Q4 2023 UMB Financial Corp Earnings Call

January 31, 2024

Ram Shankar: Net loan growth, the quality of our portfolio, including the low level of net charge-offs, and macroeconomic variables that seem to expect a softer landing. As we look into the first quarter, we expect provision to be impacted by a small acquisition of a co-brand credit card portfolio expected to close in March, which will add approximately $125 million in balances, with a day one provision of roughly $6 million, an ongoing provision based on portfolio performance, growth, and macroeconomic variables. This acquisition will also add approximately $10 million in net interest income, $2 million in interchange fees, and a break-even pre-tax and pre-provision profit in the first year, excluding conversion and integration costs. On the fee income side, reported results included some market-related variances, including increases of $3.7 million in company-owned life insurance income and $567,000 in customer-related derivative income. Trading and Investment Banking Income Increased $2 Million, Primarily Related to Municipal Trading Volume. The detailed drivers of non-interest expense are shown in our slides and press release and, on a GAAP basis, included the recognition of the 52.8 million FDIC special assessments. On an operating basis, expenses increased $6.9 million, or 3% from the third quarter, to $235.9 million.

Ram Shankar: Detailed variances are included on slide 22, but the largest impacts were 3.1 million in deferred compensation expense, an increase of 2.7 million from the prior quarter. This is the offset to the increased calling income. 2.3 million related to the pre-buy of computers in the fourth quarter, and 1.5 million in additional charitable contributions.

Ram Shankar: Partial offsets included a $1.6 million decrease in payroll taxes, insurance, and 401k expense and a $467,000 reduction in bonus and commissions expense. Excluding the one-time items and timing-related variances, our core expense run rate in the fourth quarter was approximately $230 million. Please note that in addition to the impact of the co-brand card portfolio acquisition, first-quarter salary and benefits expense will increase with the impact of the extra leap year day and for the typical seasonal reset of FICA and payroll taxes. Our effective tax rate was 17% for the full year 2023, compared to 18.9% in 2022. The decrease in the rate was driven primarily by a larger portion of income from tax-exempt securities and variations in levels of COLE income.

Operator: For 2024, we would expect a similar tax rate ranging from 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. Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak.

Christopher McGratty: Our first question comes from Chris McGratty of KPW. Please go ahead. Hi, this is Nick, the topic of conversation for Chris. Hey, morning, Mick.

Nick: Hey, there. I maybe just start out on the margin, you know, given the potential for, Yeah, okay, great cut, coming later in this year in 24. Can we see the margin continue to expand into 24 with, you know, more back book repricing and and continue to make shit? Sure, Nick. This is Ram.

Ram Shankar: And we don't give any forward guidance other than what I said in my prepared comments about, you know, there might be some modest compression in the first quarter because of the excess liquidity that we saw in the fourth quarter going away. But as we said in previous calls, the higher for longer scenario is a good scenario for us because, as you've seen in the last couple of quarters, the pressure on deposit costs has largely abated for us. And then our loan yields are still recouping higher, so loan yields will at least be better than cost of funds for us. And then there are a billion six securities that are rolling off at 2.2% that we can invest in the current rate environment.

Ram Shankar: So, you know, I think we're close to the trough on margin. Any particular quarter might have been flowing a little bit, a few basis points here and there, but I feel good about our margin trajectory until the Fed starts cutting at some point in 2024. And some of the nuance, one way or the other, you know, the strength of what happens to our demand deposits also hangs in the balance. Great. Thank you.

Ram Shankar: And, you know, maybe, maybe also depend on the revenue outlook, I guess a little bit, but could we see positive operating leverage in 2024, depending on the expense growth. Well, you know, I think we remain focused on operating leverage. And again, based on the guidance question, we don't really give guidance. What I would say is that, you know, the the environment that we come into 2024 with from 2023 remains from a standpoint of elevated interest expense and the interest rate environment, and because of that, demonstrating absolute strength on operating leverage remains challenging. We'll continue to do everything we can and work against it. We believe, on a relative basis, it will outperform on Operating Leverage. Great. Thank you for taking my question. Thank you, Nick. Thank you. And as a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. We have a question from Nathan Race of Piper Sandler. Please go ahead; your line is open. Yeah, hi guys. Good morning, and congrats on the win.

Nathan J. Race: Just a question on the NII sensitivity. You know, I appreciate the disclosure in the background. You know, a 100 basis point decline rate is about a 3.1% impact on NII in year two. Just curious to what extent you think that can be offset by just the volume of, you know, kind of continued margin accretive growth in both loans and deposits going forward and also with the cash flow you have coming off the securities portfolio as well. Yeah, you hit the nail on the head there, Nate. That is a static analysis, as you know, right?

Ram Shankar: So it's all based on just cash flows coming in and being reinvested in a new environment. And so the net interest income projected in that baseline scenario of minus 100 in year two does not include the impact of any growth and any actions we might take, right? You've seen us, and you've seen our disclosures that we put on some swaps and synthetic hedges as well. So we'll do additional, we'll evaluate it on a periodic basis and put on additional hedges to protect ourselves from a downrate environment. But, you know, that's just a statistical modeling of what would happen to our balance sheet. Of all things, we're kept the same on a static balance sheet basis. So we can take steps to mitigate it.

Ram Shankar: And so that's another layer that we'll add on to it. And as you think about looking forward into 24, we typically give you a 90-day look forward. Loan growth in the first quarter looks stronger than it did in the fourth quarter. So the signs continue to be good. Okay, great.

Ram Shankar: And then just within that context around kind of the NII trajectory and deposit costs, you know, I think you guys have about $2 and a half billion in wholesale funding maturing in the first half of this year. How do you guys think about replacing that? Is the cash flow off the securities book going to be one lever, and then any other kind of thoughts on how we should think about those wholesale sources? Yeah, on page 31, on the bottom right, we have all the wholesale funding. Obviously, as you can see, we have about $1.6 billion in brokered CDs. Given our deposit pipeline, which remains strong, you know, we might not need all of it, right? So, there's a potential for the way market rates are at that point, and we may link in for half of it or something less than that. The other one that's maturing, that will mature in the second quarter, is a billion dollars of club advances. And then we have BTFP, which will extend into January.

Ram Shankar: Again, we'll evaluate it based on collateral needs. We'll base it on where market rates are. We'll look for spreads and all those things. But we don't need any of those tools, really, given our liquidity position and our loan to deposit.

Ram Shankar: But we'll take it, you know, as the environment evolves. Yeah, I think that Rob's comment about the brokered CDs is that we may not need them, but we may roll back into some of them just because by the time they come due, rates will likely have come down, and we can have positive arbitrage on them. So, it might make sense to roll back into some of them just from a profitability standpoint. Okay.

Tom: Very helpful. Maybe just turn to credit, you know; curious to hear perhaps from Tom in terms of what occurred in the quarter in terms of criticized classified trends. And, you know, obviously, charge-offs have been very low over the last few quarters, you know, and I think in the past, you know, we've talked about a normalized charge-off range of the 20 to 30 in the United States Marine Corps. I'm a senior instructor in the Marine Corps as well. So I do have a few questions about the Marine Corps and really just wanted to know the range.

Tom: So just curious, you know, just given where MPA stands and, you know, based on the commentary around criticized trends, if you think we're going to get back to that historical range at some point this year or into 2025. You know, Nate, that's my favorite question, because it's the thing that we're really most proud of. And, you know, I think that when you think about this investor community and looking at your alternatives and the investment pieces, looking into banks, the thing that you look at with us is, I'm sitting at the table right here with two other guys that have been making credit decisions with me for 20 years through all of the cycles that we've looked at, and we've outperformed the peer group in all of those cycles, and when we talk about 27, 28 basis points If you look at page 26, you're just you're just looking at our history.

Tom: And one thing I would note about that in our investment deck is while, yeah, the average over 20 years is higher than the two basis points we have in the fourth quarter, you have to recognize that that comes with a lot of growth. So if you go back 20 years ago, the first year I was CEO, we had $2.7 billion in loans with 20 basis points of charge-off. Today, we have $23 billion in loans with two basis points of charge-off.

Tom: So, in the context of... a much greater opportunity for loss, we've maintained a very, very low operating charge, and that's because of consistency and continuity of approach, and you know we make this easy for you guys because you can look at the history. Most of the banks you look at have different teams and turnover and change and strategy change and acquisition. Whatever it is, you're staring at the same company with the same team and the same results. We will outperform, and if you look at the charge-off history over the last 20 years, us against the peer group, we have a chart, the second to the page before that shows the, It's in a different, it's in a, you know, we have a chart that shows us against a peer group, and the point is, if you look at a recessionary period. Our line, our delta line stays very close to the bottom axis of a chart, while the shark fin that takes place with the industry.

Tom: That's what happened in the last crisis. We expect that to happen. If you look at it through the fourth quarter, you can see it already taking place.

Tom: Our numbers don't move, and the peer groups and the industry are starting to move up. We expect that to be the case again, whatever the absolute numbers are, I can't tell you. But the relationship to the peer group and the industry we expect to remain the same. Okay, great. Very helpful. And just one last one.

Mariner Kemper: You know, it seems like a lot of the growth in the quarter came on the commercial real estate side of things. So just curious, you know, in terms of the composition of the pipeline entering 2024 and kind of where you guys are seeing pretty pronounced opportunities to grow loans today. You know, long growth. We've been saying this for a really, really long time. We call it the, we have a long runway for growth, both geographically and vertically, across our footprint and our national footprint related to our ABL business, largely because of market share gains. We expect that to remain the same. The caveat to that would be if we do have a softening economy, the rate at which we would grow on an absolute basis may come down from what our expectations are of ourselves, but on a relative basis.

Mariner Kemper: We would expect ourselves to continue to outperform on loan growth for the same reasons we always have. For 20 years, we've done that. And we expect that to continue again for the very same reasons, which would be more market share driven. Then they are economic conditions driven.

Mariner Kemper: So nothing new there. The absolute number could come down a bit from what we did last year based on what economic conditions are. But again, you're buying on a relative basis, and we would expect ourselves to outperform on a relative basis. Mark market specific; it's still coming from the major metros.

Mariner Kemper: Utah has been a nice growth market for us, where we have a low production office, and that seems to continue to build. But we are seeing a strong traditional operating company, CNI, and its Liz Merritor stated it's market share driven. And first quarter, as I said, looks stronger than fourth quarter, if that's any indication, right?

Nathan J. Race: We have a harder time ourselves looking beyond the first quarter, but if the first quarter is an indication of the rest of the year, it's stronger than the fourth quarter, pipeline wise. understood. Very helpful. And if I could just ask one last one, get any change in credit rates, credit ratings across, I think, 4% of loans that are tied to office space. CRE. I'm not sure I understand the credit rating question.

Nathan J. Race: What do you... Oh, man, I'm in there. Risk rating. Excuse me, Mariner. So you have seen any migrant migration office by risk rating?

Mariner Kemper: Excuse me. Oh yeah, we've had very little, if any, deterioration in our office portfolio. It's remained strong. It's four and a half percent of the portfolio, as you said. A couple of statistics.

Mariner Kemper: Forty-five percent of our office portfolio is single tenants, which adds a layer of strength there in terms of rollover. And strong sponsors, which we've talked about in the past. We have seen basically no deterioration in that portfolio and don't really see anything coming on the horizon. They're performing. A lot of the leases, the underlying leases on these office projects go out to 27 and beyond. Roughly 70% of those leases are for 27 and beyond.

Mariner Kemper: So in terms of rollover in the short term, Bury Man, Okay, perfect. I appreciate the color. Thank you. Thank you. Thank you. Yeah, thanks, everybody. Looks like that's the last question.

Mariner Kemper: Just want to reiterate something, you know; we're really proud of the year we had in the quarter. And I think, at the end of the day, we do what we say, and we say what we do, and we've been doing it for a long time. And, you know, we've demonstrated strong outside loan growth, deposit growth, fees, Spence Control, year in and year out, and I think this is good news for the investor population as they think about us, and you should know what to expect from us. And we did it again in the fourth quarter, and we're more thrilled than ever about the fourth quarter because we were able to sort of put to bed a lot of the nonsense and the narrative. As I like to say, don't let facts get in the way of a really exciting narrative that the pundits like to deliver last year.

Operator: And so, on behalf of everybody on the call, we're happy to have delivered what we did in the fourth quarter to kind of put some of that nonsense to bed. And so we'll just keep doing it for you. We're really proud and excited about what we delivered, and we're just gonna keep doing it for you. So thanks. Thanks, Mariner. If anyone has follow-up, you can always reach us at 816-860-7

Operator: And we appreciate your time. Thanks for joining us today. This concludes today's call. Thank you for joining us. You may now disconnect your...

We'd like to ask a question during the Q&A session. You can do so my question Star followed by one on your telephone keypad.

[music].

Hi, George its Kay Gregory with Investor Relations to begin. Please go ahead.

Good morning, and welcome to our fourth quarter 2023 call Mariner, Kemper, President and CEO and Ralph Shakur, 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.

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 45 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, and unless otherwise indicated comparisons are versus third quarter 2023.

Net operating income discussed here and in our slides excludes the FDIC special assessment and certain other expenses and as reconciled in our press release and slide deck.

Hello, All and welcome Jake you MB Financial's fourth quarter and full year 2023 financial results scope.

My name is Lydia and they'll be operated today.

Presentation materials are available online at Investor Relations Dot <unk> Dot com.

If you'd like to ask a question during the Q&A session. You can do so my question still slipped by one on your telephone keypad.

Now I'll turn the call over to Mariner Kemper.

Now I enjoy this Kay Gregory with Investor Relations to begin. Please go ahead.

Thank you Jay and good morning, before I get started I've got to talk about some very important business.

Good morning, and welcome to our fourth quarter 2023 call Mariner, Kemper, President and CEO and Ralph Shakur 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.

Congratulating, our hometown heroes, the Kansas City Chiefs.

Yet again headed to the Super Bowl and a couple of weeks.

Now I'd like to discuss our fourth quarter and full year performance for 2023.

Year that played out very differently from what we were expecting and I think the rest of you were expecting last year.

Today's presentation contains forward looking statements, which are subject to assumptions risks and uncertainties. These.

During a particularly challenging period for the banking industry <unk> delivered strong results demonstrating the power and resilience of our diversified business model, we close out the year with a solid fourth quarter I'll review a few highlights and then Rob will add more detail on the financial drivers section as.

These risks are included in our SEC filings and are summarized on slide 45 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.

As you know most banks recognize expense for the FDIC special assessment in the fourth quarter, our share of the assessment was $52 8 million an impact of about $1 <unk> per share pre tax to net income.

All earnings per share metrics discussed on this call are on a diluted share basis, and unless otherwise indicated comparisons are versus third quarter 2023.

Net operating income discussed here and in our slides excludes the FDIC special assessment and certain other expenses and as reconciled in our press release and slide deck.

We presented our financial metrics, both on a GAAP basis and adjusted to exclude this charge.

For the full year of 2023, net income was $350 million or $7 18 a share.

Presentation materials are available online at Investor Relations Dot <unk> Dot com.

On an adjusted basis net operating income was $397 1 million or $8 14 per share.

Now I'll turn the call over to Mariner Kemper.

Thank you Jay and good morning, before I get started I've got to talk about some very important business.

For the fourth quarter, we earned $79 million or $1 45, a share. However, as adjusted net operating income was $112 million or $2 29 per share representing an increase of 13, 9% compared to the third quarter of 2023, and 10, 8% compared to the fourth quarter.

Congratulating, our hometown heroes, the Kansas City Chiefs.

Yet again.

A year ago.

Our results reflected strong loan growth and deposit growth expanding net interest margin and net interest income solid fee income growth and exceptional asset quality.

Average loan balances increased six 3% on an annualized basis from the third quarter to $23 1 billion for comparison banks between 10, and 100 billion in assets that have reported results so far.

Have shown an annualized increase of three 6%, we posted strong topline production, 40% above third quarter and in line with our levels in recent quarters construction and commercial real estate drove most of our loan growth in the fourth quarter with continued draws on previously approved construction loans.

Payoff levels increased to four 4% of loans impacting C&I balances.

CRE growth has been largely in multifamily and industrial projects. Once again, we've included more detail on the portfolio in our slides showing the mix of loans by type and geography, along with Ltvs and other metrics asset quality in the book remains strong we adhere to Conservatives theaters, which includes.

Underwriting to imputed or stress interest rates and moderate loan to value ratios. We don't use trended rents and we have very strong liquid sponsors with great cash flow, 90% of our investment CRE portfolio is recourse.

Speaking of asset quality, we reported excellent metrics with improvements across the board nonperforming loan levels improved again to six basis points, while delinquency levels decline and we saw an 11% decrease in classified loans.

Net charge offs were two basis points of average loans for the quarter and just five basis points for the full year of 2023 again, we outperformed peer banks, which have reported a median net charge off rate for the fourth quarter of 15 basis points. So far.

On slide 26, we included a longer term history of charge offs, which have an average just 28 basis points over the last 20 years in.

In 2023, we experienced a 16 basis point reduction in our annual charge off rate compared to 2022, reflecting the active management of our portfolio.

I'm pleased with this result, especially given the environment and cautious narrative, we're hearing across the industry.

Again, we compare favorably to peer banks, which have reported a median six basis point increase in net charge off levels year over year.

Moving to deposits average balances increased 17, 2% on an annualized basis from the third quarter. This growth was led by commercial customers, including 11% annualized increase in commercial DDA balances.

We are seeing traction from our efforts to bring clients total banking relationships to <unk>.

Appear so far have seen average annualized deposit growth of just two 5% thus far in the quarter.

Net interest income increased three 7% as margin improved three basis points sequentially from industry reports, so far our NIM expansion compares favorably with peers reporting a median decline of four basis points.

We continue to deploy cash flows from the securities portfolio into loans and the pace of increased funding cost has slowed each of the past two quarters.

Ron will share more detail on drivers on our margin outlook for 2024.

Noninterest income for the fourth quarter was $148 3 million, representing 38% of revenue more than two times, the 17% medium reported by peers. Our fee businesses continue to build scale and we're seeing momentum in several areas. A few highlights include fund services, where assets under administration have eclipsed 411 billion.

A $48 billion improvement over 2022 levels and.

And in our custody business, we have had a 27% increase in net new accounts. This year, our fixed income and trading teams saw increased activity as the expectation that the fed has finished raising rates and has provided a little more clarity and brought some participants back into the market.

We've shared additional detail on our fee income businesses and the revenue that provided by them in our slides and ROM will add more detail when he speaks.

Total revenue for the fourth quarter increased four 3% from a linked quarter basis, we posted positive operating leverage of one 3% on a linked quarter basis and 3% in the year over year quarter.

As seen on slide 31, our capital position improved during the fourth quarter with a 17 basis point increase in both CET, one and total capital ratios, which stood at $10, 94% and 12, 85% respectively. Our earnings continue to support our capital position in spite of the impact of the FDIC.

Special assessment.

Finally, we saw increased profitability ratios with operating Rotc's of 16, 2% versus $14 nine 6% in the third quarter tangible book value improved nearly 12% from September 30 to $58 12 per share peer banks. So far have reported a median tangible book value increase.

Of six 9% linked quarter overall, we had a very solid quarter, especially given the challenging year. We all had before I turn it over to Ron I'd like to share a few thoughts on the events of last spring that ultimately led to the FDIC Special assessment, we recognized in the fourth quarter.

It has become very clear that the underlying cause of the 2023 bank failures with interest rate mismatch, primarily on the asset side, a few banks, where it'll position and poorly managed for the interest rate environment. We found ourselves with a largely fixed asset base that lack of flexibility one lesson learned during that time was the power of various.

Market participants to fuel a largely media based crisis and circuit.

As a panic spread across media outlets the risk of a self fulfilling prophecy became real.

Our reputation with our clients and in our markets is something we have earned and cherished over 110 years of history. It was extremely frustrating for us to watch these industry observers pontificate based on a lack of understanding of how the industry works and continue to focus on the wrong symptoms like unadjusted uninsured.

<unk> or OCI.

This was a classic case of facts getting in the way of a good narrative as I've said before thank you to you the analysts and the investors on the call with US today, who took the time and care to understand the somatic of what transpired in the spring.

Yearend reports have confirmed what.

We already knew to be true the fundamentals in this industry remains steady the demise of regional banks didn't happen as predicted.

And banks like ours that we're well prepared.

Not only weather this storm, but emerge stronger and with positive results.

The resiliency of the banking industry has been evident and on display in recent months and the liquidity regulatory capital levels loan portfolio asset quality and funding sources remains strong.

In closing I'm incredibly proud of our <unk> associates that drove this performance and I am deeply grateful to our loyal client base that grew with us through this much exaggerated industry noise in 2023.

It was extremely rewarding to see how our company and customers came together to support each other.

As always we run our company with a strong focus on both the short term and the long term performance.

Through every stage and every economic cycle.

And we feel good about our strategy.

Looking ahead into 2024, we see a muted but resilient macro environment.

And we remain well positioned for any environment.

With an attractive loan to deposit level strong capital ratios and high quality loan portfolio with that.

I will turn it over to Rob give you more details on our results from.

Thanks, Mariner net interest income increased $8 2 million in the fourth quarter to $235 million, driven primarily by loan growth and repricing along with higher levels of liquidity.

Net interest margin was 246% an increase of three basis points from the linked quarter loan repricing and mix provided a nine basis point benefit other positives included three basis points from the benefit of free funds and liquidity levels, including stable levels of DDA balances two basis points from the securities portfolio and one.

Basis points from changes in borrowing levels.

These benefits were partially offset by higher deposit costs side.

Cycle to date, our earning asset beta has been tracking along with our total cost of funds data both now at 53%.

Average deposits increased 17, 2% annualized from the third quarter benefiting from the ongoing deposit gathering initiatives across all our lines of businesses.

A typical seasonal increase in public fund balances during the month of December added $157 million in average deposits for the quarter. These.

These increases were partially offset by the intentional reduction in brokered CD balances, excluding those broker deposits average deposits increased 22% annualized from the prior quarter.

Additionally, corporate trust deposits tend to be a little bit lumpy as clients build up cash and make payments throughout the year as a third largest municipal trustee in the U S balances will ebb and flow driven by municipal bond distributions and other activity I'll note that on an end of period basis Corporate Trust deposit.

This increase pointing to the timing differences throughout the quarter in our escrow specialty trust and paying agent businesses.

Our deposit remix continued at a slower pace this quarter DDA balances increased 1% from the third quarter and now represents 31% of total average deposits, providing the benefit to margin I know that.

Wood costs.

To date, our earning asset beta has been tracking along with our total cost of funds beta both now at 53%.

Average deposits increased 17, 2% annualized from the third quarter benefiting from the ongoing deposit gathering initiatives across all our lines of businesses.

Cycle to date beta on total deposits and our loan yields are 48%, 59% respectively. This is on track with our previously discussed expectations for terminal betas of approximately 50% for deposit and 60% for loans.

Typical seasonal increases in public fund balances during the month of December added $157 million in average deposits for the quarter. These.

Looking ahead into the first quarter, we expect our loan yields will continue to benefit from the flexibility we built into our balance sheet through repricing as loans come up for renewal and from higher yields on new originations.

These increases were partially offset by the intentional reduction in brokered CD balances, excluding those broker deposits average deposits increased 22% annualized from the prior quarter.

Overall, we expect our loan yields to meet or exceed the increases in cost of funds Adil.

Additionally, corporate trust deposits tend to be a little bit lumpy as clients build up cash and make payments throughout the year as the third largest municipal trustee in the U S balances will ebb and flow driven by municipal bond distributions and other activity I'll note that on an end of period basis Corporate Trust deposit.

Additionally, we have approximately $1 6 billion in cash flows from our securities portfolio Rolling off of two 2% that will be reinvested in higher yielding loans or securities in the fourth quarter. We began legging back in with some modest repurchases of mortgage back and Treasury Securities. We will continue to assess.

Increased pointing to the timing differences throughout the quarter in our escrow specialty trust and paying agent businesses.

Based on collateral needs loan growth and overall market conditions.

As liquidity in public fund balances seasonally dissipate and given one less day in the first quarter. We expect net interest income and margin to compress modestly from fourth quarter levels actual performance will be driven by material shift in funding mix, especially DDA balances and the shape of the curve.

Cycle to date beta on total deposits and on loan yields or 48% and 59% respectively. This is on track with our previously discussed expectations for terminal betas of approximately 50% for deposit and 60% for loans.

Details on activities in our securities portfolio are shown on slides 27, and 28, the combined AOS and held to maturity portfolios averaged $12 1 billion during the quarter a decline of one 5% from the third quarter. The average roll off yield was 238% for the quarter.

The new purchases of $154 million shown on the table excluded $500 million of short term T bills purchased at 539% as additional collateral or public funds deposits.

Overall, we expect our loan yields to meet or exceed the increases in cost of funds.

Excluding those treasuries, we expect $1 $6 billion of securities with a yield of $2 23 to roll off over the next 12 months.

The unrealized loss position in our combined Securities book improved this quarter to $1 1 billion, representing approximately eight 5% of the total portfolio down from 14% in the third quarter.

Based on collateral needs loan growth and overall market conditions.

Back to the income statement, our provision expense of zero. This quarter was the result of the impact of payoffs on net loan growth the quality of our portfolio, including the low level of net charge offs and macroeconomic variables that seem to expect a softer landing.

As we look into the first quarter, we expect provision to be impacted by a small acquisition of a co brand credit card portfolio expected to close in March which will add approximately $125 million in balances with a day, one provision of roughly $6 million and ongoing provision based on portfolio performance.

Details on activities in our securities portfolio are shown on slides 27, and 28, the combined AOS and held to maturity portfolio averaged $12 1 billion during the quarter a decline of one 5% from the third quarter. The average roll off yield was 238% for the quarter.

<unk> and macroeconomic variables.

The new purchases of 154 million shown in the table excluded $500 million of short term T bills purchased at 539% as additional collateral or public funds deposits.

This acquisition will also add approximately $10 million and net interest income $2 million in interchange fees and a breakeven pre tax pre provision in the first year, excluding conversion and integration costs.

Excluding those treasuries, we expect $1 6 billion of securities with a yield of $2 23 to roll off over the next 12 months.

On the fee income side to reported results included some market related variances, including increases of $3 7 million in company owned life insurance income and 567000 in customer related derivative income.

The unrealized loss position in our combined Securities book improved this quarter to $1 1 billion, representing approximately eight 5% of the total portfolio down from 14% in the third quarter.

Trading and investment banking income increased $2 million, primarily related to municipal trading volume the.

The detailed drivers of noninterest expense are shown in our slides and press release and on a GAAP basis included the recognition of the $52 8 million FDIC special assessment on an operating basis expenses increased $6 9 million or 3% from the third quarter to $235 9 million.

Detailed variances are included on slide 22, with the largest impacts were $3 1 million in deferred compensation expense, an increase of $2 7 million from the prior quarter due to the offset to the increased coli income $2 3 million related to the pre buy of computers in the fourth quarter and $1 5 million in.

<unk> and macroeconomic variables.

<unk> charitable contributions.

Partial offsets included a $1 $6 million decrease in payroll taxes insurance and 401, K expense and a 467000 reduction in bonus and commissions expense.

Excluding the onetime items and timing related variances, our core expense run rate in the fourth quarter was approximately $230 million. Please note that in addition to the impact of the co brand card portfolio acquisition first quarter salary and benefits expense will increase with the impact of the extra leap year day and for the typical <unk>.

Trading and investment banking income increased $2 million, primarily related to municipal trading volume the.

<unk> reset of FICA and payroll taxes.

Our effective tax rate was 17% for the full year 2023, compared to 18, 9% in 2022.

The decrease rate was driven primarily by a larger portion of income from tax exempt securities and variations of the levels of coli income for 2024, we would expect a similar tax rate ranging from 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.

Thank you.

Please press star followed by the number one if you'd like to ask a question showing devices Amit. Thank you Vanessa.

<unk> charitable contributions.

Partial offsets included a $1 $6 million decrease in payroll taxes insurance and 401, K expense and a 467000 reduction in bonus and commission expense.

Our first question comes from Chris Mcgratty <unk>.

Yes.

Please go ahead.

Sure.

Hi, This is Nick the topic is on for Chris.

Hey, good morning, Thanks, Hey, there.

Maybe just if you can.

To start off on the margin given the potential for.

The rate cuts coming later in this year in 2004 can.

Can we see the margin continue to expand into 'twenty four with more back book repricing and Kantar.

Seasonal reset of FICA and payroll taxes.

Our effective tax rate was 17% for the full year 2023 compared to 18, 9% in 2022. The decreased rate was driven primarily by a larger portion of income from tax exempt securities and variations in levels of coli income for 2024, we would expect a similar tax rate.

<unk> mix shift.

Sure Nick.

Ranging from 17% to 19%.

But as we've said in the past calls right the higher for longer scenarios, a good scenario for us because as you've seen in the last couple of quarters. The pressure on deposit costs have largely abated for us and then our loan yields are still repricing higher so loan yields we'll at least do better than cost of funds for us and then the $1 six.

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.

Thank you.

First off on it by the number one if you'd like to ask a question showing devices Amit. Thank you Vanessa.

Securities that are rolling off at two 2%, though we can invest in the current rate environment. So I think we're closer to the trough on margin.

Our first question comes from Chris Mcgratty <unk>.

Hey, Farha.

Sure.

Quarter, it might have been flow a little bit of a few basis points here and there but feel good about our margin trajectory until the fed starts cutting at some point in 'twenty four and some of the nuance one way or the other area of the strength of what would happen to start demand deposits also.

Hi, This is Nick the topic is on for Chris.

Hey, good morning, Thanks, Hey, there.

Maybe just.

Can you just start off on the margin given the potential for.

Okay rate cuts coming later in this year in 2004.

Hey, good hangs in the balance.

Can we see the large and continue to expand into 'twenty four with more back book repricing.

Great.

Maybe it will be also depends on the revenue outlook, I guess, a little bit but could we see.

These mix shifts.

Sure Nick.

This is Rob we don't give any forward guidance other than what I said in my prepared comments about there might be some modest compression in the first quarter because of the excess liquidity that we saw in the fourth quarter going away, but as we've said in the past calls right. The higher for longer scenario is a good scenario for us because as you've seen in the last.

Positive operating leverage.

2024, depending on expense growth.

Well I think the.

We remain focused on on operating leverage and again based on the guidance question. We don't really give guidance what I would say is that.

The environment that we come into 2024 with from 2023 remains from a standpoint of.

Quarters, the pressure on deposit costs have largely abated for us and that our loan yields are still repricing higher so loan yields we'll at least do better than cost of funds for us and then that $1 billion six of securities that are rolling off at two 2%, though we can invest in the current rate environment. So.

Elevated interest expense.

And the interest rate environment.

And because of that.

Demonstrating.

I think we're closer to the trough on margin.

Absolute strengths on on the.

Our quarter it might have been flow a little bit of a few basis points here and there but feel good about our margin trajectory until the fed starts cutting at some point in 'twenty four and some of the nuance one way or the other area of the strength of what would happen to start demand deposits also.

Operating Leverages remains challenging we will continue to do everything we can and work against it we believe on a relative basis.

That will outperform on.

<unk>.

On operating leverage.

Great.

Hangs in the balance.

For taking my questions.

Thanks, Nick.

Okay.

Great.

Thank you and as a reminder, if you'd like to ask a question. Please questions.

Maybe it will be also depend on the revenue outlook, I guess, a little bit but could we see.

On your telephone keypad.

Positive operating leverage.

We have a question from Nathan race of Piper Sandler.

In 2024, depending on expense growth.

Please go ahead your line is open.

Well I think that.

Yes, hi, guys good morning, and congrats hey, good morning <unk>.

We remain focused on on operating leverage and again based on the guidance question. We don't really give guidance what I would say is that.

Just a question on the <unk>.

I appreciate the disclosure in the deck around.

100 basis points.

The environment that we come into 2024 with from 2023 remains from a standpoint of.

The decline in rates is about a three 1% impact to them.

In year, two just curious.

To what extent you think that it can be offset by just the volume.

Elevated interest expense.

And the interest rate environment.

<unk> kind of continued margin accretive growth in both loans and deposits going forward and also with the cash flow coming off the securities portfolio as well.

And because of that.

Demonstrating.

The.

Absolute strength on on the.

Yes, you hit the nail on the add Darren that.

Operating leverage remains challenging we will continue to do everything we can and work against it we believe on a relative basis.

It is a static analysis as you know right. So it's all based on just cash flows coming in and being reinvested a new environment and so the net interest income projected in that baseline scenario of minus 100 and year. Two does not include the impact of any growth in any actions, we might take right you've seen us and you can see in our disclosures that we put ourself.

That will outperform on an.

On operating leverage.

Great. Thank you for taking my questions.

Thanks, Nick.

Okay.

Swaps synthetics that just as well so we will do additional we will evaluate it on a periodic basis and put on additional hedges to protect ourselves from a down rate environment, but that's just the statistical modeling of what would happen to our balance sheet of all things.

Thank you and as a reminder, if you'd like to ask a question. Please press star followed by one on your tenant Thank you Pat.

We have a question from Nathan race of Piper Sandler.

Please go ahead your line is open.

Kept the same on a static balance sheet basis. So we can take steps to mitigate it.

Yes, hi, guys good morning, and congrats good morning Emlen.

And so that's another layer that will add onto it.

Just a question on the NII sensitivity I appreciate the disclosure in the deck around 100 basis point.

As you think about looking forward into 'twenty four.

The decline in rates is about a three 1% impact to them.

We typically give you a 90 day look forward loan growth.

In year, two just curious.

In the first quarter it looks.

To what extent you think that it can be offset by just the volume.

Stronger than than it did in the.

<unk> kind of continued margin accretive growth in both loans and deposits going forward and also with the cash flow is coming off the securities portfolio as well.

In the fourth quarter so sign.

Science continues to be good.

Okay, Great and then just within that context around kind of the.

Trajectory in deposit costs.

Yes, you hit the nail on that.

Thank you guys have about tuna doing wholesale funding maturing in the first half of this year.

Just thinking about replacing.

Castle Securities book going to be one lever and then any other kind of thoughts on just how.

How we should think about those wholesale sources.

Page 31 page.

One on the bottom right we have all the wholesale funding obviously as you can see we have about $1 6 billion of brokerage Cds.

Swaps synthetics that just as well so we will do additional we will evaluate it on a periodic basis and put on additional hedges to protect ourselves from a down rate environment, but that's just a statistical modeling of what would happen to our balance sheet, if all things.

Given our deposit pipeline, which remains strong we might not need all of it right. So but the potential of the wave one market rates are at that point in <unk>.

<unk> kept the same on a static balance sheet basis. So we can take steps to mitigate it.

For half of it or something less than that.

The other one that's maturing debt will mature in the second quarter to $1 billion of <unk> advances.

And so that's another layer that will add onto it.

As you think about looking forward into 'twenty four.

And then we have <unk>, which will extend into January again, we will evaluate it based on collateral needs will base. It on where market rates are we will look for spread in all of those things but.

We typically give you a 90 day look forward loan growth.

First quarter it looks.

Stronger than it did in the.

Don't need any of those tools really given our liquidity position and our loan to deposit, but we'll take it.

In the fourth quarter so sign.

<unk> continue to be good.

Okay, Great and then just within that context around kind of the.

The environment evolves.

Ross comment about.

Trajectory in deposit costs.

The brokered Cds as we May we don't need them, but we may roll back into some of them just because by the time they come due rates will likely have come down and we can have positive arbitrage on them. So it might make sense to roll back into some of them just just from a profitability standpoint.

Thank you guys have about $2 billion in wholesale funding maturing in the first half of this year.

Thinking about replacing.

Cash flow Securities book going to be one lever and then any other kind of thoughts on just how we should think about those wholesale sources.

Okay got it very helpful. Maybe just turning to credit I'm curious to hear perhaps from Tom in terms of.

In the first half, yes page 31.

Page 31 in the bottom right. We have all the wholesale funding obviously as you can see we have about $1 6 billion of brokerage Cds.

What occurred in the quarter in terms of criticized classified trends.

Obviously charge offs have been very low over the last few quarters.

Given our deposit pipeline, which remains strong we might not need all of it right. So but there is a potential of the wave one market rates are at that point in <unk>.

And I think in the past, we've talked about a normalized charge off range in the 20% to 30.

Range. So I'm just curious just given where you stand and based on the commentary on criticized trends. If you think we're going to get back to that historical range at some point this year or into 2025.

For half of it or something less than that.

The other one that's maturing debt will mature in the second quarter of $1 billion a plumber advances.

And then we have <unk>, which will extend into January again, we will evaluate it based on collateral needs based on where market rates are we will look for spread in all of those things but.

Okay.

That's my favorite question.

Because it's the thing that were really most proud of and.

We don't need any of those tools really given our liquidity position and our loan to deposit, but we'll take it.

I think that when you think I think about this investor community and looking at your alternatives and the investment thesis looking into banks. That's the thing that you look out with us as I'm sitting at the table right here.

The environment evolves.

The comment about.

The brokered Cds as we May we don't need them, but we may have rolled back into some of them just because by the time. They come due rates will likely have come down and we can have positive arbitrage on them. So it might make sense to roll back into some of them just just from a profitability standpoint.

Two other guys that have been making credit decisions with me for 20 years through all of the cycles that we've looked at and we've outperformed the peer group and all of those cycles.

And.

When we talk about 27%.

Okay got it very helpful. Maybe just turn to credit I'm curious to hear perhaps from Tom in terms of.

Eight basis points, we're just using math history. If you look at page 26.

You're just you're just looking at our history and one thing I would note about that in our investment deck as well yes.

What occurred in the quarter in terms of criticized classified trends.

Obviously charge offs have been very low over the last few quarters and I think in the past we've talked about a normalized charge off range in the 20 to 30.

The average over 20 years is higher than the two basis points, we have in the fourth quarter you have to recognize.

That comes with a lot of growth. So if you go back 20 years ago in the first year I was CEO, we had $2 7 billion in loans with 20 basis points of charge offs.

Range. So I'm, just curious just given where <unk> been.

And based on the commentary on criticized trends. If you think we're going to get back to that historical range at some point this year or into 2025.

We have $23 billion.

And loans with two basis points of charge offs.

So in the context of.

That's my favorite question.

Much greater opportunity for loss, we've maintained a very very low.

Because it's the thing that were really most proud of and.

I think that when you think I think about this investor community and looking at your alternatives and the investment thesis looking into banks. The thing that you would look at with us as I'm sitting at the table right here with.

Charge off rate and Thats because of the consistency and continuity of approach and.

<unk>.

<unk> makes it easy for you guys because you can look at the history.

Most of the banks you look at have different teams and turnover and change in strategy change in acquisitions or whatever it is you are staring at the same company with the same team at the same results.

Two other guys that have been making credit decisions with me for 20 years through all of the cycles that we've looked at and we've outperformed the peer group and all of those cycles.

And what I will say about the 28 when you think about this year and we're wherever we end up we will outperform.

And.

When we talk about 2007.

Eight basis points, we're just using math history. If you look at page 26.

And what I would say if you look at the charge off history over the last 20 years us against the share we had a chart the second patient before that shows that.

Just youre just looking at our history and one thing I would note about that in our investment deck is while.

And it's in a different scenario.

The average over 20 years is higher than the two basis points, we have in the fourth quarter you have to recognize.

Yes.

That shows up against the peer group.

The point is if you look at a recessionary period.

That comes with a lot of growth. So if you go back 20 years ago in the first year I was CEO, we had $2 7 billion in loans with 20 basis points of charge offs today, we have $23 billion in.

Our lines are doubtful line stays very close to the bottom axis of the chart.

While the shark fin that takes place with the industry. So.

And loans with two basis points of charge offs.

That's what happened in the last crisis, we expect that to happen. If you look at it through the fourth quarter as you can see it already taken place our numbers don't move.

So in the context of.

Much greater opportunity for loss, we've maintained a very very low.

And the peer groups in the industry is starting to move up we expect that to be the case again, whatever the absolute numbers are I can't tell you, but the relationship to the peer group and the industry. We expect to remain the same.

Charge off rate and Thats because of the consistency and continuity of approach and.

Sure.

<unk> makes it easy for you guys because you can look at the history.

Most of the banks you look at have different teams and turnover and change in strategy change in acquisitions or wherever it is you're staring at the same company with the same team at the same results.

Okay, Great very helpful and just one last one.

It seemed like a lot of the growth in the quarter came on the commercial real estate side of things I'm just curious.

And what I would say about the 28 when you think about this year wherever we end up we will outperform.

In terms of the composition of the pipeline entering 2024 and kind of where you guys are seeing pretty pronounced.

And what I would say if you look at the charge off history over the last 20 years us against the share we had a chart in a second the page before that shows.

Opportunities to grow loans today.

Loan growth, we've been saying this for really really long time, we call it.

It's in a different scenario.

We have a chart that shows us against the peer group.

We have a long runway for growth, both geographically and vertically.

The point is if you look at a recessionary period.

Across our footprint and our national footprint related to our ABL business.

Our line our Dallas the line stays very close to the bottom axis of the chart.

Largely because of market share gains.

We expect that to remain the same the caveat to that would be if we do have a softening softening economy.

While the shark fin that takes place with the industry. So.

That's what happened in the last crisis, we expect that to happen. If you look at it through the fourth quarter as you can see it already taken place our numbers don't move.

The rate at which we would grow on an absolute basis may come down from what our expectations are of ourselves.

But on a relative basis, we would expect ourselves to continue to outperform on loan growth.

And in the peer groups in the industry is starting to move up we expect that to be the case again, whatever the absolute numbers are I can't tell you, but the relationship to the peer group and the industry. We expect to remain the same.

For the same reasons, we always have for 20 years, we've done that.

And we expect that to continue again for the same very same reasons, which would be more market share more more market share driven.

Okay, great very helpful.

Then they are economic conditions, driven so nothing new there.

Just one last one.

Seemed like a lot of the growth in the quarter came on the commercial real estate side of things. So I'm just curious.

The absolute number could come down a bit from what we did last year based on what the economic conditions are but again you are buying on a relative basis. We continue we expect ourselves to outperform on a relative basis again.

In terms of the composition of the pipeline entering 2024 and kind of where you guys are seeing pretty pronounced.

Opportunities to grow loans today.

Loan growth, we've been saying this for a really long time, we call it.

Mark market specific it's still coming from the major metros, you talked about a nice growth market for us, although we have low production.

Have a long runway for growth both geographically vertically.

And that change continue to build but we are seeing a strong traditional operating companies C&I.

Our footprint and our national footprint related to our ABL business.

Largely because of market share gains.

As Mary stated its market share driven.

Expect that to remain the same the caveat to that would be if we do have a softening softening economy.

And first quarter as I said look stronger than Corp. If that's.

Thats any indication we have a harder time itself looking beyond the first quarter, but but the first quarters.

The rate at which we would grow on an absolute basis may come down from what our expectations are of ourselves but.

First quarter is an indication of the rest of the year is stronger than the fourth quarter.

But on a relative basis, we would expect ourselves to continue to outperform on loan growth.

Pipeline loss okay.

Understood very helpful and if I could just ask one last one.

For the same reasons, we always have for 20 years, we've done that.

Are you guys seeing any change in credit rating.

And we expect that to continue again for the same very same reasons, which would be more market more and more market share driven.

Credit ratings across I think around 4% of loans that are tied to office.

CRE.

I'm not sure I understand the credit rating question.

Then they are economic conditions, driven so nothing new there.

<unk>.

Yes.

Risk rating excuse me Mariner.

The absolute number could come down a bit from what we did last year based on what the economic conditions are but again you are buying on a relative basis. We continue we would expect ourselves to outperform on a relative basis again.

So pretty significant migration often classified risk rating excuse me.

<unk>.

Yes, we've had.

Very little of any deterioration in our office portfolio remained strong.

Mark market specific it's still coming from the major metros, Utah has been a nice growth market for us, although we had low production.

It's four 5% of the portfolio is yours.

A couple of statistics, 45% of our office portfolio a single tap.

Yes.

That change continue to build but we are seeing a strong traditional operating companies C&I.

As a layer of strength there in terms of rollover strong officers, which we've talked about in the past.

<unk> stated it is market share driven.

We have seen basically no deterioration in that portfolio.

And first quarter as I said look stronger than Corp. If.

We see anything coming on the horizon they are performing.

Thats any indication right, we have a harder time themselves looking beyond the first quarter, but but first quarters.

Lot of the leases the underlying leases on these office.

First quarter is an indication of the rest of the year is stronger than the fourth quarter.

Projects go out to 'twenty and beyond roughly 70% of those leases are 27 and beyond so in terms of rollover in the short term are.

Pipeline loss okay.

Understood very helpful and if I could just ask one last one.

Are you guys seeing any change in credit rating.

Very manageable.

Credit ratings across I think around 4% of loans that are tied to office.

Okay perfect.

Appreciate the color.

CRE.

Thank you.

I'm not sure I understand the credit rating question.

Thanks, Craig.

Yes, thanks, everybody it looks like that's the last question just want to reiterate something.

Yes.

The risk rating excuse me Mariner.

So pretty significant migration often classified risk rating excuse me.

Really proud of the year, we had in the quarter and I think at the end of the day.

Sure.

We do what we say and we say what we do and we've been doing it for a long time.

Go ahead, yes, we've had.

Very little of any deterioration in our office portfolio remained strong.

And we've demonstrated strong outsized loan growth deposit growth fees.

It's four 5% of the portfolio as you said.

<unk> control.

A couple of statistics, 45% of our office portfolio a single tap.

Year end and year out and I think the good news for the Investor population as they think about US as you should know what to expect from us.

As a layer of strength there in terms of rollover strong sponsors, which we've talked about in the past.

<unk>.

And we did it again in the fourth quarter and.

We have seen basically no deterioration in that portfolio.

More thrilled than ever about the fourth quarter, because we were able to.

We see anything coming on the horizon they are performing.

Sort of.

Lot of the leases the underlying leases on these office.

Put to bed a lot of the nonsense.

And the narrative as I'd like to say.

Projects go out to 2007 and beyond roughly 70% of those leases are 27 and beyond so in terms of rollover in the short term are very.

So I'll, let facts get in a way.

A real exciting narratives that.

London site to deliver last year and so on behalf of everybody on the call. We're happy to have delivered.

Very manageable.

Okay perfect.

What we did in the fourth quarter to kind of put some of that nonsense Tibet and so we'll just keep doing it for you and.

Okay.

Appreciate the color.

Thank you.

We are.

Yes, thanks, everybody it looks like that's the last question just want to reiterate something.

We're really proud and excited about what we delivered and we're just going to keep doing it for you. So thanks.

Thanks Mariner.

Really proud of the year, we had in the quarter and I think at the end of the day.

If anyone has a follow up you can always reach us at.

68607106, and we appreciate your time, thanks for joining us today.

We do what we say and we say what we do and we've been doing it for a long time.

And we've demonstrated strong outsized loan growth deposit growth fees.

This concludes today's call. Thank you for joining you may now disconnect your line.

<unk> control.

Year end and year out and I think the good news for the Investor population as they think about us.

As you should know what to expect from us.

And.

And we did it again in the fourth quarter and were.

More thrilled than ever about the fourth quarter, because we were able to.

Sort of.

Put to bed a lot of the nonsense.

And the narrative as I'd like to say.

So I'll, let facts getting away.

A real exciting narratives that.

London site to deliver last year and so on behalf of everybody on the call. We're happy to have delivered.

What we did in the fourth quarter to kind of put some of that nonsense Tibet.

So we will just keep doing it for you and.

We are.

We're really proud and excited about what we delivered and we're just going to keep doing it for you. So thanks.

Thanks Mariner.

If anyone has a follow up you can always reach us at 8168607106 and we appreciate your time. Thank you for joining us today.

This concludes today's call. Thank you for joining you may now disconnect your line.

And we appreciate your time, thank you for joining us today.

Q4 2023 UMB Financial Corp Earnings Call

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