund services business.
We've been benefiting handsomely from that disruption and.
We're a real strong player in the <unk> space alternatives have been very strong right in this low interest rate environment.
Alternatives have been a very strong asset class. So there's a lot of growth there both in formation as well as asset growth within our customer base.
No.
And then infrastructure and rates all are headed.
Real rates are headed up.
And the anticipation of an infrastructure bill.
Speeding up activity in the public and corporate Trust space.
And as travel has recovered our aviation business.
It is also starting to see some some.
Positive outlooks, so a lot of really good drivers as we look forward.
And.
So our mortgage business.
Is as we've talked in the past we have a lot of runway across all of our business lines.
And that's true for mortgage for us to even if purchase or refi, even if the refi business slows down on an industry wide level.
Our business is so nascent that we have a lot of opportunity and runway just within our customer base to participate in the purchase volume.
And so we see some some legs for our mortgage business on a relative basis, even if rates rise.
And reason the Refis slows down.
Along with our card business for which is for a company our size is a pretty big business.
And we're starting to see some nice momentum in card spend.
Driving interchange revenue for us.
Got it.
Very helpful color, maybe just changing gears and thinking about the trajectory of the reserve.
Over the next several quarters.
You guys are back below kind of pre pandemic.
Reserve levels as.
As we sit here today ex PPP, how are you guys kind of thinking about the need to provide for additional growth going forward kind of within the context of the charge off outlook you know.
Kind of remain in that 25 to 35.
Basis point range going forward.
Rami I think that yes, I mean, we're still not at pre pandemic levels. So on day, one our seasonal number was 85 basis points coverage and if you look at where we are today, we're close to 120 million right. So theres still.
At the macro environment, and the Moody's forecast gets better and thats going to be pressure on the allowance coverage ratio to go down further from where we are but a lot of our provision typically to your point happens because of the outsized loan growth that we have so on that basis, I think our relative recapture of the reserve might be slower than peers because of that.
Because we continue to grow our balance sheet on the loan side.
And so that'll be.
Again differentiating factor if you will.
Got it makes sense.
Maybe just one last one for me.
Additional color on the operational loss than the other expense line item here in the third quarter and I assume that doesn't recur going forward.
But would it just appreciate and get any additional color on the driver there.
Yes, that's something that you know I think you'll see the some of the other income statements as bounces around a little bit it's not regulatory non regulatory loss.
It's just.
Yes.
Typical kind of.
Business or business operating type losses that we will bump into from one quarter to the.
The next.
Based on our business activities.
Breadth and depth of our business.
Got it I appreciate the color I'll step back thank you guys.
Yes.
Thank you next question comes from Chris Mcgratty K B W. Please go ahead.
Hey, good morning.
Hey, Chris.
Ron.
Our mariner.
The deposit growth has been just off the charts I'm interested in kind of a kind of an outlook for deposit flows.
Particularly noninterest bearing.
Do you think is.
Sustainable versus a little bit transitory, because it's because those numbers are pretty pretty strong.
That's a great question and when you get the answer where you give us a call.
All right.
Uh huh.
We've benefited I think one of the reasons ours as outsized as our mix of business right. So we have a large commercial and institutional business. So the question. So that's certainly a big driver, which would be less transitory right. So the growth of our asset servicing business the gross growth of our.
New Aviation Trust business coming back of our regular corporate trust business and <unk>, one fees and just so those kind of comments around corporate trust and public finance business picking up in a raising rate environment.
All of those things would be the non transitory part of of the IND.
Increased levels of liquidity on our balance sheet.
If you just look at the pre and the post sort of numbers the range right. We've got an additional four and a half from one 1 billion on our balance sheet. The question right. The $1 million question for everybody is is.
Is it a $4 $5 million in excess transitory liquidity or something less.
We certainly believe that it's less than that because of the growth in our business lines and the complexity of our balance sheet and income statement.
Certainly there is some excess liquidity on the balance sheet.
But you know we.
We have internal debate ourselves really about how much how much there is.
<unk>.
So I know you're looking for March more than that but.
I think.
Yeah, a lot of it is going to be driven by the complexity and all of the institutional businesses, adding core balances.
But theres certainly some excess liquidity higher okay.
Yes, it's a guess, but I appreciate the color.
Second my follow up would be on expenses I've heard from many of your peers. This quarter, just inflationary wages pressures to run the business I'm interested how youre thinking about.
And the cost to obtain and also recruit thanks.
Oh.
Another great question right is where we're all sort of feeling our way through this.
The pressures of work from home in the regions from the coast.
And then just the competitive landscape for employment.
I think it's early right to tell to understand some of the longer term implications of coming out of Covid.
Some of the I think more permanent implications of the way we've been working the last couple of years.
But I would say that we have seen some.
Some wage inflation.
And.
We do not believe that it's transitory you can't Unring the bell.
But I think from a competitive landscape.
We have.
Great culture, we're not losing people.
R R.
Voluntary turnover rate and turnover rates in general are not much different than they were prior to the to the period we've gone through.
So we've been watching that.
And so we don't feel like Theres any signs on the turnover side.
And we've been able to maintain and hold the people that we have competitively on the hiring side. That's the biggest challenge because everybody's looking at everybody's need.
But again, we feel pretty good about the culture and the strength of kind of the consistency of our company.
As we as we look to <unk>.
Hiring.
Chris It's Jim Ryan the one thing that.
We've also been just dealing with I think most of our peers are dealing with two is just getting our mix of flexibility correctly I think thats. What associates are really looking for in the work place right now and that's something that we're addressing and putting a lot of and being very thoughtful with also.
As much as the wage inflation, that's just what the new work environment looks like.
Thats, where youre going to see a lot of changes in the industry quite frankly.
And we want to be a.
Thoughtful leader in that space. So we're not going to dig their heels, then we're going to make some real changes in.
Adapt.
Okay and then thank you for that the last one would be Ram on the Triple P. Can you just remind us the fees that were in the quarter and then what's left.
So it was a $10 million in the quarter, Chris that includes both the origination fee and interest income we still have $9 million of fees left on the PPP program on balances of about $320 million at quarter end.
Great. Thanks.
Yeah.
Again, if you have a question. Please press Star then one.
Next question comes from David Long Raymond James. Please go ahead.
Good morning, everyone.
I wanted to add.
The utilization rate can you talk about where your utilization rate was here at the quarter end and how you.
If you expect that to change here anytime soon.
So.
It was 32 at the end of the quarter.
And it ranges from 29 to 35, and I would say that the way to think about it is.
The average is a low for us as low thirties.
And.
If you think about a environment, where there's a lot of liquidity in the system.
Might take for the industry as its likely that that liquidity gets spent first before we would see something on the higher end of our range.
Okay.
Gotcha Okay.
And then looking at the average.
Ounces in loans.
Pretty good growth there in the quarter, but the period end didn't show the same was there some <unk>.
Celebrated payoffs or pay downs near the end of the quarter.
Yes. This is Tom Terry.
As Mariner mentioned earlier in his comments, we're seeing a greater amount of payoffs in our commercial real estate book principally.
Due to low cap rates low rate environment are either being refinanced in the nonrecourse market or there are a lot of just outright sales.
Commercial real estate properties and so we are seeing a greater amount of that this year and certainly in the third quarter than we've seen historically, but that point in time question, though that's just.
Literally just a point in time.
Growth.
I would I pay more attention to the averages and the point in time.
And then two has the rollout for a lot of them that you can see those numbers in there and as a percentage of loans.
And Tom both alluded to was a little elevated at five 9% of total loans.
Got it Okay, alright, that's all I had thanks guys.
Hi, I might I might add.
That it wasn't asked but it's something we're pretty proud of.
We're going to have a new tariff sheet coming out in a week or so on our community development and our ESG efforts. We spent a lot of time on and we're really proud of the things we're doing as a matter of fact I would say.
ESG is a new term really for some things that we as a company have always really cared about and we're pretty excited about that so I would keep an eye out and you can go to our website <unk> com.
<unk> statement in within a week or so youll see our new tear sheet for where we're making sure. We're getting recognized for a lot of the things we've been doing by detailing them in the statement. We're doing some real neat things are rolling out here in December a downpayment assistance program to reach and to LMR.
Hi neighborhoods and that helps us people up and help increase homeownership.
And in our fourth quarter expenses, we think that if.
Things continue the way they have for us this year into the fourth quarter.
Likely to share some of our profits with our with our communities in the fourth quarter as we have been doing and any way we're real proud of what our team is doing and where our company is doing to make a difference and.
And the communities that we're serving and I would love for you all as investors to take a look at what we're doing on our web site and keep an eye out for for those efforts going forward.
So thanks for everybody joining today.
Alright, it looks like we have.
No further questions. Thank you everybody for joining us a replay will be on our website shortly.
As always you can contact <unk> Investor relations at 8168607106 with any follow up questions and we appreciate your interest and time. Thank you.
Thank you <unk> Conference has now concluded. Thank you for attending today's presentation you may now disconnect.