Q4 2022 UMB Financial Corp Earnings Call
Hello, everyone and welcome to the U M B financial fourth quarter 2020 financial results call. My name is David and I'll be coordinating notebooks day.
If you'd like to register a question. Please press star one on your telephone keypad.
I'd now like to hand, the call after your highest Kay Gregory with Investor Relations to begin the case. Please go ahead, good morning, and welcome to our fourth quarter and year end 2022 call Mariner, Kemper, President and CEO and Ron Shelton CFO will share a few comments about our results Jim Rine CEO of really bad and commentary Chief Credit Officer will answer.
It will be available for the question.
Yes.
Before we begin let me remind you that today's presentation contains forward looking statements, which are subject to assumptions risks and uncertainties. These.
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 laws.
All earnings per share metrics discussed on this call around a diluted share base.
Our presentation materials and press release are available online at Investor Relations, Scott <unk> Dot com.
Now I'll turn the call over to Mariner Kemper.
Thank you Kay and happy new year, everyone. Thanks for joining us today.
I'll make some brief comments about our quarter in 2022.
Then turn the call over to Ron for a review of our results in more detail before we take your questions.
Our fourth quarter results closed out another record year of earnings driven by strong balance sheet growth solid credit metrics and contributions from our differentiated fee income sources.
Net income for the fourth quarter was $100 2 million or $2.06 per share for the full year 2022, net income of $431 7 million or $8 86 per share an increase of 22, 3% compared to 2021.
Operating pre tax pre provision EPS for the year was $11 73 per share compared to $9.26 per share for the prior year.
Net interest income for the fourth quarter increased 5% sequentially. This was driven largely by an over $1 billion increase in average loans, which is up 21% increase on an annualized basis, the impact of rising rates positive asset mix shifts and loan fees. This was partially.
As indicated by an increase in deposit costs, largely driven by deposit initiatives to attract new to bank customers, particularly in our commercial business. Additionally, we saw some continued market pressures in our rate sensitive institutional business.
As we've noted in the past our business profile and funding. This is uniquely skewed in favor of commercial and institutional customers. These sources experienced different pace and timing and some of our more retail heavy peers and the re pricing environment. We are in today.
Tegra today, we've had a beta of 54% on interest bearing deposits and 33% of total deposits our deposit pricing. During this cycle is generally in line with our internal expectations and consistent with what we've been talking about publicly.
We tend to focus more on total funding costs, which considers the benefit of DDA balances and the impact of borrowing.
It's 36% cycle to date.
And we benefit on the asset side as well with effective the day beta of 53% on loan yields 60% of our loans reprice within the next quarter and 70% in the next 12 months. We expect this re pricing combined with our outlook for loan growth will continue to drive good growth in net interest income.
Pipeline and sales activity in our fee businesses continue to be strong across the company driving year over year noninterest income growth notwithstanding some market related variances.
I'm excited for the opportunities, we see in 2023 and beyond.
This on our various lines of business are included in our slides and Ron will share a few details shortly.
We've long focused on our goal of positive operating leverage rather than specific revenue and expense levels for the full year of 2022, we generated leverage of six 7%.
This continues to be a focus for us and we expect to generate positive operating leverage again in 2023.
Moving to limiting the drivers behind our 21% linked quarter annualized growth in average balances. This quarter are on slide 23.
Total top line loan production as shown on slide 24 remained strong at $1 3 billion for the quarter, bringing full year 2022 originations to a record $5 billion.
Payoffs and pay downs represent three 4% of loans for the fourth quarter.
While we and Fairbanks has seen some slowdown in the sale of the refi markets.
Are hard to predict from quarter to quarter. The average for the year with just over 4% in line with our longer term trends.
C&I lending provided nearly half of our $1 billion of average loan growth for the quarter with balances increasing 21% on a linked quarter annualized basis.
<unk> demand continues to be strong and we're seeing robust activity within our existing customer base line utilization has ticked up from last year and was at 37% for the fourth quarter.
Commercial real estate and construction loans close to 25% annualized growth in the fourth quarter predominantly in multifamily and industrial properties.
Instructions represented a large portion of new commitments in 2022, So we will see the additional impact imbalances as those loans begin to fund <unk>.
Average residential mortgage balances have increased 21% over the fourth quarter of last year, despite the impact of rising rate environment.
Our down payment assistance program for the first time homebuyers and more than 600, new applications, resulting in $2 $9 million and assistance in 2022.
Looking ahead to the first quarter, we see opportunity in our various verticals across your footprint and we expect continued strong growth to kick off 2023.
Credit quality remains excellent net charge offs were just four basis points of average loans for the fourth quarter and 21 basis points for the full year nonperforming assets comprised of modest five basis points of total assets.
Provision for the quarter of $9 million was driven by our continued strong loan growth portfolio metrics and changes in the macroeconomic environment.
Our reserve coverage is now at 91% of total loans.
Back to the balance sheet average total deposits for the quarter increased five 3% or 21% on an annualized basis compared to the third quarter, our deposit initiatives in commercial banking brought in more than $1 billion. During the quarter DDA balances remained steady from the last quarter and represents 40% of average deposits compared to 40.
2% in the third quarter and 41% in the fourth quarter of last year.
The economic data continues to be a paradox with the labor market signaling a soft landing, but other indicators like index are signaling a more prolonged recession.
We have ongoing dialogue with our clients about their business and outlooks and borrowers are generally seeing good pipeline and many are reporting that supply chain issues have mitigated somewhat however, caution remain as finding talent to support growth maybe.
As I mentioned, we see good growth opportunities in the first quarter and although we continue to closely monitor early warning indicators, we're not seeing any broad concerns.
Overall 2022 was a very strong year, while the unpredictability of the current rate environment is challenging our time tested business model and relationship based culture continues to perform well and we're off and running as we started the 2023 of the year with a goal to maintain positive operating leverage regardless of the Hell.
And direction of the economy now.
Now I'll turn it over to Ron with some additional comments wrong.
Thanks, Mariner, let me start with some commentary on balance sheet trends with our liquidity profile as shown on slide 40, our fed account reverse repo and cash balances rebounded slightly to $1 8 billion and now comprised five 1% of average earning assets with a blended yield of 365% compared to two 3% in the third.
Quarter. This was driven by our deposit campaign as well as seasonal inflow of public funds deposits.
Cash flow from our securities portfolio continued to help fund loan growth opportunities during the quarter.
On slide 27, the portfolio roll off for the fourth quarter was $246 million with a yield of 194%, while we purchased $84 million in securities primarily CLO with a yield of five zero to 4%.
Additionally, the portfolio is expected to generate over $1 billion of cash flows in the next 12 months the yield on those securities Rolling off is approximately 2.0% to 3%.
While treasury yields present, very attractive reinvestment levels, our priority is to fund the opportunities we continue to see in our lending verticals.
Loan yields increased 89 basis points from the third quarter to 535% with the linked quarter beta of approximately 61%.
The total cost of deposits, including DDA was one 2%, 3% up from 65 basis points last quarter.
Net interest margin expanded seven basis points from the third quarter. The largest positive NIM impacts included approximately 52 basis points from loan repricing loan fees and mix 34 basis points for the benefit of free funds at seven basis points from reduced liquidity balances and rates.
Offsets included a negative 94 basis point impact related to the cost and mix of interest bearing liabilities.
As we look ahead there are a lot of variables at play that will impact the trajectory of our net interest margin, including the depth and duration of fed tightening cycles outlook for equity markets and that impact on deposits expected disintermediation of DDA balances of ECR rates further increase and our own need to generate additional deposits.
Through targeted campaigns to fund loan growth.
Based on our own simulations, we expect our first quarter net interest margin to be flat to slightly up from fourth quarter levels. Additionally, we stand to benefit when the fed pauses as the pressures on our index deposit book up base and asset yields benefited from the current repricing environment and rotation from investment Securities.
Mariner noted while the focus on deposit beta on the NIM is important we also focus on net interest income growth facilitated primarily by loan growth.
Additionally, we typically manage the loan to deposit ratio limit of 75% in the fourth quarter average deposit growth kept pace with loan growth keeping our ratio steady at just under 65%.
Given our strong loan growth outlook, we will continue to focus on deposit and client acquisition across all our lines of businesses.
Back to the income statement total fee income for the quarter was $125 5 million compared to $148 7 million for the third quarter, we saw some market related declines, including a $2 $3 million decrease in company owned life insurance income along with a $900000 decrease in customer related derivative.
Income.
Colby coverage was just 21000 in the fourth quarter versus $2 3 million in the third quarter has a similar offset in deferred compensation expense.
For the full year 2020 to 18, 6% increase in fee income included in investment security gains and losses, driven largely by the gain on our sale of visa class B shares in the second quarter.
Outside of these gains we saw positive results from several businesses, including $31 million of additional brokerage fees related to higher <unk> and money market revenue sharing costs. Despite market related compression was 11% and the underlying money market balances compared to year end 2021.
Trust and Securities processing income increased five 8% year over year and included strong contributions from fund services and corporate Trust.
For the full year, we had a decrease of $10 million coli income with a similar decrease in deferred compensation expense.
Slide 22 shows trends in noninterest expense the two 8% linked quarter increase was primarily driven by an increase of $2 6 million in processing fees largely software costs related to the ongoing modernization of core systems $2 1 million in additional marketing and business development expense driven by.
Increased advertising for various campaigns and projects.
And $1 8 million of increased charitable giving included in other expense.
Additionally, as I mentioned last quarter, our amortization expense increase related to the acquisition of HSA deposits completed in the fourth quarter.
A few items to note for the expense levels going forward as is typical fourth quarter expenses included several timing related variances along with some nonrecurring items considering those variances, we have put our quarterly starting point closer to the $225 million to $247 million range.
Also keep in mind that first quarter expenses are typically higher due to seasonal reset of payroll taxes and other benefits expenses.
Acquisition of HSA deposits will add approximately $4 $5 million of additional amortization expense annually.
And as previously mentioned the increase in FDIC assessment rate takes effect in the first quarter. As a reminder, we estimate this will have an approximate annual impact of $6 million pre.
Pretax.
As Mariner noted our focus remains on generating positive operating leverage while prudently investing in our businesses.
Our effective tax rate was 19, 1% for the fourth quarter at 18, 9% for the full year, reflecting a smaller portion of income from tax exempt municipal securities along with changes in KOL evaluations for the full year 2023, we anticipate it will be approximately 19% to 20%.
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.
Yeah.
Thank you.
A reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad.
If you would like to withdraw your question. Please.
Look my T.
Im going to ask your question. Please ensure you Amit you'd likely see that star followed by one on your kind of thanks Pat.
Our first question today comes from Eric <unk> from Wells Fargo. Jared. Please go ahead. Your line is open.
Hi, This is John Rob on for Joe Chang.
Hey, Joe.
Good I guess just big picture.
I guess going into potentially a recessionary environment, we've heard a few banks.
Talk about maybe tightening the credit box a little bit I guess could you just talk about if you're thinking about doing anything similar or if youre seeing any signs of hesitation or caution from our borrowers on the ground.
Jonathan Thanks for the question. This is Mariner I would you know for US for those of you followed us for a while you know we really don't do anything different.
And any type of environment, we saw we stick to our knitting.
Look for the good quality opportunities and we don't reach during the good times and we don't retract during the tougher times or kind of.
Stick to what we know and stick to doing it how we do it in.
So that's the backdrop for how we're making decisions as it relates to kind of what we're hearing and seeing on the ground.
Customers and prospects are still talking.
Actually optimistically about the environment for the year revenue projections and conversations seem to still be.
Pretty pretty steady I think the challenge that we hear from our customers really is about the hiring environment.
But as it relates to.
Selling goods and moving goods everybody seems to be.
Cautiously optimistic about that and we are as we normally do we give you a little look into what we see for the first quarter and pipeline remains strong for the first quarter.
Yeah.
Okay, great. Thanks, that's good color and I guess, just one other area.
Closed the HSA acquisition.
The fourth quarter could you just talk a little about.
The outlook for that for your competition competitive positioning I guess in that market with some pretty large players kind of dominating.
At this point.
Hi, This is Jim Ryan we did close the.
Yes.
The conversion went extremely well we picked up they have.
Very successful direct to employer model and that has been our strategy moving forward.
Backdrop looks good as far as on a national level.
The government is in.
It's been very quiet, so we don't anticipate any changes as far as the need for HSA.
<unk> is going away our pipeline looks.
<unk> strong regarding our competitors were obviously more focused on what we're doing but we feel like we have a extremely competitive platform.
It will allow us to deliver a better experience throughout our footprint.
With what the competitors are doing we are truly more focus on us, but we've been able to compete in this space for a long time and we are one of the original pioneers in this space. So we feel very good about our position going forward.
We're in the.
We're in this space to stay and we're excited about it yeah. The only thing I'd add is.
The technology platform and the backdrop for the business is really using the rails, we have already for for all of our other businesses. So it's a very leveraged level business and.
Being a big commercial banks, largely that's been largely what we do this direct with our attractive business.
This model, there's a lot of opportunity within our own.
Customer base to continue to grow and it's all about the enrollment season, and just our current customers and new.
New commercial customers, adding.
Adding employees to the enrollments.
Yeah.
Okay, great. Thank you for answering my questions.
Thanks, Joe.
Thank you.
Question is from Chris Mcgratty from <unk>, Chris. Please go ahead. Your line is open.
Right.
Great Good morning.
Brian maybe a question for you.
Just on the balance sheet or if I'm thinking about your comments on loan to deposit you have room there.
And you can be more selective on deposits.
But if I look at just the total deposits at the companies you're talking about 8%. This year, how do I I guess, how should we think about just the.
The pace of incremental one off.
It feels like you've got roughly a $1 billion of cash flow coming off the bond book to fund loan growth I'm, just trying to get a sense of the moving pieces here.
Yeah, and Christmas Mariner cut.
A couple of high level comments, and if theres more.
Detail you want to do Rob can add some color, but I think really what I would focus on we don't really expect run off we expect rotation.
And so it's really more about what happens to demand deposits. We have a very very strong pipeline and ability to grow deposits. So we can bring deposits on at market rates and fund growth no problem. So really really the challenge for us, which we think we're good at is being disciplined pricing the assets.
So as we bring on loan growth.
Kind of as we just as we discussed last quarter.
Our ability to be disciplined on maintaining and slightly growing margin is more important than what the absolute cost of the deposits are coming on so we're not concerned about that where and we we feel strongly that we can continue to price.
<unk> on the asset side to maintain.
Maintain our margin if not grow it slightly.
Right.
Well the only thing I would add Chris to that isn't Nols, We said our loan to deposit ratio is now 65% right. If you look at the last couple of quarters of loan production and what's happened there at the same pace continues we could see our loan deposit ratio tick loved to close to 70%, which we're comfortable with as I said in my prepared comments.
That is to stay below 75% on the loan to deposit ratio will deposits fund one to one of what we see on the loan growth, probably not but thats, where the $1 billion of securities that you talked about in terms of outflows comes in so.
Mariner said, we're focused we're focused on making sure we stay liquid fund the balance sheet with customer acquisitions.
That's really great, Thanks, Ram and Mariner.
On the mix of your deposits.
I'm looking back pre Covid, you were kind of in the mid thirties.
Noninterest bearing you got as high as 46, you kind of.
Low 40, <unk> now I guess, how do I, how are you thinking about it.
Internal migration, given the competitive alternatives for rates today.
Yes, So I think that's the million dollar question, Chris when you get the answer to give us a call. So we can so we can plan, but I think you know.
The conservative way to think about it right as well.
We got down to 32 last time.
Could it get to 35 or something this time.
Probably maybe based on history. That's possible. However, there are a lot of other things going on from the growth of our customer base in general.
<unk> added a lot of small business customers that have a low loan to deposit ratio over the last few years.
We've got a lot of other initiatives and customer bases are our aviation corporate trust business is relatively new in those demand deposit balances have been growing so you know.
Last cycle, we got down to 32 is the history repeat itself is the world different as our customer base different we're not sure. We're not sure exactly what happens we do believe there will be some rotation from demand.
This year, it's still too to interest bearing we're just not sure how much the.
The internal debate we have here.
Because we already saw a lot of that last year. It has it already happened right. So it's one of the questions that we debate internally is as that shifts taking place as everybody who wants to move to higher interest bearing deposits already taken that action, we don't really know the answer to that.
But that's so that's some of the internal debates but to be conservative thinks.
Thinks about less you don't think about the last cycle I suppose.
That's helpful.
I really appreciate it the last one I would have is.
Just kind of zooming out right if I think about.
Bullish comments on loan growth, but just call it stable comments on margin.
It would feel like the net interest income for your company has had yet to peak because I think that's a narrative that's going around among bank investors, where a lot of your peers are seeing margins and revenues top out at I guess would you agree or or offer any thoughts on that.
We expect to see net interest income continued to grow because we're a growth company.
Like I said earlier, two things we focus on.
Would be net interest income growth based on just growth period.
As well as our growth for the balance sheet and then the other thing we think we can do during this environment is is produce operating leverage so.
We're less worried about the absolute expense levels of the company because we're investing in our business for growth and and then on the other side because we have a long track record of building pipeline.
We will continue to.
We've been doing double digit loan growth since 2015.
And.
It's there's nothing about our business model that would suggest that we can't continue to do that we have new markets, great New markets, we've expanded into Utah any Atlas, Texas are our three markets for us that we have Fabulous track records and great people on the ground.
We're seeing really good traction there along with all of our other great markets. We see the same great opportunities and traction and remember we don't we don't project or predict our loan growth based on what's happening with GDP anyway.
Our loan growth is based on market share gains so depending on regardless of what's going on economically. We think we can continue to deliver the same kind of loan growth that we've been delivering.
Great. Thank you very much.
Thanks Bruce.
Thank you as a reminder, if anyone would like to register a question. Please press star followed by one on your telephone keypad now.
Our next question today comes from Nathan race from Piper Sandler.
Please go ahead your line is open.
Yes.
Good morning, everyone and I appreciate you guys taking the questions.
Good morning.
A question on just kind of the.
Longer term or perhaps kind of full year margin trajectory over the course of this year.
You guys kind of thinking about what you are paying on incremental deposits outside of the index deposits.
To date do you see some additional margin expansion potential in the back half of this year, just given maybe some lagging repricing within the loan book relative to maybe kind of the incremental cost of deposits that you guys are gathering based on some of the initiatives that you guys outlined earlier.
Prepared comments.
Assuming the fed pause.
Alright.
Yes, yes.
Yes, David This is Ron yes, definitely we see some opportunity for margin expansion, if the fed does pause and hold right. So the pressure on our index deposits as Mariner said earlier, where we are being disciplined on the loan side.
Paid market rates on the deposit side that will still be accretive to our margin. So that's been our focus so when you. When you think about what happened last night. It was the same thing repeated itself, where our margin did expand when the fed pause.
Okay great.
Expensive benefit.
Sorry, Martin benefit expansion also comes from the rotation that we talked about from if you look at the next 12 months of cash flows from the Securities book that as a 2% exit yield and obviously our loan pricing is much better than that and we pick up yield of that.
Gotcha.
Within that context curious you guys have the spot rate on deposits at the end of the quarter.
If you can exclude or isolate the indexed deposits.
We don't disclose that we don't get into that detail.
Okay fair enough and changing gears Ram.
I think in your prepared comments you mentioned starting point for expenses in the $2 45 to 240 range for the fourth quarter.
Did I.
225 to $2 47.
Okay great.
And within that guidance I mean, as you guys kind of think about some additional.
Modernization.
Initiatives that you guys are outlined here on the core system side of things or otherwise.
How does that kind of factor into just kind of overall expense growth.
For this year in light of the.
Inflationary environment that we're seeing for.
Wages and so forth these days.
So I mean high level. So the run rate that Rob was talking about is inclusive.
Of whatever spending we're doing to modernize and invest in the business. It's all in there.
In that step off that he is referring to the step up in the 227 that I talked about obviously, there's an inflation on top of that new contracts are coming up we are making some.
Collective investments in people and technology and then as I said in the first quarter will have the reset of payroll taxes and other benefits expense and then this obviously less couple of less salary day. So I would expect the trajectory from the $2 27 for the first quarter to go up just because of the pressure from primarily seasonal.
Yes.
And as you guys look at kind of criticized classified trends across the portfolio. Obviously, you know non performers are pretty negligible negligible.
Negligible amount as we ended the year.
Have you seen anything across portfolios and you're in discussions with clients that would perhaps cause you guys to come in kind of below your historical charge offs.
Guidance I think you guys have spoken to around the 25 to 35.
Uh huh.
<unk>.
Historically.
When you say below do you mean more losses or do you mean better better performance.
I would ask that question, which way you're asking the question.
I would just I would think that you know perhaps charge offs. This year can come in below or.
Better than historical country talked about Mariner.
Well I guess I would suggest that.
You know.
As has been referenced on the call already it's a softer environment I mean, I wouldn't suggest us too.
We're going to do a lot better or anything because for any any reason I mean, we expect that we can continue to perform the way we have been performing.
Don't see anything that.
On the horizon that makes it any.
Anything better based on any information that's out there I think we can just keep doing what we've been doing.
Okay, Great I appreciate guys, taking the questions. Thanks for the color.
Thank you.
The questions. We have today, so I will now hand back over to the management team for any closing remarks.
Alright, well, thank you everyone for joining us today.
The replay will be up on the website shortly and if you have follow up questions. You can reach us at 8168607106, Thank you and have a great day.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Yeah.
[music].
Sure.
[music].
Yes.
[music].