Q4 2021 UMB Financial Corp Earnings Call
Good morning, and welcome to the you wouldn't be financial fourth quarter 2021 financial results conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Kay Gregory of Investor Relations. Please go ahead.
Good morning, and welcome to our fourth quarter and full year 2021 call Mariner, Kemper, President and CEO and Ron <unk>, our CFO will share a few comments about our results.
And Jim Rine, CEO of Yum be bank, and Tom Terry Chief Credit Officer will be available for the question and answer session.
Before we begin let me remind you that today's presentation contains forward looking statements, which are subject to assumptions risks and uncertainties.
These risks are included in our SEC filings and are summarized on slide 42 of our presentation.
Actual results may differ from those set forth in forward looking statements, which speak only as of today, we undertake no obligation to update them, except to the extent required by securities law.
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 that 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 and 2021, we delivered solid operating and financial results with strong growth on both sides of the balance sheet steady asset quality metrics and continued momentum in our fee businesses.
When many others in our industry has struggled to generate meaningful loan growth. We delivered 12, 3% increase in average loans in 2021, excluding PPP largely through market share gains.
Positioned to benefit from the anticipated economic expansion higher interest rates and continued investments we're making in 2022, while others are predicting growth based on a better economic environment. We're confident that we will continue to garner more than our fair share of that growth.
There were a few factors that had outsized impacts on our results in the fourth quarter and the full year we.
We had higher than typical operating expenses, largely driven by higher incentive compensation for the strong business performance, we experience along with additional charitable contributions in the quarter.
Additionally, we saw some variances in software costs and legal and consulting expenses related to the timing of our business investments.
We estimate that approximately $10 million on a linked quarter increase in expenses was variable in nature and attributed to timing of spend.
Many of these incremental expenses should reset lower in the first quarter.
As we've discussed before we remain focused on delivering positive operating leverage across all environments. While we continue to invest prudently in our people and platforms on the revenue side in 2020, the gain on our investment in tattooed chefs and ongoing market related adjustments impacted year over year comparisons.
Ron will share more detail on the various drivers shortly.
But we expect to generate positive operating leverage in 2022, excluding the impact of the P. P P with or without the benefit of higher interest rates.
Turning to our fourth quarter results net income for the quarter was $78 5 million or $1 61 per share.
Pre tax pre provision income on an FTE basis was $113 4 million or $2.32 per share.
Fourth quarter net interest income was $210 6 million and was relatively flat compared to the third quarter and we saw positive contributions on the fee income side.
One services total assets under administration have grown nearly 25% from year end 2020 to stand at an impressive 419 billion custody, yes, it's crossed the $150 billion threshold driven by organic growth in specialty Trust and agency solutions, we saw and 149.
Percent increase in new business in 2021, and our teams continue to garner industry recognition for service and innovative products.
In private wealth, new asset sales for 2021 increased 17% over the prior year and we continue to build out and strengthen our family office offering.
I'm looking forward to further momentum as we continue to invest in this business.
You'll see more detail in a line of business updates in the presentation.
Moving to the balance sheet slide 24 is a snapshot of our loan portfolio showing the drivers behind the loan growth I mentioned.
Average loans for the fourth quarter, excluding PPP balances increased nearly 13% year over year and nearly 6% on a linked quarter annualized basis asset quality remained strong with net charge offs of 19 basis points for the quarter and 27 basis points for the full year consistent with our outlook and.
Our historical averages.
Average C&I loans increased 12% on a linked quarter annualized basis as we continue to deepen penetration in our markets. Most of our commercial clients are reporting strong pipelines and backlogs across most industries. In general these are more positive feelings about the direction of 2022, well customers are keeping an eye on supply.
Change in labor issues impacting so many businesses.
And clients have expressed more interest lately and expansion both organic and through acquisition.
In our commercial real estate and construction portfolios average balances were impacted by payoffs and by typical cycles as completed projects are converted to term loans sold or refinanced into the secondary market.
Average residential mortgage balances grew six 5% from the third quarter, an annualized increase of nearly 26% funded mortgage loans for the quarter were $200 million, including $55 million in the secondary market in 2021, we saw a 70% increase in secondary market mortgages compared to 2020.
Total top line loan production as shown on slide 25 was very strong coming in at 1.4 billion for the quarter a record level for us.
Awesome Paydowns were five 6% of loans in line with prior quarter.
Any of our recent payoffs have been tied to merger and acquisition activity.
More clients have been taking advantage of attractive multiples, often partnering with private equity firms and family offices.
At the same time, we continue to see financing opportunities coming from some of these same p/e firms and family offices.
Well estimating payoffs can be unpredictable, we continue to see a robust pipeline with opportunities across all verticals in the first quarter. Finally earlier in January we pursued and executed the sale of our small acquired factoring portfolio to an alternative financing company.
Ron will discuss the financial impact of the sale of our factoring portfolio in his prepared remarks.
Overall 2021 was a solid year like all of US I'm hopeful we're nearing the final phase of this pandemic, but no matter what issues, we may navigate I'm proud of our team and our resilience they've shown and serving our customers and keeping you and be moving forward. We're excited for the opportunities. We see ahead of us in 2000.
22, now I'll turn it over to Rob for some additional comments wrong.
Thank you Mariner net interest income was relatively flat compared to the third quarter at $210 6 million as the benefit from solid balance sheet growth was partially offset by changes in asset mix lower earning asset yields and reduction in PPP income, we amortize $5 $4 million of PPP.
The nation fees into income and the overall P. P. P contribution to the fourth quarter net interest income was $6 million compared to $10 1 million last quarter at quarter end, our PPP balances stood at $136 million down from $318 million at September 30th approximately $3 eight.
In unamortized fees remained at the end of the year.
Average, earning asset yields decreased 16 basis points to 249% due to asset mix changes, including increased liquidity and a $297 million decline in average PPP balances.
For the full year 2021, our factoring portfolio provided approximately $14 million in revenue and had about $10 million in associated costs. So the pre tax pre provision income impact was approximately $4 million.
Fourth quarter reported net interest margin fell 15 basis points from the third quarter to $2 three 7% driven by additional buildup in liquidity levels, lower reinvestment rates and core loan mix and repricing.
The buildup of excess liquidity accounted for approximately 10 basis points of the linked quarter contraction for full year 2021, NIM was 2.50%.
As shown on slide 21, our fed account reverse repo and cash balances now COVID-19% of average earning assets compared to 16% last quarter and just 9% in the fourth quarter of 2020 with a blended yield of 26 basis points.
Based on our current expectations for two to three rate hikes in 2022 deposit beta is consistent with our experience during the last rate cycle and improve reinvestment rates on our cash flows. We expect that our reported net interest margin has bottomed out and will likely improve from fourth quarter levels generally in line with the current <unk>.
Census estimate of two 4%.
While the volatility from PPP loans have subsided, our net interest margin and net interest income will continue to be impacted by excess liquidity levels.
Our provision for credit losses for the quarter was $8 5 million driven almost entirely by our strong loan growth excluding PPP loans. Our end of period loans increased approximately 900 million from September 30th our allowance to loans, excluding PPP balances is 1.14%.
Compared to 1.20% at September 30th.
Noninterest income for the fourth quarter was $118 8 million, an increase of $10 9 million from the third quarter market fluctuations drove a $3 3 million positive variance in the value of our equity investments. We currently have approximately 760000 shares remaining in our tattooed chef position.
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Derivative income increased $3 2 million from the prior quarter and deposit service charges increased $1 7 million on a linked quarter basis largely related to client conversion fees in our health care business and corporate service charges.
I will note that just about 10% of our deposit service charge line item is related to retail activity.
Other drivers to fee income, including growth in both trust and securities processing and bond trading income are shown on slide 22.
Noninterest expense trends are shown on slide 23.
Expense levels for the fourth quarter were above our typical run rate and included a linked quarter increase of $7 3 million in salaries and bonus expense driven by higher expenses related to business growth and positive business performance.
Legal and consulting as well as marketing spend was higher in the fourth quarter and pertained to the timing of such spend.
Software and processing costs increased over the prior quarter and were driven by the implementation of our new and improved private wealth management platform.
And as Mariner mentioned, we increased our charitable giving in 2021 and in the fourth quarter. The other expense line included a $2 $1 million linked quarter increase in contributions.
These ear and gifts to organizations in our markets that support housing needs small business efforts and education pushed our giving above the $6 million Mark for the full year 2021.
Looking ahead I'll reiterate that we expect to generate positive operating leverage in 2022, excluding the impact of P. P P with or without the benefit of higher interest rates.
Our effective tax rate was 22% for the fourth quarter and 17, 7% for the full year 2021.
For the full year 2022, we anticipate an approximate 17% to 19%.
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.
We will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble the roster.
And our first question will come from Jared Shaw of Wells Fargo Securities. Please go ahead.
Good morning, everybody.
Good morning Jared.
Maybe just starting out.
Rami you had said on the margin to 4% was that.
For full year 'twenty, two or is that for first quarter.
That's a full year number that's what consensus has it so when I gave guidance related it was relative to the consensus for 2022.
A lot of factors Jared will impact the outlook for margin as I said you know what.
See slide 21, you can see how that has grown just well.
And magnitude and as a proportion of our earning assets a lot of factors will play into margin.
But at this point based on our outlook for rates.
240 ish sounds about right.
Okay, Alright, and then.
Yeah, it's great to see the loan growth. This quarter can you give a little color on what youre seeing with the C&I utilization rates.
And then you know what.
Looking at going forward as those begin to normalize what type of benefit could you get from just a more normal utilization rate and then you know the <unk>.
<unk> the expected impact of pay downs over the next few quarters do you think that that moderates.
Yeah, Hey, Jaras Mariner I would say that utilization rates to say.
Bob around quite quite a bit within one or two points, one way or the other.
Particularly during COVID-19 .
The period, we're in it's kind of hard to really tell where where it should be settling out.
From third quarter to fourth quarter 'twenty.
For example, it went the other way in this quarter.
Last two quarters.
Up slightly so I think this pandemic period, it's kind of hard to adjust come up with an adjusted.
A number so it's been kind of bumping around so.
I hesitate to give you what that normalized number should be.
Right now pre COVID-19 .
Things were bumping around 30, 30%.
Our utilization rate is really around 30%.
So you can do with that what you will but on loan growth.
And and payoffs and Paydowns.
We as we have historically, we've given you a good look into the next quarter, we try not to do too much guidance beyond the coming quarter.
And as it relates to the pipeline for the coming quarter looks as strong as it has been looking.
And I would say the.
The fourth quarter of 'twenty one.
The best gross production.
Quarter, we've had at one point almost $1 4 billion and the gross reduction so we're pretty pumped about.
The trajectory and the successes, we're having there as far as payoffs and pay Downs go.
I think.
We're running in the 5% range right now.
<unk> in the fourth quarter.
I think as long as rates are low as they have been.
That's going to.
Bush.
Ray slow in the secondary market opportunities will remain strong.
We are all predicting risks that come up.
That should moderate I think that should moderate payoffs and pay downs.
Over the over over 22.
As rates come up.
We'll have to see rates.
<unk> coming up there's still going to be at all time lows.
I think the market is going to still be very strong even with rates coming up but it should certainly moderate payoffs and pay downs.
Okay. Thanks, and then just.
Final one for me when you look at the.
The $10 million of expenses that you called out sort of quarter over quarter. As we go into first quarter can you give us a little color on what could potentially be be staying around with some of the puts and takes are should we should we expect that most of that 10 million is able to roll off.
Well you know the way we are thinking about that $10 million as it is related.
A good majority of that was related to production.
And.
So.
We continue to have very strong production youll see.
Theoretically see more bonus and commission compensation certainly.
Charitable contributions.
Were elevated based on our success last year. So I guess again, if we were towards the end of the year. If we're having great success, we would consider giving back to our community at an elevated level like we did last year.
Okay. Thank you.
I would add Gary on the loan on the loan growth front.
I think really what happened in the fourth quarter storyline was actually a little muted.
Because the payoff activity at the end of the third quarter. So I think our actual growth story in the fourth quarter.
<unk> is better than it looks based on end of period loans versus.
Oh.
What the averages were because of the starting point from from the elevated payoff levels at the end of the third quarter.
Great. Thanks.
Yeah.
The next question comes from Nathan race of Piper Sandler. Please go ahead.
Yes, hi, everyone. Good morning.
Good morning, everyone.
A question on deposits you know honestly really significant ended period deposit growth.
So I'm just curious.
Do you expect those deposits to largely remain on the balance sheet.
We start this year and just any kind of updated thoughts on just the stickiness of this of the massive deposit inflows that you guys have seen which obviously you can provide a significant benefit as the fed raises short term rates with all the liquidity that you.
Got it.
That's it.
Sure I'd say.
A story of.
Many points here right I mean, you've got what's happened over the pandemic and all of the.
Stimulus money that's come in that's one we're all all of us and as an industry and analysts community are trying to figure out how long that sticks around so that's a part of it then for US specifically in the fourth quarter on into that.
<unk> ended the first quarter.
Well aware, we build some public funds and some large institutional dollars kind of year end activity dollars. If you will.
And.
That will bleed out over the first quarter.
<unk>.
So we don't.
No exactly how far down that bleeds out but.
History is a good judge could be $600 million or so over the first quarter on the public fund side that would.
Roll back out.
Nathan This is Rob I would say for US like we've said in the past right I would not focus on end of period balances both on the loan side and the dips.
Particularly on the deposit side, if you look at between sub 30 and December 31.
The balances in the period increased by $4 5 billion a lot of it is attributed to what Mariner said between public funds and some institutional so we have seen some reseeding of those deposits. So I would focus more on the average side, just because again, depending on which David Urs for the quarter as we should we could see inflow of deposits.
On the loan side, we did have on the loan side. We did have some very strong generation activity in the fourth quarter. So that as I said in my previous comment.
The average deal.
That case, a little bit is a little misleading.
Two to the upside positive for us.
Which is the opposite of the story for the deposits.
Understood.
Within that context, just thinking about the.
The upward increases in deposit costs as the fed raises short term rates. Ron can you just remind us in terms of where the index deposit balances stand on the average balance basis in the fourth quarter and just general expectations for how your deposit beta is unlucky Q2 jobs over the next several quarters relative to relative to.
What we saw during this period.
So its tightening cycle between 2015 to 2018.
And there are interest rate analysis that youll see in our 10-K, we assumed deposit betas that are consistent with what happened last time. So I think last time, we had.
125 basis point increase in short term rates in our betas over that period came to about 45% or 48%. So at least from that standpoint, we're assuming very similar data experience, obviously with the excess liquidity in the system. There is an argument to be made that this time around we can slow down those dip.
Deposit cost increases potentially depending on what the market does in competition to US and then on your first question about 35% of our funding is indexed to some short term interest rates.
And that's a little higher than what we saw maybe three years or so ago I think it was closer to 20% to 25%.
That ground.
Slightly higher than the last cycle, when we left last cycle correct.
Okay, Great and then just maybe changing gears one last one for me institutional banking revenue segment, particularly on services posted really impressive growth.
New growth year over year.
Fund services in particular close to 30% year over year growth in 2021.
Yes, the growth rates sustainable into this year I guess, how are you guys going to look at it.
Various dynamics within institutional banking as you guys kind of forecast that revenue line for 2022.
Yes.
I'll take the beginning here Jim wants to add on he can.
The story is similar to what we've been saying the last handful of quarters, which is theres been a lot of disruption in the fund servicing market a lot of.
P/e, driven acquisitions and mergers in that space.
And that has put a lot of players on the sideline and caused a lot of disruption in service and as we have just.
Benefited handsomely from that and that story just continues I think thats really what I would say about that on top of just the market dynamics of.
Private equity and alternatives as an alternative to the public markets continues to be a very strong shift I think.
I'd call it permanent shift.
In.
Kind of the market dynamics, which is really where we play and we're not really a big publics public.
Equities shop Big 40 at 40 ex shop, we're doing more on the private equity in the alternative side.
And that.
It really bodes well for us I think long term, that's what I would say it hasnt Jimmy that anything more of another thank you continue.
Continue to differentiate ourselves on service and.
The results are proof that our models.
That's great and then on the rest of the businesses.
Similar story as the investments we've been making in people and technology are really paying off 17% growth in R&R.
In our wealth business, we haven't seen a year like that and sometimes those investments we've been making and people got really a great leader there.
And having 70% 17% growth in.
And new client.
Assets is really tremendous for us we're really excited about that at all in that family office.
And there is a big part of that offering and the technology. We've invested in there is really driving and helping the whole business corporate trust now that that business is on fire.
We went on the Nielsen lead tables, we went from number five and number three in volume we've been number three for some time now in number of issues that we went from five to three in dollar volume.
And so we've really been gaining share there which is great because.
To be growing that business in an environment, where.
Is the government isn't really spending the way they normally are.
We're continuing to take share so when when that stimulus money does come.
And the government start spending on a local basis and redo on highways roads sewer systems sidewalks all of those kinds of things and that starts flowing again, we're poised to really take our share. There. Additionally, as you look forward as we've talked before <unk> one fees have been zeroed out for us looking.
Backward because the rate environment. It doesn't take much rate movement looking forward for us to pick up <unk>, Jim you might talk about what that could look like.
So in 2019.
Our <unk>, one and <unk>.
Come in brokerage and mutual fund income was approximately $31 million.
2022 after.
150 basis points and rate cuts, we were sitting right at around $12 million.
So it usually takes two to three months after we see an increase in rates for.
Let's see.
Any additional increases in those fees, but so we will see a benefit in 2022, but you should expect to see significant increases assuming we get the rate increases in 2023.
We are very excited and so the profile of that business is very strong along with the newer business that we have in the aviation Trust business, which is really poised again, that's doing well in this environment, we'll do even better.
People are traveling the world normalizes again.
So really the profile across the board for institutional and our fee business is very strong with our card business led by our commercial card. We're excited about the prospects for that again for similar reasons as corporate spending picks up again looking forward, we sit at $3 7 billion in spend at the end of the fourth quarter.
<unk> Pn and muted environment. So that represents some tailwind for US and then lastly, I know you didn't ask this but do you think about the fee overall the picture for us.
On a relative basis, we're pretty excited about.
How we are.
Our position in a raising rate environment to not have to suffer the changes that will come from.
The mortgage business, reducing our within the within the industry. We don't have a big mortgage business. So we don't stand to lose that.
Profile going forward remains as strong as it has been without having to deal with the downside pressures right radiophare environment increasing.
Got it.
Really great color and just to clarify.
Jim on the <unk>, one fees is it roughly like capital.
<unk>.
Is it roughly like $500000 in terms of the quarterly benefit you guys will see after each fed rate hike.
That's two split Nate. This is Ron this is kind of very specific I mean again, Jim said, the timing of it and we have multiple funds as clients and not all of them have the same cycle.
To be able to sit here and say what every 25 basis points might mean.
It's tough to predict it for 2022 on a full year run rate basis in 2023, as Jim said, Thats, where youll see the biggest hockey stick.
2022, you certainly see a durable in.
Based on when the rates go up when the funds.
Those benefits back to us so it's really hard sitting here just to yes the.
The idea was just to give you a little color on what it looks like we're off yes.
Before at $31 million and by the way that $31 million.
Based on the amount of business, we had 19 versus the amount of business. We have some clients, we have going into 'twenty, two and going into 'twenty three.
Yes, theoretically we've got we've got more clients and more customers. So.
That.
Would bode well for the overall volumes. So it's hard to really tell what it will be so we can tell you what it was right at two years ago, which was the idea.
Got it.
I really appreciate all the color guys I will step back thanks again.
Sure.
Once again, if you would like to ask a question. Please press Star then one.
Our next question will come from Chris Mcgratty of Keyw. Please go ahead.
Okay.
Chris are you there.
Yeah, sorry about that I was on mute.
Hey, Ron.
A question on the rate sensitivity I think.
You're right.
Q you show modestly asset sensitive.
But not I think it understates it.
I'm interested in the view on <unk> can you just remind us what percent of loans reprice within a year the floors.
We estimate to what NII would benefit like a ballpark for each quarter hike.
Sure I'll try that and come back at me if I don't answer the question. So 55% of our total loans are variable in nature, and then about 10% of our total loans have floors on them, but it really takes anywhere between 25 and 50 basis point rate most for those to be truly variable. So that's on the loan side of the equation.
So you're right. Our 10-Q disclosures have a very static approach. So there's no growth in balance sheet and one other thing that's missing in that analysis is what happens to our growth.
The related net interest income. So obviously you saw that we had 12% loan growth this past year or so that's not included in that analysis and not nor is any rotation from the fed account balances today that are earning 15 basis points into loans or investment securities.
It's a very exciting way of looking at it the best way I can point to you Chris. So if you look at our disclosures for 100 basis point move on our 800 plus million dollar net interest income run rate, we expect 1% benefit in the first year at 6% benefit in the second year. So you can kind of do the math on what that means for every 25 basis point move.
Okay. Okay.
And on the indexed deposits.
Just given the structure of your balance sheet.
I mean, how is that.
What's the thought on maintaining all of these deposits.
Versus remixing, the balance sheet, a little more aggressively.
Well I mean, there's a lot going on there.
Some of those are contractual.
And some of them I would call our soft indexed in the sense that they are bid accounts and we can.
Remove them, if we need to et cetera. So it's kind of a mixed it's a mixed bag.
We.
Most of our business is relationship based and would like to keep as much of it as possible.
And.
Just worrying more about what we do with the other categories on the balance sheet, such as putting it to work in loans and what we do with investments so.
We are as we always have been a little more willing maybe than others take the pain to continue to build the company.
The value of this franchise is really in our deposits and so we don't really like to play games for ratios, we want to build a business for the long haul.
Okay. If I can thanks, I got two final ones.
First is on your securities Reinvestments the rate you put money to work kicked up from $128 two to $1 46, where reinvestment yield opportunities today Rob.
Yes, it depends on the duration really Chris So if I wanted to stay short of three years I can get 150, if I wanted to go a little longer to close to six years I could get 192 or the range of outcomes, but again, we're talking about it live.
Those are the options. We're looking at in terms of trying to manage our duration trying to manage our interest rate risk. So the I would say if you look at the next 12 months I think the cash flow roll off is at $1 80.
Based on our current yields and based on where the 10 years, we can get pretty close to that in terms of our reinvestment again, depending on the mix that we do.
Of duration.
Perfect and then finally, the operator I want to come back to the operating leverage comment I think you said ex PPP with and without rates positive operating leverage.
Could you just speak to.
Just magnitude if we do get the forward curve it would seem like.
That would widen decent by a decent amount, but again I'm not sure what the assumptions are to reinvest into the business.
Well, we don't give specific guidance and we've been saying this for our Mariner has been saying this for a better part of three quarters right, even before the rate cycle or what the fed has done lately with so our budgeting process always assumes that we want to gain operating leverage we have a lot of investments going in the fee income side and obviously as you can see from the financial results.
Those are bearing fruit so.
Regardless of the environment, we wanted to be able to generate positive and then the juice would really come through.
Environment changes dramatically if the fed does 50 basis points for instance, instead of 45 or there are four rate hikes in 2022, so either way I think we're well positioned with or without the benefit of rates just to give you a magnitude at this point again I go back to a lot of expenses as you saw in the fourth quarter tend to be variable in nature. So we do.
Well on the revenue side expenses can grow as well.
At this scale and ultimately the day it scales with interest rate increases and new business generation.
<unk>.
Yeah.
Okay. Thank you very much.
Thanks, Chris.
This concludes our question and answer session I would now like to turn the conference back over to management for any closing remarks.
I think we covered it all thank you all for for your interest and time and go chiefs.
This call will be up on the <unk>. The replay will be on our website. Shortly if you have any questions you can always contact investor relations at 16860710.
Thanks for joining us today.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Okay.
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