UMB Financial Corporation

Good day and welcome to the UMB Financial fourth quarter and full year end 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press Start in 2. Please note this event is being recorded. I would now like to turn the conference over to Kate Gregory. Please go ahead.

Kate Gregory Good morning and welcome to our fourth quarter and year-end 2020 call. Mariner Camper, President and CEO, and Ram Shankar, CFO, will share a few comments about our results. Jim Rhine, CEO of UMD Bank, and Tom Terry, Chief Credit Officer, will also be available for the question and answer session. Before we begin, let me remind you that today's presentation contains forward-looking statements, all of which are subject to assumptions, risks, and uncertainties, including the currently unknown potential impacts of the COVID-19 crisis. These risks are included in our SEC filings and are summarized on page two of our presentation. Actual results and other future circumstances or aspirations may differ from those set forth in any forward-looking statement. Forward-looking statements speak only as of today, and we undertake no obligation to update them except to the extent required by securities laws. All earnings per share metrics discussed on this call are on a diluted share basis. Our presentation materials and press release are available online at investorrelations.umb.com. Now, I'll turn the call over to Mariner Kemper.

Thank you, Kay, and thanks to everyone for joining us today. I hope you and your families are safe and healthy. 2020 was certainly a year unlike any we've experienced. For banks, we saw the perfect storm, the timing of the implementation of CECL combined with the economic impact of the pandemic, including 150 basis point cut in short-term interest rates and uncharacteristically low long-term interest rates created additional uncertainty and variability across our industry. Initially, we were hopeful that we would see faster resolution, but almost a year later, the pandemic, along with the political and social concerns, persist. Despite all this turmoil, the strength of our diversified business model comes to the forefront as evidenced with our strong pre-provision results. We have posted solid asset growth helping drive higher net interest income, even as the industry data shows weaker trends in most categories. And our strategy to strengthen and build out our varied sources of fee income is paying off. Operationally, it's status quo, as our systems continue to perform well and most of our associate base remains remote. Even through the extended period of missing much of the face-to-face interaction, that is so important to our business, our teams are working together and producing solid results. I'm extremely proud of how our associates have adapted during this pandemic. I'll repeat, because it's so important, doing what's right to support our workforce is a top priority. This, in turn, allows us to maintain our customer relationships and our commitment to high-quality underwriting standards and solid capital and liquidity levels. We do see some bright spots heading into 2021, as our customer sentiment remains cautiously optimistic. Modified loan balances have dropped significantly, and our strong credit metrics are holding steady. As you've seen in our press release, we had a great fourth quarter, with net income of $156.3 million, or $3.24 per share. On page four in the deck, we've included a highlights table with some key points on several line items. Pre-tax pre-provision income was $196.1 million for the fourth quarter. And a quick side note about the metric. While it helps in comparing industry trends and highlighting earnings power, we don't want to lose sight of the tax advantage we enjoy because of the composition of our securities portfolio and the strategic use of municipal securities. Pre-tax pre-provision income on a fully tax equivalent basis was $202.9 million, showing that tax benefit of $6.8 million. The biggest driver of our outperformance for the quarter was the $108.8 million gain on our investment in Tattooed Chef that we discussed last quarter. This investment is a testament to the variety of capabilities that we have in our capital finance division, and we look forward to partnering with our other clients as opportunities arise in the future. Growing fee income, including opportunistically adding income sources, remains a key part of our strategy. A couple of competitive advantages we have are our lack of reliance on consumer service charges or on mortgage gain on sale income, where margins have likely peaked in 2020. No one knows for sure how long the refinance wave will last for the industry. However, we've capitalized on an opportunity we saw to add new customers through our mortgage platform, particularly in our private banking business. We've shared in prior quarters about our investment in the retail business, which includes ramping up our mortgage capabilities. We've had a great success in the early stages of our growth, building out our retail and private wealth offering as evidenced by our 70% increase in average residential mortgage loans from the year-ago quarter, which are included in our consumer real estate line on the balance sheet. On-balance sheet mortgages contributed 33% of the year-over-year growth in average loans, excluding PPP. On the expense side, we had a few items in the fourth quarter that are not expected to repeat, including approximately 15 million in operating losses and other expenses from a few unrelated matters, such as litigation, settlements, and some fraud losses. After the initial lull during the early days of the pandemic, we took a proactive approach in the fourth quarter to opportunistically resolve some outstanding matters that otherwise might have taken place in future quarters, resulting in favorable and expeditious outcomes. While most of these matters are typical to our business, the timing and impact of these were outsized in the fourth quarter. In addition, salary and benefit expense increased from the third quarter, driven by higher incentive compensation accruals based on company and line of business performance, as well as a $1 million increase in deferred compensation expense. As we shared in prior quarters, this is offset by a similar increase in income from company-owned life insurance, designed as a hedge to the market fluctuation. Finally, we made $1.2 million in additional charitable contributions in the fourth quarter. Excluding items that we do not expect to reoccur in the normal course of business, our quarterly expenses were consistent with prior fourth quarter levels. On the credit front, non-performing loans improved from the third quarter to 0.55% of loans. Net charge-offs were just four basis points for the fourth quarter and 13 basis points for the full year of 2020, better than our long-term averages. I continue to be very proud of our credit performance. In fact, since 2000, annual net charge-offs to loans have averaged 31 basis points, 2020 was our best year since 2015, when average loan balances were roughly half of what they are today. The loan risk profile table on slide 27 in the asset quality section shows the quality of our portfolio and contains the detail on the remaining modified loans by category. On the following slide, you'll see that we've seen a reduction of 95% in those balances compared to June 30th. At December 31st, loan modification balances had dropped to 68 million, or 0.5% of loans, down from 9.6% and 4.8% in the prior two quarters, respectively. We took a prudent and conservative approach to our reserve build in the prior quarters of 2020, and our fourth quarter provision was 5 million, reflecting the quality of our loan book, the nearly 400 million increase in non-PPP loan balances, and the reduction in modified loans. Our quarterly provision represents 2.8 times net charge-offs of just $1.8 million. We believe a negative provision may be imprudent given the still uncertain operating environment. However, the impact of more stimulus, improved macroeconomic forecasts, and the continued improvement in asset quality within our portfolio may make it untenable for us to leave our reserve coverage at current levels in the near future. The modest addition in the fourth quarter brings our total allowance for credit losses on loans to $216 million at year-end, with an allowance to loan coverage of 1.34%. Excluding PPP loans, that coverage is 1.45%, or nearly two times what it was at year-end 2019, prior to the adoption of CECL. Average loans excluding PPP balances increased 11% on a linked quarter annualized basis. led by consumer real estate, which was boosted by the low interest rate environment and the work we've done to build our business that I mentioned earlier. Loan production is typically strong in the fourth quarter, and that continued in 2020 with new originations of $1.1 billion, outside of PPP balance changes, with payoffs and paydowns of 3.8% of loans. Looking ahead into the first quarter, we see a solid pipeline that looks to continue this growth. Given what we know today and if history is any guide, it's reasonable to expect that our strong momentum and market opportunities should drive relative outperformance in loan growth and differentiated net interest income growth in the current low interest rate environment. Commercial line utilization was 29% returning to its historical levels after the spike earlier in the year. Our loan portfolio remains diverse and well-balanced across several product lines, geographies, and industries. The total composition is shown on slide 21, followed by loan activity during the quarter and breakdowns of our commercial portfolios by asset class. I'd like to point out that the Minneapolis area, one of our 2019 expansion markets, now represents 1% of total loans with just over $200 million in balances. We look forward to continued penetration there. On slide 25, we've updated our exposure to sensitive industries. As you'll see, we removed multifamily from this list based on the operating environment and characteristics of our portfolio at UMB, which is comprised largely of Class A properties with solid payment trends. Loans in the remaining five categories totaled $2 billion, or 13.4% of loans. After our analysis, we feel that approximately $975 million, or 6.6%, could possibly carry more risk if the crisis is prolonged. We are closely monitoring these relationships and have regular communication with these borrowers. To wrap up, 2020 was a challenging year for everyone. But for UMB, it was a testament to our resilience and to our priorities, providing unwavering customer service caring for our communities, and managing consistently in all operating environments. My sincerest gratitude goes out to all the frontline workers across all the essential industries, including the UMB bankers that have risen to the occasion and the challenge to deliver the unparalleled customer experience, which we are known for. Now I'll turn it over to Ram for a few additional comments. Ram?