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spk03: Good morning and welcome to the UMB Financial fourth quarter 2021 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kay Gregory of Investor Relations. Please go ahead.
spk02: Good morning and welcome to our fourth quarter and full year 2021 call. Mariner Kemper, President and CEO, and Ram Chankar, CFO, will share a few comments about our results. And Jim Rhine, CEO of UMB Bank, and Tom Terry, Chief Credit Officer, will be available for the question and answer session. Before we begin, let me remind you that today's presentation contains forward-looking statements, which are subject to assumptions, risks, and uncertainties. These risks are included in our SEC filings and are summarized on slide 42 of our presentation. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them except to the extent required by securities laws. All earnings per share metrics discussed on this call are on a diluted share basis. Our presentation materials and press release are available online at investorrelations.umb.com. Now, I'll turn the call over to Mariner Kemper.
spk01: Thank you, Kay, and thanks, everyone, for joining us today. In 2021, we delivered solid operating and financial results with strong growth on both sides of the balance sheet, steady asset quality metrics, and continued momentum in our fee businesses. When many others in our industry struggled to generate meaningful loan growth, we delivered 12.3% increase in average loans in 2021, excluding PPP, largely through market share gains. We're positioned to benefit from the anticipated economic expansion, higher interest rates, and continued investments we're making. In 2022, while others are predicting growth based on a better economic environment, we're confident that we'll continue to garner more than our fair share of that growth. There were a few factors that had outsized impacts on our results in the fourth quarter and the full year. We had higher than typical operating expenses, largely driven by higher incentive compensation for the strong business performance we experienced, along with additional charitable contributions in the quarter. Additionally, we saw some variances in software costs and legal and consulting expenses related to timing of our business investments. We estimate that approximately $10 million of the linked quarter increase in expenses was variable in nature and attributed to timing of spend. Many of these incremental expenses should reset lower in the first quarter. As we've discussed before, we remain focused on delivering positive operating leverage across all environments while we continue to invest prudently in our people and platforms. On the revenue side, in 2020, the gain on our investment in Tattooed Chef and ongoing market-related adjustments impacted year-over-year comparisons. Ram will share more detail on the various drivers shortly, but we expect to generate positive operating leverage in 2022, excluding the impact of PPP, with or without the benefit of higher interest rates. Turning to our fourth quarter results, net income for the quarter was $78.5 million, or $1.61 per share, Pre-tax, pre-provision income on an FTE basis was $113.4 million, or $2.32 per share. Fourth quarter net interest income was $210.6 million and was relatively flat compared to the third quarter, and we saw positive contributions on the fee income side. Fund services total assets under administration have grown nearly 25% from year-end 2020 to stand at an impressive $419 billion. Custody assets crossed the $150 billion threshold driven by organic growth. In specialty trusts and agency solutions, we saw an 149% increase in new business in 2021, and our teams continue to garner industry recognition for service and innovative products. In private wealth, new asset sales for 2021 increased 17% over the prior year, and we continue to build out and strengthen our family office offerings. I'm looking forward to further momentum as we continue to invest in this business. You'll see more detail in the line of business updates in the presentation. Moving to the balance sheet, slide 24 is a snapshot of our loan portfolio, showing the drivers behind the loan growth I mentioned. Average loans for the fourth quarter, excluding PPP balances, increased nearly 13% year over year and nearly 6% on a linked quarter annualized basis. Asset quality remains strong. with net charge-offs of 19 basis points for the quarter and 27 basis points for the full year, consistent with our outlook and our historical averages. Average C&I loans increased 12% on a link quarter annualized basis as we continue to deepen penetration in our markets. Most of our commercial clients are reporting strong pipelines and backlogs across most industries. In general, these are more positive feelings about the direction of 2022 while customers are keeping an eye on supply chain and labor issues impacting so many businesses. And clients have expressed more interest lately in expansion, both organic and through acquisition. In our commercial real estate and construction portfolios, average balances were impacted by payoffs and by typical cycles as completed projects are converted to term loans, sold or refinanced into the secondary market. Average residential mortgage balances grew 6.5% from the third quarter, an annualized increase of nearly 26%. Funded mortgage loans for the quarter were $200 million, including $55 million in the secondary market. In 2021, we saw a 70% increase in secondary market mortgages compared to 2020. Total top-line loan production, as shown on slide 25, was very strong, coming in at $1.4 billion for the quarter, a record level for us. Payoffs and paydowns were 5.6% of loans in line with prior quarter. Many of our recent payoffs have been tied to merger and acquisition activity. More clients have been taking advantage of attractive multiples, often partnering with private equity firms and family offices. At the same time, we continue to see financing opportunities coming from some of these same PE firms and family offices. While estimating payoffs can be unpredictable, we continue to see a robust pipeline. with opportunities across all verticals in the first quarter. Finally, earlier in January, we pursued and executed the sale of our small acquired factoring portfolio to an alternative financing company. Ram will discuss the financial impact of the sale of our factoring portfolio in his prepared remarks. Overall, 2021 was a solid year. Like all of us, I'm hopeful we're nearing the final phase of this pandemic, but no matter what issues we may navigate, I'm proud of our team and the resilience they've shown in serving our customers and keeping UMB moving forward. We're excited for the opportunities we see ahead of us in 2022. Now I'll turn it over to Ram for some additional comments. Ram?
spk00: Thank you, Mariner. Net interest income was relatively flat compared to the third quarter at $210.6 million, as the benefit from solid balance sheet growth was partially offset by changes in asset mix, lower earning asset yields, and reduction in PPP income. We amortized $5.4 million of PPP origination fees into income, and the overall PPP contribution to the fourth quarter net interest income was $6 million compared to $10.1 million last quarter. At quarter end, our PPP balances stood at 136 million, down from 318 million at September 30th. Approximately 3.8 million in unamortized fees remained at the end of the year. Average earning asset yields decreased 16 basis points to 2.49% due to asset mix changes, including increased liquidity and a $297 million decline in average PPP balances. For the full year 2021, our factoring portfolio provided approximately $14 million in revenue and had about $10 million in associated costs. So the pre-tax, pre-provision income impact was approximately $4 million. Fourth quarter reported net interest margin fell 15 basis points from the third quarter to 2.37%, driven by additional buildup in liquidity levels, lower reinvestment rates, and core loan mix and repricing. The buildup of excess liquidity accounted for approximately 10 basis points of the link quarter contraction. For full year 2021, NIM was 2.50%. As shown on slide 21, our Fed account reverse repo and cash balances now comprise 19% of average earning assets compared to 16% last quarter and just 9% in the fourth quarter of 2020 with a blended yield of 26 basis points. Based on our current expectations for two to three rate hikes in 2022, deposit betas consistent with our experience during the last rate cycle, and improved reinvestment rates on our cash flows, we expect that our reported net interest margin has bottomed out and will likely improve from fourth quarter levels, generally in line with the current consensus estimate of 2.4%. While the volatility from PPP loans has subsided, our net interest margin and net interest income will continue to be impacted by excess liquidity levels. Our provision for credit losses for the quarter was $8.5 million, driven almost entirely by our strong loan growth. Excluding PPP loans, our end-of-period loans increased approximately $900 million from September 30th. Our allowance to loans, excluding PPP balances, is 1.14%, compared to 1.20% at September 30th. Non-interest income for the fourth quarter was 118.8 million, an increase of 10.9 million from the third quarter. Market fluctuations drove a 3.3 million positive variance in the value of our equity investments. We currently have approximately 760,000 shares remaining in our Tattooed Chef position. Derivative income increased 3.2 million from the prior quarter, And deposit service charges increased $1.7 million on a link order basis, largely related to client conversion fees in our healthcare business and corporate service charges. I will note that just about 10% of our deposit service charge line item is related to retail activity. Other drivers to fee income, including growth in both trust and securities processing and bond trading income, are shown on slide 22. Non-interest expense trends are shown on slide 23. Expense levels for the fourth quarter were above our typical run rate and included a link quarter increase of $7.3 million in salaries and bonus expense driven by higher expenses related to business growth and positive business performance. Legal and consulting, as well as marketing spend, was higher in the fourth quarter and pertained to timing of such spend. Software and processing costs increased over the prior quarter and were driven by the implementation of our new and improved private wealth management platform. And as Mariner mentioned, we increased our charitable giving in 2021, and in the fourth quarter, the other expense line included a $2.1 million linked quarter increase in contributions. These year-end gifts to organizations in our markets that support housing needs, small business efforts, and education pushed our giving above the $6 million mark for the full year 2021. Looking ahead, I'll reiterate that we expect to generate positive operating leverage in 2022, excluding the impact of PPP with or without the benefit of higher interest rates. Our effective tax rate was 20.2% for the fourth quarter and 17.7% for the full year 2021. For the full year 2022, we anticipate it will approximate 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.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question will come from Jared Shaw of Wells Fargo Securities. Please go ahead.
spk04: Good morning, everybody.
spk00: Morning.
spk04: Morning, Jared. Ram, you'd said on the margin, 2.4%. Was that for full year 22, or was that for first quarter?
spk00: That's a full year number. That's what consensus has it. So when I gave guidance, it was relative to the consensus for 2022. Obviously, a lot of factors, Jared, will impact the outlook for margin. As I said, if you see slide 21, you can see how that has grown just both in magnitude and as a proportion of our earning assets, so a lot of factors will play into margin. But at this point, based on our outlook for rates, 240-ish sounds about right.
spk04: Okay. All right. And then, you know, it's great to see the loan growth this quarter. Can you give a little color on what you're seeing with the CNI utilization rates? And then, you know, looking at going forward as those begin to normalize, what type of benefit could you get from just a more normal utilization rate and then the expected impact of paydowns over the next few quarters? Do you think that that moderates?
spk01: Yeah. Hey, Jairus Mariner. I would say that utilization rates, they bop around quite a bit within one or two points one way or the other, particularly during COVID. The period we're in, it's kind of hard to really tell where it should be settling out from third quarter to fourth quarter in 20. For example, it went the other way, and this quarter, these last two quarters, it went up slightly. So I think this pandemic period is kind of hard to adjust, come up with an adjusted number. So it's been kind of bopping around. So I hesitate to give you what that normalized number should be. Right now, pre-COVID, things were bumping around 30%. Our utilization rate is really around 30%. So you do with that what you will. But on loan growth and payoffs and paydowns, as we have historically, we've given you a good look into the next quarter. We try not to do too much guidance beyond the coming quarter. And as it relates to the pipeline for the coming quarter, it looks as strong as it has been looking. And I would say that, you know, fourth quarter 21 was the best gross production quarter we've had at almost $1.4 billion in gross production. So we're pretty pumped about the trajectory and the successes we're having there. As far as payoffs and paydowns go, I think, you know, we're running in the 5% range right now, high fives in the fourth quarter. You know, I think as long as rates are low, as they have been, that's going to push, you know, cap rates low and the secondary market opportunities will remain strong. Obviously, we're all predicting rates to come up. That should moderate. I think that should moderate the payoffs and paydowns over 22 as rates come up. We'll have to see. Rates coming up, they're still going to be at all-time lows. I think the market's going to still be very strong even with rates coming up. But it should certainly moderate payoffs and paydowns.
spk04: Okay, thanks. And then just a final one for me. When we look at the... the $10 million of expenses that you called out, sort of quarter over quarter. As we go into first quarter, can you give us a little color on what could potentially be staying around with some of the puts and takes are, or should we expect that most of that $10 million is able to roll off?
spk01: Well, you know, the way we're thinking about that $10 million is it was related, you know, a good majority of that was related to production. And so... You know, if we continue to have very strong production, you'll see, you would theoretically see more bonus commission compensation. Certainly, the charitable contributions were elevated based on our success last year. So I guess, again, if we were towards the end of the year, if we're having great success, we would consider giving back to our community at an elevated level like we did last year.
spk04: Okay, thank you.
spk01: I would add here on the loan growth front, I think really what happened in the fourth quarter storyline-wise was actually a little muted because of the payoff activity at the end of the third quarter. So I think our actual growth story in the fourth quarter is better than it looks based on end-of-period loans versus of what the averages were because of the starting point from from the elevated payoff levels at the end of the third quarter.
spk04: Great, thanks.
spk03: The next question comes from Nathan Race of Piper Sandler. Please go ahead.
spk06: Yes. Hi, everyone. Good morning. Morning, Nathan. Question on deposits. You know, obviously really significant end of period deposit growth. So just curious, you know, Do you expect those deposits to largely remain on the balance sheet as we start this year? And just any kind of updated thoughts on just the stickiness of the massive deposit implosives you guys have seen, which obviously can provide a significant benefit as the Fed raises short-term rates with all the liquidity that you guys still have at the Fed today?
spk01: Sure. I'd say, you know, it's a a story of many points here, right? I mean, you've got what's happened over the pandemic and all of the stimulus money that's come in. That's one we're all, all of us as an industry and analyst community are trying to figure out how long that sticks around. So that's a part of it. Then for us specifically in the fourth quarter on into the first quarter, as you're well aware, we build some public fund dollars and some large institutional dollars, kind of year-end activity dollars, if you will. and that will bleed out over the first quarter. We don't know exactly how far down that bleeds out, but if history is a good judge, it could be $600 million or so over the first quarter on the public fund side that would roll back out.
spk00: Nate, this is Ron. I would say For us, like we've said in the past, I would not focus on end of period balances both on the loan side and the deposit side, particularly on the deposit side. If you look at between September 30 and December 31, our deposit balances end of period increased by $4.5 billion. A lot of it is attributed to what Mariner said between public funds and some institutional. So we have seen some receding of those deposits. So I would focus more on the average side just because, again, depending on which day the year ends or the quarter ends, we could see inflow of deposits.
spk01: On the loan side, we did have some very strong generation activity in the fourth quarter. So that, as I said in my previous comment, the average deal in that case is a little misleading to the upside positive for us, which is the opposite of the story for the positive.
spk06: Understood. And within that context, just thinking about, you know, the... likely upward increases in deposit costs as the Fed raises short-term rates. Ron, can you just remind us in terms of where the index deposit balances stand on the average balance basis in the fourth quarter and just general expectations for how your deposit bid is or likely to traject over the next several quarters relative to what we saw during the previous Fed tightening cycle between 2015 and 2018? Yeah.
spk00: In our interest rate analysis that you'll see in our 10-K, we assume deposit betas that are consistent with what happened last time. So I think last time we had, you know, a 225 basis point increase in short-term rates, and our betas over that period came to about 45 or 48 percent. So at least from that standpoint, we're assuming very similar beta experience. Obviously, with the excess liquidity in the system, there's an argument to be made that that this time around we can slow down those deposit cost increases potentially depending on what the market does and competition does. And then on your first question, about 35% of our funding is indexed to some short-term interest rate.
spk06: And that's a little higher than what we saw maybe three years or so ago. I think it was close to 20, 25%. Is that correct, Ram?
spk00: Slightly higher than the last cycle when we left the last cycle, correct.
spk06: Okay, great. And then just maybe changing gears, one last one for me. The institutional banking revenue segment, particularly fund services, posted really impressive revenue growth year-over-year. Fund services in particular, close to 30% year-over-year growth in 2021. I guess, is that growth rate sustainable into this year? And I guess, how are you guys going to look at the various dynamics within institutional banking as you guys kind of forecast that revenue line for 2022?
spk01: Yeah, I'll take the beginning here. Jim wants to add on if he can. The story is similar to what we've been saying the last handful of quarters, which is there's been a lot of disruption in the fund servicing market, a lot of PE-driven acquisitions and mergers in that space. And that has put a lot of players on the sideline and caused a lot of disruption in service. And we have just benefited handsomely from that. And that story just continues. I think that's really what I would say about that. On top of just the market dynamics of private equity and alternatives as an alternative to the public markets continues to be just a very strong shift. I think I'd call it a permanent shift in kind of the market dynamics, which is really where we play in. You know, we're not really a big public market. equities shop. You know, it's not a big 40X shop. We're doing more on the private equity and the alternative side. And that really bodes well for us, I think, long term. That's what I'd say high level, Jim. You'd add anything more to that?
spk07: No, I think you nailed it. We continue to differentiate ourselves on service and the results are proof that our model is working.
spk01: That's great. And then on the rest of the businesses, kind of a similar story, just the investments we've been making and and people and technology are really paying off. 17% growth in our wealth business. We haven't seen a year like that in some time. So the investments we've been making in people, we've got a really great leader there. And having 17% growth in new client assets is really tremendous for us. We're really excited about that development. And the family office, is a big part of that. The offering and the technology we've invested in there is really driving and helping that whole business. Corporate trust, man, that business is on fire. We went on the Nielsen lead tables, we went from number five to number three in volume. We've been number three for some time now in number of issues, but we went from five to three in dollar volume. And so we've really been gaining share there, which is great because to be growing that business in an environment where the government isn't really spending the way they normally are. We're continuing to take share. So when that stimulus money does come and the government starts spending on a local basis and redoing highways, roads, sewer systems, sidewalks, all those kinds of things, when that starts flowing again, we're poised to really take our share there. Additionally, as you look forward, as we've talked before, 12B1 fees have been zeroed out for us looking backwards because of rate environment. It doesn't take much rate movement looking forward for us to pick up 12B1 fees.
spk07: Jim, you might talk about what that could look like. Well, so in 2019, our 12B1 income in brokers and mutual fund income was approximately $31 million. In 2022, after the 150 basis points and rate cuts, we were sitting right at around $12 million. So it usually takes two to three months after we see an increase in rates for us to see any additional increases in those fees. So we'll see a benefit in 2022, but you should expect to see significant increases, assuming we get the rate increases in 2023.
spk01: So we're very excited. So the profile for that business is very strong, along with the newer business that we have in the aviation trust business, which is really poised. Again, that's doing well in this environment. We'll do even better when people are traveling and the world normalizes again. So really the profile across the board for institutional and our fee business is very strong. Our car business, led by our commercial car, we're very excited about, and the prospects for that, again, for similar reasons. Corporate spending picks up again looking forward. We sit at $3.7 billion in spend at the end of the fourth quarter, again, in a muted environment. So that represents some tailwind for us. And then lastly, I know you didn't ask this, but you just think about the overall fee picture for us. On a relative basis, we're pretty excited about how we are positioned in a raising the rate environment to not have to suffer as a changes that will come from the mortgage business reducing within the industry. We don't have a big mortgage business, so we don't stand to lose that. So our profile going forward remains as strong as it has been without having to deal with the downside pressures of our rate environment increasing.
spk06: Got it. That's a really great color. And just to clarify, Jim, on the 12B1 fees, is it roughly like half of, is it roughly like $500,000 in terms of the quarterly benefit you guys will see after each Fed rate hike?
spk00: That's too spitting. This is wrong. This is kind of very specific. I mean, again, as Jim said, the timing of it, and we have multiple funds as clients, and not all of them have the same cycle. So, you know, to be able to sit here and say, What every 25 basis points might mean, it's tough to predict it for 2022. On a full year run rate basis in 2023, as Jim said, that's where you'll see the biggest hockey stick. 2022, you'll certainly see it dribble in, you know, based on when the rates go up, when the funds give those benefits back to us. So it's really hard sitting here just to predict.
spk01: Yeah, the idea was just to give you a little color on what it looked like before that $31 million. And by the way, that $31 million was based on the amount of business we had in 2019 versus the amount of business we have and clients we have going into 2022 and going into 2023. So theoretically, we've got more clients and more customers. So that kind of would bode well for the overall volumes. So it's hard to really tell what it will be. though we can tell you what it was, right, two years ago, which was the idea.
spk06: Got it. I really appreciate all the color guys. I will step back. Thanks again. Sure thing.
spk03: Once again, if you would like to ask a question, please press star, then 1. And our next question will come from Chris McGrady of KBW. Please go ahead.
spk00: Chris, you there?
spk05: Sorry about that. I was on mute. Hey, Ron. Question on the rate sensitivity. I think in your queue, you show modestly asset sensitive, but not, I think it understates it. And I'm interested in the view on, can you just remind us what percent of loans were priced within a year, the floors, any estimate to what NII would benefit, like a ballpark for each quarter hike?
spk00: So I'll try that and come back at me if I don't answer the question. So 55% of our total loans are variable in nature. And then about 10% of our total loans have floors on them. But it really takes anywhere between 25 and 50 basis point rate moves for those to be truly variable. So that's on the loan side of the equation. So you're right. Our 10Q disclosures have a very static approach. So there's no growth in balance sheet. And one of the things that's missed in that analysis is what happens to our growth in related net interest income. So obviously, you know, you saw that we had 12% loan growth this past year. So that's not included in the analysis. And nor is any rotation from the Fed account balances today that are earning 15 basis points into loans or investment securities. So it's a very static way of looking at it. The best way I can point to you, Chris, is so if you look at our disclosures, for a 100 basis point move on a $800-plus million net interest income run rate, We expect 1% benefit in the first year and 6% benefit in the second year. So you can kind of do the math on what that means for every 25 basis point move.
spk05: Okay. And on the index deposits, just given the structure of your balance sheet, what's the thought on retaining all these deposits versus remixing the balance sheet a little bit more aggressively?
spk01: Well, I mean, there's a lot going on there. I mean, some of those are contractual and some of them I would call are soft indexed in the sense that they're bid accounts and we can remove them if we need to, et cetera. So it's kind of a mixed, it's a mixed bag. We, you know, most of our business is relationship based and would like to, you know, keep as much of it as possible. and just worry more about what we do with the other categories on the balance sheet, such as putting it to work in loans and what we do with the investments. So as we always have been, we're a little more willing maybe than others to take the pain to continue to build the company. The value of this franchise is really in our deposits, and so we don't really like to play games for ratios. We want to build the business for the long haul.
spk05: Okay, thanks. I got two final ones. First is on your securities reinvestments. The rate you put money to work picked up from 128 to 146. Where are reinvestment yield opportunities today, Rome?
spk00: Yeah, it depends on the duration, really, Chris. So if I want to stay short at three years, I can get 150. If I want to go a little longer, close to six years, I could get 190. So the range of outcomes, again, we're talking about it live. Those are the options we're looking at in terms of trying to manage our duration, trying to manage our interest rate risk. So I would say if you look at the next 12 months, I think the cash flow roll-off is at 180. based on our current yields and based on where the 10-year is, we can get pretty close to that in terms of our reinvestment, again, depending on the mix that we do of duration.
spk05: Yep. Perfect. And then finally, I want to come back to the operating leverage comment. I think you said XPPP, with and without rates, positive operating leverage. Could you just speak to just magnitude? If we do get the forward curve, it would seem like that would widen by a decent amount. But, again, I'm not sure what the assumptions are to reinvest into the business.
spk00: Well, we don't give specific guidance, and we've been saying this for a better part of three quarters, right, even before the rate cycle or what the Fed has done lately. So our budgeting process always assumes that we want to gain operating leverage. We have a lot of investments going in the fee income side, and obviously, as you can see from the financial results, those are bearing fruit. So regardless of the environment, we want to be able to generate positive. And then the juice would really come if the rate environment changes dramatically. If the Fed does 50 basis points, for instance, instead of 25, or there are four rate hikes in 2022. So either way, I think we're well positioned with or without the benefit of rates. Just to give you a magnitude of this point, Again, I go back to a lot of expenses, as you saw in the fourth quarter, tend to be variable in nature. So if we do well on the revenue side, expenses can grow as well. It just scales.
spk01: Ultimately, it scales with interest rate increases and business generation.
spk05: Okay. Thank you very much.
spk00: Thanks, Chris.
spk03: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk01: I think we covered it all. Thank you all for your interest and time, and go Chiefs.
spk02: This call will be up on the replay will be on our website shortly. If you have any questions, you can always contact Investor Relations at 816-860-7106. Thanks for joining us today.
spk03: The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.
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