UMB Financial Corporation

Good morning and welcome to UMB Financial Third Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. If 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. Please note that this event is being recorded. I'd now like to turn the call over to Ms. Kay Gregory of Investor Relations. Please go ahead.

Good morning and welcome to our third quarter 2021 call. Mariner Kemper, President and CEO, and Ram Shankar, CFO, will share a few comments about our results. Jim Rhine, CEO of UMB 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. These risks are included in our SEC filings and are summarized on slide 43 of our presentation. Actual results and circumstances 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 unless required by securities laws. 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, everyone, for joining us today. We continue to see the benefits of our diverse business model, which helps us derive key points of our investment thesis, above peer loan growth, solid net interest income, and strong fee income contributions. For the third quarter, we posted 15.3% average loan growth on a linked quarter of annualized basis, excluding PPP balances. Asset quality remains strong, with net charge-offs of just seven basis points and a $5 million negative provision for credit losses. Sentiment in our markets continues to move towards more normalized levels. While supply chain dynamics and rising material costs weigh on businesses across our footprint, pricing and customer demand led to strong loan growth. Turning to our third quarter results, net income was $94.5 million, or $1.94 per share. And pre-tax, pre-provision income on an FTE basis was $115.3 million, or $2.37 per share. Slide 18 shows primary drivers behind our results, and I'll provide some high-level comments and then turn it over to Ram for more details. Net interest income increased 4.3% from the second quarter, driven by strong earning asset growth and controlled liability costs. Net interest margin increased was 2.52% versus 2.56% last quarter, impacted by continued elevated liquidity levels, reinvestment rates, core loan mix, and repricing. We are working to deploy the excess liquidity as prudently as possible as the rate environment changes. While reported non-interest income declined for the link quarter, it was largely driven by unrealized mark-to-market adjustments in the equity holdings, including a $10.7 million swing to our tattooed chef position in the second quarter. We saw positive momentum in fund services income and bank card fees with increases of 8.5 percent and 7.1 percent respectively. Trading and investment banking income fell during the quarter on lower trading volumes after an extremely strong second quarter. Moving to the balance sheet, slide 24 is a snapshot of our loan portfolio showing the drivers behind our loan growth. CNI led the growth in average balances this quarter as we continue to gain share across our footprint. Prospects are recognizing us as a consistent, stable player in our markets. More than half of our commercial loan growth came from new customers this quarter. During the quarter, we saw some return of CapEx spending. And while the growing number of middle market companies selling to private equity firms contributes to payoffs, we've had success in building relationships with PE firms and are often able to participate in those purchases. Average mortgage balances increased 7.4% from the second quarter to $1.8 billion. Funded mortgage loans for the quarter were $236 million, including $30 million in the secondary market. Year-to-date, we've seen 53% in secondary market mortgages compared to the same period in 2020. Top-line loan production, as shown on slide 25, was $905 million for the quarter outside of PPP balance changes. Payoffs and paydowns were 5.9% of loans above recent levels. We do expect acquisition activity among middle market companies to continue, which makes estimating payoffs unpredictable. However, we see a robust pipeline for the fourth quarter with opportunities across all verticals. On slide 26, we've updated our exposure to sensitive industries. We continue to monitor our hotel and senior living portfolios. which stood at a combined $885 million at quarter end, representing 5.5% of loans, excluding PPP. After analysis of mitigating factors, including strong sponsors and guarantors, we feel approximately $419 million, or 2.6% of loans, warrant closer monitoring. We've included this analysis again this quarter. However, as the economy continues to improve, this will be less of a focus going forward. Slide 27 and 28 show asset quality trends. I'm pleased with the reported seven basis points of net charge-offs for the quarter. And as I mentioned last quarter, given what we know today and the quality we see across our portfolio, we expect charge-offs to come in near our historical levels of 25 to 30 basis points for the full year of 2021. You will see that non-performing loans ticked up this quarter to 0.59% of loans. in line with the third quarter of 2020. This increase was largely driven by one credit relationship. As we've talked about often, we'll see peaks and valleys as we manage credit, moving them to watch lists or MPAs, but our historical track record has shown limited migration to loss. Moving to capital, we saw improvement in our already strong ratios, with total capital of 14.17% compared to 13.84% in the second quarter. While we returned additional capital to shareholders through the increased dividend payment announced in July, our top priority for use of capital remains supporting strong organic growth. And as market conditions allow, we'll continue to look for opportunities to augment that growth with strategic acquisitions. Along these lines, we recently announced a single branch acquisition with approximately $250 million in deposits. in the Kansas City market. Finally, we recently announced the formal launch of our family wealth offering. This is a registered investment advisor which focuses on providing entrepreneurial investment strategies, sophisticated tax planning, and generational wealth guidance to families with significant wealth. We were already providing many of these services within private wealth management, and we decided it was time to formalize the offering, including hiring and developing a dedicated team of investment professionals. Additionally, UMB Capital Corporation, which holds our SBIC, will be part of our family wealth offering and will focus on investment opportunities in private equity, direct investments, and other alternatives for our clients. To wrap it up, we continue to see positive momentum across the company, and I'm pleased with our third quarter performance, and I'm excited by the opportunities we see as we head into the fourth quarter and beyond into 2022. Now I'll turn it over to Ram for a few comments.