Q4 2024 UMB Financial Corp Earnings Call
Good morning. Thank you for attending todays you MB financial fourth quarter 2024 financial results Conference call. My name is cole and I'll be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you'd like to queue for a question you can do so by pressing star one on your telephone keypad.
Kay Gregory: I'd now like to hand, the call it the Kay Gregory Please go ahead.
Kay Gregory: Good morning, and welcome to our fourth quarter 2024 call Mariner Kemper Chairman and CEO of you won't be financial Corporation, and Ralph Shakur CFO will share a few comments about our results and then we'll open the call for questions from our equity research analysts.
Jim Rine: Jim Rine, President of the holding company and CEO of you won't be bank, along with Tom Terry Chief Credit Officer will be available for the question and answer session.
Speaker Change: Before we begin let me remind you that today's presentation contains forward looking statements, including the discussion of future financial and operating results benefits and synergies gains and costs that the company expects to realize from the pending acquisition as well as other opportunity management proceed.
Speaker Change: Forward looking statements in any pro forma metrics are subject to assumptions risks and uncertainties as outlined in our SEC filings and summarized in our presentation beginning on slide 49.
Speaker Change: 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.
Speaker Change: Presentation materials are available online at Investor Relations Dot <unk> Dot com and include reconciliations of non-GAAP financial measures.
Speaker Change: Now I'll turn the call over to Mariner Kemper.
Speaker Change: Thank you Jay and good morning, everyone first off congratulation for Kansas City Chiefs, returning to the Super Bowl and a couple of weeks exciting times again.
Speaker Change: At <unk>, we're very excited to now earlier in January that we received approval from the OCC and fed complete the acquisition of <unk>.
Speaker Change: We anticipate closing the deal on Friday January 31.
Speaker Change: I'm extremely proud of what our.
Speaker Change: Proceeds have achieved during the past several months as evidenced by our fourth quarter and full year 2024 results. The team has remained focused on sustaining and growing our day to day business activities. While at the same time supporting integration effort and conversion planet.
Speaker Change: I want to express my appreciation for the huge amount of energy and collaboration from both <unk> and Heartland Associates. Both teams have been working very hard to ensure a successful transition for our new customers and associates.
Speaker Change: As <unk> seen Heartland filed an 8-K yesterday afternoon with a summary of our fourth quarter results. We have included some of the key performance indicators in the appendix of our deck on page 46, the strong value proposition of the deposit franchise was evident.
Speaker Change: As seen by the 6% linked quarter annualized increase in customer deposit and attractive to one 3% cost of total deposits.
Speaker Change: In anticipation of the merger close Heartland preemptively affected the resolution of certain non core loans and bonds, resulting in lower loan balances and higher levels net charge offs. During the fourth quarter. These credits, including those on Heartlands Watch list and all of the bonds were identified during our due diligence Russell, including the bonds, we had earmarked for.
Speaker Change: Sale close.
Speaker Change: The favorable resolution of these assets better positions, our pro forma balance sheet at close including a reduction in nonperforming loans. Additionally, the deleveraging of the balance sheet.
Speaker Change: But at a near 50 basis point boost in Heartlands regulatory capital ratios and further improved its loan to deposit ratio.
Speaker Change: As we discussed in our original acquisition modeling, we will maintain a conservative credit mark well.
Speaker Change: And as a combined entity, we expect our ACL coverage ratio will also increase.
Speaker Change: Now turning to our results release yesterday afternoon.
Speaker Change: We had a phenomenal quarter in 2024 on a strong note our results which contains several record setting metrics are even more impressive given the extra integration work completed by so many of our team.
Speaker Change: We set new company records with 2024 annual operating income of $461 million.
Speaker Change: Net interest income that surpassed $1 billion in fee income of $628 1 billion for the fourth quarter, We reported GAAP earnings of $120 million or $2 44 per share driven by strong performance across the board on an operating basis, we earned $2 49 per share net interest income.
Speaker Change: <unk> increased eight 7% from the third quarter, driven by an 11 basis point increase in net interest margin and strong earning asset growth.
Speaker Change: As expected, we benefited from strong balance sheet growth as well as deposit cost reduction on our end.
Deposit book as short term rates have come down on a linked quarter basis. The total cost of funds beta with 58% and our earning asset beta just 37% the beta on interest bearing deposits was 55% balance.
Speaker Change: Balance sheet growth included a very strong 14, 8% linked quarter annualized increase in average loan balances.
Speaker Change: Even by yet another quarter of record topline production of $1 6 billion.
Speaker Change: C&I led the growth for the quarter. We also saw a solid increase in CRE and in consumer real estate.
Speaker Change: For a comparison banks that have reported so far about a median annualized increase in average loan balances of just three 1% credit quality in our portfolio remains excellent with 14 basis points of net charge offs for the quarter and just 10 basis points for the full year.
Speaker Change: C&I continues to perform well with just three basis points of net charge offs for the full year.
Speaker Change: Non owner occupied CRE has had a net charge off ratio of zero for the past four years.
Speaker Change: And in fact, our charge offs are less than 900000 in total in this category since 2016.
Speaker Change: Our nonperforming ratio remained flat at eight basis points for the fourth quarter on a longer term basis I am proud of our track record that puts us near the top of the industry.
Speaker Change: From 2004 to 2024, our nonperforming loan ratio has averaged just <unk>.
Speaker Change: Three 8% compared to nine 2% for our peers and approximately one 9% for the industry as a whole.
On the other side of the balance sheet. Our average total deposits grew $2 7 billion or nearly 31% on a linked quarter annualized basis, largely driven by the activity in our commercial and institutional customer base.
Speaker Change: Average DDA balances increased 48% linked quarter annualized to $10 6 billion for comparison.
Speaker Change: Reported fourth quarter results. So far have a median annualized average deposit increased just seven 3%.
Speaker Change: The strength of our diversified financial model was evident this quarter with the continued fee income growth across all segments.
Speaker Change: The top contributors include <unk>, one fees money market revenue in trust and securities processing income.
Speaker Change: To highlight a couple of successes behind that growth private wealth teams brought in the net new asset level of $1 3 billion in 2020 for a 75% increase over 2003.
Speaker Change: In institutional assets under administration continues to expand up 18% year over year to stand at 526 billion.
Speaker Change: Trust assets part of the institutional totals.
Speaker Change: Significantly over the past 10 years to $42 4 billion, representing a compound annual growth rate of 14%.
Speaker Change: And in our health care business. The number of HSA accounts grew steadily from just 588000 accounts at the end of 2014 to more than $1 6 million accounts at the end of 2024 for a CAGR of 11%.
Speaker Change: As you know we focus on operating leverage rather than specific expense growth targets compared to the fourth quarter a year ago, we posted positive operating leverage of three 8% on an operating basis, Ron will provide more detail on income expense drivers shortly finally.
Speaker Change: Our capital levels continue to build.
Speaker Change: We ended the quarter with a CET one ratio of 11, two 9% an increase of seven basis points from the third quarter and 35 basis points from a year ago 2023.
Speaker Change: As a reminder, our capital levels don't include the $232 million forward equity offering agreement that we announced in April which we expect to settle in full during the first quarter of 2025.
Speaker Change: We're very pleased with our strong results for the quarter, coupled with the opportunities we see for our combined <unk> and <unk> in the first quarter. We're very excited about what 2025 and beyond will bring.
Speaker Change: We continue to believe that the addition of ACSF is a great fit from a strategic financial and cultural perspective, when we look forward to reporting on a combined basis at the end of the first quarter.
Rob: Now I'll turn it over to Rob for more detail.
Rob: Thanks, Mariner net interest income of $269 million represented a linked quarter increase of $21 6 million or eight 7%.
Rob: <unk> balance sheet growth favorable reinvestment yields lower interest expense on index deposits that reprice in a mixed shift in funding composition, including the strong DDA growth that we experienced during the quarter. These benefits were partially offset by the repricing of variable rate loans, the $1 6 billion or three 9% increase in average.
Rob: Turning now.
Speaker Change: It was driven by strong loan growth Mariner mentioned, along with an additional $586 million in average securities and $102 million in fed funds sold and resale agreements.
Speaker Change: During the last few quarters, we began pre purchases of nearly $1 billion of U S. Treasuries and agency mortgage backed securities in advance of our planned delevering of certain bonds held by Heartland. The average impact of these pre purchases was approximately $168 million in the fourth quarter.
Speaker Change: Average interest bearing liabilities increased one 6% from the linked quarter with increases in interest bearing deposits, partially offset by the decrease of $1 $1 billion in borrowed funds, reflecting the repayment of borrowings under the <unk> and <unk> advances.
Speaker Change: Average DDA growth was driven primarily by corporate trust in capital markets, where DDA can fluctuate based on tax our bond payments and other trustee activities, particularly at quarter in Europe.
Speaker Change: The percentage of index deposits remained relatively flat with approximately 35% of total deposits hard indexed to short term interest rates.
Speaker Change: As fed fund rates changes these deposits reprice immediately.
Speaker Change: 17% of our deposits are soft index balances negotiated at current prevailing market rates on these soft indexed deposits you will generally move rates pretty quickly following fed rate moves.
Speaker Change: Overall, we continue to expect our deposit betas on the way down to be steeper than peer banks as we experienced this quarter.
Speaker Change: Net interest margin for the fourth quarter increased 11 basis points sequentially to $2 five 7%.
Speaker Change: Primary drivers of the increase were the positive impacts of 31 basis points from repricing of interest bearing deposits nine basis points from reduction in borrowing levels, partially offset by a negative 16 basis points related to loan repricing and mix six basis points related to excess liquidity levels and five basis points related to changes in the benefit of free.
Speaker Change: Funds.
Speaker Change: Looking into the next quarter given the anticipated closing date of January 31, our first quarter results will include three months of <unk> operations and two months of hardwood and all the yet to be determined impacts from purchase accounting accretion associated with the merger based on our outlook for no additional rate cuts this quarter, we expect <unk>.
Speaker Change: Hand alone core margin to be relatively flat to fourth quarter 2004 levels.
Speaker Change: As shown on the right side of that page, 30% to 70% of loans repriced within the next 12 months with the majority of those indexed to short term rates and adjusting monthly.
Speaker Change: Details on the hedges we have in place are also on that slide.
Speaker Change: During the fourth quarter, we added two floor spreads each with $250 million of book value.
Speaker Change: At yearend, we had $3 billion.
Speaker Change: <unk> value hedges comprised of three four contracts and 10 floor spreads.
Speaker Change: Based on the forward start arrangements to two 5 billion of these 3 billion hedges are within their payment windows with the remainder becoming effective over the next 60 days or so.
Speaker Change: You mean, no additional rate cut the net impact of these hedges on our net interest income is expected to be fairly modest.
Speaker Change: The combined <unk> and HTM portfolios average $12 8 billion, an increase of four 6% from the prior quarter.
Speaker Change: As I mentioned above in the third and fourth quarters, we preemptively bought additional securities in advance of closing the <unk> acquisition.
Speaker Change: As discussed at the time of the announcement.
Speaker Change: <unk> identified a pool of securities and Hdls portfolio that didn't match our investment profile currently standing at approximately $2 billion.
Speaker Change: We expect to sell any remaining bonds of this pool are close likely reinvesting the proceeds into agency mortgage backed securities or U S treasuries.
Speaker Change: The average purchase yield in our portfolio was 454% for the quarter, while securities Rolling off had a yield of 339%.
Speaker Change: We expect $1 $5 billion of securities with an average yield of 262% to roll off over the next 12 months the.
Speaker Change: The reinvestment of these cash flows that the current accretive yields and bonds or loans will help <unk> margin, regardless of any fed action.
Speaker Change: Turning back to the income statement noninterest income was $165 2 million linked quarter increase of four 1%.
Speaker Change: We recognized a pretax gain of $4 1 million in the fourth quarter on the sale of <unk> distribution services part of our asset servicing business.
Speaker Change: Fee income in the quarter also included $1 million in gains on the sale of other non core assets.
Speaker Change: Excluding these two items, our core fee income of approximately $160 million.
Speaker Change: <unk> strong traction in our institutional and private wealth business lines.
Speaker Change: Brokerage income increased $2 9 million linked quarter, driven by higher <unk>, one fees in money market revenue.
Speaker Change: What trucks off balance sheet money market balances have increased by nearly 35% in the past 12 months and now stands at $16 3 billion.
Speaker Change: This quarter has further demonstrated our ability to garner both on balance sheet and off balance sheet deposits. Thanks to the strength of our diversified business model.
Speaker Change: Trust and securities processing income, where the strong private wealth and asset servicing activity. Mariner mentioned is captured increased $2 6 million or three 6% from the third quarter.
Speaker Change: Partial offsets include a market related variances in investment security gains and coli income, which each decreased $2 million from the third quarter.
Speaker Change: Reported noninterest expense of $2 $70 4 million for the quarter included pre tax acquisition expenses of $3 7 million. Additionally, within the other expense line, we had $4 5 million of additional operating losses in the fourth quarter.
Speaker Change: On an operating basis, which excludes the merger charges noninterest expense increased $15 8 million linked quarter and included a $15 4 million increase in salary and bonus expense as our strong performance in several businesses continued resulting in higher incentive accruals.
While we calibrate our accruals of these performance based measures throughout the year based on expected performance, our strong second half results, particularly our fourth quarter meant that these accruals needed to be revised higher.
Speaker Change: Expense offsets included lower bankcard expense and lower supplies expense the $1 $8 million decrease in deferred compensation expense is the offset related to coli income.
Speaker Change: Excluding some of the items I mentioned, we would put our quarterly normalized starting point for expenses closer to $250 million.
Speaker Change: Additional details are available in our slides and press release.
Speaker Change: Separately in the first quarter, we expect to pay approximately $2 million in dividends on preferred stock that we will assume from heartland.
Speaker Change: Finally, our effective tax rate was 18, 5% for both the fourth quarter and full year 2024, compared to 17% for full year 2023. The 2024 increase primarily related to a smaller portion of income from tax exempt municipal securities and higher nondeductible acquisition costs.
Speaker Change: It was 2023.
Speaker Change: For full year 2025, our preliminary estimate, including the <unk> acquisition is an effective tax rate of 20% to 44%.
Speaker Change: Now I'll turn it over to the operator for the Q&A session.
Speaker Change: Okay.
Speaker Change: Great if you'd like to queue for a question you can do so by pressing star one on your telephone keypad.
Speaker Change: If for any reason you'd like to remove your question. It is star two.
Speaker Change: But again to join the question queue. Please press star one.
Speaker Change: Our first question is from Jared Shaw with Barclays. Your line is now open.
Jared Shaw: Hey, good morning.
Speaker Change: Hey, good morning, good morning.
Speaker Change: Maybe just starting with the the Heartland deal.
Speaker Change: The impact of their fourth quarter on.
Speaker Change: I guess, how that compares to the marks that you had assumed at the beginning can you just sort of walk through.
Speaker Change: What.
Speaker Change: If the change in non performers if that changes your total assumed tomorrow or how we should think about that and then the $2 billion of Securities. You said never identified how much is still left to sell versus what they've what they've already cleaned up.
Speaker Change: Yes, Sharon this is mariner thanks for the question.
Speaker Change: We remain Super excited about the impact that Ireland is going to have I would start by saying and then ill answer directly just to kind of set the stage for for any future questions might come on the call around heartland.
Speaker Change: Obviously, there are some stringent rules about how we operate separately as companies and we have given you guys in the deck.
Speaker Change: A slide in there that sort of summarizes all that happened.
Speaker Change: And in our in our prepared remarks.
Speaker Change: I'm not really going to be giving you a whole lot more than what we already disclosed just because we are operating as separate companies until we close on Friday, but I will.
Speaker Change: I tried to give you a little more high level color in the sense that basically if you think about when we announced this transaction in April of 'twenty for the pro forma assumptions, we've made around selling $2 billion of securities and capital levels.
Speaker Change: Approximately 10%.
Speaker Change: And the importance of the demand or the overall customer deposits sticking and being the reason that we're really doing this transaction all remain very much intact.
Speaker Change: So I guess that would be what I would say is that.
Speaker Change: When you think about all that we assumed.
Speaker Change: In April with some puts and takes some things are better some things are worse at the end of the day.
Speaker Change: Major drivers of this transaction remains very much intact, whether it's capital levels or.
Speaker Change: Customer deposits being intact.
As a matter of fact customer deposits you see in the deck has actually grown since we announced the deal and.
Speaker Change: By the time, we closed nonperforming loans will be down from where we were we announced.
Speaker Change: Okay, alright, thanks for thanks for that color.
Speaker Change: And then looking at the expenses.
Speaker Change: Yes, I think you said that $2 50 is a good is that a good starting point can you say are that's a good base for 25, and how should we think about incentive accruals.
Speaker Change: Starting off the year and as we're moving through the year on the online pickup.
Speaker Change: Darrin, it's Ron so yeah to 50 is the normalized fourth quarter run rate for all the things that I mentioned right. So as we said $15 million of the $270 million excess is just catch up in accruals. So those all get reset on day one.
Speaker Change: Due to normal levels typically 100% and then the only thing that happens in the first quarter. As you guys know is about $8 million to $10 million of FICA resets and all the things that are part of the first quarter resets payroll taxes and all of that so <unk> is the steady state run rate you might see some elevated expenses just because of the FICO payroll reset again.
Speaker Change: Thinking about <unk> operations before.
Speaker Change: We acquired Heartland.
Speaker Change: That will be slightly higher in the first quarter for the full year that would be.
Usual seasonal resets.
Speaker Change: Okay, Thanks, and if I could just sneak one more in you talked a little bit about targeted CRE growth.
Speaker Change: Is that is that.
Speaker Change: More attractive to you now because of better spreads or are you seeing better terms and conditions or what's what's causing you to be a little more excited about CRE here.
Speaker Change: Im not sure I recall, those comments about even more and more excited about it I would say no.
Speaker Change: Exactly sure what you're referring to but we remain.
Speaker Change: I would say in the same place as we have been we like the category.
Speaker Change: We were always looking for high quality developers partners sponsors and largely in the.
Speaker Change: In the industrial and multifamily space and I guess nothing new there.
Speaker Change: There is demand there have been some demand.
Speaker Change: Supply demand issues, they're really related to interest rates and activity, but as far as our interest goes we remain ever the same same level of interest in the space.
Speaker Change: Great. Thanks.
Speaker Change: Yes.
Speaker Change: Our next question is from Brian <unk> with Morgan Stanley. Your line is now open.
Brian: Hi, Good morning. Thanks for taking my question first question is on the net interest margin. So there's been a lot of volatility in the forward curve over the past several weeks can you just talk about what the range of potential outcomes is for NIM. If we get say no cuts over the next few months versus.
Brian: The two that a lot of people are expecting for 2025.
Brian: Hey, Brian Good morning, Rob I think when you think about the yield curve environment and we've said this before higher for longer is actually a pretty good environment for us, especially when you think about some of the data points. We've shared in our deck, we have $1 $5 billion of securities Rolling off of $2 60 kind of yields that we bought in the fourth quarter at $4 54 right.
Brian: So as long as the slope of the curve remains pretty close to where it is and if there are no additional rig cost theres no more pressure on loan yields obviously theres not a lot of movement on the deposit cost either so that's not a bad environment for us to be able to grow NII without additional loan growth and then there's the component of added loan growth on top of it. So if you look at our.
Brian: Interest rate simulation.
Brian: Standalone again, we're slightly liability sensitive. So we don't expect that this is actually a really good rate environment for us higher for longer is a good one for the NII perspective.
Brian: So we don't give specific guidance on a range of outcomes, but again, there's a lot of fixed rate loans that are still repricing 200, or 300 basis points higher 1 billion and a half.
Brian: Securities cash flows and then the last.
Brian: Caveat always is what happens to the DDA balances that can impact our deposit growth that can impact any particular quarter's NII.
Brian: That's really helpful. Thank you and then <unk> was another really strong quarter for loan growth specifically new on production can you talk about any trends that you've noticed post election, specifically is there anything youre seeing in borrower sentiment or activity levels or anything that impacts your view.
Brian: On what loan growth looks like going forward.
Brian: It's a little it's little too early to tell what.
Brian: The new administration's impact is on that I would say if you separate activity from sentiment.
Brian: Activity I would say, it's just too early to tell sentiment wise there is in general a pretty bullish positive sentiment that that there will be.
Brian: Better business environment.
Brian: It should drive more activity, but it's too early to tell really what what that means.
Speaker Change: Yeah, Okay, great. Thank you for taking my questions.
Brian: Yes. This is Jim Ryan the only thing I would add to that just as a quick follow up is.
Speaker Change: Yes.
Speaker Change: If you remember our whole investment thesis is market penetration, so regardless of the political climate.
Speaker Change: Our underpenetrated in each market with the exception of the Kansas City. So there is a runway to grow which what I mean by that is we're basically taking other based clients.
Speaker Change: The market penetration versus additional economic activity. So we feel quite bullish about our position in 2025.
Speaker Change: Okay.
Speaker Change: That's really helpful. Thank you again.
Speaker Change: Thanks, Brian.
Speaker Change: We have a question from David long with Raymond James Your line is now open.
Speaker Change: Good morning, David.
David Long: Good morning, everyone.
David Long: In the fee based businesses <unk> has shown positive momentum in trust and securities processing brokerage throughout the year.
David Long: As we go into 2025 any headwinds that we need to think about in some of these fee based business that could slow the momentum.
David Long: No no headwinds at all actually I would say so if you take the funds will take the big biggest pieces, if you take fund services.
David Long: The growth in fund services largely comes from alternatives.
David Long: The alternative space, which is.
Speaker Change: Really doesn't.
Speaker Change: Correlate with what's happening in the public markets, so regardless of what happens to the public markets that's really about.
Speaker Change: Flows so.
Speaker Change: As funds generate assets.
Speaker Change: Those into their fund vehicles.
Thats, where the fees against asset size comes and it doesn't it doesn't move up and down with the market as correlated as the public equities and fixed income deal. So that's where that growth comes from is just.
Speaker Change: Fund flows and fund generation and new fund creation et cetera. So the profile for that business remains very strong.
Speaker Change: And as we've said in previous quarters.
Speaker Change: There's been a lot of disruption in that space with that.
Speaker Change: P/e coming in and rolling up some service providers that's been good for us.
Speaker Change: <unk> continues to be good for us and we continue to have exceptional ratings from customer service and outcomes perspective within the industry. So very very good profile forward looking for that business and we're also very innovative so.
Speaker Change: We control our technology and are helping customers create new new ways to go to market. So very good good profile their corporate trust.
Speaker Change: Also has a very strong forward looking profile as the government continues to spend and we do all these infrastructure projects.
Speaker Change: Profile just continues to grow for the traditional part of our corporate Trust business as we said.
Speaker Change: In a pole position with center, our footprint to do all of the infrastructure work from an escrow trustee and patient perspective.
Speaker Change: Along with the <unk>, one fees that come along with that business as as projects are generated.
Speaker Change: Aviation.
Speaker Change: Other big vertical there and within corporate trust it remains very strong as well as the.
Speaker Change: Sort of travel business has turned around and picked up.
Speaker Change: There is a huge short supply of Eric airplanes.
Speaker Change: So as that releases in the plane Boeing is able to build and get their plans off of out of this out of the manufacturing process as well as Airbus and others.
Speaker Change: <unk> really.
Speaker Change: A nice pipeline of business for us in that in that space.
Speaker Change: And then we launched Clo's this last year and.
Speaker Change: We're off to a good start this year, Jim I think we've already done this year, we did last year in January right.
Speaker Change: So the CLO.
Speaker Change: We're very excited about.
Speaker Change: And then we have our wealth business, which we've already talked about is we've had very very strong results in our wealth business.
Speaker Change: And.
Speaker Change: Our industrial solutions and HSA business, we gave those results to you in the opening remarks so.
Speaker Change: All in all I'd say profile is fantastic looking forward for all of those businesses no real headwinds to speak of at all.
Speaker Change: The only thing I would add is we've also continued to invest as you know not only in people, but we upgraded operating system.
Speaker Change: Our 40 act side of phone services as well as corporate trust. So we're making the additional investments to handle increased volume.
Speaker Change: The new footprint that comes with Heartland should help corporate trust also it's a very localized business.
Speaker Change: So doing business with local law firms and so as we put our signs up in our office is up across all of these new states and markets that should benefit our corporate trust business as well.
Speaker Change: Perfect. Thanks, Ryan I appreciate all that color and then typically fourth quarter is strong with deposits are you seeing normal seasonal outflows from public funds at this point.
Speaker Change: What other moving parts within deposits should we be thinking about for the Standalone bank here.
Speaker Change: Yes, usually I gave this wrong, yes second half of December is when we start seeing public funds inflows. It can be ranged anywhere from 800 to a $1 billion. Usually early February is when it starts dissipating actuals missed payments are made in bond and tax payments are made out of these municipalities. So thats the big.
Speaker Change: Driver of that and then as we said with the fourth quarter, there's always some seasonality even in the corporate trust business with bond and tax payments and so it's always hard to predict that so those are the only two things that can materially change our deposit pipeline on our outlook for the first quarter.
Speaker Change: Great. Thanks, Ron appreciate it thanks guys.
Speaker Change: Yes.
Speaker Change: We have a question from Ben Garlinger with Citi. Your line is now open.
Speaker Change: Thanks, Good morning.
Speaker Change: Hey, Brad.
Speaker Change: <unk>.
Speaker Change: Call It legacy Mb seem to be fine.
Speaker Change: Really strong loan growth good funding mix really healthy margin fees were good as expenses that are a little higher than I would've guessed, but all else equal to create healthy results.
Speaker Change: To be a bit tactical with how you respond to heartland questions.
When you just look at Heartland.
Speaker Change: Last couple of quarters, they seem to be shrinking a bit the margin came in as you talk to your on charge offs incarnate, what they are experiencing.
Speaker Change: <unk>. It seems like you started to kind of what to expect.
Speaker Change: Okay.
Speaker Change: The initial kind of pro forma data announcements.
Speaker Change: <unk> $200 million and change roughly of net income from Hartland and when I look at.
Speaker Change: Fourth quarter, I see a pretty big gap, just annualized fourth quarter heartland towards to expect for.
Good morning, 25 kind of a pro forma can you kind of help me out with like squaring that circle look like what you guys are actually expecting for the.
Speaker Change: The addition for the pro forma you ought to be.
Speaker Change: Should we expect from 25% I know you have a lot of opportunity for March.
Speaker Change: Cost savings over the next 18 months, but just.
Speaker Change: Putting two balance sheets together.
Speaker Change: Seeing the numbers that you previously assumed.
Speaker Change: Well I think so youre, specifically I think focused on the loan balances as a <unk>.
Speaker Change: Perspective contributor to earnings I think that's your specific question.
Speaker Change: Question, there right so loan balances will come down that kind of what you're specifically getting at loan balances.
Speaker Change: And frankly, I mean, the net income in general even if on backlog conversion out of Heartland.
Speaker Change: There's still a pretty big gap.
Speaker Change: So I think I think.
Speaker Change: When we talked about the perform I would say that really all that we assumed.
Speaker Change: <unk> is still pretty well intact related to like I said before.
Speaker Change: Capital levels and all the other puts and takes the loan balances will.
Speaker Change: At the front end of SP, a bit of a drag from the pro forma from our expectations.
Speaker Change: It is hard to tell what will be able to do it's too early to tell what will be able to do with that on a go forward basis are our machine.
Speaker Change: The legacy machine as you call it is very strong.
Speaker Change: I think.
Speaker Change: While huawei, while their prospects and customers wait for a conversion in light likely to slow.
Their historic growth rate a bit.
Speaker Change: Thank you would expect that we expect that.
Speaker Change: We hope to desire to and hope to make up for that with.
Speaker Change: Our abilities to leverage our sales force across their footprint in our footprint.
Speaker Change: We'll see I don't I can't.
Speaker Change: Until we really get in there and assess what we got and and and and.
Speaker Change: And the year unfolds can't really tell but thats, our expect our we expect and hope to make up for some if not all of that.
Speaker Change: And then I think we've talked about this from the get go.
Speaker Change: We really expected to see the lift in 2006 not in 'twenty five anyway. So.
Speaker Change: Really is more of the expectation is that on a combined basis that were.
Speaker Change: Really roll in on all cylinders in 'twenty six.
Speaker Change: Got it okay.
Speaker Change: And then when you think about the credit.
Speaker Change: And I know a lot of confidence come with conversion.
Speaker Change: 800, this year and then how you sell it.
Speaker Change: Going into 2016, what are you kind of really see the pro forma numbers start to dance.
Speaker Change: If you think about just the credit experience that they've had.
Speaker Change: Okay.
Speaker Change: But some of it is to be expected, but.
Speaker Change: The rest of the loan portfolio I'm, assuming underwent entertainment stringent coming through that you went through like should we expect some integration noise on charge offs as well once you do become that pro forma product.
Speaker Change: Well, here's what I'd say about that.
Speaker Change: We did our diligence, which we shared with the street.
Speaker Change: That we had full diligence I, what I'd say is what you saw happen in the third and the fourth quarter was all identified through their their existing process and our diligence process. So as all identified.
Speaker Change: And so that's what you see there and.
Speaker Change: As far as as far as what's left that wasn't identified and resolved their process. They have to do it independently right. They've got there they've got their accountants et cetera.
Speaker Change: Operating their own process and following their own procedures and policies to two reserve.
Speaker Change: That was their process.
Speaker Change: Were they.
Speaker Change: They use our kind of our reserving against potential losses process in it I think is to best of our knowledge.
Speaker Change: As a reserved against everything that they've identified in conjunction with working with their regulators and their accountants and they're following the processes and procedures.
Speaker Change: Theoretically they have reserved going into 'twenty.
Speaker Change: 25% reserved for.
Speaker Change: Everything identified so that's the best I can tell you before it's under our watch and.
And so.
Speaker Change: Again, we are operating as separate companies and they are following their process and the best of our knowledge, where they've done that they've done that.
Speaker Change: Got it that's really helpful color I appreciate it congrats on the <unk>.
Speaker Change: Yes. Thank you.
Speaker Change: Our next question is from Nathan race with Piper Sandler Your line is now open.
Speaker Change: Hey, everyone. Good morning, Thanks for taking the questions.
Speaker Change: Just going back to the loan growth discussion.
Speaker Change: I appreciate that it seems like you guys were able to get in front of some of the problem credits that maybe don't fit.
Speaker Change: Your credit box ahead of the deal closing later this week.
Speaker Change: So just curious with maybe less intentional run off of the ECL Hdls post closing.
Speaker Change: Do you think kind of the additional issue of is accretive or maybe just neutral to the overall company's loan growth outlook going forward. I mean, this year you guys put up 8% loan growth and historically, it's been at least in that high single digit range. So just curious any thoughts of kind of the combined loan growth capacity of the combined entity going forward.
Speaker Change: And I guess I would say.
Speaker Change: You're back to one of the complex you made a minute ago about.
Speaker Change: That.
Speaker Change: We do expect 25.
Speaker Change: Heartlands con.
Speaker Change: Contribution to the overall loan growth will slow from its.
Previous couple of years growth rate.
Speaker Change: Largely just because.
Speaker Change: Their prospects and customers who are waiting for a conversion right.
Speaker Change: So I don't know what thats slowing will ultimately be but we expect some slowing.
Speaker Change: We expect that our book.
Speaker Change: We don't see anything in the way of US continuing to do what we've been able to do for the last 21 years showing demonstrating.
Speaker Change: Near.
Speaker Change: Double digit loan growth every quarter and every year. So we don't expect that to change for us.
Speaker Change: And.
Speaker Change: It is possible.
Speaker Change: That we can take our engine and make up for the slowing.
Speaker Change: Net.
Speaker Change: It will probably persist in 'twenty five with their with their book.
Speaker Change: No that will be able to do that but thats possible and we.
Speaker Change: Reiterate that the expectation really is that on a combined basis after integration and after conversion.
Speaker Change: <unk>.
Speaker Change: The well oiled machine that we expect to deliver on his starts more holistically.
Speaker Change: 26.
Speaker Change: Got it that's helpful.
Speaker Change: Just going back to expenses.
Speaker Change: I think you alluded to like $250 million.
Speaker Change: Core legacy run rate come out of the fourth quarter Heartland has been running around $110 million.
Speaker Change: Two thirds of an impact.
Speaker Change: From Heartland and <unk> is it fair to assume combined kind of core expenses are in the kind of $323 30 range for <unk>.
Speaker Change: Generally doing the math right there yeah I would expect again some of the cost saves are trickling in right. So when.
Speaker Change: When we did the announcement, we still feel pretty good about it we're going to get 25% of their cost saves overtime, including 40% in the <unk>.
Speaker Change: First year, the stub period of 2025 so.
Speaker Change: We're still working through that with.
Speaker Change: With various work streams, but generally you are thinking about it right.
Speaker Change: Okay great.
Speaker Change: Is your expectation still that you'll be able to get 40% of the targeted cost saves.
Speaker Change: Completed by the end of this year are you guys, maybe tracking ahead of expectations on some of those fronts.
At this point, we feel good with what we announced.
It's early we still got to execute right, but that's still our expectation.
Speaker Change: Okay, Great I appreciate all the color and congrats on a great quarter.
Speaker Change: Our next question is from Chris Mcgratty with <unk>. Your line is now open.
Chris Mcgratty: Great. Thanks, good morning.
Chris Mcgratty: Good morning, Chris Mariner around.
Chris Mcgratty: You won't be balance sheets coming in bigger you've talked about the smaller heartland balance sheet.
Chris Mcgratty: But you also mentioned because heartland coming in they're coming in with more capital.
Chris Mcgratty: How are you thinking about.
Chris Mcgratty: Uses of capital once you get through the conversion beyond loan growth.
Speaker Change: That you've talked about is there a scenario where we're at close you would look at your own bond portfolio like other banks have done because you've got the capital.
Chris Mcgratty: Maybe into 2596 is there a thought on a buyback.
Speaker Change: Well.
Speaker Change: So lots of things are possible down the road a year year and a half two years from now we're you know US well, we are very conservative and I would say that while we're comfortable with the starting balance sheet capital levels, We certainly would like to get them back to where we are today and.
Speaker Change: So we've got.
Speaker Change: Call it a year or so to regenerate that capital and as long as we continue to perform at that point, we're going to be generating capital in a very consistent way and then we can start thinking about those those those things but.
Speaker Change: Think over the next year or so we will be regenerating focused on regenerate in that capital.
Speaker Change: And then the only other thing I would add to your question is we've evaluated bond portfolio restructuring.
Speaker Change: And we're very comfortable with what we own including what we're going to acquire from Heartland. After we sell the bonds that we had originally targeted so I don't see a lot of opportunity, especially given our capital levels to take a loss on something and deplete our capital even more.
Speaker Change: So don't see a whole lot of opportunity doing our balance sheet repositioning there.
Speaker Change: Okay.
Speaker Change: Our perspective on on repositioning.
Speaker Change: So <unk> is that you are fixing a problem when you do it and we don't have any problems.
Speaker Change: No I wasn't intending theres a problem I'm, just saying you're going to have more capital on smaller balance sheet acquired but.
Speaker Change: I get the message I think.
Speaker Change: In terms of on on Slide 32, your rate sensitivity you talked about the hedges.
Speaker Change: You talked about higher for longer being good but.
Speaker Change: As you kind of go through.
Speaker Change: The merger does.
Speaker Change: Can you just remind us of rate overall rate positioning.
Speaker Change: Ideal curve ideal rate scenario for the bank.
Speaker Change: Yes, I would say as we said pro forma we expect so we're liability sensitive on our Standalone Heartland was.
Speaker Change: Materially asset sensitive until they terminated some of the hedges that we thought they talked about in the fourth quarter release, and so they became slightly less asset sensitivity to put the blood. The two balance sheets together, we're pretty neutral so although ecmo earlier question.
Speaker Change: The answer on the first question. This is actually a pretty good rate environment, we have a higher and steeper curve with reinvestment rates that are significantly higher than whats going rolling off new loan yields are accretive to where we are so we feel pretty good.
Speaker Change: Pretty good about what that means for our margin outlook in NII.
Speaker Change:
Speaker Change: Okay. Thank you.
Speaker Change: Yes.
Speaker Change: We have a question from John <unk> with RBC. Your line is now open.
Speaker Change: Okay. Thanks, good morning.
Speaker Change: Good morning, John.
Speaker Change: Great.
Speaker Change: Mariner what are the what are you focused on initially with Heartland I mean, it's obviously closing very soon but what are the first couple of things that you want to get accomplished early.
Speaker Change: Well I think that's a great question.
Speaker Change: We're.
Speaker Change: I think culture I would put it at the very top of the list, which is two <unk>.
Speaker Change: Emulate the teams make sure that we do as good a job as we can.
Speaker Change: And making them feel welcome and comfortable learn our processes and our procedures our way of doing things.
Speaker Change: Pretty much.
Speaker Change: Core foundational component of USB is.
Speaker Change: Risk management and.
Speaker Change: We want to make sure that they understand how we think about risks and then can quickly integrate and help.
Speaker Change: To help keep that profile intact. So I would say that thats, probably number number one at the top of the list is bringing that bringing the families together.
Speaker Change: And breaking bread and making sure that everybody's on the same singing from the same book.
Speaker Change: And then from there it's it'll be.
Speaker Change: Assessing sort of the talent for growth and then.
Speaker Change: Making sure we're building the pipeline on our end to add talent to the <unk>.
Speaker Change: Footprint.
Speaker Change: And help build out the growth profile.
Speaker Change: And then on a retail basis, one of the things that we're really excited about right as we are doubling our footprint doubling our branch network doubling our deposit levels there and.
Speaker Change: Liz Lewis, who oversees that for us we're very excited about so we will be going through a process of.
Speaker Change: Optimizing the branch network, we're going to make sure that we.
Fill out.
Speaker Change: Markets, where we know we can play and will be.
Speaker Change: Yeah.
Speaker Change: Exercising our muscle basically kind of bringing all of that back to life at <unk> with.
Speaker Change: Being in the market with campaigns on a regular basis refreshing branches.
Speaker Change: And.
Speaker Change: Expanding the branch footprint in the markets, where we feel like we already have a strong presence in fill them out like Arizona, Kansas City Denver.
Speaker Change: Being the highest profile ones there that we know we have the right to play.
Speaker Change: Broad major retail way and making sure we hold places together like.
Speaker Change: New Mexico, which is a top player in new Mexico and make sure that we stay invested there.
Speaker Change: And then we will look for ways to do things like.
Speaker Change: What do we do in the Central Valley of California, where there are 10 million people from Bakersfield.
Speaker Change: Two Sacramento and outcome.
Speaker Change: How can we build out.
Speaker Change: Our footprint, there and take to take advantage of that 10 million people through.
Speaker Change: Maybe bolt on acquisitions over time and branch build out.
Speaker Change: And hiring talent.
Speaker Change: Similar story in say Minneapolis and Milwaukee.
Speaker Change: And then.
Speaker Change: There's some other really great markets right outside of say the Chicago land like rock Rockford, we have a nice branch and that we're already in Rockford, Illinois, and sort of expand and build out and grow and see what we can do around the Chicago land area with that so.
Speaker Change: So to summarize I started at the top of the list the number of opportunities to sort of enlist. So I think it's our job is really to stay focused.
Speaker Change: I'll have my team kind of banging on me to stay focus because it's an enormous amount of opportunity and I did do that in order of sort of what we want to attack first.
Speaker Change: Okay. Okay.
Speaker Change: How long do you think it.
Speaker Change: There've been some questions on lending obviously in the Heartland balance sheets, how long do you think it takes you to bring in.
Speaker Change: But what youre lending process or lending engines to the heartland footprint.
Speaker Change: Well, that's one of the things. We're most excited about I will say that the thing I'm. Most excited about related to the connection between our risk profile and being able to deploy that and then move forward growing the business.
Speaker Change: Our way is.
Speaker Change: <unk>.
Speaker Change: We had we had the depth coming in to be able to deploy our regional credit officer model into their footprint.
Speaker Change: At <unk>, we have in our own footprint, we have regional credit officers with loan authority that our people have worked here 20, plus years, who know how we do things and so we've given them the authority to oversee the people the process the product the customers stay on top of all of that in the footprint.
Speaker Change: And so we identified in the process of bringing this heartland into the family.
Speaker Change: Individuals that have that same profile with us give them opportunities for career development.
Speaker Change: We've identified several regional credit officers to oversee the new parts of the footprint and so we're going to do that immediately.
Speaker Change: Byron.
Byron: Here in Kansas City actually move is moving this weekend to Madison.
Byron: And he was running our loan review process for <unk>, and we're moving them to Madison to be on a regional credit officer from the upper Midwest as an example, I could go on but Thats the.
Byron: I'm Super excited about that because I think that is the way we're going to do it and you asked how long it can take I would say that is immediate.
Byron: So I think the the ability to kind of get in oversea and do it our way we will be immediate that loan growth part.
Byron: We'll come I don't have the answer to that loan growth will come yet but.
Byron: We certainly expect that we just got to get in there.
Byron: Do the work.
Byron: Okay.
And then Ron just a quick one a follow up on Chris Mcgratty <unk> question on Slide 32.
Byron: On the right side whats the message you want us to take away from that it seems like most of the loans are repriced and you're protecting against.
Byron: For the Cogs is that what you want us to take away from that or am I misreading that.
Byron: Are you talking about the hedges are you talking about the top half.
Byron: Both of them.
Byron: Tom.
Byron: We're just stating what our variable rate book looks like obviously, when you look at an earning asset basis and liability basis, we're pretty matched in terms of what percentage of our earning assets are variable versus what percentage of our deposits being indexed or variable. So it's a pretty good question Thats why we got our neutral position when it looks to interest rates and so.
Byron: That's why I say, what we have right now in terms of the rate environment is pretty ideal for us and then on the bottom side is <unk>.
Byron: Conservative approach that we've taken historically to make sure that we're protected against rates falling right. So we over the last 18 months I want to say, we put these $3 billion of notional hedges synthetic hedges here to protect us from down rates.
Byron: Today, what my point earlier in the prepared comments was even if there are no more rate cuts the impact from these hedges is not going to be material for our net interest income and net interest margin because the.
Byron: Some of these hedges amortize the benefits also start reaping some of these hedges are already in the money based on the movements in software that we've seen so far and then additional rate cuts were to happen, there's a little bit more upside again modest I would say some of these hedges are four to five year terms. So thats a long period of time that we basically bought insurance against.
Byron: Falling interest rates. So that's the message I would say hopefully that's clear.
Byron: What you are looking for okay.
Byron: Yes.
Byron: Okay, well good luck this weekend.
Byron: And I guess next weekend as well burner.
Byron: Yeah. Thank you Sir.
Byron: I'm going to be there by the way it looked for me and our stance.
Byron: Alright.
John: Thanks, John.
Speaker Change: As an additional reminder, it is star one to jump into the question queue.
John: We'll pause briefly while we allow other questions to register.
Speaker Change: Okay.
Speaker Change: Again, it is star one to join the queue.
Speaker Change: Our next question is from Timur <unk> with Wells Fargo.
Speaker Change: Line is now open.
Speaker Change: Good morning to you Mark.
Speaker Change: <unk> already there.
Speaker Change: Yeah.
Speaker Change: Sorry, Yes, do you hear me.
Speaker Change: Yes.
Speaker Change: Hey, guys sorry.
Speaker Change: Sorry about that first.
Speaker Change: First question just on the cadence of the cost saves the 40% that you're expecting this year how.
Speaker Change: How much of that hits in for Q. The systems conversion and then just the remaining 60% how quickly in 2006, when we see those coming through.
It really depends on contract by contract right. Some of it is <unk>. Some of it is obviously vendors and how long.
We won those vendors to stay past conversion day, but generally.
Speaker Change: <unk> conversion that we expect to complete in the fourth quarter means that.
Speaker Change: Most if not all of their systems will be on ours. So thats the expectation and then it's just accelerating some of the negotiations we have with our providers and making sure that we can get those cost saves on a run rate basis, and Thats, where youll see the biggest onetime costs that you will see will be will be the first quarter and the fourth quarters for those specific reasons.
Speaker Change: Between.
Speaker Change: Between people and the technology contracts that are being unwell.
Speaker Change: Okay. Thanks, and then I wanted to take another shot at that.
Question, just looking at the earnings run rate.
Speaker Change: And the initial deck and it looks like Portland earnings are down.
Speaker Change: It's a 40% from that initial deck.
Speaker Change: So much of that type of paid up on the balance sheet that had been expected.
Speaker Change: Are you somewhat surprised by the level of decline.
Speaker Change: How are you thinking about potentially filling this hole.
Speaker Change: Yes, sorry, I'm going to attempt to do a little better for you still have to be pretty careful about.
Speaker Change: The pre and post here in there their operations and ours from a from a modeling perspective, I think highest level best thing I can tell you there is from an EPS accretion perspective.
Speaker Change: Our targets are still in place on a combined basis okay.
Speaker Change: For what we shared early on in the process. So that's all still in place some of that comes from US some of that comes from them or some of our outperformance some of their underperformance et cetera, but I think what's important to note is that those <unk>.
Speaker Change: EPS accretion targets are in place are still still in check so.
Speaker Change: I would focus on.
Speaker Change: As far as.
Speaker Change: Surprises again.
I'd say is again puts and takes right all of what they took all of what they accomplished was on credits identified in the diligence process.
Speaker Change: Some of them were aware some of them were better but all of it was identified and.
Speaker Change: Again at the end of the day the way I think about it.
Speaker Change: As you'll have you'll have the loan levels from an earnings perspective, and Youll have.
Speaker Change: Capital levels in line with what we expected.
Speaker Change: With and from that perspective, then reserving and identifying everything at the end of the year.
Speaker Change: Their processes and per per the regulatory environment. The expectation is all of that's been done and reserved for at the appropriate levels and marked at the appropriate levels.
Speaker Change: And we will start.
Speaker Change: February one.
Speaker Change: Overseeing it and then at the end of the first quarter Youre going to see a full look at all of that from us and Youll start seeing a much fuller picture at that point.
Speaker Change: From a performance perspective, whether it comes from us or comes from them all of it is largely intact Tac and within striking distance of everything we announced.
Speaker Change: Back in April.
Speaker Change: So the other thing I would say that we didn't get too earlier nobody has asked.
Speaker Change: It is about the credit Mark.
Speaker Change: In addition to all that I, just said, we will be coming in with a conservative credit Mark on top of all that.
Speaker Change: As we roll into the combined entity.
Speaker Change: And in February.
Speaker Change: Okay. So it sounds like what.
Speaker Change: What was laid out in <unk>.
Speaker Change: April.
Speaker Change: Some level of degradation of the credit process.
Speaker Change: The credit Mark is conservative maybe more of that is gonna be made up of a lay person side.
Speaker Change: Yes.
Speaker Change: Certainly that will play a role.
Speaker Change: That will play a role what I was getting out at the top of the house was whether it's our outperformance or underperformance at the end of the day, our EPS accretion expectations are still intact.
Speaker Change: Right.
Speaker Change: Okay. Thank you.
Speaker Change: Yes.
Speaker Change: There are no additional questions at this time, so I'll pass the call back over to the management team.
Speaker Change: Thank you everyone for joining us today, we appreciate your time.
Speaker Change: If you have follow up questions you can reach out.
Speaker Change: Okay.
Speaker Change: 71.
Speaker Change: Yes.
Speaker Change: Thanks, and have a great day.
Speaker Change: That concludes today's call. Thank you all for your participation you may now disconnect your lines.