Q2 2023 UMB Financial Corporation Earnings Call
Yes.
Good morning, or good afternoon, I'm talking to the <unk> financial second quarter and first to cope my name is Adam and I'll be your Robertson for today, if you'd like to ask a question during the Q&A portion of today's call. Please press star followed by one on your telephone keypad.
I'll now hand, the Florida, Kay Gregory SVP and director of Investor Relations to begin the K. Please go ahead when you're ready.
Good morning, and welcome to our second quarter 2023 call Mariner, Kemper, President and CEO and Ron <unk> CFO will share a few comments about our results.
Jim Rine CEO of <unk> 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, which are subject to assumptions risks and uncertainties.
These risks are included in our SEC filings and are summarized on slide 47 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 are on a diluted share basis, our presentation materials and press release are available online at Investor Relations Dot U M B Dot com.
Now I'll turn the call over to Mariner Kemper.
Thank you Kay and good morning, thanks, everyone for joining us today, despite the exaggerated noise from the recent crisis that has largely subsided our second quarter results reflect strong trends highlighted by strong asset quality and overall portfolio health.
Drawn and consistent fee income that helps us navigate this elevated interest rate environment continued yet prudent opportunities and loan growth, particularly in commercial and industrial lending.
Strong client engagement and traction across our diverse lines of business.
These solid results in several areas were masked by higher interest expense driven by the federal reserve monetary tightening actions and the resulting increases in funding costs and the interest rate environment, we live with today.
As noted in our last call the deposit pricing pressures. The industry is experiencing is not just similar to the price of commodity raw materials for other industries.
As other industries would we are reacting to our cost of raw material by pricing our products for this environment.
As we have noted 62% of our existing loans also reprice with movements in rates.
Like others in the industry. We also maintained elevated levels of excess liquidity during the second quarter. This resulted in brokered Cds and borrowing levels higher than we typically carry which also impacted interest expense and our margin.
To help mitigate the continued impact of liability pricing, we maintain flexibility on the asset side of our balance sheet.
We have a loan to deposit ratio on the lower side of peer averages.
Largely variable asset base and strategically planned cash flows.
This is not to diminish the challenges the industry faces from higher interest expense or the rotation of deposits to rate bearing options.
This has had an impact on margins and spread as evident during this earning season.
On the macro front the economy continues to be resilient with some pressures in isolated pockets and industries. It also seems that the bulk of the tightening cycle may be behind us and the prevailing questions are how long will the fed maintain rates at these elevated levels and we ended up with a soft landing.
Okay.
Through the recent industry volatility we've maintained our focus as a growth company.
We reported double digit annualized loan growth excellent credit metrics solid fee businesses, and largely stable and diverse deposit base.
As our cost increase we remain disciplined in pricing our loans and continue our efforts to control operating expenses.
<unk> has a track record of sticking to the business model that has proven itself over time, even as we adapt to changing circumstances.
Now I'll cover a few highlights from the quarter GAAP net income for the second quarter was $90 1 million or $1 85 per share operating net income was $93 8 million or $1 93 per share net interest income decreased for the first quarter as strong loan growth and improved asset yields were offset by increased.
The cost of liability mix shifts.
We have continued to benefit from asset repricing with a linked quarter beta on loan yields of nearly 70%. This is in line with the beta on the total client deposits, which excludes brokered deposits.
Both fee income and expense levels contained a few factors that impacted linked quarter and year over year comparisons as a reminder, second quarter of last year contained a $66 $2 million pre tax gain on the sale of our visa B shares Ron will provide more color on the drivers in his discussion.
We posted average quarterly loan growth of 17, 3% on a linked quarter annualized basis.
Even as we've grown loan balances asset quality remains strong with net recoveries of 139000 for the quarter nonperforming loans were just 0.09% of loans as of June 30, and provision for credit losses was just $13 million for the quarter driven by loan growth in.
Economic variables.
We're incredibly proud of our current and historical credit performance. If you look at our 20 year history, ending with a full year of 2022, our annual losses have averaged just 29 basis points that our 10 year average was 26 basis points.
Well it makes it even more impressive is that over these periods, we have enhanced our reach and footprint through market and vertical expansion and are generally a more complex organization.
We've achieved this through our focus on risk management and with consistent approach that comes from having the same team.
Our allowance to loan coverage ratio further increased two basis points sequentially to 99 basis points of total loans.
Will we believe to be prudent.
Criticized loans were essentially flat from the prior quarter, our total watch list levels, including past loans.
Fluctuate from quarter to quarter, but as evidenced by our recoveries. This quarter, we continue to have very little migration to loss.
The drivers behind our growth in average loan balances. This quarter are on slide 24, nearly half the increase was driven by C&I customers, followed by construction lending and residential real estate, while customer sentiment is mixed with some uncertainty about the economy.
<unk> pipeline remains steady tone.
It'll top line loan production as shown on slide 25, with $986 million, while payoffs and Paydowns represent three 4% of loans in the first quarter. The average for the past five quarters of three 6% in line with our longer term trends.
Commercial real estate and construction growth in the second quarter came in and predominantly in the multifamily and industrial categories credit quality is strong across our book and the CRE portfolio is well diversified by property classification tenant type and geography as shown in the line of business section of this presentation on slide 37 and 38.
Eight.
As we did last quarter, we've included Ltvs recourse and other statistics by property type as well as geographic detail on the portfolio. The office portfolio represent just four 5% of total loans with only an average size of $8 5 million.
Looking ahead into the third quarter, we see opportunities in our various lending verticals across our footprint. We will continue to remain disciplined on pricing further emphasizing lending accompanied by meaningful deposit relationships on the other side of the balance sheet average total deposits decreased $87 million or one 1%.
On an annualized basis from the first quarter to $31 5 billion.
Included in the linked quarter reduction in average deposits were typical public funds fluctuations of $284 million in normal course of business activities such as tax payments.
As we pointed out each quarter activity in our commercial and institutional customer base, along with seasonal public fund balance fluctuations differentiate us from peers with large retail businesses.
Deposit balances will naturally ebb and flow for typical business purposes, including payroll dividends and other activity.
We have deep relationships with long term clients, who rely on you and b not only for deposits, but for multiple financial products and services to manage and grow their businesses.
Our pipeline for new to bank deposit relationships also remains healthy and while nominal we continue to add commercial accounts. Despite the common industry narrative.
While cost of deposit acquisition will mimic current market rates.
We also benefit from cheaper sources of funding and our corporate trust and aviation businesses that can be lumpy from time to time.
To reiterate as I noted earlier, we've been diligent and successful in pricing our loans for the market dynamics around our funding costs.
Slide 30, and 31 shows the composition and other characteristics.
The portfolio at the end of June deposits stood at $33 5 billion, an increase of 5% from March 31, and uninsured deposits adjusted to exclude affiliated and the collateralized deposits were at 41% of total deposits as of June 30th.
Now I'll turn it over to Ron for a more detailed look at our results Rob.
Thanks, Mariner I'll share a few additional drivers of our second quarter results, then I'll discuss some of the key balance sheet items that continue to be top of mind in the current environment.
Net interest margin for the second quarter was 244% a decrease of 32 basis points from the linked quarter drivers included negative impacts of approximately 45 basis points from deposit pricing and mix and 14 basis points related to changes in fed funds purchased repurchase agreements and short term borrowing levels offsets include.
A positive 21 basis points from loan mix, and repricing and 10 basis points from the benefit of free funds and changes in liquidity balances.
The cost of total deposits for the quarter was $2, one 7% excluding broker deposits that we added to enhance our liquidity levels that cost was 195% compared to $1, 62% in the first quarter for our linked quarter beta of 70% as Mariner mentioned betas on loan yields kept pace.
With this quarterly data.
We continue to benefit from the shorter tenor of our asset base, including the fact that 69% of our loan portfolio re prices within 12 months.
Cycle to date, we've seen betas in loans, and total earning assets of 56% and 50% respectively.
Really the beta on total funding cost, which consider the benefit of DDA and the impact of borrowing levels has been 50% while the cost of total deposits has experienced a 43% beta cycle to date.
Our outlook for net interest income going forward will be impacted by a variety of factors, including the shape of the yield curve anticipated fed hikes, along with the timing of those hikes the length of the fed pause timing a rotation out of wholesale funding sources and the replacement cost and potential for any additional disintermediation.
Of DDA to rate bearing categories and continued competition from deposit alternatives.
Our <unk> averaged 33% of total deposits down from 38% in the first quarter driven both by increase in interest bearing deposits and decline in DDA balances.
Our percentage of DDA to total deposits mimics the low point during the 2015 to 2017 tightening cycle wildly.
While we do not anticipate any material changes to these levels. The migration can be episodic and vary from quarter to quarter due to the nature of some of our business lines.
A July rate hike seems to be priced at looking ahead to the second half of the year, we would expect a terminal beta of 50% for total deposits and 60% for loans through the end of this cycle.
We would expect some additional modest margin compression in the third quarter driven by the timing of the July rate hike.
Our reported noninterest income of $138 1 million contained some market related variances, including a $1 3 million decrease in customer related derivative income and a 900 in $2000 decrease in company owned life insurance income.
The $6 2 million linked quarter increase in net investment security gains relates to the impairment of a sub debt security last quarter, along with the increased valuation of equity investments this quarter.
Additionally, we recognized a gain of $4 million on the sale of some noncore assets in the second quarter.
The detailed drivers of our $241 million in noninterest expense are shown in our slides and press release, a few items of note.
We recorded $7 4 million in additional salary and bonus expense largely driven by a $4 9 million severance expense in the quarter and higher salaries related to annual merit increases that were effective in the second quarter.
These increases in salary and benefits line were partially offset by seasonal decreases in payroll taxes and insurance and lower 401K accruals.
Excluding $3 2 million of deferred compensation and the $4 9 million of severance costs.
As well as other typical timing variances, we would put our quarterly starting point expense run rate closer to $230 million.
Our effective tax rate was 18, 1% for the second quarter compared to 28% in the second quarter of 2022.
The decrease rate was driven primarily by a larger portion of income on tax exempt securities for the full year 2023, we anticipate that the tax rate will be approximately 17% to 19%.
Now turning to more detail on the balance sheet I'll start with our investment securities portfolio as shown on slides 28 and 29.
Our average investment securities balances remained relatively flat from the first quarter at $11 4 billion, excluding the $1 $2 billion of industrial revenue bonds and the held to maturity category do.
During the quarter $243 million of securities with an average yield of 2.07% rolled off.
The yield on our total <unk> portfolio increased to $2 seven zero percent in the HTM portfolio, excluding the IRB that I've mentioned had an average yield of 233% for the second quarter.
The portfolio is split roughly 60 40 between available for sale and held to maturity and the RFS book has a duration of just under four years.
Additionally, the portfolio is expected to generate more than $1 6 billion of cash flows in the next 12 months, providing further funding flexibility and opportunity to deploy in assets that have more attractive yields.
The rollout of these securities, which have a blended rate of two 6% will also improve our OCI position over that period.
As of June 30, the unrealized pretax loss on the CFS portfolio with $766 million or 10, 3% of the amortized cost for the HTM portfolio. This loss was $576 million, including the IRB.
Slide 33 highlights our liquidity position along with our contingent sources of funding available to meet customer and operational needs as of June 30, we had $16 billion in available liquidity sources liquidity coverage of adjusted uninsured deposits increased to 117% at quarter end.
Additionally, if needed we have some further capacity to add broker deposits, which could boost the coverage ratio to 129% of adjusted uninsured deposits.
Also on that slide we've included our regulatory capital ratios for June 30th our CET, one ratio improved to $10 six 5% and compares favorably to the peer median.
Tangible book value per share was $52 54, an.
An increase of three 8% compared to the same period a year ago. Since 2018, we've experienced a five 6% annualized growth rate and tangible book value per share.
Our tangible common equity ratio was $6 two 2% at June 30th improving to 790% when excluding the impact of a OCI.
We believe our strong capital and liquidity levels provide the flexibility to support our customers grow our business and deliver returns for our shareholders, while giving us the ability to address uncertainty in the industry as well as any upcoming regulatory changes.
That concludes our prepared remarks, and I'll now turn it over back to the operator to begin the Q&A portion of the call.
Thank you if you'd like to ask a question today. Please press star followed by one on your telephone keypad to enter the queue from the parent to ask you. A question. Please ensure your headsets fully put in an unmetered locally.
I wanted to ask a question today.
And our first question comes from Chris Mccarthy from <unk> you. Chris. Your line is open. Please go ahead.
Okay.
Oh, great good morning.
Brian maybe just starting with the top line and you talked about a little bit more pressure on the margin.
How should we think about just the level of NII.
It feels like we are.
It was near given fairness growth comments, but interested in comments.
Where you see the cadence of it.
Hi, Owen.
Over the back half of the year. Thanks.
I'll take that Chris Mariner and if you say it from.
Promise on that he can.
We've said in the previous comments made.
Mid single digits growth.
And I think that's probably still reasonable.
There are a lot of things a lot of variables, both headwinds and <unk> to shake out for the rest of the year, but.
For what we can see right now.
That holds true with our you know.
Maybe some.
The headwinds remain persistent see how they play out but it's a it's a.
A fair starting place.
The just so unclear.
The.
Mid single digit as full year.
Net interest income growth compared to 2022.
Correct year over year year over year last year's basis about $913 million, yes.
Again, a lot of Merit I said, a lot of moving parts some of which I highlighted right. When the fed is done how long they keep it what might happen with DDA.
Some big deals that come our way from our pipeline things.
And things like that yes.
As you know because of the institutional corporate it's pretty lumpy we can have.
A big corporate Trust deal come in just as is.
As we can have tax payments go out.
It's hard to tell exactly what happens from one quarter to the next.
Okay, but that would that would seemingly imply that.
The step down from Q1 to Q2 would reverse and you'd have growth off of these levels.
My math right.
What you are messaging.
Again, a lot of moving parts, but to Mariners earlier point about that mid single right. There's a lot of these things need to come together for that to happen, but I'm not ready to call a bottom out on NII, but at the same time I'm not saying, it's going to be.
Much lower than where we are.
The loan growth is going to be certainly a driver of net interest income what happened, yes borrowings.
And with the step down from <unk> to <unk> as we highlighted was a lot of the <unk>.
This liquidity that we carry the brokered Cds that we issued in restaurants to some other things going on in March and those are those are coming down right as we go into the back half of the year. So.
Okay.
Maybe just one more on on your capital your balance sheet is in great shape from a capital perspective.
I saw the million share in the release last night from the buyback.
Any thoughts any updated thoughts on just capital return given the market seems to settle a bit.
Well.
The share repurchase approval is to give us that flexibility. We obviously don't have any plans to do that but we want to have that flexibility as we watch the stock price in the market and our company perform in the back half of the year.
I am not sure how to what we did yesterday was the annual cadence that we have for the board to approve some share repurchase authorization typically we've done it in April for 2 million shares and this time around out of Prudence.
Just given the circumstances in our environment, we all find ourselves in we just asked.
Ask the board to approve a 1 million share authorization at this point I would say probably.
Not a lot of.
Appetite to do that.
Because we still see loan growth opportunity like we've said our capital stack is largely going to be used up for loan growth. Yes, that's probably the main answer is loan growth.
That's where that's where the capital is going.
Thanks, a lot.
Thanks, Chris.
As a reminder, that stock followed by one on your telephone keypad to ask a question.
And the next question comes from Nathan race from Piper Sandler. Please go ahead. Your line is open.
Great. Thank you.
Hope everyone's doing well.
A question just in terms of what you guys are seeing from a deposit pricing perspective outside of the portion of the funding basis indexed to short term rates. We've heard from some banks that deposit pricing pressures have slowed to some degree recently curious if you guys are seeing that and to what extent you guys can maybe be more competitive on some rates.
Into the second quarter.
Well.
It's hard really to predict a lot of that I think from my vantage point I think we are coming to the back and a lot of that has to do with what the fed yet to do still to do.
Yes, I think from our we believe that we went through most of this cycle early right.
Having more of a commercial and institutional deposit base.
So.
If what the fed's doing is leveling off which seems to be.
With an announcement of another 25 today, maybe another 50.
Another $25 50 total rate.
The level of increased increases to the deposit rates for us should be.
Leveling out.
We've taken most of that pain I believe so.
That doesn't mean, they're not going to go up slightly but I just think that the rate of increases is definitely coming off.
Okay, Great and then maybe just one longer term question.
Alright again, sorry.
Alright.
Just going to add and when it does level off and the deposit increase rates level off we should still see the increases on the loan side.
Yes that kind of answers my second question.
Mariner in terms of theoretical higher for longer interest rate environment.
<unk>.
We should see some pretty.
Substantial margin expansion, just given the lagging repricing impact on loans and with those short term deposits I'm sorry those.
Short term index deposit repricing slowing that a fair way to kind of think about the cadence of the margin and the type of rate environment.
Directionally, yes.
Yes for sure.
Okay.
I understand I appreciate that you guys don't pay much attention to and if your balances versus the average but.
End of period deposit growth was fairly pronounced.
Hence in the quarter and just curious how you guys are thinking about the pipeline for deposit growth.
It sounds like you know the loan growth pipeline remains pretty solid, but should we kind of expect deposit growth to lag loan growth going forward and I think some of that margin or NII lift.
But you guys are speaking to for this year should be a function of just some of the remix and maybe less deposit growth relative to loan growth going forward or at least some of the next couple of quarters that makes sense.
Yes, I mean, I think the way to think about it.
As in this in this environment with an inverted yield curve and the attractiveness of money market funds off balance sheet funds in this environment.
It is more challenging to grow your deposits at the rate that we were before the inverted yield curve.
So.
We always have the broker Cds and we can always do campaign money.
To keep up with with loan growth in this in this short period before the rate cycle normalizes and when that happens we should be able to.
Pick up the deposit rate of growth again.
But I think for this from the standpoint of view and B. It's important to note that we come into this cycle with a very low loan to deposit ratio.
So we have a lot of room to run with loan growth without feeling like we are stressing our balance sheet. So.
We are.
Sitting here with 70 ish.
Loan to deposit ratio.
For some of them said 70, so we have.
We have room to run there during this and this.
Rate cycle that we're in to protect us there.
To wait for the environment to change and.
Normalized deposit growth.
A few data.
No just the prepared comments that we set about on the institutional side, particularly we have active deposit pipeline that we're pursuing so to your question, yes, it's a difficult deposit environment, but.
Unlike.
Most peers, we have a lot of different sources of funding that's available to us at Mariner walked us through so I'd go back to what we said in our prepared comment yes, I think I was reacting to his specific question about keeping up with the same rate our deposit growth will not keep up with the same rate.
Not grow at the same rate of our loans and were protected by our loan to deposit ratio with that we definitely expect our deposits to grow and I think that.
To Rob's point about the nuance of all our institutional business as you know from one month or quarter to the next we can have an 800 $900 million.
Corporate trust piece of business come in and sit on our balance sheet for six or nine months, just as easily as we can have.
A tax payment go out on the other end so it's.
That's why we focus on the averages instead of the point in point in time.
Gotcha Okay.
One last one for me just in terms of what Youre seeing from a lending competition perspective, I imagine some of the consistent senior pipelines as a function of maybe competitors pulling back and maybe more liquidity constrained as you guys, but would just be curious kind of your where you guys are seeing particular growth in what's going on competitively Thats also kind of supporting the strong pipeline coming out of the second.
Quarter.
Yes. This is Jim Ryan.
We're seeing plenty of opportunity still and rates remained competitive as they ever happened and we have seen competitors pulling back I think it's a common theme right now as it relates to.
Banks are looking for full relationship more than transactional lending and if it doesn't come with the.
Opportunity doesn't come with additional funding.
Folks are taking a much stronger look at whether or not they want to.
Pick out a particular large opportunity like CRE for instance, or even participations, so, especially in the <unk>.
Syndication banks without additional fee income or additional deposits are definitely pulling away from those regarding pricing.
Banks are still looking for loans.
Good.
Credits are still able to command a decent.
A decent rate.
Marginally we are seeing more rate on everything that'll obviously with it.
Which is why our betas are doing so well.
We expect as we as we've been doing in the past we tell you what the next quarter it looks like pipeline wise and.
This quarters coming quarters pipeline looks just as good as last quarter.
Okay great.
Wish you all the color. Thank you.
Thanks Nate.
We have no further questions at this time, so I'll hand, the call back to the management team for any concluding remarks.
Thank you to everyone for joining us today and as usual if you have any further questions you can reach.
Okay.
Hey.
710.
Thanks, and have a great day.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
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Please today's cool. Thank you very much for your attendance you may now disconnect your lines.
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